Newsletter 006

February 2008/ 006

I

Stay Hungry. Stay Foolish.

n the commencement address by Steve Jobs, CEO of Apple Computer and of Pixar Animation Studios, delivered on June 12, 2005, he ended with this quote from the final issue of ‘The whole earth catalogue’: ‘Stay hungry. Stay foolish.’ Steve was trying to tell those who were graduating his mantra of success. Let us examine this pithy sentence and understand its significance better.

Before the beginning of great brilliance, there must be chaos. Before a brilliant person begins something great, they must look foolish in the crowd. Does this mean that you start following the crowd simply to gel with them? No, because if you do that you are chaining yourself to a life of a mere facade of intelligence. You have then consigned yourself to a life lived by others. If a million people say a foolish thing, it is still a foolish thing... but if you are a part of that crowd, you will begin to consider it wise. And you will remain foolish! Even Steve Jobs remarked in his speech mentioned earlier that ‘your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.’ Truth is that the moment you start being a mere follower of what others instruct you to do, you end your journey into the wonderful world of creativity and individuality. To perceive the way something has never been perceived, only your subliminal or inner urges matter. Complacency destroys... just as a facade of wisdom destroys! Therefore, it is good to stay hungry and stay foolish! Think about it!! (An article by Arvind Passey.©)

Editorial What are the essentials of becoming a successful investor? Well, all you need is a healthy combination of the right education, immense patience, and maybe a little luck. The market gives an average of 12% return annually, if you make a judicious use of your knowledge as well as intuitive knack. In this issue we will be informing you of five legendary investors and some brief details on their investment strategies. These personalities represent the pinnacle of the financial world. Each one has dramatically exceeded market performance. They have all made a fortune off their success and in many cases, they've helped millions of others achieve similar returns. These investors differ widely in the strategies and philosophies they applied to their trading; some came up with new and innovative ways to analyze their investments, while others picked securites almost entirely by instinct. Where these investors don't differ is in their ability to consistently beat the market. The small article next to the edit is based on an expansion of a lovely quote by Steve Jobs. His words: ‘Stay Hungry. Stay Foolish.’ have been reverberating in my mind for a long time now. Read the article carefully and let the essence enter the depths of your being. February is a wonderful month. Not just because the World Book Fair and the Surajkund Mela will be tempting us, but because the 4th of February happens to be Mr Siddharth Bagri’s birthday! Wishing him a wonderful year ahead!! Hoping to get some interesting feedback from you all. Lots of readers of ‘The Learner’ have written back that they have liked the content. Thanks to all. Those of you who’d like to contribute... do so. This effort must evolve into a participatory one soon. Bye for now.

“The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses.” Warren Buffett

The Learner

A small newsletter that reads big!

1.

Benjamin Graham

This legendary father of P/E ratios and dividends is known as the ‘Father of Value Investing’ and the ‘Dean of Wall Street’. He conceptualized in-depth fundamental analysis of stocks. The current and widely familiar concepts of price to earnings ratios (P/E ratios), dividends, debt-to-equity, book value and earnings growth became main stream in fundamental research. Graham’s work told investors how to minimize risk by adopting a ‘margin of

investors. He is also famous for several books including, ‘One Up On Wall Street’ (1989) and ‘Beating The Street’ (1993), which are widely considered to be mandatory reading for any investor. Apart from this punishing work ethic, Lynch did consistently apply a set of eight fundamental principles to his stock selection process. According to an article by Kaushal Majmudar, a CFA at The Ridgewood Group, Lynch shares his checklist with the audience at an investment conference in New York in 2005: Know what you own. It's futile to predict the economy and interest rates. You have plenty of time to identify and recognize exceptional companies. Avoid long shots. Good management is very important - buy good businesses. Be flexible and humble, and learn from mistakes. Before you make a purchase, you should be able to explain why you're buying. There's always something to worry about.

Five legendary investment minds safety’ and buying only those stocks that are deemed to have excellent value. His teachings work in real-life, as Graham’s investments returned an average of 17% per year from 1929 to 1956: years that included the Great Depression, World War II, and two recessions. In brief, the essence of Graham's value investing is that any investment should be worth substantially more than an investor has to pay for it. He believed in thorough analysis, which we would call fundamental analysis. He sought out companies with strong balance sheets, or those with little debt, above-average profit margins, and ample cash flow. Graham authored his wildly successful book on financial analysis, Security Analysis (1934) with David Dodd. In this book, Graham laid out the principles of ‘value-oriented investment’, i.e. the use of fundamentals in guiding the valuation of securities. This approach was further advanced in two other Graham classics, the Interpretation of Financial Statements (1937) and the Intelligent Investor (1949).

2.

Peter Lynch

Hello analysts! Did you know that at Fidelity, Peter Lynch rose from the rank of a number-crunching analyst in 1969 to fund manager in 1977? During his career at Fidelity, Lynch achieved rock star status in the world of investing. No wonder he is known as the investment legend who turned $22 million into $14 billion! Lynch built a massive fund with assets of $14 billion by 1990, at which time he decided to call it quits to spend more time with his family. By then, a legend had been born, and to this day his investment strategies are still analyzed and yielding big profits for

3.

Philip A. Fisher

The importance of research in the stock market becomes evident when one considers the name of Philip A. Fisher. A college dropout from the Standard Business School, he became one of the top investors in history. Fisher was a visionary with an investment career that spanned over seven decades. He stressed a longterm perspective when buying stocks and searched for companies that displayed innovation. Fisher recognized the technology potential of Motorola in 1955 and acquired a position that he held until his passing in 2004. He also acquired shares in Texas Instruments in 1956, long before it would became publicly traded in 1970. His investment philosophies, recorded in his investment classic, ‘Common Stocks and Uncommon Profits’ (1958) are still relevant today and are widely studied and applied by investment professionals. His famous ‘fifteen points to look for in a common stock’ were divided up between two categories: management's qualities and the characteristics of the business. Important qualities for management included integrity, conservative accounting, accessibility and good long-term outlook, openness to change, excellent financial controls, and good personnel policies. Philip Fisher searched far and wide for information on a company. A seemingly simplistic tool, what he called ‘scuttlebutt’, or the ‘business grapevine’, was his technique of choice.

“The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses.” (Warren Buffett)

4.

William O’Neil

This man launched Investor's Business Daily, the widely popular and highly respected financial publication, in 1963 as an option to The Wall Street Journal. He also developed the C-A-N-S-L-I-M system, which was driven by in-depth analysis of every big stock market winner over a 40-year period. Each letter in C-A-N-S-L-I-M represents one of the seven key factors that O'Neil found was prevalent in the stocks that showed the biggest price moves. Each letter in CANSLIM stands for common characteristics which proponents claim are found in the greatest stock market leaders over the past 50 years:

history of the stock market. Regardless of the market conditions, Buffet has proven to be a consistent performer over time, with an incredible compound return of around 22.3% over a 36 year period. Buffett's criteria for "wonderful businesses" include, among others, the following: They have a good return on capital without a lot of debt. They are understandable. They see their profits in cash flow. They have strong franchises and, therefore, freedom to price. They don't take a genius to run. Their earnings are predictable. The management is owner-oriented. John Train, author of ‘The Money Masters’ (1980), provides us with a succinct description of Buffett's investment approach: "The essence of Warren's thinking is that the business world is divided into a tiny number of wonderful businesses – well worth investing in at a price – and a large number of bad or mediocre businesses that are not attractive as long-term investments. Most of the time, most businesses are not worth what they are selling for, but on rare occasions the wonderful businesses are almost given away. When that happens, buy boldly, paying no attention to current gloomy economic and stock market forecasts."

Five legendary investment minds C = Current earnings per share. They must be up 18 to 20% or more. A = Annual earnings. They should be up 25% or more in each of the last three years.

N = New. The company should be under new management, have a new product, or have a new service. It should also have a new high for its stock price.

S = Shares of common stock Outstanding: Keep it small. The price of a common stock with 300 million shares outstanding is hard to budge up because of the large supply of stock available.

L = Leader or laggard? Within an industry, always choose the company that is leading the way, not one that is following in another's footsteps.

I=

Institutional sponsorship. Make sure large mutual fund companies (and other institutions) are investing in your stock - you can ride on their capital. Also, focus on the better performing institutions buying your stock.

M = Market trends and market indices. Recognize the cup and handle pattern, as well as other market correction footprints. Know when a stock has peaked out. Also, buy stocks only when all exchanges are going up. William has written books like '24 Essential lessons for Investment Success', 'The Successful Investor' & 'How to Make Money in stocks' etc.

5.

Warren Buffet

Marshall Weinberg of the brokerage fi rm of Gruntal & Co. told about going to lunch with Buffett in Manhattan: “ He had an exceptional ham - and cheese sandwich. A few days later, we were going out again. He said, ‘ Let’s go back to that restaurant. ’ I said, ‘But we were just there.’ He said, ‘Precisely. Why take a risk with another place? We know exactly what we ’ re going to get.’ "That,” said Weinberg, “is what Warren looks for in stocks, too. He only invests in companies where the odds are great that they will not disappoint.”

Buffet was the only student at Columbia to receive an ‘A+’ from Benjamin Graham. Later on he went on to become one of the wealthiest people in the world, with an estimated net worth of $52 billion in 2006, according to the Forbes annual ranking of the world’s richest people. Warren Buffet is widely considered the icon of value investing and is arguably the best investor in the Arvind Passey Corporate Communications BLB Limited | 4th Floor, Rear Block, Gulab Bhavan, 6, Bahadur Shah Zafar Marg, New Delhi – 110 002 | Ph: 011-32968120/ 21 extn: 229 | Mobile: 09871139992 | www.blblimited.com | [ Truth needs words just as much as it needs silence ] [ Communication is the death of distance! ]