Safal Niveshak Investment

8/12/2019 Safal Niveshak Investment

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Lesson #1: Why Invest in StockMarkets?

Value Investing for Smart Peopleis a course that will teach you the simple and sensible

strategies to invest in the stock markets to grow your wealth over the long term.

But since this is the very first lesson, let us answer this question to start off with

Why invest at all?

All of us have a long list of financial goals, starting with things like paying the EM of our

house, putting food on the table, and paying all other bills so that we live comfortable

lives.

!hen you work your way down the list, you get to things like replacing the old car, buying

a second house, putting the kids through college, and retiring.

"ou see, most of our wants # and you might associate with this # will e$ceed our

e$pected lifetime earnings. %his is even before you include a lu$ury car and a foreign

holiday that you&ve promised your wife.

'ow to you plan to meet all these e$penses( )emember, we&ve already said that most of

these e$penses will e$ceed your e$pected lifetime earnings.

*o how do plan to meet at least the critical financial needs that will arise in the future #

like putting the kids through college, and your own retirement(

"ou already work so hard to earn money to meet your e$penses and save for the future.

"ou toil hard, you sacrifice your personal life, and sometimes your health in the race to

earn more and more money.

But amidst all this, how much thought do you give to that fact that you can take help from

+someone else& as well to earn us more money to help you meet all your financial goals in

the future.

et me cut it short here. %hat +someone else& is none other than your own money # what

you are earning and saving today.

"es, your own money can earn money for youand lots of it- eople who are rich know

this for a fact. But most of us in the middle class don&t.


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After all, our school and college education has never taught us this way to earn money.

And neither have our parents.

!hat we have always learnt is to study well, get a good /ob, earn money, and save for

the future. 0obody has really told us that there&s one more aspect to our working and

earning life # investing for the future.

%his is the reason most ndian middle1class households +save& money # in safe deposits

of banks and post offices, or in the form of gold and silver # and rarely +invest&. "ou might

be one of them too.

But do you know how much our money grows when kept in these +safe& places(

A bank account can give you a ma$imum of 2134 interest per year. A bank fi$ed deposit

or a post office saving will give you somewhat better, but only 5164. 7old and silver

won&t earn you anything till the time you don&t sell them. And as far as property is

concerned, in a normal year, it can rise at an 819:4 rate as well.

;Aren&t these good returns(< you might ask. 0ot really, let me say-

!hile calculating your +real& return from all these or any other avenue, we must also take

into account the +inflation& factor.

n simple terms, inflation is nothing but a rise in prices of things that we consume. *o, if

we are paying )s =: a kg for onions today while these were costing )s 9: a kg one year

back, the rate of inflation is a whopping 3::4. But this is an e$ception.

nflation is ndia has generally been in the =164 range over the past many years. And it is

e$pected to remain in this range in the future as well, notwithstanding sharp spikes and

falls in between.

*o, when you calculate the +real& return on your investment, you must reduce the inflation

rate from your total return. ike, if your bank account gives you an annual interest of 34

while inflation is at =4, your real return equals a negative 94 >194?. And if a fi$ed

deposit gives you 84, your real return will stand at 24 >84 minus =4?.

0ow do you think that this kind of return is fine, especially when inflation rate is only

going to rise in the future >given the rising shortage of everything we consume?(

t isn&t. mean this is not what we can call +growth of our money&. nflation actually eats

into our money. And how(


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et&s assume that you have )s 9:: with you are looking to buy onions. At a rate of )s 9:

per kg, you will end up buying 9: kg of it. But what is the price rises to )s =: a kg after

one year while you still have only )s 9:: to spend(

n that case, you will be able to buy only @ kg of onions. %hat&s the negative effect of

inflation # the value of every rupee you will have in the future will be lesser than the value

of that one rupee today. And that&s the where the concept of investing and inflation

comes into play. %o grow your money fast at a time when inflation is eating into it is very

important.

orget onions. ook at the total cost of living that is rising at such a fast pace these days

that that we need to prepare ourselves well to meet our future financial obligations. And

these can include our children&s high education and marriage, our parents& healthcareneeds, and our own retirement. All these are big e$pense items and as such we need to

save and invest a lot to collect their kind of money over the ne$t =, 9:, 9=, or @: years.

et us now look at how many years you will take to accumulate )s 9: lac for your new

born daughter&s higher education 98 years down the line, if we start with )s @ lac today.

!e will assume real returns >total return minus inflation of =4? of different avenues to

arrive at this number.

'ere&s the chart that shows it all.

Note: Real returns (shown inside brackets) are calculated assuming inflation rate of !

As the above chart shows, the only way to meet you target of reaching )s 9: lac >if you

start with )s @ lac today? in 98 years is to invest in stocks. !hile your bank will not


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get you anywhere, the property route will take a much longer time that what your

requirement >of 98 years? permits.

%hese calculations are not based on some random numbers. %hese are e$actly what

these investment avenues have earned over the long term in the past.

%hus we arrive at the fascinating >though risky? world of stock markets # one of the most

critical investment avenues that can help you achieve your long term financial goals.

/ust said that stock market is a risky place, but so are our lives. %here is always a risk in

anything we do. But then, with the right education and research, we can minimiCe that

risk. And as we get more education, we can better decide how much risk we want to take

and conversely how much return we can make safely.

Dnderstanding the risks is the first step toward minimiCing them. n fact, it is possible to

make 9:19=4 annual return on your stock market investment with almost no risk. But

only if you know what you are doing.

%here are many paths you can go down when you get into investing in the stock market.

But there&s one thing you can be sure of. !ith education and research you will make

money.


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Lesson #2: Hey, You Call ThisInvestin?

"I am reall# shocked to hear #our stor#$ Ravi% &ut how did #ou manage to do this' I said

in a tone of s#mpath# mied with sarcasm*

"I don+t know Vishal* I had been so careful all this while with m# investments* &ut despite

that$ I have lost ever#thing in the crash* ,# stock portfolio is down in the dumps% Ravi

sounded utterl# depressive*

"-ou call that investing' &u#ing stocks without a hint of what #ou were getting into' It+s

like flirting with someone and then sa#ing that #ou were serious all this while%

still remember this small conversation with a friend sometime in ctober @::8. %his

gentleman, my classmate from school, had been a bright student in the past. 'e was a

practicing doctor, but had no clue about investing in the stock markets.

But one fine day, on advice from some of his patients >yes, even patients can give

doctors some +painful& advice?, took his first step into the stock markets only to see his

savings burn in the crash that followed.

*ometimes wonder how even intelligent people >like my doctor friend? fall into the trap

of playing with their hard1earned money without knowing what they are getting into.

%hey work so hard for many years to become successful students, professionals, and

businessmen. And then, in a small phase of mindlessness, lose their entire savings /ust

because +someone& advised them a way to become rich fast.

Most of such people have had the luck to meet call what they are doing as +investing&.

f the father of investing # or let me say +sensible investing& # Ben/amin 7raham were to

hear that, he&d turned over in his grave-

7raham was the first to clearly define what +investing& actually is, and how it differs from

what most people do in the stock markets >like my friend did? i.e., speculate.

n what is known as the best book on investing ever written # %he ntelligent nvestor #

7raham differentiated investment and speculation asF


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!"n investent o$eration %investin& is one 'hich, u$on

thorouh analysis, $roises sa(ety o( $rinci$al an) an a)e*uate

return+ $erations not eetin these re*uireents are

s$eculative+-

%his definition of investing isn&t difficult to understand.

n fact, it can easily be understood if we break it down to its three key elements.

9. irst, 7raham says that you as an investor must thoroughly analyse a company,

and the soundness of its underlying business operations. !hat he means alternatively

is that an investment in a stock without understanding its underlying company is

purely speculation.

@. %he second important task for you is to identify all the potential risks associated

with the investment so that you can protect yourself against chances of serious

losses.

2. %he third key element of 7raham&s definition is that an investor must aspire for

only an +adequate& return on his stock market investments # any rate if return,

however low, which the investor is willing to accept, provided he acts with reasonable

intelligence. 'e must not go after +e$traordinary& performance, which is what the stock

market e$perts usually promise to dupe gullible investors.

%he combined practice of these key elements is what investing is all about.

Invest, to eet your li(e.s oals

"ou must have some dreams and goals in life. "ou also realise that most of these

dreams and goals require money.

*o whether it is the dream of spending your @=th wedding anniversary traveling around

the world, or the goal of saving enough money for your child&s higher education, you

need to have enough money at your disposal whenever you need it.

%he good part here is that you usually need this kind of money 9:19=, or sometime even

@: years from the time you first start investing your savings.

*o you have ample time to see your investments grow and build into a huge corpus that

you can use to meet your dreams and goals.


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But /ust because someone advises you a +sure1shot& way to get rich fast by speculating in

the stock markets, you spend your entire life&s savings in speculation only to lose

everything when the markets take a bad turn.

!/ut, is s$eculation a sin?-%his is what most of my friends whom warn against speculating in the stock markets ask

me. And &m glad you also want to know this.

*ee, there is no doubt that speculation is bad. *peculators are always obsessed with

predicting the future of stock prices, which is in fact a near impossibility.

*peculators thus depend not only on their own forecasting skills, but they also go by the

baseless and biased predictions of brokers or stock market e$perts appearing on

business channels. %hey try to guess the future, which is ne$t to impossible-

But for better or worse, the speculative or gambling instinct is a core part of every

human&s nature.

"ou and both want to speculate at some points in our lives. And stock markets are no

different.

*o what 7raham has also said is that even if an investor wants to speculate, it

>speculation? must be a restrained activity. t must be controlled by the amount of money

you use in speculation.

"ou can call it +sin money&, and it must be not more than =4 of the total funds you have

for investment.

0ever increase this level of sin money i.e., money you use to speculate in stocks. %his

way you won&t go overboard with your speculation.


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The Investent0S$eculation yrai)

But this requires a lot of discipline. And the discipline says that you must never equate

speculation with serious investing. %his is because as soon as speculation becomes a

serious activity, it gets e$tremely dangerous for you.

'ere, remember what the famous American author Mark %wain once saidF

!There are t'o ties in a an.s li(e 'hen he shoul) not

s$eculate: 'hen he can.t a((or) it, an) 'hen he can+-

Anyways, stay tuned for the ne$t lesson, because here&s where things start to get

interesting. &m going to give you some specifics about the kinds of strategies that work

well to make money from stock markets, and in a sensible and easy1going way.


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Lesson #: There.s " /usiness /ehin)3very Stock

f were to ask you to bet your money on the future success of one of your classmates or

colleagues, whom would you choose(

!ould you bet on your best friend amongst these people(

r would you bet on the most capable person >assuming that you friend is not the most

capable out there?(

f can trust your G, betting on the most capable person would make greater sense for

you than betting on your best friend.

%he same philosophy holds true while investing in stocks. "ou must not put your money

on a stock whose name you like the most or whose chairman is your best friend.

nstead, you must invest in the stock of a business you believe has the ma$imum

potential.

But this is one reality that most investors forget # that

!4 a stock is not 5ust a $iece o( $a$er that has a nae, 6ut a

share o( a 6usiness that has real assets an) $ro(its+-

!hile buying a stock, you should take the same approach as you would if you were

buying an entire business. %he only difference is that instead of buying the whole of the

business, or a partnership in the business, you are only buying a tiny share.

Investin.s nine ost i$ortant 'or)s

;nvesting is most intelligent when it is most businesslike,< said Ben 7raham.

As per 7raham&s best student !arren Buffett, these are the nine most important words

ever written about investing. And rightly so-

%he biggest differentiating trait of Buffett&s own investing philosophy is the clear

understanding that stocks are representative of businesses, and not /ust pieces of paper.

%he idea of buying a stock without understanding the company&s operating functions # its

products and services, management quality, employee relations, raw material sources


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and e$penses, plant and equipment, capital reinvestment requirements, and needs for

working capital # is unacceptable.

%his mentality reflects the attitude of a business owner as opposed to a stock owner, and

is the only mentality an investor should have.

wners of stocks who perceive that they merely own a piece of paper are far removed

from the company&s financial statements.

%hey behave as if the stock market&s ever1changing price is a more accurate reflection of

their stock&s value than the business&s balance sheet, income statement, and cash flows.

or Buffett and all other successful investors , the activities of a stock owner and a

business owner are closely connected. Both should look at ownership of a business in

the same way.

As Buffett saysF

!I a a 6etter investor 6ecause I a a 6usinessan an) a 6etter

6usinessan 6ecause I a an investor+-

As e$plained in +%he !arren Buffett !ay& by )obert 'agstrom, these are some of the key

questions that you must answer to understand the business of a company.


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7uestions you ust ans'er to un)erstan) a co$any.s

6usiness

et&s discuss them in some detail here.

Guestions on the core business

1+ Is the 6usiness si$le an) un)erstan)a6le?

0ever invest in a business you do not understand, for you can&t see the future

opportunities and challenges before they arise.

2+ 8oes the 6usiness have a consistent o$eratin history?

ast performance is no guarantee for future success, but it shows if a business can

operate under varying business conditions.

+ 8oes the 6usiness have (avoura6le lon ter $ros$ects?

+*ustainable business& is the key word here. *tay away from companies that operate on

trends and fads that can go out1dated in the future. ook for business that can sustain in

the long term.

Guestions on management quality

9+ Is anaeent rational?

0ow this is a very important part of an investor&s business analysis. %he rationality of the

management and its ability to deploy cash in a profitable manner is what separates a

good business from a bad one.

+ Is anaeent can)i) %(rank& 'ith its sharehol)ers?

"ou don&t want to get into a future *atyam, right( ook for managers that admit mistakes


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and take complete responsibility of their actions.

;+ 8oes anaeent resist the institutional i$erative?

nstitutional imperative is the need for managers to act like their peers, no matter how

irrational their actions may seem. Avoid managers who have the tendency to give in to

peer pressure.

Guestions on financial position


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Lesson #9: >no' Your Circle o( Co$etence,an) Stay Well Within It

".hat did #ou stud# in #our college$ Ravi' I asked m# friend*

"-ou know Vishal that I am a doctor% .h# are #ou asking this unintelligent /uestion' Ravi looked at me

with disgust* 0e was alread# disappointed seeing his stocks crash and savings wiped out* 1nd now he

had to face such /uestions from me*

"2h oka#$ so #ou studied how medicines work on a human bod#$ right' &ut what made #ou invest in a

banking compan# then' 3o #ou know how a bank works'

"No Vishal% &ut are #ou telling me that a doctor can+t invest in a banking stock'

"No$ I am not sa#ing that% .hat I am sa#ing is that #ou must not invest in a banking stock if #ou don+t

understand how a bank works*

Ravi looked with confusion at me as I continued$ "If #ou don+t know wh# rising interest rates suggest and

how it is different from what rising blood pressure indicates$ #ou have no right investing in a banking

stock*

"ou see, we generally do not know the answers to questions from sub/ects we have not studied in the

past. And we are humble in accepting our ignorance on such sub/ects.

But things get different when it comes to investing in the stock markets. !e have no qualms in going

beyond the boundaries of what we know.

!e have no doubts before treading beyond our +circle of competence&.

or most investors, investing outside their +circle of competence& is what creates the ma$imum losses.

What.s your circle o( co$etence.?n simple terms, your circle of competence with respect to investing defines your understanding about

certain businesses.

%he businesses that you understand fall within the circle, and the ones you don&t understand fall outside

it.

As !arren Buffett, the world&s most successful investor ever, has said so oftenF

!You )on.t have to 6e an e@$ert on every co$any, or evenany+ You only have to 6e a6le to evaluate co$anies 'ithinyour circle o( co$etence+ The siAe o( that circle is not very

i$ortantB kno'in its 6oun)aries, ho'ever, is vital+-


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%his means that you as an investor need to restrict yourself to the businesses you know # businesses

you can understand.

Dnderstanding one&s circle of competence is a very necessary discipline in investing. %hose who do not

do this are left to suffer.

8ra' your o'n circle as /u((ett )i) his4Buffett&s investing process involved creating three lists of companies # n, ut, and %oo 'ard.

/u((ett.s List o( Co$anies

%his was his way of sticking to his circle of competence, however small it was.

As he said, ;!e have a ton of doubts on all kinds of things, and we /ust forget about those.inflow

and outflow? of all cash during a year. And cash, as you must know, is the most precious resource for a

business.


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Sa$le Cash Flo' Stateent

Ho' these stateents hel$?*o these were the three key financial statements through which businesses talk to investors. %hese

statements help businesses showcaseF

9. erformance during the year gone by # !hether the year was a good one of bad one for the

company.


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@. 'ow strong the business is # %he stronger a business, the more capable it is to face slowdown

and competition.

2. %he level of profitability # a highly profitable business gets the ma$imum investor attention.

3. !hether the business is guCCling cash or releasing a lot of it # %he former type of business ishated by intelligent investors, and the latter loved.

%he ability to read financial statements and understand what they convey will open up several areas for

you to analyse stocks, buy the good ones, and ignore the bad ones.

By knowing how to read and analyse financial statements, you will be able toF

9. Dnderstand how a specific company has performed in the past.

@. Dnderstand whether the company is doing a profitable business or is running loss1making

operations.

2. *eparate well1performing companies from the bad ones that are losing money for

shareholders.

3. Jnow if a company is using faulty accounting to inflate its sales andNor profits.

=. )ealise that some stocks you already own in your portfolio, are actually dud businesses that

are doomed to fail.

"es, this fifth realisation is the most striking aspect of your understanding of the financial statements.

have met several investors over the past few years # some from within my e$tended family, some from

among my previous company&s clients, and some /ust by the way.

!hat has amaCed me is that a ma/ority of these investors # and several have been old timers in the

stock markets # know little or nothing about identifying a good balance sheet from a bad one. And it&s

not by chance that almost all these investors have a large proportion of their portfolios invested in bad

stocksNweak companies.

But don&t blame them for their ignorance, which they have misunderstood for bliss all these years.

%heir source of stock ideas have been brokers, friends and relatives # people whom you can consider

least likely to tell you how a goodNbad balance sheet looks like.

robably you might have been one of their types. And if that&s the case, don&t worry.

!e have /ust studied the key financial statements that you need to read in a company&s annual report to

make out how it is doing.

0ow, let us move a bit deeper, and understand some key financial terms and ratios that you must know

in order to make a /udgement on a good business versus a bad business.


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%his is going to be a pretty long lesson, so you can read it over the ne$t few days before you get the

ne$t lesson. !hile the sub/ect is boring by nature, &ve tried to make it as easy and interesting as

possible.

*o let&s get started.

1+ SalesGevenue*ales is what a company earns by selling its products or services. or e$ample, if Kompany A sells 9::

units of a product at )s =: per unit, its sales will be )s =,::: >or 9:: multiplied by =:?.

!hile the sales figure is /ust the entry point to your understanding of a company&s financials, it is

important to know how the company is doing on this front. or, without sales, there won&t be any

business.

%racking a company&s sales growth over a number of years >at least 9: years? gives a good indication of

its siCe and stability. A company with a stable growth in sales over a 9:1year period is generally

considered better as compared to a company that has a rapid yet volatile sales growth history.

2+ et ro(it%his is +the& figure most investors look out for in a company&s account. 0et profit represents the

money left over with a company after reducing all kinds of e$penses from its sales. 0et profit is akin to

your monthly savings after paying for all household e$penses from your monthly income. ike sales,

looking at the long term performance of net profits gives a good indication of a company&s financial

health and stability.

+ $eratin arin, or ro(ita6ilityrofit >like net profit, as we discussed above? is what a business earns after it reduces all e$penses from

its sales. But profit is a number and does not e$plain much on an as1is basis. !hat is more important for

you as an investor is the +profitability +, which is equal to the money a business makes for every rupee of

its sales.

Assume Kompany A sells toys worth )s 9:: in a year and earns a profit of )s 3:. Kompany B sells toys

worth )s =: in the same year and earns a profit of )s 2:. 'ere, the profit of company A is higher than

profit of company B >3: O 2:?.

But when to comes to profitability, that of company B is better than that of company A >2: divided by =:

is greater than 3: divided by 9::?. Always remember, profitability is more important than profit in

understanding how a business is doing.

n highly competitive industries, a more profitable business has a greater fle$ibility to reduce prices to

fight competition. A more profitable business also generates more cash to spend on its e$pansion and

pay dividends to its shareholders.

9+ 8e$reciation

All the fi$ed assets, e$cept land, that a company owns >like plant, machinery, computers, automobiles,


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etc.? are sub/ect to a gradual loss of value through age and use. %he allowance made for this loss of

value is known as depreciation >or obsolescence, depletion, and amortiCation?.

%he amount of depreciation to be charged each year is based on the value of the property >usually

taken at the cost it was bought at?, its e$pected life, and the salvage or scrap value when it is retired.

et&s understand with an e$ample. "ou buy a car for your personal use at a cost of )s =::,:::. %he

e$pected life of this car is = years, and your e$pected scrap value is )s =:,::: >at which it can be sold

off after = years?. n this case, the annual depreciation charge will be 9N=th of )s 3=:,::: >)s =::,:::

minus )s =:,:::?. %his gives )s P:,::: as the annual depreciation charge. A company will reduce such

an amount from its operating profits every year.

'owever, note one important thing here. epreciation is a non1cash charge i.e., a company does not

have to +pay& depreciation to anyone. t only needs to reduce the depreciation amount from its operating

profits.

0ow, since it reduces this amount from its operating profits, the ta$ it has to pay to the government also

gets reduced >as net profit before ta$ comes down due to reduction of depreciation e$penses from the

operating profit. Money so saved can be used by the company to replace the depreciated asset after the

end of its useful life.

%his is the core reason behind the concept of depreciation # it enables companies to save ta$es every

year so that it can accumulate money so saved to buy replace its old assets after cross their useful

lives.

Note:In case #ou have an# doubts4problems understanding the financial concepts as eplained in this

lesson$ please fee free to send me a message using the 5ontact page$and I+ll be able to eplain #ou

further*

+ 3*uityAlso known as shareholders& funds or book value, equity is the money shareholders >like you? put in the

business. Equity is a very important concept in financial analysis because a very rough relationship

tends to e$ist between the amount invested in a business and its earnings.

t is true that in many individual cases we find companies with small book values earning large profits,

while others with large book values earn little or nothing. "et, as Ben/amin 7raham suggests in his 6he

Interpretation of 7inancial Statements>one book you must read to understand financial statements?, in

these cases some attention must be given to the book value situation, for there is always a possibility

that large earnings on book valueNinvested capital may attract competition and thus prove temporary.

;+ 8e6tEquity is what belongs to the owners of the business >shareholders like you?, debt is what is borrowed

>from banks and others? by the owners of the business. !hile the owners of equity >shareholders? have

a claim on the company&s earnings >by way of dividends?, those that e$tend debt to companies >like

banks? receive interest payments every year.
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An important ratio you can work out here is the amount of working capital per rupee of sales. ower the

ratio, lower is the working capital requirement of the company, and the more financially strong it is.

Note:In case #ou have an# doubts4problems understanding the financial concepts as eplained in this

lesson$ please fee free to send me a message using the 5ontact page$and I+ll be able to eplain #ou

further*

=+ Free Cash Flo'Kash >as you can see in the balance sheet above? is what a business holds in banks and other

investments. But the concept of free cash flow >K? is entirely different.

K is what a business is left with at the end of every year after it takes care of its capital e$pansion

and working capital needs. *o if you look at the cash flow statement in the previous slide, the K will

be calculated asF

K Q Kash flow from operations # Kapital e$penditures

Q )s 2:==.6P lac # )s 6@@.92 lac

Q )s @222.55 lac

n simple terms, K tracks the money a business has generated by the end of each year. t&s the cash

that is left over with the company at the end of the year, after it pays all its bills and pays for any new

capital e$penditures. t is what it has left over to pay investors. And that is why K is one of the most

important numbers you must track as a shareholder in a company.

J+ eturn on e*uity)eturn on equity, or )E, is one of the most useful tools to determine how well management creates

value for shareholders. %he formula isF

R2; 8 Net profit 4 ;/uit#

!e&ve already discussed both +net profit& and +equity& in this lesson, so you must not have any problem

calculating the )E.

%he legendary investor, !arren Buffett believes that the return that a company gets on its equity is one

of the most important factors in making successful stock investments.

As such, the higher the )E, the better it is for shareholders, as it indicates that the management has

allocated capital >equity? in a profitable way.

A higher )E also means that surplus funds can be invested to improve business operations without

the owners of the business >shareholders? having to invest more capital.

t also means that there is less need to borrow, which is a positive sign for the business >we read above

the perils of borrowing more?.

1K+ 8ivi)en)ne of the most loved words in a shareholder&s dictionary, +dividend& is a payment made to the
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shareholders >owners? of a company, out of the company&s profits. Most ndian companies usually pay

dividends on a yearly basis while some also do it quarterly.

*o why is dividend important( *imply because it comes out of a company&s profits. r, more

specifically, its free cash flow. A consistent, rising dividend payment is usually a hallmark of a solid, well1

run business that generates substantial, consistent cash flow.

All things equal, that equates to a relatively stable business and a stock that might be a little less volatile

than the market at1large. n other words, companies that pay consistent and rising dividends are usually

lower risk than companies that don&t pay dividends.

*ee, these are some of the basic yet among the more important concepts that you must know as an

investor. "ou will get data for all these terms and ratios in a company&s annual report.

"our /ust need to pull out the relevant data, make necessary calculations, and check for yourself the

financial health of the company.

Anyways, won&t go further into the sub/ect here, as that would require the space of a book.

!hat you can do is pick up a high school accounting book or basic book on finance and that will teach

you everything you&ll need to know about understanding financial statements.

"ou might ask # s there a way can invest without understanding financial statements(

f course, there&s a way. But it&s very much like climbing Mount Everest without knowing

mountaineering.

"ou might still reach the peak, but the chances are miniscule.

"ou know that, don&t you(


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Lesson #;: It.s "ll "6out The Intrinsic alue

Kan you compare the price of a Mercedes *1Klass and that of a Maruti18::(

f course, one costs )s 5: lac while the other costs less than )s 2 lac. And you can compare )s 5: lac

with )s 2 lac.

But then, is that the right comparison( mean, isn&t this the same as comparing apples to oranges(

%he two cars have different values in terms of lu$ury, safety, quality, and brand value. *o comparing

them /ust on their prices won&t be the right idea. "ou need to see the difference in their values.

After all

!rice is 'hat you $ay+ alue is 'hat you et+-

%he same goes for stocks. A )s =: stock might be considered cheaper than a )s =:: stock. But that&s

an incorrect way of looking at it, /ust like comparing the price of a Mercedes with a Maruti18::.

As we learnt in thethird lesson,a stock is not a piece of paper but a share in a business. *o it is

important to compare a stock&s price with the company&s business value >and not with anything else,

ever-? to ascertain whether it is cheap or e$pensive as compared to another stock, and also in isolation.

%he )s =: stock might be backed by a business whose value is )s @= # thus a price1to1value of @ times

>=: divided by @=?. n the other hand, the )s =:: stock might be backed by a business whose value is

)s 9,::: # thus a price1to1value of /ust :.= times >=:: divided by 9,:::?.

!hat this means is that the first stock is priced at @ times the business value, while the second stock is

priced at thus :.= times >or =:4? the business value.

0ow, which is cheaper( %he )s =: stock, or the )s =:: stock( Based on this short analysis, the )s =::

stock definitely looks cheaper. sn&t it(

Anyways, the idea of this discussion is to bring to light the key investing concept of +intrinsic value&. n

simpler terms, you can also call it the +core business value&.

*o, why you should calculate intrinsic value(

!To calculate intrinsic value is vital+ It is one secret tosuccess(ul investin that you can.t a((or) to inore+ You nee) to

calculate the intrinsic value 6ecause you ust not 6uy anystock at any $rice+-
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%he price you are paying is the ultimate determinant for the rate of return that you&ll be earning from a

stock. %he higher the price you pay for it, the lower will be your return. As simple as that-

And that is why you need to know how much a stock is really worth. nce you know its intrinsic value,

you can identify if the stock is trading cheap or e$pensive. A very high stock price as compared to the

business& intrinsic value means that the stock is e$pensive >like our first stock above?. And a low price

as compared to the intrinsic value means that the stock is cheap >like the second stock as discussed

above?.

%hese are general rules of thumb. !e will understand the specifics of how much price to intrinsic value

makes a stock cheap or e$pensive in the ne$t two lessons. And we will also study the different ways you

can calculate the intrinsic value of a stock.

But for starters, remember that intrinsic value is an estimate rather than a precise figure. And it is an

estimate that must be changed with changes in the variables that are used to calculate it >don&t worry,

we will study all that in the ne$t two lessons-?


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Lesson #7: Calculating Intrinsic Value-

Part I

Moving ahead from the previous lesson on the basics and purpose of intrinsic value,lets now move a bit further into this very important subject for value investors.

Lets learn something about the different ways you can calculate the intrinsic value of

a stock.

But first, heres the easiest and the most important definition of intrinsic value that

youll come across anywhere. This is what arren Buffett wrote to his companys

shareholders in !""#$

%e define intrinsic value as the discounted value of thecashthat can be taken out

of abusinessduring its remaining life.&

'n simpler terms, intrinsic value of an asset is the discounted value of the e(pected

cash flows that that asset can earn over its life.

Cash I know, ut whats the discounted value!'n his definition of intrinsic value, Buffett mentions that the intrinsic value is nothing

but the )discounted value of cash that can be taken out of a business.

Lets understand these two key terms *

!. +ash

. -iscounted value

Most investors believe that understanding the term )cash is akin to understanding the

nglish alphabets.

But your see, cash isnt as simple as +/0/1/2.

+ash is not what a company earns when it sells its products or services. 0nd it is

neither the profits a company makes during the year after paying its operating

e(penses 3like raw material costs, employee salaries, sales 4 marketing costs,administrative costs5, interest, depreciation and ta(es.

+ash is beyond these * sales and profits.

Cash is what re"ains with a usiness at the end of a ear and after $aing for

the cost of anthing and everthing a usiness us and $as for during the ear%

1o it is a much/refined form of profits. But it is what remains with a company after

also paying off the dividends, cost of new plant 4 machinery and buildings 3or capital

cost5, and working capital changes 3and adding back depreciation which is a non/cash

charge5.
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This cash is also known as )free cash flow, and it is the ultimate measure of a

companys profitability.

By looking at freecash flow, you can see whether a company is actually making any

money and you can get a sense of what its spending its money on.

Lets now turn our attention to the second critical element of Buffetts definition * the

)discounted value.

-iscounted value is used to define thepresentvalue of future cash flows. 1o it is also

known as the )present value.

Let us understand this concept using a simple e(ample.

'f ' offer you 6s !77,777 and you could receive it now or in !7 years, when would

you take it8 Most likely you would say, %9ow.&

This is because you already know that money received now is more valuable to you

than money received in the future, simply because you can invest this money 36s

!77,7775 to earn interest on it for the ne(t !7 years.

9ow assume that the interest rate that a bank is willing to offer you for 6s !77,777

that you depositit there now is !7:. 1o your cash flow for the ne(t !7 years will look

like this$

PV when cash flows are constant &as in ank de$osits'

; 0ssuming interest rate of !7:, which will also be the discount rate

hat this table shows is that if you deposit 6s !77,777 in a bank at !7: interest rate,

you will earn 6s !7,777 as interest 3cash flow5 for the ne(t !7 years, plus your capital

36s !77,7775 at the end of the tenth year.
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9ow, when you calculate the present value of each of these cash flows 3as shown in

column +5, and total it, the sum comes to 6s !77,777, which is the present value of all

these cash flows 3that total to 6s 77,777 over this !7 year period5.

1o, as you can see from the e(ample, while you receive a total of 6s 77,777 over

these !7 years, when you calculate the present value, the number comes to 6s !77,777or e(actly what you had deposited in the bank.

9ow, the .

1o, while you invest 6s !77,777 today, the present value of your total cash flowsstands higher by 6s ",#@>, which makes it a profitable investment.


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Fiven this limitation of trying to predict the future, 've changed my way of analysis

to value stocks based on the present data rather than what will happen in the future.

Thats why ' now dont try be accurate with my E+E growth estimates. ' just try to be

reasonable and use common sense.

Eor most stocks, ' generally perform a !7/year /stage -+E analysis. hat this means

is that ' assume a particular growth rate for the first five years of my E+E calculations

3as you can see in my -+E e(cel5, and then another number for the ne(t five years.

' rarely go above !7/!: annual growth rate for the first five years, and @/H: for the

ne(t five.

The best practice is to keep growth rates as low as possible.

'f the company looks undervalued with just =: annual growth in E+E over the ne(t

!7 years, you have more upside than downside.

The higher you set the growth rate, the higher you set up the downside potential.

To repeat, while assuming E+E growth rate for the future, just be reasonable and use

common sense.

0 caveat * dont take cues from the past as the past performance is rarely repeated in

the future.

% 4ow "uch discount rate do I assu"e!'n simple words, discount rate is the rate at which you must discount the future cashflows 3as estimated using above growth assumptions5 to the present value.

hy present value8 Because we are trying to compare the companys intrinsic value

with its stock price %now&I.in the present.

Just to help with an e(ample, what price would you pay for an investment today if

company 0B+s future cash flow is worth 6s !,777 after ! year8

'f the discount rate is =:, you must pay 6s "= now 3!777K!.7=5.

'f the discount rate is !7:, you must pay 6s "7" now 3!777K!.!5. 'f the discount rate is !=:, you must pay 6s H?7 now 3!777K!.!=5.

'n other words, the higher the discount rate you assume, the lower you must pay for

the stock as of now.

Einance te(tbooks and e(perts would tell you to use +apital 0sset Aricing Model

3+0AM5 to calculate discount rate. ' used +0AM myself to arrive at discount rates in

the past.

2owever, if you are worried what +0AM is, dont be because you can avoid knowing

about it and still live happily ever afterI.like ' am living.


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Look at discount rate as the %annual rate of return& you want to earn from the stock.

'n other words, if you are looking to invest in a business that has comparatively higher

3business5 risk than other businesses 3like in case of most mid and small cap stocks5,

you may want to earn a !=: annual return from it.

Eor valuing such businesses, take !=: as the discount rate.

'n case of relatively safer businesses 3think 'nfosys, 2L, +olgate5, earning around

!7/!: annual return over the long term is a good e(pectation 3because these

businesses will also provide some stability to your portfolio during bad times5.

Eor valuing such businesses, take !7/!: as the discount rate.

Better still, assume a constant discount rate for all companies. ' am gradually turning

to this model * of taking a constant !=: discount rate for all kind of businesses 3safe

or risky5.

%But this way, how would you adjust for the risk in each business8& you may ask.

1imple * adjust the risk in E+E growth estimates. That is where the real risk lies,

right8

5% 4ow "uch ter"inal growth rate do I assu"e!0s ' mentioned above, ' do a !7/year E+E calculation for arriving at a stocks -+E

valuation.

But the companies 'm valuing wont cease to e(ist after !7 year. 1ome will survive

for !7 more years, some for 7 years, and very few for =7 years.

That is where the concept of %terminal value& 3or the value after !7th year and till

eternity5 comes into picture.

The terminal value ' generally assume lies between 7: and :. 0ssuming higher

terminal value 3>/#:5 is like assuming the company to grow bigger than the world

economy in the infinity, which isnt possible.

1o the idea is to keep it as low as possible. Best to keep it at 7:.


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Lesson #6: Calculating Intrinsic Value-

Part II

'f you are a reader of financial newspapers, or watch business channels, you musthave come across stock market e(perts and analysts blabbering terms like )AK or

)AKB.

Nou must have even cursed the speaker for using such difficult terms that bounced

above your head. 'f thats the case, you are not alone.

' have come across many investors who have been in the market for years, but who

still do not understand the basic difference between )price and )value 3the intrinsic

value as we discussed earlier5, forget understanding terms like AK or AKB.

But like investing isnt difficult 3its just made out to be difficult5, understanding theseterms and their relevance isnt hard as well.

1o lets start with the superstar of them all * the AK ratio or price to earnings ratio.

hy superstar8 This is because AK is by far the most popular valuation metric used

by investors and analysts to assign an intrinsic value to a stock.

The AK ratio of a stock is a simple tool for measuring the markets temperature. 't is

calculated by dividing a stocks price by the companys earnings per share or A1.

P/E atio = Price per share / !nnual earnings per share

1o if a companys latest years earnings 3or profits5 per share stand at 6s !7, and its

stock is trading at 6s !7, the AK of this stock is ! times. 'f the same stock moves

up to 6s !=7 while the earnings of the company remain at 6s !7, the AK moves up to

!= times. 1o both the change in a stocks price and the companys earnings define

how a AK ratio moves.

0s a general rule of thumb, higher a AK, more e(pensive is a stock as investors are

paying more for each rupee of a companys earnings.

P+2 8hats the right nu"er!The


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1o the point is that the AK of a stock depends on the companys


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Look at the top of this Balance 1heet. The formula to calculate book value is$

Book alue P


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balance sheet 3and thus the book value as shown on the balance sheet is an artificial

value5.

The sale of inventory would most likely be at some loss. 0nd the fi(ed assets will also

be sold at a substantially lower price than what these are shown in the book 3balance

sheet5.

'n general terms, book value is considered a measure of what shareholders can take

out from a company when it is li


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Lesson #: Insure ;our Invest"ents

8ith a


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=

1o if you pay just 6s !77 for a stock that you believe is worth 6s !=7, even if your

analysis goes wrong and the stock is actually worth less than 6s !=7, your investment

will still be safe.

Fiven that the calculation of intrinsic value 3of 6s !=7 in this e(ample5 is subjective

in nature, it is always better to have a good margin of safety while buying a stock. 0

>7/#7: margin of safety is what Fraham recommends.

This disciplined pursuit of bargains 3stocks that are available for >7/#7: less than

their intrinsic values5 makes value investing very much a risk/averse approach.

But the greatest challenge for you as an investor is to maintain that re


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=8e insist on a "argin of safet in our $urchase $rice% If we calculate

the value of a co""on stock to e onl slightl higher than its $rice,

were not interested in uing% 8e elieve this "argin-of-safet

$rinci$le, so strongl e"$hasi?ed 9en @raha", to e the

cornerstone of invest"ent success%>

Buffett describes margin of safety concept using this e(ample * %hen you build a

bridge, you insist it can carry >7,777 pounds, but you only drive !7,777/pound trucks

across it. 0nd that same principle works in investing.&

4ow "uch "argin is good "argin!+oming again to the


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Lesson #*A: 0he curious case of


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The above story is created using the parable of Mr. Market that was first told by

Benjamin Fraham in !"># in his )The 'ntelligent 'nvestor. ven after almost eight

decades of being first introduced, Mr. Market remains a manic figure.

0nd just like when he was introduced, the prices


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2ere are five most common biases that we carry with us, and which can really have a

negative impact on our decision making capabilities, including the way we invest in

stocks.

*% verconfidence

0nswer this simple 7s, the dotcom boom of !"""/777, and the more recent financial crisis are

the most famous e(amples of how investors have lost big time by doing what

everyone else was doing.

1o, which herd are you following8

Gnow the holes, and fill the"1imply noticing the holes in a boat wont save you from drowning. 0 boat will fill

with water whether you are aware of a hole or not. But by being aware of the holes

you can devise methods to patch them up.


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'n the same way, if you know how your biases can hurt you, you will take

precautionary action to safeguard yourself from them.

1o just be aware of yourselfG


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Lesson #*: Checklists, Checklists,

Checklists

'magine going to a doctor with a stomach pain after you have been operated upon.The doctor asks you to get an (/ray done. The (/ray report shows a piece of sponge in

your tummy.

Erightening, isnt it8 This could be life threatening.

0s per a study done by the orld 2ealth Organisation, such medical mistakes result

in around ? million getting disabled every year. One reason this number is not higher

is that doctors use what is known as a checklist before and after every operation.

Medical treatments have become so comple( that it is difficult for doctors to keep

personal check on each and every procedure. Mistakes still occur. But then thenumber of such mistakes is greatly reduced due to the use of such checklists. 1o,

checklists save lives.

The 1 0ir Eorce introduced the concept of checklists decades ago. These have

enabled pilots to fly aircrafts at mind/boggling sophistication. 'nnovative checklists

are now used in hospitals around the world. These help doctors and nurses respond to

everything from common cold to epidemics. ven in the comple( world of medical

surgery, a simple "7/second checklist has cut the rate of fatalities by more than a

third.

0 fair amount of research has been done in the past that suggest the immense value of

checklists. +hecklists are valuable as these help short circuit the human brain in a way

that it wants to work against us.

e generally are overconfident of our capabilities. 0 checklist can remind us that we

are not infallible, that we do make mistakes, and not to be too sure about our

decisions.

'nvesting in stocks is not as comple( as doing a medical surgery or flying an airplane.

But checklists play a very important role when it comes to investing in stock markets.

+harlie Munger, arren Buffetts partner at Berkshire 2athaway, can be credited of

first introducing the checklists in investing. Munger talked about these in his book *

Aoor +harlies 0lmanack.

2ere is a checklist ' have prepared from my study of Mungers checklists and that of

other great investors like arren Buffett and Ahilip Eisher.

0he Investing Checklist

Hte$ *: 3o the initial groundwork


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!. 6ead about the company * +ompany website, Foogle search, B1

announcements, 9ewspaper clippings

. 6ead about the competitors * 1ame sources as above

Hte$ : ead $ast F-*A ears annual re$ortsof the co"$an

!. 6ead the financial statements * 'ncome statement, Balance 1heet, +ash Elow

1tatement

. 9otes and 1chedules at the end of financial statements

>. Management discussion 4 analysis

#. Managements compensation * 1ee for red flags like higher compensation as

compared to industry, e(cessivebonusor commissions

=. Aromoter stake * +heck shareholding over the past few years

@. 6ead annual reports of the closest competitors and see for differences in tone

and industry outlook

Hte$ 5: atio analsis Calculate the following ratios and the trend in

the $ast

!. 9et/net working capital

. Eree cash flow to A1 growth

>. Eree cash flow to sales

#. 6eturn on e. Beware of wanting to just buy and study later

#. 1ee if you are being overconfident in your analysis

=. 0re you buying just due to amount of research youve put into the stock8

@. 0re you reluctant to accept differing opinions8?. Beware of buying just because others are buying the same stock

H. Fet away from the e(citement and noise. 'f necessary, take a break and clear

your mind.

Hte$ F: )inal 2valuation

!. hat can go wrong8

. hat will be you reaction if things really go wrong8

>. hat are the risks8 2ow likely are the risks8 2ow big are the risks8

#. 2ow attractive is this idea compared to the other holdings8 's that stock youalready hold, better than this stock8
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=. hat is your e(pected holding time frame8

@. hat price will you sell8

3oneB1o here was the checklist that you must run through before making any investment

decisions. 0nd if you do your homework on this properly, you can rest assured thatthe stocks that pass this checklist will give you great return in the long run.

But theres a caveat here * even if a stock passes this checklist and you go ahead and

buy it, it is important that you run this checklist on that stock ever year to see if things

have changed. That will keep you on your toes in case any adversity was to hit your

stocks.


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Lesson #*5: Gnow when to sell

Most value investing discussions revolve around when tobuy a stock. %hich stock

should ' buy8& is the first


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There could be other reasons to sell a stock, but these are the most common and

obvious ones. 'f you find any of your stocks to be facing any of these situations, it

will always pay to get out of the same.

# 5 eason to Hell D Htock 8hen D 9etter $$ortunit is Identified

'f you have made the right decisions while buying your stocks, this reason for sellingstocks does not arise often. But in case you were to find a better opportunity in

another stock than you find in any of your holdings, and you dont have additional

funds to deploy, it is a good idea to sell some of your e(isting stocks to reinvest in

that better opportunity.

The stocks that you might decide to sell might still be good. But then the newly

identified stock might be even better. 'ts like selling a stock where you e(pect annual

average returns of !=: 3which is good in absolute terms5 to buy a stock where

e(pected returns are around 7:. But when you are looking to switch to a better

company, return must be just one of your criteria. The new company must also pass

your investment checklist.

Kever sell our stocks ust ecause.

Nou think a big stock market correction is round the corner, and that you must

book profits on your stocks before the correction takes place. This is

ridiculous. Like purchase of good


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To repeat Eishers words, %'f the job has been correctly done when a common stock is

purchased, the time to sell it is * almost never.&


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Lesson #*E:


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. 'f you just own a few shares in the company 3and thus a minority shareholder5,

the best option you have is to sell your stock immediately.

But remember this * you can take either of these decisions only if you know how the

company and its management have done in the past. 0nd you can know that only if

you have read its annual reports.

1o, readG 6ead the annual reports of the company you )own.

6ead its directors report to know his vision.

6ead the management discussion on the annual performance and the risks it

foresees in the future.

6ead to find out of the management is taking the blame of a year of poor

performance. Or whether it is laying the blame of everything else * like a

global crisis, or a domestic crisis.

6ead the financial statements to find out big changes over the previous year.

6ead the schedules and notes after the financial statements to really

understand what the company is up to.

6ead the


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Lesson #1: Five Ha6its o( Hihly Success(ulInvestors

!e are nearing the end of our value investing course # Halue nvesting for *mart eople. At this

/uncture, let&s spend some time on understanding the five habits that you as an investor can practice to

become better at investing in the stock markets.

et&s start right here.

Ha6it #1: Set a oal, an) 'ork to'ar)s it"ou would vouch for the fact that the core reason you are an investor is because you want to create

wealth for yourself and your family. And you would also agree that there are some reasons you want to

create this wealth.

%he reason might be toF

9. Kreate a nest egg for a post retirement life.

@. lan for the education and marriage of children.

2. Accumulate money to go on a world tour.

3. Kreate wealth to meet all these wants, wishes, and obligations.

*o, it is important that you have some financial goals in mind for which you are working >investing? to

create that kind of a resource pool. But then, you might be one of those ma/ority investors who do not

have any goal for which they invest. Ask them why they invest in stocks, and the plain answer # ;%o

make money-no' 6asic accountin0ot comple$ accounting that companies use to manipulate their earnings- But you need to understand

the basic accounting concepts before you even become an investor. After all, accounting is the

language of business. And /ust like you learned the basic grammar in school to be able to speak and

write now, you need to understand basic accounting to identify good companies from the bad ones

based on their past financial performance.

*incerely, if you cannot tell the difference between something like a current asset and a fi$ed asset, you

have no right to invest in the stock markets.


57/70

Ha6it #: ea)4rea)4rea)%hat&s the best habit that to can have as an investor. *uccessful investors will tell you that if you /ust

read a company&s annual report, you will be better read than P:4 of all investors. And if you read the

footnotes >e$planations? after the financial statements in an annual report, you&ll be better than PP4 of

all investors.

!arren Buffett&s business partner Kharlie Munger once said, ;n my whole life, have known no wise

people over a broad sub/ect matter area who didn&t read all the time # none, Cero.when they

were all bullish? and at the start of @::P >when they were all bearish?, you will know why +being an

e$pert to make money& is a big myth. f course, you need to be educated and aware about what you

are investing into >some basic accounting and awareness about your own behaviour are necessary?, but

that&s akin to a high school education, not a h-

%he irony is that the entire financial services industry has conspired to make you believe that investing is

tough and it&s better to leave the game to the e$perts. After all, if they do not do so and instead spread

the belief that you can make your own profitable investing decisions, how would they earn their billions

from selling worthless advice, and commissions every time you trade in stocks(

%he reality is that you do not need more than these free >or very cheap? resources to become a

successful investor yourselfF

9. Brain >we rarely use it when it comes to investing, but it&s still the most precious of our

resources?

@. %ime >this is precious, but you do not need to spend more than 2:13: minutes of it each week

towards enhancing your investing knowledge?

2. !illingness >you need to put in some of your own effort for sure-?

3. Annual reports of companies >for studying which companies are doing well, and which aren&t?

=. An internet connection >apart from getting investing ideas, you need this to read everything

else on a company that its annual reports do not provide # like about its competitors?

Myth #: I( you can.t 6eat it, stay outeaving aside the efficient market theory, believe that +beating the markets& is /ust a whim. %he reality

is that your core goal must not be to beat the markets, but to meet your financial goals with comfort. And

for that, whether you earn same as the markets, or 91@4 here or there than the markets, makes no

sense.

t&s true that ma/ority of all mutual fund managers have not been able to beat the market in the last @:

years, but then you are not a fund manager and your investing performance won&t be /udged by whether

you beat the market. nstead, it will be /udged by whether you and your spouse are living comfortably

after your retire from work.

remember a /oke that will make this fallacy about +beating the markets& clearer for you.

nce upon a time, two guys were hiking through the /ungle when they spotted a seemingly hungry tiger.

ne of the guys reached into his pack and pulled out a pair of sports shoes.

'is friend looked at him in fear, and asked, ;o you really think those shoes are going to make you run

faster than that tiger(or your friend,

relative, or the fund manager?. "our stocks /ust need to earn you enough to live happily in your life in

your golden days. Every other idea is superfluous-

Myth #9: Hih risk0hih returnso you think you were a safe driver when you last drove your car to your office or somewhere else(

mean, safe for others walking and driving around you( f you are like P:4 of the respondents, your

answer will be +yes&.

0ow imagine if your ten year old son or daughter is behind the steering wheel the last time you travel by

your car. !ill your /ourney be still safe( mean, you will still travel in the safety of your car, and you will

possibly take the same route. But still, will your /ourney be safe(

*ee, my point is that when we put someone in the driver&s seat who doesn&t know how to drive, a

relatively safe trip becomes an incredibly risky trip.

E$actly the same thing holds true for investing in the stock markets. f you don&t know what you&re doing,

your /ourney is going to be either very slow or very dangerous. 0ot knowing what you are doing, as we

discussed in the first myth on investing, is what risk is all about. And considering this, if you take a high

risk >you known nothing at all about the stock markets?, you won&t be getting high rewards anyways.

%he concept of high risk1high rewards is possibly true when you get paid a bounty for working in the

middle of the Atlantic cean as an oil driller. "ou might never come back from there. But if you do come

back, your family will reap the rewards.

But when it comes to investing in the stock markets, high risk mostly does not equate with a high reward

until and unless you know the insider, or are one of them. And mind you, am talking about +investing&

here, not speculation.

"ou might earn high rewards with high risks when you speculate. But the biggest problem with this is

that you need to repeat this cycle over and over again. %his is because after every period of high

rewards, you will face a period of big losses that will wipe out your previous gains.

n investing, you get high rewards only when you take low risks. nvesting in quality companies selling at

cheap prices is a good way to get there. %he whole idea is to keep a good margin of safety to nullify the

impact of potential losses in the future. And when you do that # buy a good company at cheap

valuations # you aren&t taking a high risk, right( "ou are indeed lowering your risk of going wrong.

*o, when it comes to investing, low risk Q high rewards.

Myth #: This tie it.s )i((erent;%his time it&s different-

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