Narach Investment


There are many financial investment avenues available today to the investor, ranging from bank deposits and bonds, to investments in equity, debt, commodities, currencies, etc., to real estate, to doing a job of work.

But let's get specific here. Our discussion at present is restricted to the investment (or employment or deployment) of our financial resources from our bank to a financial instrument and back to the bank along with the gains and profits. Here the financial instrument would be the stocks (or shares) of underlying corporate entities traded in the stock market. It would be stocks, as it is in them that you would find and gain the highest returns on your investment when compared with the others you may choose from.

We may expect that in all probability there would be a positive return on our investment as long as we abide by the rules of value investing; and have purchased the stocks with a reasonable discount to their intrinsic value on the one hand and have a fair margin of safety under the belt on the other. The quantum of return would depend on the risk profile of the financial instrument and the level of risk adopted by the person. The aim of the game here would be to minimize this risk while keeping a view on reasonable gains over the passage of time the stock(s) are held in the portfolio. This risk is mostly provided for in the study of the historical financial data available with regard to the stock(s) we may elect to invest in. Further, reinforcement of reducing this risk would lie in not basing decision on futuristic earnings projections but on the reality of audited financial results.

It would be prudent to realize and appreciate that not all stocks are equal. You would have a choice amongst the value stocks, growth stocks, the rising start stocks and the cash cow stocks. Further, that at various points in time over the investment time horizon not all stocks would provide you similar return at their varied levels of risk. While the rising stars may turn out to be a flash in the pan, the cash cows would tend to trade in a range while providing for their annualized or trailing 12 month earnings per share (or EPS). You may also be able to find turnaround cases from time to time, but there would be an added level of risk which would need to be provided for in the returns or expected returns.

For the value investor this matter of "where to invest" would be tasked with discovering stocks which are priced below their intrinsic value, near their 52 week lows or probably making new 52 week lows. That the business model of the underlying corporate entity is intact, and it may be due to cyclic reasons or a general pessimism that these otherwise stocks of good standing may be trading at such low prices. The value investor fully understands that his gains or profits would be realized sometime in the future, probably after a few months and in some cases even after a year or two. Thus, he would elect stocks which he is willing to hold for long periods of time; some of them for a decade or longer as well.

The growth stock investor would seek stocks whose underlying corporate entities are in industry and service sector groups where it is expected that a higher level of growth may be expected due to a higher level of demand for such products and services as provided by them, or due to government policy changes which may have made such corporate entities more competitive or provided them with better growth and margin prospects. However, on most occasions, the investor would find out about such policy changes after the event and the effect stocks may have already priced in this improved outlook by the time the investor has completed his study of them. However, this initial opportunity loss would be more than compensated for during the subsequent rise in the stock price over the succeeding quarter and years. On other occasions, policy changes may adversely affect future outlook of corporate entities resulting in a reduced price level for their overlying stock.

The rising star stock investor would need to find stocks in industries and service sector groups where there is expected to be a higher level of expected earnings and popularity in the near term future; information technology of a decade ago would be an example. However, it would only be the better performing underlying corporate entities whose stocks would continue to perform as rising stars over the longer period of time. Initially, all stocks in such industry and service sector groups would rise; but it would be the better performers who would continue to rise while the rest would drop off.

The cash cow stock investor would focus his attention on the bellwethers. Such stocks would mostly be found in the stock market index and the rest would find their place in the sector indexes. In a sense, these stocks would influence market index trends and would hold some sway over the sentiment of the investing masses. Such stocks have achieved a high level of earnings per share and have been able to maintain them for many years, while their stock prices have made their annual highs and lows in quite a sequential manner. The investor would usually buy such stocks at or near their 52 week lows and sell them at or near their 52 week highs. Of course, systemic risk would affect such stocks as they would all others in the stock market.

The investor would need to discover the type of investor he is; which would lead into the investment style he must adopt to achieve the desired results from the investments he would make in the present and in the future. Further that over the passage of time his investment style may undergo a change, with the result that his investor type would also change. For instance, a rising star stock investor may over a period of a few years prefer the tenants of value investing and become a value stock investor.