Ashish Chugh Revealed the 10 Hidden Secrets of Stock Market Success That Even IIM and Harvard Can’t Teach You

Investing

Millions of people try their luck in the stock market, but very few actually make money.

Why?

It’s not the mathematics or the knowledge of finance that matters; there are some other factors that drive success in the market and no else can reveal this better than Ashish Chugh, the veteran Delhi based investor who always talks sensible thing whether it’s euphoria in the market or carnage.

He is so calm and composed as if like a saint who has obtained salvation or moksha! The best part is that he is always eager to share the secrets of his success on a platter absolutely free!!

Nowadays he stays away from the television and limelight but whenever he speaks one can’t just afford to miss it.

Only a Guru who himself knows the secrets and obtained success can guide on the right path. It becomes all the more important when suddenly everybody is bleeding in the market mayhem. Let’s know what he has to say.

First, temperament is the most important. It is something more important than the education and degree. How you behave when euphoria in the market and how you react when the stock market is going through a phase of extreme pessimism and depression in the bear market is what matters the most.

The second and the most important thing is the ability to remain comfortable when miserable— matters a lot. As an investor you will go through a prolonged phase of a bear market when you’ll find that your investments are bleeding. Portfolio may be down by more than 50%.

That is a point where your patience is tested as an investor. This is like an exercise—to enjoy the fruits of an exercise you need to go through a phase of discomfort. Same applies to investing also. If you really want to enjoy the fruits of higher investment returns, you must go through the bear phase of the market cycle.

Third, one should take the onus of his actions. Rather than blaming Mr. Market, you should take the onus of your actions. You can’t blame broker, analyst or anybody else. So, spend more time doing your homework.

Fourth, don’t clone big investors blatantly. Whenever a big investor takes a position in a stock, retail investors scramble to buy it. This is not an advisable action at all. The focus should be on selecting those stocks that will elicit the interest of big institutions in the stock.

Fifth, the biggest lesson I have learned is to invest in a good management. This becomes all the more important when you’re investing in a small cap. Very little information is available in the public domain regarding these managements. In that context, you should observe the actions of the management in the last 5 years closely.  A good management has always a skin in the game. So, the promoter’s stake should be very high in the company.

Sixth, they should be able to grow business consistently with no equity dilution. They should grow business with internal cash flow and may take a reasonable amount of debt.

Seventh, if a company is sharing the benefits with investors through dividends and share buybacks, it’s a good sign of ethical management.

Eighth, Stocks should not be construed as merely a ticker symbol. You have to consider it as a part of a business. Without holding stocks for a considerable time, you can’t create wealth.

Ninth, one should always focus on both valuation and growth of the business. Earlier I used to look to buy value stocks, now I have realized that a value stock will always remain a value stock if there is no growth.

The common characteristics in all those stocks that have turned multibagger are that they have consistently clocked growth in sales and profitability. A growth stock may have slightly higher valuation, but it is worth it. And if you are able to buy it at a reasonable valuation, nothing can be better.

Tenth, Understanding the risk factors in the business is extremely important. I’m always looking at the downside if things don’t turn the way I expected. It is important to know how much money you can lose if your investment doesn’t perform.

The biggest returns come when a stock is out of favor and facing a temporary negative sentiment.  I love picking the mis-pricing theme when picking a stock. Mis-pricing can be due to a variety of factors. Some of them can be genuine and some may be market perceptions. If the negatives are of short-term or curable, I’ll go for it provided other criteria are met.

Thanks sir for your wisdom for novice investors like us!! This becomes all the more important when market is panicking. 

(The blog is inspired from his recent interview with ET Money Podcast)

 

Why You Should Pay Attention to Debt on the Balance Sheet

Investing

What is the most important thing in the stock market?

Earning money—isn’t it?

Wrong!

Saving your investment capital is the most important thing. Most often those who leave the stock market completely lose their hard earned money. That means they don’t have enough capital left to make money when the cycle turns.

Vishal Khandelwal, the ace investor and one of the most sensible voices in the Indian stock market has made it the mission of their life to guide investors so that they don’t lose money. This is the guiding principle of safalniveshak.com.

He pays a lot of attention to reading the balance sheet of the company since it tells a lot of things about the company in question.

So what does he see in the balance sheet?

‘Leverage’— he answered nonchalantly to Nikunj Dalmia of ET Now. You should keep away from the companies that borrow a lot of debt.

Let’s understand this example.

The Debt/Equity ratios of Ruchi Soya Industries=5.09. This means the company is 5 times more leveraged than equity!

That’s a bad sign, isn’t it?

The company must be borrowing to fund expansion from taking a lot of debt. For example, if you take a lot of loan to run your family or buy a new car—it’s a sure shot recipe to disaster. Ideally, you should do this from your own income.

Similarly, a company should be able to meet working capital expenses and growth plans from internal resources. No wonder the stock of Ruchi Soya industry fell from 69 Rs to 17 Rs in the last five years.

Most people in the stock market are enamored by growth. But ask yourself—at what cost the growth is coming? If a company is borrowing a lot of money, avoid that stock. In general, “one should avoid highly capital intensive stocks.” says Vishal Khandelwal to Nikunja Dalmia.

Similarly, you should avoid companies that need a lot of working capital to run the company.

Companies borrow funds from either shareholders or lenders. Excessive dependence on borrowings is risky. A company is considered financially sound only if a firm depends on its ability to repay principal and interest on borrowings even during bad times.

So how much debt on the balance sheet is permissible? The answer varies. Let’s see what Gods of investing think about it.

According to Benjamin Graham, long-term debt not to exceed current assets (current assets— current liabilities). Company’s cash plus inventory should be enough to pay its both short-term and long-term debt. However, many people consider it very strict.

Warren Buffett wants the company to have the ability to repay its long-term debt with no more than two years of its net earnings. He prefers a company with debt to equity ratio below 0.5.

So what happens if a company messes up by taking excessive debt? Take the example of JP Associates, which is on the verge of defaulting. Between 2006 and 2012, the group invested Rs.60,000 crore in real estate, power and cement by borrowing excessive amount of debt.

Jaypee, Rs.8, 000 crore 1,320MW Nigrie thermal power plant in Madhya Pradesh was funded by debt to the extent of 70%. Similarly the entire 1,000MW hydropower portfolio of Rs.7, 000 crore had a debt-equity ratio of 70:30.

If we apply Vishal Khandelwal’s views, he would simply avoid buying such stocks. Take another example of Bhushan Steel whose debt level started increasing fast.

Initially, company generated enough cash to repay debt but when financial capacity deteriorated its ability to pay debt decreased. It did the same mistake as that of JP Associates. The ratio of debt in the Odisha plant’s ₹19,400 crore expansion programme was funded by debt.

No wonder, it’s in such a mess!

In general, companies with a higher debt to capital ratio are financially vulnerable and they have greater chance of defaulting.

Hope you enjoyed the article. Please put your comments.

This Investor Who Generated 5000% Return in 3 Years—Revealed His Hard Kept Secrets on a Platter

Investing

Ashish Chugh, the ace micro-cap stock picker, needs no introduction at all. He has discovered many hidden gems that have created enormous wealth for investors.

IFB Industries is one example that he presented to novice investors on the platter at the throwaway price of 69 Rs per stock. This is now trading at 1360 Rs—a whopping 2000% return in just three year. I really wonder only drug trade can offer more return than this!

Avanti Feeds is another illustrious example of this maverick stock picker that is up 5000% in the last 3 years.

What else can you expect then?

When it comes to picking stocks, it’s difficult to emulate his success. However, he has liberally revealed his investing secrets. These are so simple, yet so effective that you can’t learn them in MBA colleges.

And whatever research he does is available in the public domain. It’s believed that he just uses BSE website for all his research.

And I bet if you take care of these things, nobody can stop you from being a millionaire. Let’s know how he picks stocks:

1.Preference For Out Of Favor Stocks

Getting a stock at a cheap valuation (low P/E and P/BV) in the bull market is extremely difficult. Generally he looks for those stocks that are from either out of favor sectors or have been beaten down heavily due to some negative developments. These should be, however, curable negatives.

He gives an example of Balaji Amine, which was hammered badly . The reason was that it had adopted some expansion plan that was running behind schedule and it ventured into hotel industry.

Because of these two factors it suffered problem related to capital allocation. Most analysts wrote off the stock thinking that management is not able to deploy capital effectively.

That was wrong assumption. Ashish Chugh was of the view that if a plant expansion project is delayed, it’s bound to be completed one day for sure. So the problem is temporary in nature. So he decided to buy the company share at just 35 Rs.

Now Balaji Amine is trading at 700+ Rs—2000% returns in just 3 years!

There is a catch here. How will you decide whether it will not fall further since it can easily fall 30-50% from that level. We have already seen thin many stocks like GVK Power, Suzlon, JP Associates and in myriad of other cases as well..

This fear is perfectly justified.

This is where you need to take a judgmental call. The company was available at the value of just two years of cash-flow. Also, its existing business was generating a lot of revenue unlike GVK, Suzlon and JP Associates that lost mainly because of the huge level of debt and bad business model. There problems were of far more complex in nature.

2.Always Opt For Portfolio Approach

Microcap investing is a different art of stock picking. If you pick 10 microcap stocks in a portfolio, 2-3 stocks will virtually become zero. Remaining 4-5 stocks will give good returns. However, 2-3 stocks will give multiply 10-20 times.

However, when you are investing in an out of favor stock, you should ignore some quarterly numbers and negative events as you properly understand the reason behind the lagging performance.

3.Competent Management

Finding out a competent management is the trickiest part in the whole process of stock picking. One can’t decide with conviction whether promoters are ethical or not. Ashish offers a simple solution to this problem.

You should choose the company that has been able to grow over years without diluting their equity in the last 5 years at least. They should grow from Reserve and Surplus amount they have, which means company should grow with internally generated funds. There sales should go up, profits should go up, market caps should grow continuously.

Bad companies, however, often try to grow by exhausting Reserve and Surplus. Just see the balance sheet of Suzlon 5-6 years ago. They took excessive amount of debt so that their market cap grew but shareholders fund (Equity +Reserve and Surplus) was negative. No wonder for the kind of hammering the stock price witnessed. Another similar example is of JP Associates.

In addition, management should have skin in the game that means they should have high promoter’s stake.

Another positive signs are that if the management is increasing their stake from the open market buying, offering preferential warrants or doing a share buyback. During the last couple of years paper stocks rallied vigorously. However, the signs were clearly visible since promoters of many of the paper companies were buying from the open market. That was a sure shot sign of what was in the offing. Similar event was witnessed in the case of chemical stocks run up in the last few years.

And similar action is being seen in the steel cycle currently when promoters of many of the steel companies such as Prakash Industries, Jindal Steel and Power have offered preferential warrants or bought continuously from the open market.

These are common sense tips that may help you find the next multibagger stock. The purpose of this blog is to make you competent enough so that you can develop the capacity to analyze stocks yourself.