March 27, 2007

You can be a stock market genius - Introduction

I am currently re-reading the book by ‘Joel Greenblatt’. I will post my thoughts and key points which catch my eye. It is not a book summary or review. Look at it more as running notes on the book (based on memory).


- 8-9 stocks can help one diversify almost 80-90% of the non-market risk. With 20+ stocks the non-market risk reduces by almost 95 % (quoting from memory)
- don’t depend on broker recommendations. They are baised on buy side as they make commision if you buy stocks. Also as there are always more stocks to buy (for an investor) than to sell (one’s holding is limited in comparison to the total universe of available stocks), brokers are more interested in generating buy recommendations. Have seen the same in india. As a result I tend to look at sell recommendations more closely than buy recommendations.
- small cap and midcap is a fertile ground to find undervalued stocks as these stocks are neglected by brokers and also by large investors due to various size, legal and other types of restrictions.

I will keep posting more notes as I continue reading the book

3 comments:

RaviAranke said...

Rohit,

I had been planning to re-read Joel Greenblatt's 1st book (You too can be stock market genius). Your post has motivated me to do it right away.

From what I remember, the key point was to look at spin-off, demerger opportunities where the institutional holders of the stock might not be interested in smaller spun-off entity and sell indiscriminately.

Anyway, I will re-read again and let's see if there are some opportunities in current market which we can put through the Greenblatt test.

Regards,
Ravi

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Prem Sagar said...

Hi Rohit,
I was reviewing the paint industry and looked at ur sheet too.
Here are few updates.
Industry size is 9500 Cr in FY06

Mkt share:
Asian Paints - 44%
Kansai Nerolac - 20%
Berger - 17%
ICI - 12%

And you did a very good job in the analysis. But I think you missed 1 thing. The % mix between decoratives and industrial paints being a key determinant in profitability.

Decorative pricing is pretty good. But the same is not true with industrial.

In FY06, the industry saw a 17% sales rise. Gross margins saw a 30 basis pt rise. working cap to sales worsened from 11 (fy05) to 12.

I do agree that the brands have competitive advantage. But I am not sure if they have a strong franchise beyond a point. There is little differentiation amongst the top 3-4 brands. The painter plays a key role as u rightly said. I am not sure if any household is very particular in using a particular brand.

And one more key demand driver is the festival effect and good monsoons (atleast in rural areas)