An interesting formula that helps to buy stocks when they are down
There is a variety of ways to make money from shares. But, over time, it has become clear that all successful investing is based on accepting one essential feature of the markets: it is impossible to know what will happen to the price of a stock in future. From this understanding flow multiple trading and investing strategies. One of them is buy-low, sell-high. While this is one of the most popular and oft-repeated investment maxims, how does one define what is ‘low’?
Luke Wiley suggests a simple formula. Look for stocks that have hit 52-week lows and judge them on four basic questions:
1. Do they have durable competitive advantage?
Is it the kind of company that is hard to compete with, either because it has cornered a difficult market or because competing with it would require an unreasonably high investment by others?
2. What is the purchase value of the company relative to its free cash flow?
If someone were to come in and buy the entire company, would the free cash flow being generated be well in excess of simply investing in a 10-year Treasury bond? After all, the cash flow on a 10-year Treasury bond is said to be ‘risk-free’ while the free cash flow from a company is not without risk.
3. What is the return on invested capital of the company?
Is the company using its money wisely to create returns below its cost of capital? It is using its money well to create returns, or is it taking on bad investments that don’t pay off.
4. Can it pay off its long-term debt quickly?
There are several companies that are making a lot of money, but should revenues stall or decelerate, could their long-term debt be paid off within a short period with free cash flow?
Wiley claims to have spent years refining the principles behind this—back-testing data and putting his own money on it; the results have been impressive. He asserts that his clients—those willing to take a slightly different approach to investing their requirement dollars—have never been happier.
The 52-week low formula is based on the idea that even the best companies go through problems when their stock value heads down. This leads you to investing in a good business trading at an attractive valuation. You are buying into a company that is out of favour with the investing public and Wall Street analysts.
Of course, you don’t just buy any company, trading close to its 52-week low. You have to always keep an eye on the first part of the investment approach: good quality business (that is temporarily out of favour with the market). The idea is to bet on something afflicted with a mild infection rather than a terminal disease.
Buying 52-week low strategy is a clever way to take two important steps while buying stocks: narrow down a wide universe of stocks and remove behavioural bias. “It narrows down the wide world of possibility when it comes to investing by starting with an end goal—outperforming the market, with less downside risk-and working backwards. It is a logic-based, disciplined approach to narrowing down the 3,000 publicly traded companies in the market to the 25 that represent the best opportunities for creating real value in the coming months,” writes Wiley.
More importantly, the 52-week low formula ensures that our behavioural basis is dealt with effectively. Far from buying stocks at their lows, we are attracted to stocks that are shooting up. Too much money is lost because investors herd behind what is popular, follow emotions, instead of the data. This can be eliminated only by a disciplined system of staying away from the ‘highs’ and looking for the ‘lows’ through an objective formula. Zeroing in on 52-week lows is a big help in that process.
I believe this facet of the approach (helping to deal with behavioural biases) makes it one of the best I have come across. There are lots of good approaches to buying stocks. Many cannot follow them because human beings, by nature, are not very rational. Successful investors train themselves to deal with their own biases. The 52-week low approach helps you remove your biases more easily. Definitely worth applying.
Due to uncertainty, the Indian steel industry has resorted to import iron ore. Although the SC has allowed category A mines to start production, miners are facing several issues like renewal of licence and compliance
A three day Mining Exploration Convention and trade show, organised by the Federation of Indian Mineral Industries (FIMI), was inaugurated by the Union Minister for Mines, Steel and Labour, Narendra Singh Tomar, in Bangalore. More than 300 delegates are expected to participate in the Convention, where, there is no doubt that the steel industry's spokesmen are going to explain the state of affairs in the mining sector.
Indian production of iron ore has now come down to 140 million tonnes (mt), as against 220 mt before the ban on illegal mining. Supreme Court, while permitting the mining operations to start, classified the categories of mines as A, B and C, and permitted those under "A" to commence their mining operations. In the meantime, in order to continue and/or revive production, import of iron ore in 2013-14 amounted to 360,000 tonnes, and, so far, during the current fiscal, it has reached 2.37 million tonnes.
Iron ore production in Karnataka, for instance, is now only 17 million tonnes against the rising demand of over 30 million tonnes annually. Karnataka has 160 iron ore mines of which, currently, only 27 are operational. After the Supreme Court permitted those mines, categorised as "A" to commence operations, most of them have been attempting to renew leases (many of which expired during the interim period), acquire fresh licences, and, of course, comply with the usual formalities relating to environmental clearances.
Although the Environment Minister, Prakash Javadekar, had assured one and all that his Ministry would not be a speed breaker, it now appears that mine owners wishing to start their operations are confronted with potholes! Because of the recent amendments to the Mines & Mineral (Development and Regulation) Act 1957, the process of lease renewals have become "particularly difficult" according to Basant Poddar, Managing Director of Mineral Enterprises. The steel industry has been left with little choice and due to uncertainty in obtaining the indigenous ore, to tide over the production needs, they have resorted to import.
Details of the pathetic conditions of the steel industry, arising out of the non-supply and inadequate supply of iron ore are expected to be highlighted in the Convention. Union Minister Tomar, it is hoped, would carry the details and ensure necessary steps are taken with the Environment Ministry and the State Government authorities, so that Karnataka iron ore mines can start brimming with activity. It will also help to bring down employment to the mines, who have been suffering for long.
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)