Checklist / Tips
Choosing companies
- Legacy Planning - we do not want a situation where a rich child living abroad has equal share in your house where a not-so-rich 2nd child lives. This can lead to hardship for the 2nd child. This is a complex subject and some vision on your part is necessary.
- Estate Planning
- Living Will
Choosing Stocks
- PE less than 15 (avg - 30, not more than 30)
- Fundamental Analysis
- Annual report
- Management discussions
- Audit report
- Important ratio
- Industry analysis
- Valuation (Undervalued vs Overvalued)
- Price to sales
- PE
- PV / EBITDA
- Technical Analysis
- MACD
- RSI
- Bollinger Bands
Benjamin Graham's Stock Screener
- PE ratio < Inverse of yield on AAA corporate bonds
- PE ratio < 40% of average PE ratio over the last 5 years
- Divident yield > 2/3rd of AAA corporate bond yield
- Price < 2/3rd of book value
- Price < 2/3rd of net current assets
- Debt equity ratio < 1
- Current assets > 2x current liabilities
- Debt < 2x net current assets
- 10Y historical EPS growth > 7%
- No more than 2 years of negative earnings in last 10 years
Warren Buffett's Principles
Business
- Simple and understandable
- Consistent & predictable operating history
- Favourable long term prospects
- Presence of economic moat
Management
- Candid and honest managers
- Leaders and not followers
Financial
- High return on equity
- Strong owner's earnings
- High and stable profit margin
- Advocated use of discounted cash flow
Market
- Use conservative estimates of earnings
- Greed and fear amongst investors
Things to keep in mind
- Risk and Return go hand in hand. Higher the risk, higher the return. Lower the risk, lower is the return.
- Investment in fixed income is a good option if you want to protect your principal amount. It is relatively less risky. However, you have the risk of losing money when you adjust the return for inflation. Example -- A fixed deposit which gives you 9% when the inflation is 10% means you are losing a net 1% per annum. Fixed-income investment is best suited for ultra risk-averse investors
- Investment in Equities is a great option. It is known to beat inflation over a long period of time. Historically equity investment has generated returns close to 14-15%. However, equity investments can be risky
- Real Estate investment requires a large outlay of cash and cannot be done with smaller amounts. Liquidity is another issue with real estate investment -- you cannot buy or sell whenever you want. You always have to wait for the right time and the right buyer or seller to transact with you.
- Gold and silver are known to be a relatively safer but the historical return on such investment has not been very encouraging.