@Sanjay__Bakshi The most rational course of action is to buy below your expected value, hold when it's between your expected value and overvalued zone and sell above overvalued zone (No in-betweens or holding extra cash).

But there are many impediments in executing each step.

1/ There are a ton of books about Financial & Fundamental Analysis, Scuttlebutt and Technical Analysis. But there aren't many books 'taking risk'.

Among the few that exist, 'Zurich Axioms', written in 1985, is the best. Here are my key takeaways from the book.

2/ A bit about Max Gunther's (The Author) background. He was an Anglo-American journalist and writer, who wrote 26 Books.

His father, Franz Heinrich, was the New York Head of Schweizerischer Bankverein, which later merged into the famous Union Bank of Switzerland (UBS).

3/ The 'Zurich Axioms' were a set of unwritten rules followed by a informal group of Swiss Bankers and Traders who used to socialize around Wall Street after World War II. Mr. Heinrich was one of the founding members.

Max Gunter formalied these 'Axioms' by writing about them.

4/ There are 12 'Major Axioms' and 16 'Minor Axioms' (Corollary to the Major Axioms) in the book.

But remember, this is MY key takeaways from the book and not an exact summary. So you might find quotes, phrases and links inserted here and there by me (Not from the Author).

5/ Axiom #1: In order to earn returns, you must take risk. Risk will make you worry.

Risk-taking and worrying go hand-in-hand. If you're not worried about an investment, you're not taking risk.

Spend half your energy towards earning an income and the rest towards speculation.

1/ Since "liquidity" has been the buzzword these days, here's an anecdote and a powerful lesson from history about printing unlimited amounts of money. Story time. #fintwit

2/ Our story begins with Mansa Musa or Musa I of Mali, an African king who consistently figures in the list of richest people in the world (Inflation-adjusted). One of his given names was 'Lord of the (Gold) Mines of Wangara'. Lest we forget, Gold was the 'Money' in those days.

3/ One fine day in 1324, Musa decided to go on a pilgrimage to Mecca. Of course, it was easier said than done. Mecca was ~8,500 Kms away from Timbuktu, Mali. Ultimately he did make that journey and it has been recorded in the script "The Chronicles of the Seeker" by Mahmud Kati.

4/ Famously, he took a ton of 'money' (Gold) with him to aid in his journey (Well in his defense, it was ~8,500 Kms). About 60,000 laborers and soldiers carried 2 Kgs each and their camels carried 13 Kgs each, bringing the tally to an estimated ~1,30,000 Kgs of Gold.

5/ Being a generous King, he donated Gold left and right to every poor person he saw on the way. Regions of Cairo, Medina and Mecca became instantly 'rich'. The estimated donation is ~32,000 Kgs of Gold or ~$2 Billion in today's estimate.

1/ I've Valued 150+ companies using the Discounted Cashflow (DCF) Model. Far be it for me to say I am an expert. But if you've done this as much as I have, you start noticing certain patterns.

Here are 10 lessons I've learned from using the Discounted Cashflow Model.

2/ Every investment decision you make follows a Discounted Cashflow calculation.

You let go of X today to earn Y in the future. You wouldn't do that if you didn't expect to earn an expected amount of returns (r).

Nobody wants to let go of X and get back X years down the line.

3/ When you invest in a company, you hold claim over the Assets and the Profits of a Company. Without diluting your ownership, Assets and future Profits are generated out of one thing and one thing alone: Free Cash Flow to Firm.

FCFF is the treasure at the end of the rainbow!

4/ Combining the above two observations, a company may not always make Profits in the present. In fact, if it's a young company or in a new market, losses are a given.

Eventually though, future profits should be large enough to offset or overtake all the past losses in PV terms.

5/ For most companies, generating Returns falls in a spectrum: Have high Margins and generate lower Sales in relation to Capital Employed Vs. Turn Assets faster but have low Margins (Or somewhere in between).

For Indian context, compare the Business Models of D-Mart Vs. NESCO.

@Gautam__Baid He laid down very similar principles a decade ago in his 1976 letter (Source: https://t.co/6Z5v0qEaIg)

What's amazing is how consistent he's been in following his philosophy even after nearly 5

1/ Howard Marks once said that before buying an asset, above anything, he wants to know “the amount of optimism that’s in the price.”

All investors can do this with a handy tool: The Reverse DCF.

I'll also leave a download link to my compact DCF Model at the end of this thread.

2/ We all know a regular DCF. But's what a "Reverse DCF"?

If we consider that a DCF is a Linear Equation, we could say the 'X' (The unknown variable) is the Intrinsic Value.

In a Reverse DCF, we start with the Market Price and try to find some other variable, say Sales Growth.

3/ Let's start by taking an example: VST Industries, a Cigarette-maker based in India.

I valued them on my blog a while ago. I'll be retaining the old assumptions, but using the latest financials.

So please note that the Valuation isn't accurate

4/ This is a "Regular DCF" of VST Industries. The Assumptions I've made indicate an Overvaluation.

The Intrinsic Value is Rs. 3,012, but the Market Price is Rs. 3,492.

Let's not dwell on whether this is correct, since we discussed earlier that this isn't an accurate Valuation.

5/ If we want to do a "Reverse DCF" instead, we need to pick a different variable to 'find'. Say, I will pick the Sales Growth numbers.

I will now remove the Sales Growth numbers from the Model and assume that Sales Growth is the same across the years for ease of calculation.

Share Market is only place where except fall in markets n euphoria,

Majority of the times

Fall in price ≠ CHEAP / DISCOUNT

And rise in price ≠ EXPENSIVE

Business performance is ignored

Many keep averaging down n don't add at higher price when business improves

#investing

Prediction is an addition in financial world many suffer from

Sorry, addiction

Your view of the world and markets can change significantly when you close out your derivative positions and trading/leveraged trades v/s only hold a delivery-based portfolio.

The reason is psychological. The quick gains and losses that leveraged trades bring make you react with the same emotions you do in a regular portfolio at a faster rate. So what a 30% drawdown would make you think on a delivery portfolio ends up happening in days.

Suddenly you will find it easier to believe that negative conspiracy theory-based video or blog post than you would have otherwise.

It is therefore always a good idea to have an investment portfolio outside your trading positions to help you keep perspective of the big picture and ask the right questions.

The trading then is a subset of the big picture. Bull market cycles often go on for years and go through many bouts of hope and fear themselves. But stocks hold out better making higher highs and lows as long as the trend is intact.

Stocks are bought and sold based on short term price movements. Even institutions don't take more than four quarters view. As an individual investor, you can completely ignore short term and take a decadal view. That's why each one gets different result from the same stock.

@HurriCap What a great summary.

This one struck a chord with me:

"With small companies, you're better off to wait until they turn a profit before you invest."

Many on Fintwit think otherwise.