magic formula for stock market

Magic formula for stock market

There is no magic formula to grow money in stock market.

The first task should be to not lose money on an investment over 3 years.
The second task should be to match NIFTY and SENSEX returns over 3 yeas.
The third task can be to beat returns of NIFTY and Sensex over 3 years.


Every day and every month, I come up with a different formula.

1. We should invest in only NIFTY and Sensex companies but exclude something that doesn't match your taste. But these keeps changing and it is not under our control.
2. We should invest in PSUs as they give good dividends. 
3. We should invest in only golden stocks of ICICI but that also keep changing. What do we do the dropped companies?
4. We should invest in only companies that are large cap as they are proven.
5. We should invest in only mid cap companies as they will become large cap (or become small cap).
6. We should invest in only small cap companies as they will become mid cap or die down.
7. We should invest in only 1 leader company in each sector but what in case other company become leader. What about oligopoly? how to exclude other companies?
8. We should invest in only 3 companies in each sector. What in case several companies are there with similar characteristics? Is marketcap, profit, sales enough to identify top 3? Also it changing frequently. We don't have that much time to identify.
9. We should invest in only companies with high ROCE of either 18 or 24.
10. We should invest in only companies that are debt/free (debt/equity of 0)
11. We should invest in only dividend paymasters (who pay good dividends).

The answer lies somewhere in between.

• Do not invest in PSUs.Exclude PSUs as they are driven by greed of govt and are focussed on short term tenure. They will be forced to pay dividends even when they are in need of money. They will be told that debt cannot be raised without approval. They will be told that land doesn't belong to them etc but you ministry...so  it is difficult to arrive at a fair value. Sbi and sbi life is different as sbi life has external promoters.
• We should target companies that are VERY LOW (Value???) on debt as the debt generally doesn't bloom overnight. As long as the company is monitored once in 3 years, it should be good enough unless it is making lot of news.
• Fix the maximum debt/equity allowed.
• Don't relax it once it has been set.
• We should invest in only those who companies who have been paying dividend for last 10 years or from the listing year( in case they are newly listed).
• Fix the minimum DPR3 benchmark.
• Don't relax it once it has been set.
• We should look at ROE3 and ROCE3 for last 3 years.
• Fix the minimum ROE3/ROCE3 benchmark.
• Don't relax it once it has been set.
• Target price - we should look at the target price based on last 3 years.
• Fix the target price.
• Don't change the target price for 1 year (before next review). 
• Fix the margin of safety
• Fix the margin of safety over target price.
• Don't buy till the margin of safety hasn't been hit.
• Don't relax margin of safety.

Best

1. Select the stocks
1. Pick up all cap 500 stocks.
2. Exclude PSUs from those.
3. The best is to have 3 different people set first three things (d2e, dpr3, roe3/roce3)
4. These should be used to screen stocks from 'all cap 500'.
2. These two should be used for 'entering' the stock market.
1. The margin of safety should be set by 4th guy.
2. The target price for each stock should be calculated by 5th guy.
3. The exit rule will be covered in next blog.