MRP of Stocks!

No More a Distant Dream...

An exclusive eBook that helps you to 'Take The Gamble out of Stock Investing'

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© 2010 MoneyWorks4me.com, All rights reserved

MRP of Stocks : No More a Distant Dream
MoneyWorks4me.com
TM

C h a p t e r

1

The Question That Stumped Me!

MoneyWorks4me.com

TM

my wife abandoned me and my son and decided to shop for some time on her own.THE QUESTION THAT STUMPED ME! I honked the horn for the umpteenth time! Women!! How much time do they require to get ready!!??! It was one of those 'wonderful' days on which I had been persuaded (read emotionally blackmailed/pestered) by the missus to take her and my 7 year old son for shopping (Well. Not only do you end up paying (un-willingly) for most of the stuff from your pocket but you also have to suffer the ordeal of roaming around hundreds of shops. believe me. almost like I pay too much for anything and everything. carrying the large number of bags. Surprisingly. She told me that she would call me once she was done and harped about how considerate she was for not making me roam around with her!I agreed immediately! 1 MoneyWorks4me. especially their price. And above all. it was mostly her. Well. I presume. I am quite the haggler. Infact. so much that it could well be my middle name! But the missus is something out of this world! She makes me feel uncharacteristically extravagant. I am not a sucker who would buy at any price that the shopkeeper demands. Now. you have to endure the never-ending arguments that she has with the shopkeepers about the clothes. finally we got going and reached the nearby shopping mall. my 7 year old's shopping consisted usually of just toys and chocolates).com TM . I thoroughly suffer these joint shopping sessions – as do most men.

“Have you checked its MRP?” He turned it upside down to find where the MRP tag was.” 2 MoneyWorks4me. all my friends have this car. buy this for me na!” I picked up the magazines I wanted and looked at him. “Today. Still.THE QUESTION THAT STUMPED ME! The day was turning out to be better than I thought. I am going to teach you something you will be thankful for. “It's just 500 bucks!” he finally answered. I decided to do some shopping of my own. My son immediately ran to the toys and games section. before he could give any other reasons.com TM . It's the latest from the Hot Wheels series! Please. I was still engrossed in looking over the magazines and mumbled something about how he already had many toy cars at home. having found some toy car that “he had to have”! “Dad. I tried. for the rest of your life. while I looked around all the business magazines. He was back soon. “Just 500 bucks??!! Are you crazy?” I couldn't believe my ears! “Is it even worth that much? It's just plastic and metal. I needed to buy some magazines and hence we walked into a book store.” “But Dad…” “Listen son…” I began. “But Dad. I want to buy this car!” he said. It was going to be hard to convince him.

He pretended to listen but was visibly irritated. “Is it a good stock?” I questioned him. we won't buy the car. And how much do you suggest I invest?” “Atleast a lakh of rupees. and I mean always. 3 MoneyWorks4me. and then you can pull your money out. I am quite sure you'll get a decent return in a fortnight or so. 15-20. I thought!! Suddenly.” “Okay. “Obviously! Have I ever recommended any bad stock to you? The quarterly results are going to be very good.THE QUESTION THAT STUMPED ME! “Okay Dad. The price will increase by atleast Rs. 150. It was my broker.com TM . wishing I would stop! Nothing like a lecture to avoid spending on some toy car. My son took the opportunity to escape but soon returned with another toy in hand – this time a robot! Meanwhile. my cell-phone rang. my broker had news about some stock which was expected to surge in the next few days. make sure that you check the MRP of anything you buy! And then make sure whether it is worth the price you are paying for it!” I went on and on about how I always follow this principle whenever I buy anything. The target is Rs. Please don't start lecturing!” “No!! Listen to me! Always.

I will send you the cheque. What do you want to buy now?” I tried to divert the topic to the robot he wanted to buy. Here. but had myself just bought something blindly based on what my broker was telling me! “Good!! You seem to have learned your lesson. but this one really got me thinking. Einstein. The overt questioning of kids does get irritating most of the times. do we? Infact. did you? And you always tell me to check??!! And is it worth the price you bought it for?” It was his chance to get even. I realized he was right. I was trying to educate my son on how to understand the worth of anything and buy at the right price.THE QUESTION THAT STUMPED ME! “Okay. I don't think we ever think about stocks having a MRP. 4 MoneyWorks4me.com TM . Sounds good! Buy it for me. dad?” he questioned. I knew he was just getting back at me. the only difference being the value we get from these things. Why?” “Did you check its MRP? You did not ask him. We never ask for the MRP of a stock. “What?” I asked him. “Oh that! I bought a stock. “What did you buy. toy robot in hand and a smug look on his face. But somewhere.” My son stood there. But aren't stocks similar to any other thing we buy. I was stumped for a moment.

Only one question occupied my mind Can We have a MRP for Stocks? 5 MoneyWorks4me. clothes because they make us look good whereas we buy stocks with the intention of getting good returns and making money.com TM . Almost every time. everything except Stocks! The entire way back home I was lost in my thoughts.THE QUESTION THAT STUMPED ME! We may buy vegetables for consumption. we check the price of everything and try to judge whether it is worth the price.

com TM .C h a p t e r 2 The First Step Towards Finding The MRP MoneyWorks4me.

do you think it can be done. “So. Rajiv was the finance Guru of our batch. I was excited of getting a possible solution to the problem. But Iguess we will have to read through some basic material first. 'Reading some basic material' meant 'reading huge books with stuff that totally went above my head'. I knew he was the man for the job and decided to pay him a visit on the weekend. we got down to business. Rajiv?” “Hmmm… sounds quite interesting you know. I bravely yet reluctantly agreed.THE FIRST STEP TOWARDS FINDING THE MRP I HAD to find the answer to this question. his last sentence scared me! Coming from Rajiv. right?” asked Rajiv. you said something about stocks and their price on the phone. what's up?” I greeted him. Infact. “So. as he opened the door. And I knew just the person who could help me out. “Hey Rajiv. Actually.” Though. Rajiv Mehta! A college friend.com TM . I think I do have a bit of an idea of how we can proceed with this. After exchanging the normal pleasantries and enquiring about our other friends from college. It was good to see him after quite a few days. I narrated him the entire incident that took place in the book store and how my 7 year kid had ignited my thought process to find the MRP of stocks. even the professors used to fear his questions sometimes! Post college. 6 MoneyWorks4me. he had gotten into Investment banking and recently had started a web portal related to stock investing.

THE FIRST STEP TOWARDS FINDING THE MRP Immediately. I woke up in some time only to see Rajiv had moved over to another book and was reading. Rajiv got 3-4 fat books (fatter than I had ever seen) from his study. “I think I got it!” I looked up to see Rajiv beaming with satisfaction and joy. Let's first understand how you invest in stocks. I was engrossed in reading gossip about Priyanka and Shahid when suddenly I heard the words. unaware of my activities. I would really like to say that I finished the entire book and found the solution but in reality. that's great!!” I said. I slowly picked up a Filmfare magazine lying nearby and started reading it. “Tell me. He handed me one and started flipping through the pages of another book. a look similar to the one he had when he had topped college. how do we go about it?” “Yeah. “Hey.” Rajiv got into lecturing mode! 7 MoneyWorks4me.com TM . I dozed off after the first few pages.

like you suggested. It's very common sensical then. you never pay more than the MRP of the stock. “Before buying a stock”. But. Let's call it. You are basically following the herd and buying stocks based on some short-term news. you tend to go with the tips and recommendations of your brokers. You are just getting lured into buying and selling because your broker tells you to do it.com TM . the MRP of the stock. my friend. Discounted cash flow is based on future cash flows etc. This can get you into deep trouble. It is the maximum price that you as an investor should be willing to pay for a stock. I am coming to that. He is telling you to buy it. because most of the other people are also doing the same. This was starting to sound like a finance 8 MoneyWorks4me. Infact most of the people do this. There are many popular ways to calculate the right value of the stock -popularly termed as Intrinsic worth or fair value. Makes sense.” I got a bit apprehensive. But what is the basis to calculate this MRP?” “Yes.” I somehow remembered my childhood days when I used to listen to my dad lecture me when I did something wrong. Understand?” “Yeah.THE FIRST STEP TOWARDS FINDING THE MRP “Currently. Once you do that. every model has its own basis for calculations – Dividend discount model is based on dividends. that like any other thing you buy. the most important thing then is to know the worth of the stock. he went on ”You need to first make sure that the company is a fundamentally strong company. Also. this is almost like gambling with your stocks.

the current price of the stock is the investment you have made in the stock.. So.” I nodded my head in agreement. “Umm. I guess the returns I get is the price appreciation that happens in the stock. “Well.” I answered. “But what we really need to do is. As a shareholder. 100. Rajiv kept the explanation very simple. you have invested in a stock. “Suppose. you are almost right.” 9 MoneyWorks4me. to look at the right value of a stock from the perspective of a common shareholder. 50 and sell it for Rs. if I buy a stock for Rs. keeping a long-term holding period in mind.com TM .THE FIRST STEP TOWARDS FINDING THE MRP lecture now. But there is another way in which you earn returns and that is through dividends. So to summarise. my return is Rs. Thankfully. there are 2 ways in which you earn return while investing in stocks.. 50. What would be the ways you will earn returns on this investment?” he quizzed me.

(b) Future Dividends: Dividends which you will receive in future “Rajiv.THE FIRST STEP TOWARDS FINDING THE MRP (a) Future Sell Price: The Price at which you sell the stock. what should the price of the stock be after 1 year? he asked. “Around Rs. “Yeah. suppose the MRP of a stock is Rs. “Rs.”. “Correct! And the price next year? I racked my brains and said. considering the additional risk involved in stock investing. “Yeah. let's take it as a 15% return year on year. every year or as they say in finance a 15% compounded annual growth rate (CAGR). So. Now keep quiet and listen. I would say something like 12%-15% minimum. 132. This was easy. I guess something like 12%-15% every year. when you invest in stocks!” I nodded. once again he questioned me! “Let me think. So. “Now. sounding least interested in my comments. Assuming the 15% expected rate of return. you know!” I joked. I anyways make around 7%-8% by investing in fixed deposits. What kind of a minimum rate of return are you expecting when you invest in stocks?”.” I said. Around 10%-11% by investing in some corporate bonds. let's understand how much returns you expect when you invest in stocks. 115.” 10 MoneyWorks4me. Here. Absolutely right.” he replied. I replied. “Now.com TM . you will benefit if the stock price appreciates. you could easily become a professor. 100 and you buy it at MRP. I know.

if you knew that the future price of the stock is going to be Rs. your stock price should be equal to something around Rs.15) 1 . So. I just discount the future price at my expected rate of return i. If you include dividends. So. Got it?” “Yes. how did you find the second year price?” “Well.e. could you calculate the MRP?” “Yeah. isn't it? So. 15%. then the second year the price is 100 x (1. it is the Future Price plus the future dividends discounted at 15%.” “Right. suppose if you had the future price of your stock in your hand. “So to calculate MRP. It is just reversing the equation.THE FIRST STEP TOWARDS FINDING THE MRP “And. 200 in 5 years. for the first year the price is 100 x (1. Instead of compounding.” I replied. I would need to know what my expected rate of return is – let's keep it at 15% –. the formula for calculating MRP becomes MRP = Future Price + Future Dividends (1 + Expected Rate of Return) n 11 MoneyWorks4me. Obviously. right?” “Yup. the future price of the stock and the future dividends. Now.com TM . similarly after say 5 years. 200. we have not considered dividends here.15) 2 and so on. it's the basic compounding formula. You can discount it at your expected rate of return of 15% for 5 years to arrive at the MRP. So.

com TM . we consider an expected rate of return of 15% and use it for discounting the future price and dividends. To arrive at it. MRP depends on the price for which you can sell the stock in the future and the future dividends you earn.THE FIRST STEP TOWARDS FINDING THE MRP Crux of the Matter: The intrinsic worth or MRP of a stock is the maximum price that you should pay for it. 12 MoneyWorks4me.

C h a p t e r Understanding Earnings Capacity To Arrive At The MRP 3 MoneyWorks4me.com TM .

we know the expected rate of return which is 15% CAGR. One thing was for sure. I lost betting on a stock which was supposed to go up due to reports of some new order but ultimately didn't. Now. Just last month. “So.” “Correct. right?” I asked Rajiv. “Yes. the things were starting to get clearer. making us all the more confused about where the market is headed.” I told him about my tragedy. Now. A new government gets elected – Boom! It rises.UNDERSTANDING EARNINGS CAPACITY TO ARRIVE AT THE MRP Slowly. we need to know. To add to this Foreign Institutional Investors (FIIs) keep on pumping money in and out of our markets as they please. how to calculate the future price and future dividends. we were slowly but steadily getting the method to find the MRP for the stocks. right? You never know what is going to happen tomorrow. the thing about stock markets is that they tend to behave erratically in the short term. 13 MoneyWorks4me. The weather department forecasts less than normal rainfall for this season – Bang! It crashes. In such a scenario trying to make a quick buck by investing in some hot stock usually leads to losses.com TM .

it usually is correct about which stock is good and which is not. “Right. or from a shareholders perspective at what rate this company can grow its earnings i.e. The stock price is going to go up over the long term. you need to get an idea about its capacity to earn profits. the bottom-line is you have to ascertain the earnings capacity of the company to get an idea about its MRP. the basis for the MRP is the earnings capacity of the company?” I repeated. “Yeah! So. the future price is equal to the future EPS multiplied by the P/E multiple that the stock will command in the future. How do you not know him?” He looked angry.UNDERSTANDING EARNINGS CAPACITY TO ARRIVE AT THE MRP “Exactly!! The market tends to behave erratically over the short term but over the long term. “Yes.” ”And to judge whether the company will perform consistently. only when the company performs well. don't you? 14 TM MoneyWorks4me. consistently. it acts like a weighing machine.” “Dude. the market acts like a voting machine while in the long term. So. “He is one of the Guru's of stock investing! The world's most renowned stock investor Warren Buffet regards him as his Guru. Like Benjamin Graham said. so what you need to understand is that you are going to make money only when the stock price goes up. consistently. Correct. 'In the short term. but went on. EPS. who is Benjamin Graham?” He looked at me in disbelief. You do know what P/E means. “Anyways. To put it into perspective from a mathematical basis.com .

the demand for the company's product/service 15 MoneyWorks4me. the expected EPS growth rate depends on 2 things: 5 1) The prevailing market conditions i.” “Right. Now. 22 “Yes. I attended a few of our lectures you know! I also look to always buy low P/E stocks whenever I can” “Now. So. suppose your expected EPS growth rate is 18% the EPS after say 5 years becomes around Rs. Suppose the current EPS or the TTM EPS as it is known is Rs.e. whether the company is present in a growing or stagnant industry. So. the key point here is to have an idea about the expected EPS growth rate for the company.UNDERSTANDING EARNINGS CAPACITY TO ARRIVE AT THE MRP “Obviously.22” 10 x (1. 10. “Now.18) = Rs. Got it. but we will talk about that some time later. As we discussed. it indicates the earnings capacity of the company which is the basis for finding the MRP. that is not always a good thing you know. But how can you find the expected EPS growth rate? As far as I understand this is the key step here.com TM .” he said. Future Price = Future EPS + Future PE “And to get to the future EPS we once again go back to our compounding equation.

but aren't we predicting a lot of things here? I mean. let's not get into it for now. We could turn out to be wrong. This will help you to narrow down on a figure. 16 MoneyWorks4me. Now. As far as future PE is considered. just keep in your mind that there is a method (which is not complicated) to get a pretty good estimate of what the expected EPS growth rate will be.com TM . “So. we can calculate the Future EPS. you are right. Also. earnings and book value growth rates in the past (yo-y and CAGR). one way is to look at the historical average PE that the stock has commanded. the expected EPS growth rate is an estimate. All these are estimates. Infact consider any method for that matter. we need the future PE.UNDERSTANDING EARNINGS CAPACITY TO ARRIVE AT THE MRP 2) The company's own capability to grow and make the most of the opportunities in the market: This can be gauged by looking at its sales. you get a better estimate. quite a lot!” “Yes. okay?” “Yeah! Thanks a lot!” I smiled. So. average return on invested capital (ROIC). its average return on equity(ROE).” “Woah!! Seems pretty complicated!” “Actually. look at the PE commanded by other players in the industry. For the time being.” “Rajiv. using the compounding equation. But look at minimum 6 years. predicting the value of a stock involves a lot of estimates. But remember we are not trying to predict how much the EPS will be in the next quarter. it isn't! But for the sake of not confusing you. the future PE is an estimate.

Now you arrived at that figure by looking at his past record.” I answered getting a bit confused as to where Rajiv was heading.” “Good..UNDERSTANDING EARNINGS CAPACITY TO ARRIVE AT THE MRP Let's take an example which will make it very clear what I am saying. he may well do better but I guess he will average atleast around 50 something. Now. he will tend to score similarly on an average. So you can be pretty certain that if you take a sufficiently long duration. “That's a tough one! I mean. In a match he can get out on a duck due to an awesome delivery but that doesn't happen every day! 17 MoneyWorks4me. can Tendulkar score in ODI you predict how many runs will Tendulkar score in his next inning or his next ODI?” I thought for a moment.” “Exactly!!” said Rajiv getting excited. can you predict how much will he score on an average in a series of 5 ODIs?” “I guess something like 50 odd based on his lifetime average. “Now. Did you watch the India versus Australia Test match?” “Yeah..I did. it can be anything from 0 to 200. right? Tendulkar's average stands somewhere around 5055. right? Very low chances of being right in predicting his exact score for the next match. “Okay.com TM . Going by his current form.

Rajiv continued.” I was almost surprised by the analogy. the chances of you being right about its earnings capacity over the long term are very high. For a company.UNDERSTANDING EARNINGS CAPACITY TO ARRIVE AT THE MRP He will make up for it in the next match and the average will be close to 50. later I will tell you another trick to ensure that your capital remains protected. that nobody can predict the future accurately. in case your estimates turn out to be wrong. The same is the case with any fundamentally strong company. Clear?” 18 MoneyWorks4me. A trick given by none other than Benjamin Graham and Warren Buffett. We are trying to get a ball-park figure. Provided your company is a Tendulkar. if it has managed to grow its earnings by 20% every year for the last 10 years. It is also true. Definitely past performance cannot give a guarantee of future performance but it does give a pretty good idea about the future. most probably this growth rate will slow down in the future as the company becomes larger. We can then consider something like 15%-17% as the growth rate.com TM . You also took Tendulkar's average as 50 not 60 or 70 going by his current form. Also. It was so simple yet so correct. our estimates are based on analysis of past performance and future growth prospects. but over a long term. A few bucks here and there are okay. Also. Over a long term the past performance and class did make a difference. That's why we also try to keep our estimates on the conservative side. “Also. remember we are not trying to find the exact price here. We do not try to estimate how much it will grow in the next quarter.

right? Is that it?” I asked getting excited. we have the MRP. once you know the future EPS and future P/E.com TM . The future selling price of a stock depends on the future EPS and the future PE that it will command. wondering whether we had completed our quest to find the MRP of a stock.” I replied! “So. And once we know the future price.UNDERSTANDING EARNINGS CAPACITY TO ARRIVE AT THE MRP “Crystal clear. 19 MoneyWorks4me. Past performance cannot give a guarantee of future performance. but it does give important clues for the future. Crux of the Matter: You need to ascertain the earnings capacity of the stock to arrive at its MRP. This earnings capacity measured through the expected EPS growth rate depends on the market conditions and the company's own ability to grow and make the most of the opportunities. To estimate the EPS growth rate or the PE multiple we look at the historical performance of the company as well as analyse the future growth prospects. calculating the future price becomes pretty easy.

C h a p t e r 4 THE FINISHING TOUCH TO MRP MARGIN OF SAFETY MoneyWorks4me.com TM .

3. for the 2nd year is Rs.” “Okay. 5.20)1 = Rs. you keep on growing this for say. You forgot kya?” said Rajiv. Say company ABC has a face value of 10 and a dividend percentage of 30% for the current year.” “So. Yeah. So. how do we calculate the future dividends?” Rajiv started explaining.6.THE FINISHING TOUCH TO MRP .com TM . Over a period of time as profits increase.” “Can you explain this with an example?” “Yeah. in this case the future dividend component for the 1st year is Rs. Now. 3. We still have to learn about future dividends. the next 4 years. 4. you have the dividend from Year 1 to Year 5. 20 MoneyWorks4me.MARGIN OF SAFETY “Not yet.6. Now.1 and so on. “A company will usually maintain the level of dividends that it has paid out in the past. its current DPS is Rs. for 3rd is Rs. Easy. isn't it?” “So. Again. So. We can consider the historical dividends paid per share as the base figure for calculating the future dividend. You add them to get the total of the future dividends paid. 3. if you expect EPS to grow at a 20% CAGR then its dividend in the next year will be 3 x (1.3. we take either the historical average or the current Dividend per Share (whichever gives a better picture) and grow it with the expected EPS growth rate to calculate future dividends. “Oh! It almost went out of my mind. it will increase this level gradually.

THE FINISHING TOUCH TO MRP . And the number we want is the sum of these 5 numbers which comes out to around Rs. “Yup. except stocks! Graham said 'Always buy a stock with a margin of safety i. I mentioned to you that there is a trick to ensure that you do not lose your entire capital if your estimates do not turn out to be right or if the market behaves erratically?” “Oh. what are those?” “Remember.. that's it then!” I said getting excited. The trick…rather the rule that he suggested is something we practice whenever we buy almost anything and everything. “And.Yes! The trick given by our guru. at a discount to its intrinsic worth' – in our case its MRP!” I understood why Rajiv said 'we practice this whenever we buy anything'. We still have a couple of important things to cover. We are constantly on the lookout for discounts! 21 MoneyWorks4me.e. right?” I said. “Almost. Correct!” “So.com TM .” said Rajiv shutting a few of the huge books. we have the future price. So.5.7.MARGIN OF SAFETY in the 5th year it is Rs. 27?” I verified while entering the numbers in a calculator. And then from our MRP formula and 15% expected rate of return we can arrive at the MRP. and we can now calculate the future price. we know the future dividends. noting the satisfaction on Rajiv's face that I had made Benjamin Graham “Our” Guru! “Yeah. Benjamin Graham..

right? So. the market tends to over react and the price of the stock drops considerably. Take the example of the telecom sector. we should be looking to buy at a discount of 50% to the MRP. You are right. many telecom stocks dropped like anything! 22 MoneyWorks4me.com TM . But as I also said.THE FINISHING TOUCH TO MRP . we bargain with the doodhwala bhaiyya to give us a lower rate for the milk and even with the vegetable seller to reduce the price of the onions and potatoes! But we never think of a discount on a stock.MARGIN OF SAFETY We eagerly await a sale to shop for clothes. what kind of a discount are we looking for exactly?” I questioned understanding the importance of why we need to buy stocks at a discount? “Ideally. is it possible to get such a margin of safety for such good companies? Wouldn't these companies be the most widely tracked companies in the market? “Yeah. say a company or industry is facing some problems currently. Doing this will minimize your risk to a great extent and will protect us from the inherent volatility in the stock markets.” “Okay! But is it possible to do that?” I was a bit apprehensive. In the last few months with the intense competition and price war going on. do we? “So. So. “I mean right at the start you mentioned that we should look for a fundamentally strong company. the market behaves erratically in the short term.

THE FINISHING TOUCH TO MRP . which I did immediately.MARGIN OF SAFETY True. it made perfect sense! 23 MoneyWorks4me. “Even the market leaders were available at bargain prices some days back!” said Rajiv. Either way buying at a healthy discount will ensure that your risk is minimized.a fundamentally strong company available at a 50% discount . stronger than before! But the market freaks out! And people start selling like anything! But this is the time to buy these companies. obviously. you can think of buying it when it is at.” I sadly remembered my broker advising me that I should sell a telecom stock I owned because the industry was doomed. “The trick thus is to buy when everyone else is selling and sell when everyone else is buying. that the industry is going through a tough phase! But which industry doesn't? The best companies survive and move on. Although this is easier said than done! Also. a 30%-35% discount! And keep in mind you can always find a diamond in the rough . Got it?” I agreed completely with Rajiv.com TM . after doing a thorough analysis.because the market has not noticed it! But you have to be sure of it. say. if you have a very strong company and you are okay with a lower discount. As simple as it sounded.

com TM .e. make sure that you always look for a margin of safety i.THE FINISHING TOUCH TO MRP . This will minimize your risk and protect you from the inherent volatility in the market. The market gives you many opportunities to buy fundamentally strong companies at a 50% discount to their MRP. 24 MoneyWorks4me. Once you find the MRP. a 50% discount on a stock's MRP.MARGIN OF SAFETY Crux of the Matter: Future Dividends can be found by growing the current dividend per share at the expected EPS growth rate.

com TM .C h a p t e r Putting It Into Practice 5 MoneyWorks4me.

we can expect 15% returns. the price movement then is being determined by sentiments and not by fundamentals or earnings. If we buy a stock at the MRP and it grows exactly as per our expectations. you don't make any returns. Keep the stock on your watchlist and when it falls below your MRP. better get out. if it goes well above its MRP and you have made more than 20% CAGR?” This confused me a bit. So. That is one of the most important parts of investing. And remember prices fall faster than they rise! So. the rule for selling is. But when do I sell it?” I raised another doubt. the upside left is minimal. “Yes. “Isn't MRP the intrinsic worth or fair value of a stock? We also said that if we buy at MRP we can expect a 15% return year on year.com TM . Correct. But because we buy it at a 50% discount to MRP and sell only when it crosses the MRP. if you buy a stock at a 50% discount to its MRP. No point in being greedy. every year?” “Yes. isn't it? If you do not sell your stock. if the stock's price goes well above its MRP or intrinsic worth. you should sell it off. Even if it goes still up. you can think of re-entering the stock!” “But how 20% CAGR?” “It is simple.” 25 MoneyWorks4me.PUTTING IT INTO PRACTICE “Yes. But keep in mind. Your risk then increases because you never know when it might reverse and start falling. we get more than 20% returns. if you have bought the stock at a 50% discount and have gotten your 20% CAGR.

which I considered impossible to understand before. “Yes. that it is almost impossible to find the exact worth of a stock. So let's start with the benefits? What do you thing are the biggest benefits of this method?” “For me it is the simplicity of the method. 26 MoneyWorks4me. fat or just right! So. logical and also very do-able!” I answered confidently. be it any method. before I was walking in the dark completely unaware of what might lie in front of me. now there is a way to be sure of what could be the worth of the stock!” “Yes. don't be worried if you are off by a few bucks here and there! In the long term these small variations won't matter!” “Yeah. It is definitely a good method but before you start putting it into practice. It's like you can never tell what's the exact weight of a person. It seemed a bit confusing at first. you must also understand its benefits and shortcomings. Atleast. But remember. It is like.com TM . It is making perfect sense. What the MRP concept gives you is an estimate of the stock's worth based on rational expectations of returns and the earnings growth of the company. had really been a revelation.PUTTING IT INTO PRACTICE I slowly digested what Rajiv was saying. it was pretty easy. That is true. This method is simple to understand. The ease with which I had understood valuation. “This is great Rajiv. It is not based on complicated formulae which nobody understands and which make it virtually impossible to understand how the value has been calculated. but after taking some time to understand it. but you can definitely say whether he is thin.

So. But as I said. if it has just crossed its MRP and is close to its full value. “So. that I wasn't going to buy anything that my broker suggested. once you get better at using the method. you may miss out on the rally which happens sometimes even if the stock is above MRP. Also you tend to sell once the stock goes above the MRP and is fully priced. once I got the hang of the method. we would be better off putting in conservative estimates for the growth right?” “Yes”. if your stock crosses its MRP and is quoting considerably above the MRP. Coming to that. make sure you are not in need of funds or you do not have another strong company quoting at a great discount to its MRP. “But what are the shortcomings of the method?” “Yes. 26 MoneyWorks4me. you can consider holding if you are still comfortable with the company and are sure that it still is a wonderful prospect for the future.com TM . “So. I now knew for sure. You would anyways be sitting on handsome profits. as I said. I atleast have a flashlight which can help me find my way!” I replied excitedly. say 20% or more. Rajiv responded.” These seemed to be the intricate details that I needed to practice. However. Also. Clear?” “Yes. this rise will not be based on the earnings but on sentiments or news and hence you are better off not going for it. you can definitely consider selling. blindly.” “Also you can tweak the rule a bit.PUTTING IT INTO PRACTICE With the MRP. one disadvantage could be that your MRP figure could end up being on the conservative side.” Rajiv continued. I replied. But atleast.

“I am fine. Great company. 175. ek naya stock hain! Its quoting at Rs. how are you? Relaxing on the weekend?” he sounded cheerful than usual. it is an ideal stock for HNI like you. Target 200 sure shot within the next 2 weeks. Speak of the devil!! “Hello Sir. He was looking at me. I called you first. It is going to get a big order in the next week. I smiled at him and confidently asked my broker. It was my broker. my cell phone rang.” I looked up at Rajiv. “Forget all that! First tell me…… What Is The MRP Of The Stock?? 27 MoneyWorks4me. a bit bemused.PUTTING IT INTO PRACTICE Before I could thank Rajiv for everything.com TM . Thought. Aapne kaise yaad kiya Sunday ko?” What is the MRP of the Stock?? “Sirjee.

Monopoly etc. Strong Financial Performance (Look at NetSales. BVPS. Debt to Net Profit ratio) 3.) 4. Patents / Secrets. EPS. ROIC.com TM . Business which you understand 2. Sustainable Competitive Advantage (Brand. The Intrinsic worth i. Pricing power. Whether the stock is available at a discount to the MRP 28 MoneyWorks4me. Credible and Trustworthy Management 5.MoneyWorks4me’s Checklist Things to look for when you invest in a company: 1.e. MRP of the Stock 6.

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