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Created by Hrijul Dey@HRijulD

The little book beats the market: a summary

  1. businesses survey the market and acquire/procure/create products/solutions/services at a cost then conduct marketing activities to sell the solution with a margin
  2. the margin typically gets utilized in running the operations and whatever is left is the profit that gets taxed to 30 to 40 percent.
  3. A business with good books and good brand / good idea can be incorporated into a company and the parts of the company can be sold as shares
  4. The promoter and the shareholders negotiate the value of shares based on the past performance of the company and future prospects of growth or profits
  5. The company has a thing called income statement that declares the revenue, the expenses, the tax and the final profits.
  6. we can calculate the yield of a share by checking how much it gives you per unit of time
  7. Some companies by the very nature of the business they are in earn more for every penny invested.
  8. Benjamin Graham created a formula that tries to find undervalued stocks which have assets/ IPs etc more than it’s own value
  9. If we rank the list of stocks based on 2 things i.e. their ROCE and yield and add the rankings, we will get a consolidated rank
  10. The formula used to work strictly in the last century because of the nature of business was physical, now we have to slightly modify the formula to fit the IT and emerging technology sector.
  11. When we take a large number of companies like 3 to 4 thousand over a time span of 15 to 20 years, the return will be higher.
  12. My main question is that if everyone knows this 10th standard math of ranking companies, why 90 to 99 percent traders in the stock market loose money?
  13. The magic formula doesn’t always work ( because of people and their sentiments) they want to get rich quick and loose faith over the formula while it under performs
  14. If a company or sector does well in a sustained manner for a considerable amount of time, It attracts competition from other players.
  15. Companies have to have something working as their unfair advantage to keep ROCE up for a long time.
  16. Failing to do so will create average companies.
  17. the formula always works wonders if we give it more than 3 years of time to invest in the capital.
  18. There are 2 types of risks that we have to cater to: what is the risk for if we follow the strategy and it underperforms. and what is the risk that another strategy that under performs the market average.
  19. Usually due to unforeseen circumstances A stock stays undervalued for a certain period. It can be a few months or a few years.
  20. In those situations big players make big moves and buy a substantial chunk of stocks in a company. Sometimes Buying out the whole company itself
  21. Most of us are not into the business of picking stocks on our own, that is why the formula is there to pick 20 to 30 stocks.
  22. If things are too chaotic to understand, then putting money into a mutual fund seems to be safe option. The main caveat of having a mutual fund is that fund managers look at 200 to 300 companies at a time, making it impossible for them to focus on small number of good stocks.