It is all about durability

All these factor are very important in the valuation of a business. Let try to quantify them. I will be using the discounted flow analysis (without doing the math here) and will also be making some simplifying assumptions

EPS = 10 Rs Return on capital (ROC) = 22% Growth in profits = 15 % Company is able to maintain this return on capital and growth for 10 years. After that the ROC drops to 12% and growth to 8% (leading to a terminal PE of around 12)

If you input the above numbers into a DCF model, the fair value comes to around 230 (PE = 23)

Active patience

I think the next 2-3 years are not going to be easy, just because we are in a bull market. A few of you who decided to invest when India was supposedly going down the drain, must be feeling good about it. It is fine to feel good about it, but one should not get carried away by it.

More noise

In a bear market, as we had in the last 3-4 years, almost no one spoke about the stock market except as a place to avoid. Unless you turned on one of the financial news channels, it was easy to avoid any talk about it.

The advantage of this comparative silence was that you could think investing without too much distraction. The situation has changed quite a bit in the last few months. We now have friends, colleagues and relatives, all getting excited about the market. If like me, your acquaintances know that you invest in the stock market, I am sure you must get badgered with tips for the top ten hot stocks which will double in 21 days small caps especially.

In my case you can imagine the disappointment recommending people to invest in 2013 when no one wanted to, and being cautious now when everyone and his dog thinks we are at the start of a multi-year bull run.

Feeling envy

It is easy to feel envy when you see others do better during such times. The media adds fuel to the fire by publishing the list of stocks which have gone by 50 or 100 times in the last 4-5 years. Ofcourse, they were silent when these stocks were starting the journey.

In addition, you now have friends and other investors boasting how they doubled their money in the last six months, by buying the hottest idea.

One can abandon his or her approach and start chasing such stocks which have worked well for others in the past. From personal experience, I can tell you that this never works out (atleast for me).

Unnecessary churn

As the market touches new high, I think some people get itchy to sell stocks which have given high returns and recycle them into new positions, which appear to be cheap.

I am looking for new ideas too, but will not do it for the sake of doing something, unless I think it will add to the overall returns. If this means doing nothing for long periods of time so be it.

Let me explain further I currently have around 19-20 positions in my portfolio. I am constantly looking for new ideas. As I am close to fully invested, I will have to sell an existing idea, incur the brokerage and taxes (if any) and then buy the new position. The implication of this decision is that I expect this new idea which has been analyzed for a few weeks, will do better than an existing company which I have analyzed and followed for more than a year.

There are people who are smart enough to do this consistently I am not one of them. I do not want to take these decisions lightly. If the time horizon is 2-3 years and more in my case, it is really important that I take a little more time to think through this decision.

Being patient is never easy

I have found bull markets to be far more difficult to handle than other times. For starters, it involves doing nothing for long stretches of time, when stocks are going up and you are missing out on easy money ( that the easy money is lost in the end is a different matter).

Let me ask a few rhetorical questions (which I keep asking myself too) is it really important to have all the hottest stocks in your portfolio? Is it really necessary or even possible to have the highest possible returns at all times, if a lower rate of return at much lesser risk will meet your goals. Is this investing or just showing off?

The main challenge we will face in the coming months and years is to keep our heads amidst the euphoria. It is very easy to get carried away and starting buying marginal companies showing profit and stock price momentum I have done that a bit in the past and it has always come back to bite me.

Let me suggest a few activities to keep you busy while waiting for the right opportunity

- Watch TV soaps, especially the family dramas. They have a lot of twist and turns too (or so I have heard)

- Take up body building or weights. You will have chiseled body if the bull market turns out to be a 10 year one J

- Go for long walks and walk a little more every day. If this a long bull market, you may be walking the whole day

- If you are single, go to parties and have fun. If you have been investing in the past and not partying, shame on you anyway what a waste of youth!

For those of you who like me, cannot do any of the above keep faith and hope. This too will pass. The skies will turn dark again, and they will be gloom and doom. You will get your chance then J

Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.