A summary of % rules of successful stock investing

1. 5 RULES OF SUCCESSFUL STOCK INVESTING
BOOK SUMMARY BY PARTH SOLANKI

2. THE FIVE RULES
 Have an investing philosophy and stick to it.
 DO YOUR HOMEWORK
 Due to the grey nature of investments investigating your stocks is important .Annual reports can uncover many
secrets based on quantitative value that markets meaningless chatter cant. And for a long term investor missing out
on early gains doesn't make that big of a difference.
 FIND ECONOMIC MOATS
 What does the company do to keep its competitors at bay from eating away their profits
 HAVE A MARGIN OF SAFETY
 buy stock for less than they are really worth
 historical price to earning ratio is a good measure for safety of margins
 HOLD FOR THE LONG HAUL
 Trading comes with expenses like commissions and short term capital gains tax. Buying for long term avoids the
unnecessary costs.

3. KNOWING WHEN TO SELL
 KNOW WHEN TO SELL
 constantly monitor the companies you own rather than the stocks itself.
 look to the future expectations
 Ask these questions
 did you make a mistake?
 have the fundamentals deteriorated?
 has the stock risen too far its intrinsic value?
 Is there something better to do with the money?
 do you have to much money in one stock?

4. & MISTAKES TO AVOID ACCORDING TO THE AUTHOR
 SWINGING FOR THE FENCES
 Don't put your money with the mindset of all or nothing is very difficult to value companies which are in the startup stage as many
startups delist from the exchanges each year.
 BELIEVING ITS DIFFERENT THIS TIME
 not knowing market history is a major handicap.
 Only a student of market history can really have a hand at understanding the future of a company in its industry.
 FALLING IN LOVE WITH THE PRODUCT
 GOOD products don't necessarily translate into great companies. Economy is a far better factor in assessing a company that
technology and innovative products.
 PANICKING WHEN THE MARKET IS DOWN
 TRYING TO TIME THE MARKET
 when timing the market investors tend to loose out on compounding and a study shows that you only have a 33% chance of beating
the buy and hold strategy. The timing the market strategy only produces once in a blue moon wonders and never deliver results on a
consistence basis.
 IGNORING VALUATIONS
 the underlying business should be the only factor in decision making not the mindset that someone else will pay more.
 RELYING ON EARNINGS
 ACCOUNTS BASED EARINGS CAN BE Manipulated to suit according to the management only cashflow should be considered. i.e. If
operating cashflow is stagnant or declining that may raise some red flags.

5. ECONOMIC MOATS
 Economic moats are what keeps the companies competitors from eating the firms profit away.
 To evaluate an economic moat the author gives basic metric guidelines
 Evaluate the profitibilty
 free cashflow and how much- cash flow from operations - capital expenditure
 free cash flow/sales= 5 percent or more better
 net margins =15%
 ROE =15%
 ROA=7 %
 ROIC
 WACC

6. SOURCES OF ECONOMIC MOATS
 Real product differentiation
 The product is technological superior.
 Perceived product differentiation
 It is driven by brand value or goodwill. The brand itself adds value which is transferred to the customer. Tiffany,
Apple Inc
 Driving cost down
 Cost cutting helps to price the final product lower than the competitors
 Locking In Customers
 Some products take consumers time or a steep learning curve making it difficult to switch to an existing competitor
 Locking out Competitors
 Patents, high barrier to entry, high barrier to success. Reduces the competition.
 how long will it last
 how long can the firm keep this up some firms have narrow or wide moats.
 Industry analysis
 Is the industry highly competitive, or ruled by select few companies.

7. THE COMPANY IN THREE SHEETS
 BALANCE SHEET
 It’s the companies credit report it tell you how much the company owns relative to
how much it owes
 INCOME STATEMENT
 This shows how much the company has made or lost in accounting profit or loss at the
precise quarter or year
 CASH_FLOW STATEMENT
This records all cash that come to the company and all the cash that moves out of the
company.

8. THE BASICS OF FINANCE

9. BALANCE SHEET

10. INCOME STATEMENT & CASHFLOW STATEMENT

11. ANALYZE A COMPANY
 The factors to analyze a company are: Ratios in these help us better
understand a business and even prepare the investor for a worst case
senario
 PROFITIBILITY
 FINANCIAL HEALTH
 RISK BEAR CASE
 MANAGEMENT
 GROWTH

12. PROFITIBILTY
 ROE Return on equity !0 % for traditional business and 12% for financial business like banks.
 ROA Return On assets roe above 10 percent without excessive leverage is worth looking into
 free cash flow= cash flow from operations – capital expenditure
 Profitability matrix
 Roic -Return on Invested Capital It is calculated as –
 “Net operating profit after taxes (NOPAT) divided by Invested Capital”,
 where NOPAT is Net income after taxes but before interest.
 Invested Capital is
 “Total Assets + Non-interest-bearing Current Liabilities – Excess cash”

13. FINANCIAL MATRIX

14. GROWTH
 Growth can be achieved by the following
Selling more good and services
raising prices
new goods and services
buying another company
Strong earning growth is not persistent over the series of years.
Investigate the sources of growth.
Always be skeptical of acquisitions.
See changes in taxes, one time profits and accounts receivable to see if the revenue is always recognized to
boost growth but the accounts receivable keeps piling up

15. FINANCIAL HEALTH
 Debt To Equity
 Times Interest Earned
 Current And Quick Ratios
 Current Ratio-1.5<is Good
 Financial Leverage more than 4 is seen as risky
 Quick ratio

16. BEAR CASE OR RISK
 Find the reasons not to invest in a position.
 Track all your investments
 Track key risk and all shortfalls or reflags you can find
 Read about the company and its business itself that the stock price.
 The industry trend around the company

17. MANAGEMENT RED FLAGS
 Paid to much.
 Excessive perks given
 Bonus for acquisitions than performance bonus
 Loans forgiven
 Skin in the game
 No self confidence
 Owners role
 Board filled with related people or former managers.
 No self confidence
 How long does the board members last, talent retention
 Accepting mistakes or not

18. FINANCIAL FAKERY
 Declining cash flows – cash flows declining with respect to net income
 Serial chargers- The fixed one time cost keeps on increasing
 ,Serial acquirers- acquisitions may be used to hide or cover up something as it gives them a chance to mess with
the statements.
 CFO leaving when company is under scrutiny or investigation
 No bills paid
 Messing with the credit items and account receivables
 Gains from investments
 Pension padding or pileup- can boost net income but is not profit from actual operating activities
 Changes in accounting policies
 Inventory build up – In cases for computer which are difficult to sell after a short period of time an inventory build
means the firm is not able to sell and inventory will by wasted

19. VALUATIONS
 The stock market returns come from investment return speculative return.
 Always buy a great company at an attractive price. Price Paid lowers speculative risk
 PRICE MULTIPLES
 Price to sales- price of the stock/sales per share depends on companies profitability, don’t compare it with different industries.
 Price to book- Stock value to the book value from the balance sheet.
 Price to Earnings
 Questions to ask
 Has the firm sold an asset recently?
 Is the firm cynical?
 Has the firm taken a big charge?
 Does the firm capitalize or expenses its income generating assets?
 Price to Earnings Growth (PEG)
 Yields – Yield is an exact invert of P/E. Here we divide Earnings by Current market price.
 The P/E should be lower than the benchmark
 Fast growing firms can be riskier so use PEG with caution

20. VALUATION OF CONSUMER GOODS
 Consumer good business make money by making products and selling them for a
profit to retail institutions or their distribution network.
 Due to domination of only few companies there are limited strategies of growth.
 Steal market share by introducing new products.
 Acquire other consumer goods company
 Reduce operating cost
 Sell overseas


21. CONS OF CONSUMER GOODS BUSINESS
 Increasing power of retailers
 Litigation risk
 Foreign currency exchange risk
 Expensive stock

22. ECONOMIC MOATS AND HALL MARKS OF SUCCESS
 Moats:
 Economies of scales
 Distribution channels and relationships
 Big powerful brands
 Hall marks of success:
 Innovation
 Belief in brand building
 Free cashflow
 Market share

23. INDUSTRIAL MATERIALS
 Broadly categorized into basic materials and value added materials
 Basic material firms can’t influence the price as value added material firm can specialize and earn a higher marget
 This industry is cyclic in nature.
 Only efficient producer can survive downturn
 Economic moats for basic material are less(economies of scale, high barriers of entry)
 ECONOMIC MOATS for industrial material include Technology and Competitive advantage