WE ARE BACK!

It has been some time we posted anything, but we are back and back with a promise to keep our readers posted and updated with investment ideas, poems and what is happening at our end. 

But before you listen to what we have to say, I think it makes all the more sense to see what happened to what we said . 

Here is a list of ideas we talked about : 

1) Gold 

3) IBM Puts at 190

4) JP Morgan 

5) BF Investment

6) Crude Oil

Our analysis and results do speak for themselves, and we are not going to blow our own horn.Again as a reminder, do not expect us to come out with writings when we think it does not change significantly at the margin, and none of the articles can be construed as an advice to buy/sell. We take no responsibility for the same. 

We hope to have atleast one article a month. 

Happy Reading, and Welcome back. 

ValueeInvestor Team 

Nobody Gets Fired for Buying from IBM

As the old adage goes, and so does our trading idea (or ex-ante for now). One of the most talked about thing lately has been Mr.Buffets $10 B investment in IBM, and IBM’s 5 year plan of $20/share operating EPS till 2015.Nonetheless,before we delve ourselves into what the idea is all about, its important for us to understand the facts and the suggested commitment.

IBM: 

Ibm 21

So what is that is offered by IBM ?

a) IBM closed 14th Feb’12 at 192.22.
b) It trades just 2 dollars shy of its 52 week high, and a PE of 14.72.
c) EPS has grown compounded by around 17 % approx over the past 7 years.
d) Plans to have $20/share Operating EPS by 2015 ( if history is any guide, they probably will achieve that target )

Here is where you can find historical comparison of IBM technicals over time.

That said, we are not fortune tellers here, and we are neither trying to predict what tomorrow would look to be. We are here to look at investments (or trading decisions), based on informed, and intelligent analysis.

Without further wait lets just move onto the present trading idea, and see how at times inefficiencies in the marketplace can help investors capitalize on information and knowledge. Fear is the friend of an intelligent investor, and optimism his worst enemy.

a) The idea is for the fixed income part of the portfolio
b) 2 year  BBB rated bonds yield less than 3 %  ( That comes along with a lot of risk itself , credit as well as interest rate risk)
c) We think options with Strike ranging from 180-200 on IBM spread out ( or just 190, which is the focus of the analysis here) offers a really attractive return for the amount of money at risk.

Now lets see how it works, and what are the assumptions implicit within the argument for the trade. Assume we select 190 as the strike price for options expiring in 2014, and get paid a premium of around 25. For the same, as we are risk averse we would like to have our accounts fully funded for the maximum net money which we shall ever be required to put which is around ($165). What are the things we can expect after two years ?

Scenario 1 : Options get exercised , and you are made to buy the options at a strike price of 190 two years from now. Even on a conservative basis, if EPS grows by 10 percent, you would be holding one of the blue chip stocks at a PE of around 12 ( at a price of  $190),  not bad when the lowest it dropped to was around 9 during the financial crisis, so very much limited downside. Even at this price you are still up around $ 25 to the actual money you had to put down 2 years ago.

Your buffer is 165, anything below that eats into capital for a dollar to dollar loss, that said 165 which would your actual cost relates into a PE of 10.5 and not 12 mentioned above, which was the PE at 190 two years from now considering EPS grew compounded at 10 percent. Historic  average PE of IBM starting from 1985 is around 15.74.

Scenario 2: Options do not get exercised, in this case you get a return of approx 7.3 percent compounded over a period of 2 years.

As a Fixed Income investor, I think for the risks, the rewards offered by this transaction makes more sense as compared to even High Yield debt, and any other debt investment.

If you have any questions feel free to write us back at info@valueeinvestor.com

Ibm Technical Historic Valueeinvestor

Margin Trading , and its relation to PE

As many of the readers know, we are neither interested nor are we willing to advice anyone to actively pursue trading. That said the topic of the post shall come across as a contradiction to what we have followed, and would like to follow in the future. 

A closer look, and after going through the article might help you better understand our stand and our fixation on the topic and its importance on ones investment decision ( especially in India, as the topic is drawn onto from data on Indian Indices) 

What you shall see below is a comparison between two graphs, which on a simultaneous basis seem to have increased significantly all of a sudden, followed by a sudden crash. Why is it that this graph is important in particular, and why one needs to pay attention to it ? How will this help one in his or her investment decisions , as well as timing ( which in itself is a tricky part at times can come in handy if one has looked around for all the pitfalls that come along with investing in the stock markets) 

Without further wait , we shall look at the graphs first and then give our explanation.

Margin Data


Nifty Nse Pe

The first graph shows margin trading in Lakhs Rs, and the other one shows the trailing PE for the index. The margin data is much shorter which starts from 2005, and has been updated to Jan 2012, as compared to NIFTY PE which starts around 2001, and is complied to the Jan 2012 the latest day. 

One striking thing, that calls for ones attention is the significant overlap in each of the graphs patterns. While this shall come as no surprise, increase in margin trading followed by increase in PE ( aka prices increasing higher than earnings ) eventually results into prices rising to levels which are not sustainable in the long run and are eventually followed by crash in the prices.

Now why does one needs to be aware of the absolute level , as well as the relative significance the variables have on each other ? Well it is quite intuitive, if PE is going high and so is margin what is the reason for the price increases ? Increase in earnings or a speculative excess in the markets ? 

Henceforth, before and while investing in the market it is always necessary to make sure what are the averages, at what level you are getting in and what is the time one should get out of the market ? 

As the saying goes, we buy cheap and sell dear. To follow the saying, one should know before investing if they are buying cheap or not. 

Before we end this post, we forgot to mention one thing the long run PE of Nifty is around 18 (approx.) So every time keep an eye out for the levels.

If you have any further questions or are looking for data please contact us at info@valueeinvestor.com

DISCLAIMER: Anything on the website , including this post and or anything is not to be taken as an investment advice. Our sole purpose is to share our knowledge on an educational open forum basis. That is open for discussion, and is to be part of a learning process. Anything taken otherwise is at the readers own risk. We take no responsibility for any loss experienced in the markets, or otherwise in any ways. Please consult or financial advisor before investing in the markets.