Seth Klarman :

Top three principles of Value investing:
  - Think of Risk first before return.
  - Think of absolute return instead of relative performance to index.
  - Follow bottom up approach instead of top down.



Goal : To make money all the time, protect capital in downside and do well in the upside.



- Look for the Mispriced situation:
       - stocks dropped out of S&P500 index
       - investment rating has changed for a bond from investment to worse.
       - upcoming S&P500 stocks which is 501
       - rating for bond chances to invest
       - corporate spin off due to some issue or parent company looking to get rid of people.
       - Acquisition
       - Mispriced situation with catalyst.

- Look for a range of values in a company.

      - P/E
      - Book Value
      - Working capital
      - Cash value / Per share

- Model the every possible worse situation before investment in stocks
     - in case of auto loan, 2,8,40 % auto loan loss rate
     - 40% cars sitting in dealers home

- Find out who is selling stocks
    - Be careful,
               - if management is selling stocks.
               - if people like Steve Mandel /warren buffet is selling.

- Buy from people who don't know what they are doing.
              - Some situation  people just want to sell so buy in such kind of investment.
              - Corporate spin off natural many seller but not buyer.

-Sell soon / Buy soon.

      - If intrinsic value  is too close. Don't wait for the last moment and greedy. (Before quarterly result).

- Collaborate and corporate for investment ideas since not all ideas are best all times.

- Always keep more weapons in arsenal to take advantage of mispriced situation.
       - Look for situation in bond.
       - Corporate debt
       - Mortgage based security
       - Can own building in real estate
       - Can own loan on building
       - CD/CLO/

- Identify an edge to outperform.
    - Longest edge is long term.
    - Expertise than any other crowd.


- Bad Management

   - Hiring Brother-in-law or relative
   - Taking advantage with free stock and options
   - Poorly capital allocation.
   - Paying overly to themselves.
   - Leveraging too much
   - Only think themselves first.

- Good Management

   - Buy stocks when undervalued.
   - Using stocks as currency.
   - Good capital allocation.
   - Using leveraging diligently.
   - Community/shareholder interest



      
  




 

Four Valuation method
=================

1. net-net working capital method,
2. DCF method,
3. Four filters investment process,
4. Two-Column Valuation Method.

Read more: http://www.nasdaq.com/article/warren-buffetts-twocolumn-valuation-method-cm247095#ixzz4hI7y7ITP

 4 Criteria to choose stock based on warren way.
=================================
1. Understand the business
2. Enduring the competitive advantages
3. Able to trust management
4. Margin of safety.




Main Criteria to choose the stock
========================

Performance 

1. Company performance in the last 5 years.
2. Investment return %
3. Debt Management
4. Return on working capital
5. Return on Asset
6. Return on Equity


Balance sheet

1. Cash holding
2. Rate of growth.
3.Asset Growth
4. Cash generation capability.


Management 
Who owns the company.
Is management honest/ accept mistakes ?
Is management do what they promise ?

 
Competition-Moat.
How competitive is the company.
New product /services



Stock Valuation in Market

Is it cheaper or Expensive.



Brand Value
Is it brand /quality value ?

Multiple source of Income in company
Does it has multiple source of revenue or single revenue  ?


Baseline from industry.
Get a baseline of good and successful company and compare with other companies to evaluate the ratio.

Cause to grow/generate income.
Look for the upcoming investment/events which can generate more revenue.

History Similar Events 
Look for history events /solution for bankruptcy/restructuring/Debt/interest hikes.


Types of stocks

1) Values : 
2) Cyclicals :
3)Turnaround :
4) Price arbitrage :


Causes of selling :

1) small portion of profit
2) frustration 
3) sell one stock to buy another.
4) Characteristic change in company.

Peter Lynch Vedio notes:

- pateince
- little research
- no panic
- emotional strength


1) Long time ---- not a short time....
2) Give time to grow
3) stock picking -- area/field , consumer, product, service
4) dont take your area granted.
5) good observant neigbor
6) key organ is the stomach.
7) research -- things u know...story does not change ... only spend few hours--- low cost /donut....mcdonald. they added breakfast, low cost. overseas.
8) No one can predict the market. 90 years-- market fluctuates...10 % 25 %.
9) if company does good...stock does good.. if company lousy..stock lousy..
10)  symtpms---
11) stoks in category...what question will ask in category.. different stocks---different expectation, different behavior.
12 5 catrgories---- fast grower---slow grower,,circlonic,, asset ,,turnaroud,,

     categories are guildine and not hard rules

13 ) smalller companies tend to move faster compare to large
14  Growth companies--- baseball 9 inning...growth compani --buy in 2 or 3 innn
15 ) look for signs..---- steady grow earning.. rising divinde.. room for keep growing..
16 ) dont buy on hope... something should happen
17) pick strong companies-- strong cashflow and low debt...so that they can survive..

18 ) trun around happening--gets some real evidence
19 ) hidden asset of companies  ---- real estate --true market value--- brand name--intel,att..numerios patenet...
20) stocks follows earning direction...
21) strong reason to grow...
22) p/e == thumb rule...if earning/growth rate is less then p/e ...good if pe/e is more than grow..bad..expensive..
23) if dividend is rising.. its good signe..
24) Explore balance sheet. company should have atleast some cash ...


-be carefull with high yeild.
-asset-liabilites = equity(networth)
-company should atleast have cash to pay short term debt. if not..keep bororw ..mo
-if subtract cash - short term debt-long term cash = one quarter of networth -decent balancesheet.
- if subtract cash - (short term debt-long term cash) = > networth = weak balancesheet balancesheet.
- how much debt is good : addup equity with long term debt = total capitalization.
now total long term debt/total capitalization = if it is total deb is half and more than total capitalization then it is too much debt. if it is less than 25% then fairly low.


--banking/insurance/finanical institues --- normally 25-50%  and higher normal.

--looking into the footnotes for debt.

-- balancesheet/income statemetn--- basic formula--- quarter or year.

-- ways to improve earning... increase sales..reduce cost....

-- talk about stories.

---



-- assestment section

---story creation ---

---brass tax...



  

Trading tutorials

http://thepatternsite.com/tradehelp.html


Warren Buffets quoates.


http://www.suredividend.com/warren-buffett-quotes/#tips

Short sellling Advice/Tips

Tips for Shorting Stocks: Do Not Short When...

First, let's talk about what not to do.

• Don't short a stock based on valuation. Just because a stock has a high price to earnings ratio (P/E) is not a good reason for shorting a stock. Other common valuation measures apply, like price to book, price to sales, and well, price to anything. Do not use valuation metrics to determine if the stock is worth shorting.
• Don't short an expensive stock. Stocks that seem unbelievably pricey can get even more expensive. Check out Berkshire Hathaway (BRK-A), Warren Buffett's playground stock. It closed on 5/7/2010 at $111,500, down $2,000 a share. Just because price has run up a huge amount is not a good enough reason to short a stock. Many traders buy high and sell higher (momentum plays), so don't try to short against them.
• Avoid the sucker short. These are stocks that have risen much too far in price based on fundamentals that seem made out of rumor only. The stock gets lots of media attention for its quick but large run-up, leaving many to believe the stock just has to drop. It doesn't. If you short the stock, the upward rise will kill you just before the stock finally tumbles. Avoid the pain by not playing the sucker short in the first place.
• Don't short a stock above the rising 30-week (150-day) moving average. The rising simple moving average means upward momentum is still on the side of the bulls.
• Never short a thinly traded stock. A good rule of thumb is that your position should be no more than 1% of the average daily volume. If a stock trades 100,000 shares daily, on average, shorting more than 1,000 shares could be a mistake. I'd avoid a stock with fewer than 500,000 shares trading daily.
• Check the short interest. If the stock has a huge short interest, the exit is going to be blocked by traders trying to cover when someone in the theater yells "Buy!" Divide the short interest by the average daily volume to see how many days the stock has to trade to equal the number of shares sold short. In 1988, when the book was published, Weinstein said that a common ratio was 3 or 4 (short shares) to 1 (meaning 3 or 4 days of average trading to cover all the shorts). Get nervous about anything above that.
• Avoid shorting stocks in a strong industry. You want the market, industry, and stock to all show weakness. If any of the three are strong, you increase your chances of picking a loser.


• Don't short a stock in stage 2. I show where in the price mountain a stage 2 stock belongs in the figure to the right.
• Never short a stock without a protective stop. Doing so is a good way to wipe out your account.

8 Tips for Shorting Stocks

If the above list is what you should not do, how do you short a stock?

1. Short Stage 4 stocks. When a stock is in stage 3, price moves horizontally. A trendline drawn beneath the minor lows will outline support. The 30-week simple moving average will be climbing up to meet the stock. When price closes below the horizontal (or nearly so) trendline such that it's clear support has been pierced then consider shorting the stock. If a pullback occurs, then you can initiate a short position once the pullback to support completes and it's obvious that the stock is again heading lower.


2. Short in a bear or weak market. If the market is rising like oil gushing from a ruptured oil line in the Gulf of Mexico, avoid shorting stocks unless the situation is compelling. If the market is trending downward (bear market) or stocks are especially weak, then that's the time to short.
3. Short weak sectors. You can use relative strength to compare industries. Since stocks in hot industries can continue moving up, look for industries that are especially weak and select stocks from those.
4. Relative strength should be trending lower. The stock compared to the market index should be trending lower, meaning the relative strength of the stock should show weakness.
5. The stock should be below the 30-week moving average, and other stocks in the same industry should also be weak (below their 30-week moving averages).
6. Look for a significant run up. If there is little to reverse, then don't take the short ("the bigger the top, the bigger the drop"). The ideal stock should have an extended uphill run that is now in the process of reversing.
7. Look for underlying support. If support is nearby then this stock is not an ideal short candidate. Look for stocks which show sparse underlying support as they make their way to the top.
8. If a head-and-shoulders top or other reversal pattern appears, that's good. Look for bearish chart patterns to bolster your confidence about picking a winner.

Taken from below site.:

http://thepatternsite.com/ShortStocks.html



– Target companies with declining sales and earnings.

– Target stocks of large companies that have declining public and institutional perception. That creates a large supply of selling pressure.  (Can you think of any automobile manufacturers or airline companies that qualify?)

– Only sell short when the market's intermediate-term trend is down.

– Never (never!) try to pick the top; only sell short stocks that are in confirmed downtrends.

– Pick your sell point carefully, trying to sell after the end of a normal rally upward, preferably to the declining 50-day moving average.

– Don't get greedy. When you have a decent profit after an extended period of downside action, take it.

– And finally, cut all losses short. If the stock continues to rally after you short, cut your loss at 10% to 15%.

The most dangerous way to sell short is to pick a hot little stock that's "way overvalued" and bet that it will come down.

Trading Lessons

Trading Lesson learnt

• Get full report or information before trading and decide the trading plan.
• Accumulation is good thing  but at the same time chasing price is dangerous and put in the spot and leaves you with waiting/patience. Do not chase the price.
• Always keep the 35 % percent cash in hand. 
• Loss comes from the emotion.  Never invest in emotion.
• One bad stock can take away all your profits.
• Invest at right time. Even company is good and if overprices do not invest in emotions.
• Better to keep cash rather loosing by investing in emotion.
• Be careful with penny stocks. It goes up and down at the same pace. 
• All you can loose is amount but you have the probability to earn 3 times ,4 times.
• No one can predict market direction. Use your senses and find out the value and invest. 
• Do not do too much portfolio changes as it cost transaction fees and brokerages charges which reduces the profit.

RULES

•  

CHECKLIST
 

•  
•  
•  
•  

 STRATEGY

• Find out most shorted stocks with lowest value close to 1 or 2. Buy if "Days to cover " is more than 7-8 days of volume.
•  

RISK MANAGEMENT

•  
•  

PROTECT PROFIT 

•  
•