Stock Shastra #12: Buy at 50% discount to minimize risk and get fantastic returns

In Stock Shastra #11, we told you about the right value of a stock – its MRP. Having already said that you need to buy at a discount to its MRP, you must be now wondering what is this discount %, that will minimize your risk as well as give you great returns? Answering this question, will complete your quest for a great investment.

So, at what level lower than MRP should you buy the stock?

Every smart shopper prefers buying stuff on discount and you can do the same, while shopping for stocks. While calculating MRP, we considered a 15% expected rate of return. But, this is the minimum you should expect. Also, just operating on MRP, may not be the best way to invest as you are not covering any risk. So, while investing in stocks, always demand a margin of safety.

What is this Margin of safety you ask? Margin of Safety is the difference between the current price and the MRP of the stock. So, if the MRP of a stock is Rs.100 and is currently trading at Rs.70, you have a margin of safety of 30%. But is this good enough? Well for the safer stocks for example a large cap company with a trustworthy management, yes, it is probably enough. But, for the small caps where the risk is higher you need to demand a higher MOS.

The Value Investing Guru – Benjamin Graham in fact insisted on a 50% MOS while buying stocks.

Discount Price = MRP *(1- margin of safety/100)

But the rule of 50% may not be applicable for all stocks and at all times. If you always insist on a 50% discount, you may miss out on a buying opportunity in the case of at least the large caps, the popular brands and the market leaders. Very rarely will these kind of stocks be available at a 50% discount. Hence, we at MoneyWorks4me.com have come up with our in-house model which helps us ascertain a MOS% for each stock.

This model consists of 8 parameters/componenets that help us ascertain the risk associated with the stock and hence guides us wrt to the % of MOS the stock deserves. Buying the stock at/below this MOS% will help you negate this risk. Let’s have a look at these 8 parameters and understand them with the help of a few companies:

So, why look for a margin of safety?

You must be wondering why do you need to wait for a margin of safety. A couple of reasons for this are:
•    Minimize risk: Compared to other traditional investment options like bank FDs, bonds, etc stock investing comes with an additional risk. This is because of the irrational behavior of the market which drives the short-term fluctuations in the price of a share. The market almost doesn’t need a reason to react and fluctuates due to news, sentiments, baseless rumors and just about everything else.

•    Great Returns: The other advantage by buying low is that you increase your returns. The lower you buy the stock, the higher return you get on the investment.

So, does the market give you such opportunities that you can buy the stock at a very low price? Yes, it does! In reality, there are many times, the market tends to over-react and undervalues a fundamentally strong company, probably because it is facing tough times right now or maybe due to some negative rumor, news etc. But in the long-term, its stock price will appreciate rationally based on its earning capacity. So, while investing always keep a long-term perspective in mind and make sure you take advantage of such opportunities.

Hence, to protect yourself from risk and get great returns, buy your stock at/below Discount Price i.e. at a 50% discount to MRP

Having understood the Margin of Safety concept, you must be eagerly wanting to know where can you find the Discount Price of your stocks. For this, visit Moneyworks4me.com, where we have given you the Discount Price of around 1000 stocks.

So, now you know when to buy a stock. To know when to sell and what considerations to keep in mind while selling, wait till the next week for Stock Shastra #13.

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10 Responses to “Stock Shastra #12: Buy at 50% discount to minimize risk and get fantastic returns”

  1. prashant joshi 16. Mar, 2013 at 4:14 pm

    astrazeneca pharma wich type of stock

  2. prashant joshi 16. Mar, 2013 at 4:17 pm

    this time if we buy @720rs. astrazeneca share, can suggest astrozeneca pharma stock beneficial yes or not. in next upcoming week………

Trackbacks/Pingbacks

  1. Stock Shastra - 21. Jul, 2010

    Stock Shastra #12: Buy at 50% discount to minimize risk and get fantastic returns http://bit.ly/dkBBOz #stockshastra

  2. stockshastra - 21. Jul, 2010

    Stock Shastra #12: Buy at 50% discount to minimize risk and get fantastic returns http://bit.ly/dkBBOz #stockshastra

  3. MoneyWorks4me - 30. Jul, 2010

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