Notes on The Thoughful Investor by Basant Maheshwari

3-The change in price of shares is more frequent than a change in value of the business and it takes a lot of experience
and understanding to note that the frequency of change is higher for price than it is for value even though instead of
being worried by a change in value, most investors remain more concerned by the changes in price.
3-Expectation about future prices is one of the chief causes of bull market euphoria and bear market panic.
5-Investors who identify one big investment idea every 12 months make more than people who find a new stock to bet
every 12 hours.
6-The focus of investing should be to buy stocks that carry a potential to move up 10 times and not the ones that
promise a random 10% upmove.
6-To gain financial freedom one would need to increase income, reduce expenses while simultaneously keep making
profitable investments. Once investments start expanding in value, he will have to restrain himself from taking early
profits.
7-An investor has to be lazy in taking profits and agile in cutting losses. Good companies are supposed to occasionally
get ahead of their current fundamentals and if the stock that an investor has bought moves up with the companys
prospects, it makes sense to hold on or even buy more especially if the underlying business is indicating excellent
prospects ahead.
7-The process of getting rich for a big everlasting smile entails sacrificing a lot of these small happy moments. The option
for the investor should be clear as to whether he wants to be happy in these small moments or create a life time of
happy moments.
8-To attain financial freedom an investor must strive to have at least a corpus of fifty times his annual expense. 2% yield
of carefully chosen businesses should grow at a rate significantly ahead of inflation.
9-A small investor should first let his investments grow before he starts thinking of it as a money plant.
11-Personally, more than 90% of my wealth has been generated from less than ten stock ideas only. Making meaningless
and insignificant token investments that do not have the power to change the balance sheet of a person is only an ego
massage and does nothing to advance his process of wealth creation.
11-A great idea does not come often and when it does the need of the hour is to bet big and hold it for the entire
duration of the up move as it is more profitable to be allocating large amounts of capital on a moderately winning
investment than it does to be betting with smaller amounts on a super sizzling risky venture.
11,12-The CAGR is the only distinguishing feature of an asset class and varies from one asset to another. While the
initial capital that an investor brings to the table and number of years that he intends to retain his investment are
completely in the hands of the investor and remains the same for all assets, the rate of return is a market determined
number and is unique to an asset type whether, stocks, bonds, metals or real estate.
18-An investor should evaluate each investment opportunity with the twin aspects of investing risk and reward. If the
risks are higher, then no matter how big the rewards are, he should sit back and introspect. Allocating small amounts
will make negligible difference to the portfolio and buying more he might put the good work of the previous years at
risk.
19-All investors become careless and confident after four years of supernormal returns and in order to keep the
momentum running they move down the quality curve, buying low priced stocks of inferior businesses, with
questionable management and debatable financials.
19-In markets speed overrules size, most people look for the quickest money making stock and not the one which will
make them the biggest gain. The best investment is, therefore, the one which generates a higher rate of return, on a
large initial amount over longer periods of time. Merely generating a high rate of return is not enough.
21-While equity markets do generate higher returns over other asset classes, these higher returns come in short bursts
and without linearity when compared to income from fixed deposits or monthly salary credits.
22-Real estate prices are not volatile as during a slowdown, prices hold their levels rather than fall down. This is because
due to low level of mortgage penetration sellers prefer to withdraw from the market rather than engage in distress
selling which creates a vacuum.
23-The easy way to live a life is to let the first investment be a house and the simple way to make wealth is to put the
first investment in a group of stocks and allow more time for compounding.
23-While returns from equity come to an in investor in bunches, these returns are expressed in terms of compounded
annual growth rate (CAGR), which is just an effective way of smoothening out the abruptness of these returns.
27-Investors who run away from the bear generally arent around to receive the gains when the bull comes along.
29-When work becomes passion, wealth follows.
30-A prospective full time investor should be absolutely passionate about investing and everything even remotely linked
to it but being passionate about stocks is a lot different from being passionate about looking at stock prices. Its the
research that needs the passion, not the minute to minute outcomes.
31-The easiest way to develop skill in the investing game is by being in the market, reading from the past experiences of
people who could succeed in converting a limited capital into a retirement fund.
32-Among many attributes that a person should possess to make a living out of this game is to be an optimist. He should
go to bed everyday thinking that tomorrow will be better than today.
32-As a person who intends to make a living out of this business, the first thing he has to do is to accept responsibility
for his actions.
33-Fifteen to twenty years and three bull markets is all it takes to make wealth from the market and all that an investor
needs to do is survive that time period by being in the market continuously rather than coming in when times are good
and moving out when they are not.
34- Companies dont grow at 40% on an individual basis. There has to be a sector tailwind for which such stocks are
leaders.
35- Unless you can take the pain, you will never be able to participate in the gain.
36- The process of seeing a stock go down is very much a part of an investors life. It is like falling down for a child while
he is learning to walk or being unable to float the first time a person is pushed into the swimming pool.
36- Investing is about making less and retaining more rather than making more and retaining less.
36- The reality is that the market does not care about whether an investor gets his original capital back or not. All that it
knows is to price the stock on the basis of the available information as disseminated by the collective opinion of the
participants.
39- Though stocks are supposed to be valued on promise, markets pay on performance. It is much better to buy a stock
after it has started to show improved earnings than on its anticipation of doing that.
39- It is easy to sit with a stock delivering earnings growth then to stick with an investment whose earnings are going
nowhere.
39- An investor who buys on borrowed capital is less likely to make a mistake than the one who buys on borrowed
conviction.
39- In investing returns create conviction and conviction generates returns, something like the chicken and egg
syndrome but most investors start from the returns side because it is easier that way.
40- Making income is different from creating wealth. The former has to be done repeatedly, while for the latter once is
enough.
41- It is not what you make that counts, but how much you can keep.
41- Investing is all about RISK and contrary to popular public opinion, most investors get rich by avoiding risk and not by
taking it.
43- Getting a yield isnt enough. An investor needs to look for a stock that will grow with the yield and I started looking
for the high yield, high RoE, low PE stocks.
43- 30-5-5 method: buying debt free companies having a RoE of 30%, available at a PE of less than 5 and yield of 5% or
more. The logic of this 5% yield for debt free companies where payout ratio was less than 50% was that while dividend
would protect the downside, the high RoE would assure a PE expansion whenever the cycle turned.
43- For high quality businesses it makes sense to be a little early as their recovery is assured whereas for low quality
stocks it makes sense to be a little late after seeing the first signs of recovery as these companies work with undefined
timelines.
44- The fact that a stock could be good at a price for all kinds of known risks escapes the thought process of most
investors. One way of evaluating whether a stock has discounted the worst is to see if the worst is being debated on
business channels on a regular basis. If the level of discussion is continuous and intense with a greater proportion of
commentators anticipating the same then the market would be said to have discounted the worst and will probably
move up after the event and in case the worst does not happen, the upmove that follows it will be sudden and sharp.
45- Risk to an investor in listed securities comes from not knowing what he is doing and from being unable to anticipate
sudden unexpected moves.
47- More often than not, the popularity of the stock is always preceded by the popularity of its product a signal most
investors tend to miss.
48- Satisfied customers generally lead to satisfied shareholders.
48- Irrespective of the agreement, a company will never let its dealers, distributors and franchisees earn a higher RoE
than itself and in the long run shareholder returns are determined to a large extent by the RoE only.
49- Except under special circumstances of extreme overvaluation, stocks can keep going up as long as earnings keep
expanding.
52- It is mostly better to buy a company with a great product at a higher valuation than to buy a bad product company
at a cheaper price.
53- When the inner conviction is strong, an investor finds a hundred reasons to buy a stock and when the inner
conviction is weak then an investor finds a thousand ones for ignoring it.


PE ratio = Dividend payout / Dividend Yield
= (Div per share / EPS) / (Div per share / Price)
= Div per share / EPS / Div per share * Price
= Price / EPS