Stock Market Guide

Warren Buffett: Stock Market advice

noreply@blogger.com (Krishna) — Fri, 15 Jan 2010 17:05:00 +0000

Tips and advice for smart investors by Warren Buffet:

1. Beware of companies displaying weak accounting.

2. Unintelligible footnotes usually indicate untrustworthy management.

3. Be suspicious of companies that trumpet earnings projections and growth expectations.

4. Suspect those CEOs who regularly claim they do know the future –and we become downright incredulous if they consistently reach their declared targets.

5. Managers that always promise to “make the numbers” will at some point be tempted to make up the numbers.

6. Derivatives are financial weapons of mass destruction.

7. A director whose moderate income is heavily dependent on directors’ fees is highly unlikely to offend a CEO or fellow directors, who in a major way will determine his reputation in corporate circles.

8. If regulators believe that “significant” money taints independence (and it certainly can), they have overlooked a massive class of possible offenders. (referring to outside directors)

Those attributes are two legs of our “entrance” strategy, the third being a sensible purchase price. We have no exit to strategy –we buy to keep.

That is one reason why Berkshire is usually the first- and sometimes the only –choice for sellers and their managers.

This is the synopsis of Warren Buffet speech in 2003.

Economic and Stock Market Indicators

noreply@blogger.com (Krishna) — Mon, 04 Jan 2010 13:04:00 +0000

It is very clear that during the months of September – October the TED spread surged up. This meant that there was hardly any liquidity in the markets and the consequence was a major stock market crash. Then governments around the world injected money into the financial system and this lead to the easing of liquidity globally.So investors need to track this index and any reversal in the downward trend of dollar would mean that stock markets and other asset classes can again fall. So, as long as the dollar keeps going down the markets will remain relatively strong.

It is important for all investors to observe this as any rise in the TED spread again would be alarming and would mean that the global liquidity problem is again coming back. This in turn is bad for the markets as the stock markets are a function of liquidity more then anything else.

Many investors are now wondering why the markets have gone to 14,000. Is it because of a big reversal in global economic activity? The answer is no. The markets are up because the market participants have too much money in their hands indicated by the easing spreads in the above chart.

Just remember the simple rule: Rise in TED Spread is bad for the stock markets and economy and fall in TED spreads is good for the stock markets and the economy (but more for the stock markets).

Investors can track the TED spread using the link below:

http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND

3) Movement of the US Dollar

The movement of the US dollar is a great indicator of the direction in which the stock markets will move. Consider this:

Ø From 2003 to mid 2008, the US dollar was going down and all the asset classes (stocks, bonds, gold, and commodities) were going up. In May 2008, when the commodity prices peaked out, the US dollar also bottomed out (see chart below).

Ø After the second quarter of 2008, the US dollar started to appreciate and all asset classes collapsed one by one.

Ø After March 2009, the US dollar has again started to show signs of weakness and again stocks and commodities are moving up.

So I hope this simple relation between US dollar and all asset classes is clear to investors. A weak US dollar is all asset class supportive.

The chart below gives the US Dollar Index and a sharp decline in US Dollar Index is evident in the last few months.

Investors can track the Dollar Index using the link below:

http://www.bloomberg.com/apps/cbuilder?ticker1=DXY%3AIND

4) US Treasury Bond Yields

In very simple terms the bond yields are the interest rates payable by the government on their issued bonds. The bond yield is a great indicator of several key things as discussed below:

Ø A lower bond yield means that people are putting their money in bonds. As bond prices and yields are inversely related (when bond prices go up, yields go down). Thus, when global economic risk is high, investors prefer to park their money in safer assets like Treasury Bonds. So when bond yields go down it indicates there is risk aversion globally and people are not willing to invest in risky assets such as stocks and commodities.

Ø Conversely, when bond yields go up it indicates that the investors are getting their confidence back to invest in other assets and are pulling money out of safer assets like bonds. Thus, its time to put money in the stocks when yields are going up and to exit stocks when yields slump. This chart below will make things clear for investors.

The chart above shows that the bond yields slumped in the last quarter of 2008. The same time the equities also slumped (because money was moving from equities to bonds which are relatively safer assets).

The bond yield started to move up from early 2009. So money was being pulled out of bonds from early 2009, but it was not going into equities. Thus, there was huge cash holding in the first quarter of 2009. The result of this is what we see now. All the cash is now moving into stocks and commodities globally.

Remember, that money just moves from one asset class to another. If an investor is smart enough to understand to which asset class money will go next, then he/she will make big profits.

For bond yields simple rule is:

When yields go up then stock markets are most likely to go up and it also means the economy is recovering.

When yields fall then take money out of the markets as people are taking money out of the equities and re deploying it into bonds.

Investors can track the movement of the 10 year US bond using the link below:

http://www.bloomberg.com/apps/cbuilder?ticker1=USGG10YR%3AIND

5) Volatility Index

No investor would like to invest in a market where the big market participants are unsure of where to invest or what is happening in the economy and financial system. For this reason, tracking the volatility index is of great importance for all investors.

When the volatility index is high, an investor can easily lose 40-50% of his/her capital in a matter of few days. A high volatility also shows that the markets are very unstable and so is the economic scenario.

The chart below showing the 5 year volatility index would make things clear for investors.

As evident from the five year chart, the index was below 25 levels in a stable market and economy. However, it surged to over 75 in the worst phase of the crisis. With more liquidity coming back in the markets and signs of economic recovery evident globally the index is again back to near 25 levels. The fall in the index is reflected in the bullish sentiments in the stock markets.

Any reversal in trend should be looked for to determine the future direction of the markets.

Investors can track the volatility index using the link below:

http://www.bloomberg.com/apps/cbuilder?ticker1=VIX%3AIND

India Specific Indicators

There are some good India specific economic indicators which can be used by investors to determine the direction of the economy. Some of these are discussed below.

a) Rail Freight Index – In India, most of the commodity transport within the country is through rail containers. Hence, the rail freight index is one really good indicator of local economic activity. If the rail freight index has shown de growth or very low growth as compared to prior year then one can safely assume that there is not much industrial activity happening. The table below shows the rail freight revenue earning growth and also some other major service sector economic indicators.

It is very clear from the above data that all service related areas have contracted as compared to prior year. This proves that the economy is still in a downturn. Moreover if one observes big slump in commercial vehicle production or the rail freight revenue, he/she can safely assume that these sectors will come up with poor results in the quarter.

a) Credit Growth – It is debt which creates new money in the system. Thus, looking at credit growth is very important to measure if banks are willing to lend. Robust lending not only creates new money in the system but also helps businesses to survive. To a good credit growth is an indicator of good times to come ahead in terms of economic activity and growth. The data below shows the credit growth for public sector and private sector banks in India.

Clearly it is the foreign banks and private sector banks that are not lending and have become risk averse. The public sector banks on the other hand still have robust credit growth. This also shows that in the near term the public sector banks might do relatively well in terms of their results.

This and many more amazing economic indicators are available in the monthly bulletin from the RBI. Any investor who wants to know the health of the economy should read this monthly bulletin from RBI in my opinion.

The link for downloading this monthly bulletin is:

http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx

Investors can make use of all these resources and charts to figure out the direction of the economy and also the stock markets.

Please share your views on article through comments.

Value investing: Significance and traps

noreply@blogger.com (Krishna) — Mon, 04 Jan 2010 12:14:00 +0000

Value investing is defined as an investment approach where an investor buys a stock which is undervalued as compared to its intrinsic price. Legendary investor, Benjamin Graham originated the concept of value investing. His follower, Warren Buffet, is also the greatest value investor known till date in the history of equity markets. According to Warren Buffet, value investing is the real form of investment, anything else is pure speculation.

The basic idea behind value investing is that many times market over reacts to negative news and rate good stocks below their fundamental values along with bad stocks. Value investing relies on fear psychology of market i.e. when there is fear in the market, everyone starts selling, be it a good stock or a bad stock. In this process, good stocks also come below their fundamental values. As and when the market sentiments improve, they finally reach their fundamental value.

Now, the million dollar question is how to identify a value stock. The answer is pretty simple.

A stock which satisfies following criteria can be classified as a value pick:

Market cap is less than or equal to two-third of net current assets
P/E of the stock is low as compared to the sector average
PEG is less than 1
Debt-to-equity ratio is less than 1
Sales and EPS are rising year over year
P/E is below its own past P/E (i.e. earnings rising but P/E declining)
High returns on equity (RoE) as compared to industry average
Price-to-book ratio less than or equal to 1
Current ratio and quick ratio more than 1
High dividend yield
Low market-cap to sales ratio as compared to peers
Company is generating enough cash
Company has debt levels below its peers

Besides the above financial parameters, following criteria should also be met:

Company brand name has strong reputation
Company has strong market position
Company has exceptional management
Competitive advantages
Product and market diversification

Points to be noted while doing value investing:

A value investor should always look out for margin of safety. Buy a stock at 60-70% of its value price so that in case computation goes wrong and stock falls more, there are less chances of making loss. For example, if market cap of stock is already at two-third of its net current assets and stock is currently priced Rs 50, then buy the stock if it comes to Rs 30-35 (provided it satisfy other criteria too)
Sell the stock when stock price reaches a point when the market-cap is equal to the net current assets of the company
You should know how to differentiate a value stock and a cheap stock. Every stock which has been beaten down by the market is not a value pick. The company might be on the verge of bankruptcy or it might have been beaten down by the market for no fault of its own. Do proper research before investing. Investigate if there is any reason that justify the fall. If answer is no, it should be further looked into

The risk is low in case of value investing as compared to growth investing provided you know the difference between a value stock and a cheap stock

Value investing is not just finding the stocks hitting 52-week lows (even though they are mostly found from this list). It is about thoroughly understanding the business, carefully evaluating the company management and finally believing in the potential of the company

As a value investor, you should have the courage to go against the crowd, staying focused on the long term goal and value, ignoring the short-term gains or losses. Value investing is a bottom up approach. A value investor ignores market sentiments and focus on business fundamentals and its intrinsic value.

Understanding business story is crucial for value investing. Success cannot be achieved just by purely focusing on the fundamentals like Return on Equity or free cash flow. You should be good at understanding both the fundamentals, the story and how the two work together to define a great business

You should have a long term focus to get real benefits of value investing. If you have done your homework right, you should not care what market is doing to the stock on a daily basis. Just look for a good price with respect to value and do not try to time the market

Because of the wide popularity of this approach and the fact that all the information regarding companies is available so easily today through web, it is very difficult to find out companies that fulfill value investing criteria. Therefore, this strategy can be successfully applied only during extreme market panic situations. Value investing works best when stock market is at its historic lows like in current times. During bull period, it is difficult to find stocks below their intrinsic value. For example, during current bear markets, you can easily find out many value picks

The basic problem with value investing is that new investors buy a weak stock which is in a strong downtrend thinking it a value pick. The stock then never picks up or makes further lows thereby increasing the losses multifold.

As a value investor, you should have patience as many times market takes its own time to re-rate the stock.

When you go out for shopping, you look out for the best possible deals. You want a good quality product that will last for years at a fair price. Value investing is also about using the same approach while buying stocks i.e. buying a business that will create wealth for many years and that are available at fair prices.

Please share your opinion on value investing.

Peer Analysis for Stock Selection

noreply@blogger.com (Krishna) — Thu, 31 Dec 2009 04:40:00 +0000

Peer analysis is one of the most important steps for selecting a company over the other in the same industry. Before I move on to explain how peer analysis can be done by every investor, I would like to summarize the steps we generally use for selecting a stock. In financial terms, what most investors do for stock selection is called the top - down approach to stock selection. The top-down analysis can be explained in a simple way through the diagram below.

In my opinion the most difficult thing in the 3 step to stock selection is step 3. An investor can select the best industry, but if he/she is unable to choose the right company, then the entire analysis is of no use. Through this article I will try and give investors certain parameters which can be used to compare companies and hence choose the best among the best. This will lead to superior long term returns for every investor.

Before I talk about the parameters to look at for stock comparison, I would like to make the concept of peer companies clear to investors. Peer Company does not only mean companies in the same industry. Peer companies are companies which also have comparable revenue.

For Example:

Company “A” has revenue of 100 Crores

Company “B” has revenue of 5,000 Crores

Company “C” has revenue of 7,000 Crores

Company “D” has revenue of 150 Crores and

Company “E” has revenue of 200 Crores

All these companies are in the same industry. But all are not peer companies. Company “B” and “C” are peer companies, while company “A”, “D” and “E” are another set of peer companies.

The simple logic is that you cannot compare the financial parameters of a huge company with a small one. Its not justified and will not give a correct picture of which company is relatively good or bad. But when you compared the relatively same size companies then it gives a better idea of which company is better then the other based on certain financial parameters.

With the explanation of peer companies clear, I would now proceed and lay out the financial metrics which investors can use to compare companies. In the end I would take up the example of an industry and compare companies in that industry using the financial metrics discussed. This will make the concept clearer to readers.

Investors should note that this process of research does take time but its more then worth the effort if one can spot the right company. Moreover, investors put their hard earned money into companies and businesses. So it’s wise to make a well informed decision by spending some time doing personal research.

Income Statement Related Ratios:

1) PE Ratio: This is the most common ratio used for comparing companies. PE ratio simply means how much an investor is willing to pay in the market for Rs. 1 of company earnings. So, if a company has a PE ratio of 10, it means that investors are willing to pay Rs. 10 in the market for every rupee of the company earnings. When comparing companies the thumb rule is – lower the PE ratio the more undervalued the company is relative to its peers.

PE Ratio = Market Price of Company/ Earnings per Share

2) PEG Ratio: This ratio is applicable mainly to high growth industries. For companies growing at 50-60% or even more the PE ratio is not a great indicator of valuation. For such companies PEG ratio is used.

PEG Ratio = PE Ratio / Growth

For simplicity sake the growth here is the revenue growth rate for the company. Example: A company has a PE ratio of 50. This looks high and we would say that the company is overvalued. But suppose that the company is growing at 100% annually. So PEG ratio for the company is 0.5 (50/100). A PEG ratio of less then 1 means the company is undervalued with respect to its future growth potential. A PEG ratio of over 1 indicates that the company is overvalued with respect to its future growth potential.

3) Gross Margin, Operating Profit Margin and Net Profit Margin: It is very important to compare these margins for peer companies. If in the same industry a company has a better gross, operating and net profit margin then its peer then it makes a big difference. It shows that the company is more efficient and better equipped to control its cost then its peers.

Gross Margin = (Revenue – Cost of Sales/ Revenue)*100

Operating Profit Margin = (Earnings before Interest and Tax/Revenue)*100

Net Profit Margin = (Net Profit / Revenue)*100

4) Price/Sales Ratio: This is another simple to calculate as well a very useful ratio to do peer analysis and valuation. The lower the price/sales ratio, the more undervalued the stock is as compared to its peers.

Price/Sales Ratio = Stock Price/Sales per share

Sales per share can be calculated in the same way as we calculate EPS. I.e. Sales/Shares outstanding

Balance Sheet Related Ratios:

1) Return on Equity: This is one of the most important ratios as it shows how efficiently the company has been using the shareholders money. The higher the ratio the better it is and indicative of an efficient management. So among peer companies this ratio can be used as a big differentiator between good, medium or bad managements.

Return on Equity = Net Income/ Shareholders Equity

2) Return on Assets: This is another important ratio for giving investors an idea about how good the management is in utilizing its assets to generate returns for its shareholders. So the higher the ROA, the better is the company in extracting maximum use of its assets to generate returns for shareholders.

Return on Assets = Net Income / Total Assets

3) Debt Equity Ratio: For the same size companies in the same industry it is important to know the debt equity ratio. In general the lower the debt equity ratio the better it is for the company. The most important reason is that it reduces the interest burden for the company.

Debt Equity Ratio = Total Debt / Equity

Cash Flow Related Ratios

1) Operating Cash Flow per Share: This ratio is the most important ratio to look at in the cash flow in my opinion. This will give the real cash inflow for the company per share for any given year. So among same size companies, if a company has higher operating cash flow per share then it’s a much better bet then a company having low or negative operating cash flow per share.

Operating Cash Flow per share = Cash flow from operations / Number of shares outstanding

2) Capital Expenditure per share: It is the capital expenditure which tells how much the company will expand in the future in terms of its size and revenue. So among same size companies if a company is going for higher capital expenditure per share then its likely to have higher revenue growth also in the future. So among peer companies always go for the company with higher Capex per share.

Capital Expenditure per share = Capital expenditure / Number of shares outstanding

While these ratios are not the only thing one needs to do in order to select stocks, this process acts as a filter. So among 10 stocks in the same industry, an investor can narrow down the selection to 2-3 stocks using these ratios. Then other things can be looked into before making a final selection of stocks.

For a moment this process may look time consuming. But it works and to spend some time is essential before any investor puts his/her hard earned money in any business.

Stock Market Books: My favourites

noreply@blogger.com (Krishna) — Tue, 08 Dec 2009 04:54:00 +0000

Many blog readers asked me to write about “best books on stock markets”. I am writing about books which helped me immensely in learning about stock markets.

This is not a comprehensive list of “Best books on stock markets” but a list of “my favourite books on stock markets”.

My favourite books on Stock Markets:

1. One up on Wall Street: Peter Lynch. This is a must read to learn about stock markets.

2. The Intelligent investor: Benjamin Graham. Warren Buffett learnt a lot by reading this book.

3. Security Analysis: Benjamin graham. This book is a must read for every value investor. This is “The Bible on value investing”.

4. The Best Investment advice I ever received: Liz Claman. Simple investment lessons from stock market legends.

5. All about Stock market strategies: David brown and Kasandra Bentley.

6. Your Money and Your Brain: Jason Zweig. Psychology plays vital role in stock market movements especially over short term. This book is all about brain’s role over your investment decisions.

7. Common Stocks and Uncommon Profits and Other Writings: Philip Fisher.

8. Wise investing made simple: Larry Swedroe.

9. Contrarian Investment strategies: David Dreman. Contra investors always make money due to their investment style and duration. But these investors needs extreme patience to make money.

10. Buffett: The Making of an American Capitalist: Lowenstein Roger. Read this book to know about the legendary investor.

11. The New Market Wizards: Conversations with America’s top traders – Jack Schwager.

12. Lessons from the Greatest Stock Traders of All time: John Boik. Good book for traders.

Note: I am requesting readers to suggest their favourite books which helped them in taking better investment decisions. You should not just read these books but you should "eat them". One should learn about stock markets by doing hard work like reading books and magazines. You need to learn about Companies and businesses. There are no shortcuts to make money in stock markets.

Stock Market Nostalgia: On November 15 in 1867, the first stock ticker was unveiled in New York City. It was invented by Edward Calahan, who configured a telegraph machine to print stock quotes on streams of paper tape. In 1869, Thomas Edison patented an improved, easier-to-use version of Calahan's ticker.

Note: I am not responsible for your investment decisions.

Top Business Magazines in India

noreply@blogger.com (Krishna) — Wed, 02 Dec 2009 07:30:00 +0000

According to latest readership survey (IRS), Economic Times is the undisputed number one among business dailies.

Top Business magazines:

Outlook group publications registered good growth numbers.

1. Business Today: 2.7 lakh readers.

2. Business India: 2.16 lakh readers.

3. Outlook Business: 1.81 lakh readers

4. Business World: 1.59 lakh readers.

5. Outlook Money: 1.05 lakh readers

6. Business and Economy: 94,000 readers

Top stock market magazines:

1. Outlook Profit: Best magazine for stock market investors.

2. Dalal Street and Capital market: Good but needs more content.

Top Business Newspapers:

Business Line is the only newspaper that registered increase in readership. Economic Times is in 6th position among all English dailies but it is way ahead of other business dailies.

1. Economic Times: 7.57 lakh readers.

2. Mint: 1.59 lakh readers.

3. Business Standard: 1.5 lakh readers.

4. Business Line: 1.24 lakh readers.

5. Financial Express: 30,000 readers.

Subscription numbers of other good business magazines like Outlook profit are not known.

Among Business TV channels, CNBC TV18 is still number one with 51% markets share.

Cash Flow Analysis for Investment Decisions

noreply@blogger.com (Krishna) — Sat, 28 Nov 2009 16:23:00 +0000

The cash flow is one of the most important financial statements and can reveal a lot about the company. Thus, analyzing the cash flow of a company can help investors make more sound investment decisions. Through this article I hope to give investors an insight into cash flow analysis in a very understandable manner so that all investors can do their own analysis before making any stock selection.

Before I go on to explain how cash flow analysis can help make better investment decisions, I would like to make readers aware of the basic difference between Income Statement and Cash Flow. In the income statement revenues are recognized as soon as a product is sold. In the cash flow revenue is recognized only when the payment for the product is made.

For Example: Company “A” sells Cars. The selling price of one car is Rs. 1, 00,000. Suppose the company sells one car. In the Income statement the price of that car immediately gets added to the revenue of the company. This is irrespective of the fact that the payment is made after 1 or 3 months. But in the Cash flow the cash inflow will be shown only when the payment comes in.

So the cash flow gives a real picture of the cash coming in for the company. The income statement on the other hand just records revenues as soon as any sales are made.

With this basic difference explained I would now like to proceed and explain the structure of the cash flow. Post this I would explain what items to look at in the cash flow for making sound investment decisions.

Cash Flow Structure:

The cash flow reports cash receipts and cash payments through operating, investing and financing activities which are the primary business activities of the company.

Operating Activities: This part of the cash flow shows the earnings related activities of the company. Operating cash flow, as the name suggest gives the gives inflow and outflow of cash resulting from the core business activities of the company.

Investing Activities: This part of the cash flow gives an overview of the investments made by the company. These investments involve buying of assets which would generate income in the future for the company. The investing activities also give cash inflows resulting from sale of asset or investment by the company.

Financing Activities: This part of the cash flow gives the sources used by the company to fund its expansion or operations. These sources of acquiring funds can be debt or equity. It also gives investors an overview of when the company is making payments on its debt.

Analyzing the Cash Flow:

The three components of the cash flow will be clearer as I explain how different components of the cash flow can be used to analyze the company.

Below is a sample cash flow which will help make things clear and also help me in explaining things.

The first important thing to look at in the cash flow is the “Net Cash (used) provided by operating activities”. This gives the cash inflow or outflow for the company during the year from its core business operations. In the above sample $37,813 of cash has been generated from the company’s business during the year. What can investors analyze from this?

· Suppose the Income statement of the company shows that it is making good profits. But when you look at the operating cash flow you find that it is negative. This means that the company is making sales but has not been able to receive its payments. This is ok for small company or for any company for a year or two. But if for 4-5 years the company is showing profits in income statement but generating negative operating cash flow then it’s a bad signal.

· The company can get money to fund its expansion and daily operations in 3 ways. These are debt, equity sale or through internal funds. These internal funds will be there only if the operating cash flow is positive. So avoid a company which has huge debt, can’t raise money through equity in bad markets and also has negative operating cash flow for several years.

· Within the operating activities look at inventories. In the sample statement it is a negative of $20,344. A negative inventory figure indicates that the inventory level for the company has risen from previous year. Since rise in inventory blocks cash (which company would have got if it was sold) it is represented as a negative figure. Looking at inventory is very important, especially for industries like retail industry. So look at the trend for few years. If the inventory keeps rising then it’s a bad signal. This means products are being made but not sold.

Next we move on to the cash flow from investing activities and see how investors can benefit from this section to choose the right company.

· In the sample statement the first item is the “purchase of property, plant and equipment”. This is the capital expenditure the company has made during the year. It is represented as a negative figure as it is cash outflow for the company (company uses cash to buy assets). This is very important as this gives an indication of future revenue growth for the company. If a company makes no capital expenditure then it sees no scope for growth in the industry or it has no funds to make capital expenditure. The former is most likely the case. So investors should ideally look for companies making robust capital expenditure. These companies will also show robust revenue growth in the future.

The financing activities mainly tell investors what the company is using (debt or equity) to fund its expansion or operations. Moreover, if companies are paying off their debt in good amounts it is a very positive sign. It shows that the company is generating enough cash from operating activities to fund its expansion and also pay off its debt.

Free Cash Flow:

Investors can use a simple formula to calculate the free cash flow of the company. In general, higher the free cash flow per share the better it is for the investors and the healthier is the company.

Free Cash flow = Cash flow from operations + Net Capital Expenditure – Dividends paid

All these parameters can be obtained easily from the cash flow. So any investor can sit back and calculate this.

Free Cash Flow per Share = Free Cash Flow/ Number of Shares Outstanding

This gives the amount of free cash the company has for each of its shareholders. Needless to say the higher it is the better it is for the shareholders. Moreover, it is a great reflection of positive health of a company if its free cash flow per share is higher or equal to its earnings per share calculated from the income statement.

Capital Adequacy Ratio:

This is another very simple ratio that investors can calculate. It measures the ability of the company to generate sufficient cash from operations to cover capital expenditure, investment in inventory and also payment of cash dividends.

CAR = Three year sum of cash flow from operations/ Three year capital expenditure + Inventory + Dividends

Again, all these items are easily available from the cash flow statement. Three year data is taken to make the reading more reliable.

When the CAR (capital adequacy ratio) = 1, it implies that the company exactly covered all the cash needs without external financing.

A lesser then 1 CAR means that the company needs external financing. So suppose a company has a CAR of 0.5. It means that company needs half of the cash needs from external financing (debt or equity). Now suppose the company already has huge debt and its stock price is too low for it to raise funds through equity. Then it’s better to avoid the company. But if it’s an emerging industry and banks are willing to fund the company even at a debt- equity ratio of over 3 or 4 then it’s a different thing. One also needs to look at what is the industry growth rate, and if the company is also growing at that rate or higher then that.

I think every investor can spend some time looking at the annual report and calculating and looking at these simple things. It would surely help investors make a better investment decision on their own.

10 tips for Stock Market wisdom

noreply@blogger.com (Krishna) — Mon, 16 Nov 2009 16:11:00 +0000

Guest author: Mohamad Shaved.

Stock Market wisdom:

1. Give people more than they expect and do it cheerfully.
(Share your knowledge with others; you'll receive multi-fold from others)

2. Marry a man/woman you love to talk to. As you get older, their conversational skills will be as important as any other.

(Be in touch with experts in the field, you'll learn much from them)

3. Don't believe all you hear, don’t spend all you have.

(Don’t believe in what others are saying or doing, invest money wisely)

4. Be engaged at least six months before you get married.

(Understand the market first deeply, only then commit yourself to it)

5. Love deeply and passionately. You might get hurt but it's the only way to live life completely.

(Do what your passion is. If it's stocks, only then does it else look for something else)

6. Talk slowly but think quickly.

(Take quick decisions)

7. Remember that great love and great achievements involve great risk.

(Higher the risk, higher the gains)

8. When you lose, don't lose the lesson.

(Don’t fear about making mistakes but learn from the mistakes)

9. Remember the three R's: Respect for self; Respect for others; and responsibility for all your actions.

(Respect others opinions but take your decisions)

10. When you realize you've made a mistake, take immediate steps to correct it.

(Words say it all. If you have bought a wrong stock and you've realised it, sell it before your losses multiply)

Share your opinion on article.

Warren Buffett investment principles

noreply@blogger.com (Krishna) — Sun, 08 Nov 2009 16:30:00 +0000

Source: Berkshire Hathaway and Dan Barufaldi.

Warren Buffett Investment Criteria:

Berkshire Hathaway relies on an extensive research-and-analysis team that goes through reams of data to guide their investment decisions.

While all the details of the specific techniques used are not made public, the following 10 requirements are all common among Berkshire Hathaway investments:

1. The candidate company has to be in a good and growing economy or industry.

2. It must enjoy a consumer monopoly or have a loyalty-commanding brand.

3. It cannot be vulnerable to competition from anyone with abundant resources.

4. Its earnings have to be on an upward trend with good and consistent profit margins.

5. The company must enjoy a low debt/equity ratio or a high earnings/debt ratio.

6. It must have high and consistent returns on invested capital.

7. The company must have a history of retaining earnings for growth.

8. It cannot have high maintenance costs of operations, high capital expenditure or investment cash flow.

9. The company must demonstrate a history of reinvesting earnings in good business opportunities, and its management needs a good track record of profiting from these investments.

10. The company must be free to adjust prices for inflation.

The Buffett Investment Strategy:

Buffett makes concentrated purchases. In a downturn, he buys millions of shares of solid businesses at reasonable prices. Buffett does not buy tech shares because he doesn't understand their business or industry; during the dotcom boom, he avoided investing in tech companies because he felt they hadn't been around long enough to provide sufficient performance history for his purposes.

And even in a bear market, although Buffett had billions of dollars in cash to make investments, in his 2009 letter to Berkshire Hathaway shareholders, he declared that cash held beyond the bottom would be eroded by inflation in the recovery.

Buffett deals only with large companies because he needs to make massive investments to garner the returns required to post excellent results for the huge size to which his company, Berkshire Hathaway, has grown.

Buffett's selective contrarian style in a bear market includes making some large investments in blue chip stocks when their stock price is very low.

And Buffett might get an even better deal than the average investor: His ability to supply billions of dollars in cash infusion investments earns him special conditions and opportunities not available to others. His investments often are in a class of secured stock with its dividends assured and future stock warrants available at below-market prices.

Conclusion:

Buffett's strategy for coping with a down market is to approach it as an opportunity to buy good companies at reasonable prices.

Buffett has developed an investment model that has worked for him and the Berkshire Hathaway shareholders over a long period of time. His investment strategy is long term and selective, incorporating a stringent set of requirements prior to an investment decision being made.

Buffett also benefits from a huge cash 'war chest' that can be used to buy millions of shares at a time, providing an ever-ready opportunity to earn huge returns.

Analysis: Nifty Vs Baltic Dry Index

noreply@blogger.com (Krishna) — Thu, 20 Aug 2009 22:10:00 +0000

Baltic Dry Index corrected by 7% in the last 1 week and is corrected by 40% in the last 2 months after reaching peak levels of 4,230 on June 3rd. BDI is correcting from June. I plotted a chart comparing Baltic Dry index with Nifty for last 1 year.

Data used was from 21, August, 2008 to 21, August, 2009, and value on starting point was taken as 100.

My observations:

1. Till June end, there is an amazing co-relation between the two index.

2. After June end, Nifty has not followed BDI; hence if BDI follows

downward path in next month, there is more chance of Nifty coming down than going up.

3. BDI trend line is mildly up, whereas Nifty trendline is sharply up. So, Long Term: Trend is up, but Short Term: Trend is down as Nifty has gone up more than justifiable.

Regards,

Sourav Chowdhury

Book value: Significance and trap

noreply@blogger.com (Krishna) — Sun, 28 Jun 2009 16:35:00 +0000

Book value, in simple words, is equal to the assets of the company minus its debt and liabilities. Book value per share is the total net assets divided by the number of shares. If a company goes out of business and is sold immediately, this is the amount that investors will get for their investment.

Investors look at book value to find some good bargains in the market. For example, if book value per share is Rs.100 and stock price is Rs.50, it means company is selling at a discount. However, book value should never be used as the only criteria to judge your investment decisions. There are many traps to it.

Points to be noted while evaluating a company based on its book value:

1. Since companies are expected to grow in future, market cap is normally higher than book value for most of the companies. Companies with higher growth prospects rarely command valuations below their book values. Book value is more important for companies which are not growing too quickly. Book value is more important for finding value picks rather than growth picks.

2. Companies with tangible assets like real estate, machinery, hotels and banks tend to have a large book value while companies with intangible assets like IT, trading firms etc have less book value. Therefore, book value is useful to evaluate a company with tangible assets while it is not very useful for companies with intangible assets.

3. Companies account for their assets in different ways. They tend to assign higher weight to assets whose actual value is depreciated i.e. they tend to manipulate book values for their own benefits.

Ex: When you go for car insurance, the sales guy normally quote higher price for your car as this will increase their premium amount but if you go to them to sell the same car, they will quote less price. Same happens with when you try to sell real estate.

The point is, when something is actually sold, there are very less chances of getting its fair value. Companies normally keep on quoting the same value year over year without actually depreciating the value of their assets at the rate at which they are actually depreciating. This is done to trap the investors who took their investment decisions based on book value.

4. Book value should be one of the factors while making a purchase. It should not be the only factor. While looking at book value, you should also evaluate other parameters. Carefully examine other factors like company’s growth prospects, its market leadership, debt position, free cash, P/E etc along with book value and take a decision based on all factors. Sometimes, book value is very helpful to find a good bargain in the market.

5. If a fundamentally good company is selling at a discount to its book value, you should carefully evaluate why it is so. Try to find out the exact cause of this. There must be some reason. If you could not find any reason, then it might have fallen because of bad market sentiments. In that case, you have found a good opportunity.

6. While making purchases based on book value, you should have patience to hold your investment. Generally, companies in sector which are out of limelight tend to sell below their book value e.g Gujarat NRE Coke, Country Club, Gitanjali Gems etc. You will have to wait for a turnaround in that sector for your investments to turn profitable.

Book Review: Cash the crash

noreply@blogger.com (Krishna) — Tue, 12 May 2009 04:00:00 +0000

I completed reading "Cash the Crash" book yesterday mid-night. So as I have said last week, I have written a small review.

"Cash the Crash" review:

To be clear, it is not an investment book. I didn't know that when I bought it. The author has talked very less on investment. I would recommend the beginners to read the book - and is a MUST BUY, for them if they are interested in economics.

I love learning different things, including economics. So I feel it is really a good investment. The author has talked a lot about the reason for the crash; how sub-prime loans were mixed with good loans by the banks; how American banks played a huge game, where they defeated themselves and others - to corrupt the entire economy.

He also expresses how bail-out plans are not going to work out. At the end, he also describes how to solve the problem. His views are reasonable, and his arguments are satisfactory too.

One remarkable point about the book is that he wants all of us to be financially literate - which is great. I have some of my friends, who are better programmers than me, but absolutely do not have basic financial understanding.

They all ended paying huge taxes at the end of the year. The author also shows how things are all interconnected, just like "Butterfly effect". I was totally surprised to see how each man is a part of the mesh, and a guy spending a lot in London, can ruin my life too.

Conclusion: if you want to understand how world economy works, in other words, if you want to know the fundamentals, nothing should stop you from reading that book.

Otherwise, if you feel, you already know that, and you just want to learn deep about investments, I would show a red signal.

I found it great reading that book, as I am a beginner and wanted to understand how stuff works. If you are of my kind, just go ahead.

17 stock market lessons from life and nature

noreply@blogger.com (Krishna) — Wed, 06 May 2009 08:35:00 +0000

Lessons from the nature and life for Stock market investing:

We can learn many things from the nature and life for stock market investing. If we take a note of these points, then stock market investing becomes very simple.

1. Just like nature gives us different kind of fruits and vegetables in different seasons, different kind of stocks should be chosen in different economic environment.

2. Just like day comes after night, bull market comes after bear market and vice versa. Day or night cannot last forever. One has to take proper rest and rejuvenate during the night to prepare best for the next day. Similarly, an investor should prepare himself during the bear period in order to become successful during the bull period.

3. When a farmer grows a crop, all of the plants cannot become big. Some of the plants will die and some of them will not give as much fruits or vegetables as farmer has expected. The overall crop should give a decent yield and profit to farmer. Similarly, when you buy a stock, all of the stocks might not give a heavy profit. Some of them will show losses and some of them will not show decent profits. The overall goal should be to have profit on complete portfolio.

4. Just like a plant cannot survive without a good quality soil, a business cannot survive without a good quality management.

5. Just like a plant cannot survive without air and light, a company cannot survive without proper funding and cash.

6. Just like a plant cannot survive without water, a business cannot survive without liquidity in the system and a good overall economic scenario. Just like a rain is a boost to a crop but too much rain can destroy the crop, government stimulus packages are good for the companies but too much liquidity in the system will be detrimental for them.

7. When a storm comes, the trees or plants which are strongest survive. Similarly, when an economic downturn comes, companies which are fundamentally strong survive.

8. Just like a tree or plant cannot yield fruits in one day, profits should not be expected immediately as soon as you buy the stock. Plant a seed and wait for the fruits to come. A plant should be given enough time for it to become a good tree. It requires constant monitoring to check that it is not falling sick.

9. The growth of the tree is very high during the initial phases. But once it becomes big, its growth becomes slow but it continues to give fruits year over year. Similarly, growth of a stock is very high during initial phases but once it becomes big, it shows a relatively smaller growth but continues to give profits year over year.

10. Just like weeds need to remove from the crop, bad stocks need to be removed from portfolio as they will ruin the overall return.

11. Just like a crop needs constant monitoring by the farmer, a stock needs a constant monitoring by a stock holder. Any plant or tree which has become sick should be removed.

12. Once the tree becomes very old and stops giving fruits, it should be cut down by the farmer to make profits and different tree need to be planted in its place. Similarly, once the business becomes very huge and stops showing further growth, it should be removed from portfolio and different stock need to be picked.

13. Just like crop rotation is useful for better output, stock rotation is also useful for better returns.

14. Just like a human needs to eat different kind of fruits, vegetables and whole grains for proper body nutrition, a person should have different kind of stocks in the portfolio. Grains are like large caps, vegetables are like mid-caps and fruits are like small caps. A person can survive only on grains but in order to have a good health, he/she needs to eat fruits and vegetables too. Similarly, in stock markets, large caps are must for every portfolio, mid-caps are good and small caps are should (and are needed in small quantities only but they should not be ignored).

15. Consider growth investing like men and value investing like women. Just like their relationship is most successful when they are in love, the stock market investing is most successful when growth is in harmony with value i.e growth stocks brought at reasonable valuations. Ups and downs come in every relationship. Similarly, stock price fluctuates many times but these should be ignored if value is always there to support the growth i.e business is consistently expanding. These ups and downs are short term in nature. Small fights actually make the relationship strong.

16. Just like when a person fall sick, a doctor conduct various tests to find out the root cause of problem. Similarly, when a stock starts declining, proper evaluation should be done for its fundamentals. If a person takes care of himself and takes proper medicines, he/she will survive. Similarly, if a company is taking proper corrective actions and measures, it will survive and there is no need to worry. If it is ignoring the problems, it will not survive and it’s better to exit the position.

17. Just like life throws different opportunities and people who recognize them and use them, becomes successful in life. Similarly, stock market throws lots of opportunities. You should be able to spot them and use them.

Please share your comments on article.

Book Review: Cash the crash

noreply@blogger.com (Krishna) — Tue, 28 Apr 2009 16:20:00 +0000

Book review: Cash the Crash

This book is financial bible for people who believe in growing their money by research and believes in India's growth story. Author has used very simple language and simple examples to explain the root cause of current Crash/ Crises and how individuals can benefit from current situation. Author in every chapter of his book seems to be motivating everyone in India to be finically literate and use this crash as an opportunity and see bigger picture, which one shouldn't miss to make huge profits in coming years.

This book is very useful for new investors who are generally get trapped in brokers recommendations and listen to analysts to buy there stocks, after reading this book I think one will start with their own research and spot good opportunities. Author has explained some useful tolls in this book which will make readers understand financials of the companies and how one can focus buying wealth creating companies. Author explains to spot opportunity for buying value assets in current scenario. Crashes always come with opportunity and try to focus on opportunity, find quality stocks and create wealth in coming decades.

This book will help investors to take individual decisions for buying quality assets (stocks) simply by our own research. Author gave good examples to explain which all sectors will participate in future Bull Runs and how author grab opportunity and enters stocks when others are exiting. After continuous practice of understanding on how to spot opportunity, you can not only create wealth but one can be finically secure create huge profits after in every crash.

I think I have really learned new lessons on creating wealth. I think reading this book will benefit everyone but you will believe that education is recession Free. This book helped me in changing my view on stock market investments. This book is a must read for every investor who wants to improve their knowledge.

Author: Yogesh Chabria

Total pages: 256

Total chapters: 29

Price: Rs.499.00

Investment tips from Stock Market Gurus

noreply@blogger.com (Krishna) — Sun, 15 Mar 2009 17:41:00 +0000

Outlook Profit magazine conducted interviews with 5 famous Indian Stock market analysts to know about Indian growth story, investment strategy, future themes and stock picks. I am here writing about synopsis of the interviews.

Investment ideas and Stock recommendations:
1. Samir Arora: Chief Investment Officer, Alliance Capital.

Past record: He invested in HDFC Bank, Infosys and Bharti Airtel in their early days.
Future theme: Infrastructure.
On Indian Stock Markets: Good long term story.

Preferred sectors: Banking, Telecom and Infrastructure.

2. Madhusudan kela: Chief Investment Officer, Reliance Mutual Fund.

Future Theme: Rural consumption and alternate energy.
Stock Recommendations: Jain Irrigation, Gujarat State Fertiliser Corporation, Reliance Industries, Pantaloon Retail and Suzlon

3. Prashant Jain: HDFC Mutual Fund.

Past record: He sold all his IT holdings before stock markets crash in 2000. He sold power stocks before their crash in 2008.
Investment advice: Invest for long term and short term is negative.
Future theme: Infrastructure.

Stock Recommendations: Nagarjuna Construction, HCC, Sadbhavan Engineering and Gammon India.

4. Manish Chokhani: Director, Enam Securities.

Past record: Infosys and GMR Infra IPOs but failed miserably in Reliance Power IPO.
Future themes: Media and Metals.

Stock recommendations: Sun TV, Zee, Jagaran, Cairn Energy, Reliance Industries, Sterlite, Hindalco and ONGC.

5. Ramdeo Agarwal: Motilal Oswal Securities. Value investor.

Past record: He saw India growth story in 2003. He invested in Bharti Airtel in 2002.
Future theme: Banking.

Stock picks: IDFC, Tata Steel, HDFC Bank, ICICI Bank and SBI.

These are excerpts from their interviews. All are believing in the long term India growth story. Please share your opinions on their Stock recommendations.

Source: Outlook Profit.

Rakesh Jhunjhunwala: Investment advice

noreply@blogger.com (Krishna) — Sun, 15 Mar 2009 17:06:00 +0000

Rakesh Jhunjhunwala, "Indian Warren Buffett" gave some valuable tips on investing in Indian stocks. He was nicknamed as "Young tiger" during Harshad Mehta days. Like Buffett, he started investing in shares from his young days.

Stock Market Investment Tips:

1. You have to wait for right moment before investing in stocks. Never invest in any stock without proper idea on its business and fundamentals.

2. First quality every investor should have is optimism. Ups and downs are common in stock movements but patience ultimately wins.

3. Monitor price moments regularly. Don't forget the past history of stocks. Never take decisions in hurry.

4. Believe in markets. Markets always do right thing in long term. Do not speculate.

5. Never miss good investment opportunities. If you find them, grab them with both hands.

6. Price at which you buy a stock is very important. Look for the opportunities around with a keen eye.

7. Maximize the profits and minimize the losses. Don't forget this basic rule.

8. Invest in a business not a company. He made big money in Praj industries.

9. Don't look for excess profits in a over valued economy. Greed is not good for Stock Market investors.

10. Investing is not my profession. It is my passion. Investing is the most interesting thing for me in this world.

11. You should have your independent opinion. Keenly Observe and read relevant information with an open mind. Means are very important. Never follow herds.

12. Learning is a continous process. Learn to accept losses with smile.

13. Ready for challenges and risks. If you want to win a war, you have to lose many wars.

14. You are not a owner of the wealth. You are a just trustee.

15. Indian stock markets will reach peak by 2010.

Baltic Dry Index: Significance

noreply@blogger.com (Krishna) — Wed, 28 Jan 2009 16:04:00 +0000

Where to check for BDI?

Baltic Exchange - Official site but you need free registration.

Click here to know about latest prices and chart of Baltic Dry Index.

1. Investment Tools is providing best charts to check Baltic Dry Index.

2. Wikiinvest is another good site to know about BDI and check about latest price.

3. Bloomberg is another source.

Significance of Baltic Dry Index:

Source: First Value

Baltic Dry Index

Baltic DRY Index it is an excellent indicator of the economy and also to understand the price trend for commodities. Just tracking the Baltic Dry Index is an easy task and requires no big research or analysis skills but can help individuals in a great way to make investment decisions.

How is Baltic Dry Index useful to Investors?

Baltic Dry index is one of the purest economic indicators. Unlike commodities, there is no element of speculation in this. Dry cargo, whose shipping cost is measured by BDI mainly consist of commodities such as coal, steel, iron ore, copper, cement and others. So any drastic fall in the index indicates slump in demand globally for these commodities.

World economy in 2009

noreply@blogger.com (Krishna) — Fri, 16 Jan 2009 17:53:00 +0000

I am giving some images and charts about global economy in 2009, employment numbers and how major economies will grow in 2009. Not only America, whole world is waiting for Barack Obama and for his aggressive stimulus package. Will it cure all ailments in the system?

Major countries and economic statistics:

Important economic statistics like GDP number, GDP growth, inflation and population of the most important nations.

Above image will give you details about major countries, population numbers, their GDP numbers and estimates.

Employment numbers since 1970:

Current crisis is much severe one than that world experienced in 1975.

Courtesy: Economist.

Just see how economy moves through boom and bust cycles. If you can understand these numbers properly, you may never go through manic-depressive cycles in life. At which part of cycle you enter and exit will decide your returns.

GDP growth 2004-2009:

Just see how GDP growth is falling from 2007 onwards and how analysts are expecting bright picture about future.

Top 5 countries In GDP growth (2009 estimates):

1. Qatar - Fastest growing economy in 2009.

2. Angola

3. Congo

4. Malawi

5. China, Georgia and Uzbekistan

Best of luck for 2009.

Checklist for selecting a good stock

noreply@blogger.com (Krishna) — Sat, 03 Jan 2009 18:40:00 +0000

These are some of the criteria that I follow while selecting a stock. I’m sharing these so that they can help people new to the market and serves as a checklist for them while selecting a stock.

Understand the company first:

What does the company do?
What are its final output products? Do you or people you know use it’s products? What do they talk about company’s products? It’s not possible to dig out this information for each and every company as some companies are operating in segments where you are not directly involved e.g. shipping, mining etc. In that case, ignore this question or try to search for review of its products on internet.
Are the products something which impact the life of people currently (e.g. solve the problems which people face) or will change the life of people in future e.g. solar energy, biotechnology etc.
What are its raw materials and input costs?
Are the products new and innovative or they are age old commodity products which people have been using for years? What will be the future demand for such products?
Is company operating in the niche segment? If yes, what are the growth prospects?
Is the company the top company within the sector? If not, is it capable of becoming the next leader within the sector?
What are the future prospects of the overall segment in which the company operates?
What are the government policies for the segment in which company operates?
What are the competitive advantages the company has over other players in the same segment?

Understand the past history of the company:

What is the annualized growth rate of the company for the last 4-5 years? How has the company grown?
Look at the last 4-5 yrs (or whatever is the maximum) chart of the company.
Whether the company has the history of bringing new and innovative products in the market?
What are the lifetime high and lifetime lows made by the stock?
At what premium to the sensex PE had the stock traded during bear and bull periods.
Whether the company is paying dividend or not? What is the dividend yield?
How much remuneration, perks and bonuses company is paying to its top employees. Is it increasing or decreasing with company’s performance?
Whether the company is changing itself with time or it is just sticking with its old business?
Whether company has introduced innovative products in the market time-to-time?
How much company invests in the research and development of new products?
Whether company holds any patents in its field of operation? Competitors will not be able to use the same technology till the time patent holds. This also shows that company has the history of developing new innovative products.

What are the future Growth prospects:

Is the growth sustainable in future?
What will be the demand for company’s products in future?
Who are the competitors? Are they growing at a faster rate?
What are the future plans of the company?
What are the future revenue forecasts?
Do you see yourself or your friends using the company’s products in future?
What’s the future order book of the company?

What are the risks/Concerns:

What are the risks to the company’s business model? You can understand the risks by looking at the company’s annual report. This will help you in exiting the stock in case some risk becomes a reality.
Look at the share holding pattern of the company
How much holding FIIs and mutual funds have in the company? Very high ownership by FIIs and mutual funds is a concern. You should be able to spot a company before them. A high holding also poses a risk in future if they opt to sell the stock suddenly.
How much is the ownership of the management of the company? Pick companies with high management ownership. High ownership means they have confidence in their business.

Management Quality:

What are the educational qualifications and background of the management people of the company? Do they have the track record of some past big successes?
Is management honest? Do they give proper explanation for any bad news or any discrepancy in company’s reports or rumors?

Check Financial details:

What’s the current PE of the company? For a fairly valued company, the PE ratio should roughly be equal to the rate of EPS growth.
What’s the PE of the company as compared to the PE of other companies in the same sector?
What’s the average PE of the industry in which company operates?
Quarterly earnings should be growing at least more than 20% in the past 3 quarters.
Annual earnings should be growing for the last 3-4 years by more than 25%. A very high growth rate is also a concern. Such companies are risky for investment.
What’s the earnings per share (EPS)? Is it increasing year over year? If it is decreasing on yearly or quarterly basis, it is considered as a negative sign.
For new companies, look at the sales rather than the profits. Companies that are relatively new in a high growth industry should be valued based on their market cap to sales ratio. Lower this ratio, the better it is.
What’s the free cash flow? Is it growing year over year?
What’s the ratio of price-to-book value of the company? Lower it is, the better.
What’s the debt-to-equity ratio of the company? A value more than 1 is problematic.
What’s the free cash flow to market cap ratio of the company? If it is 10% or more, it is considered OK.
What’s the ratio of total net current assets to market cap of the company? If it is more than 50%, it is good.
What are the current ratio and quick ratio for the company? These ratios should not be less than 1.
What are the operating profit margins and net profit margins? Are they getting better year over year? Any decrease is considered as a negative sign for the company’s growth.
What is the return on equity for the company? Companies with higher RoE among the sector should be chosen.
Is the company planning to sale more stake in future through equity route? If yes, this will lead to dilution of EPS.
What’s the beta ratio for the stock? A higher beta ratio means more volatile stock prices movement. Conservative investors should not invest in high beta stocks

These are the criteria that I follow while selecting a stock for long term investments. Of course, the entry price and exit price are also crucial.

Please share your views on article through comments.

Stock market lessons from 2008

noreply@blogger.com (Krishna) — Thu, 11 Dec 2008 17:28:00 +0000

Current generation of investors and economists in any asset class will never forget 2008 as it spoiled reputations of analysts and mutual fund managers, bankrupted Companies while investors lost billions of money. Investors learnt lifetime investment lessons in just 1 year and 2008 dispelled many investment myths.

Millions of people lost jobs while Companies left with assets due to mindless expansions. Real Estate boom was gone while crude oil bubble busted. The ferocity of fall in January and October of 2008 left even experienced investors with shock and many people fell into depressive mood from euphoric “Reliance Power” atmosphere of early 2008.

What happened in 2008?

1. BSE Sensex crossed 21,000 levels in January and analysts predicted 25,000 levels but Sensex fell to 7,800 in October. Experts are now talking about 7,000 target in 2009.

2. Rupee strengthened to 39 against dollar and analysts like ICICI Kamat predicted 35 levels but rupee fell to 50 levels. Experts are now talking about 55 against dollar in 2009.

3. Crude Oil prices touched $147 per barrel and Goldman Sachs talked about $200 per barrel but crude oil in now trading around $45 levels. Experts are now talking about $30 per barrel in 2009.

4. Inflation moved to 13% and analysts talked about 15% but inflation fell to 8% in December. Experts are now talking about 4% levels in 2009. They are actually now talking about deflation.

5. Indian GDP grew at 9% in 2007-08 and analysts predicted about 10% growth in 2009. Experts are now talking about 7% GDP growth in 2008-09 and 5% GDP growth in 2009-10.

6. Commodities traded around all time high levels in June, 2008 but they collapsed to 2003 levels in December, 2008. Companies are now shutting down plants and are removing employees due to lack of demand and piling up of inventories.

7. Investment banking is the most sought after industry in early 2008. They are now either disappeared or merged with banks.

8. Real Estate prices reached stratospheric levels in early 2008 but investors bought them as if there will be no land available for purchase in 2009. They are now announcing bonuses and free offers to attract buyers. Many real estate stocks corrected by 70-90% in this year alone. We will hear some bankruptcies in 2009 in this sector. DLF and Unitech will cut prices by 30% in 2009.

Investment lessons from 2008:

1. Unlike in past, stock markets are now become more dynamic, more volatile and more unpredictable due to more global integration of economy and money flows.

2. Stock market investors will never react normally – they will overreact to the economic or political events. One should take into consideration this psychological aspect along with business fundamentals in arriving at price target.

3. As I said in my previous posts, stock markets always move much ahead of real economy. If real economy will suffer in early 2009, stocks fell by October, 2008. If economic conditions will improve by early 2010, stocks will rise by late 2009.

4. Timing: It is very difficult to time the stock market investments. 80% of price variations occur in 20% of days – time of maximum profits and losses.

5. Significant falls or rises do not occur in slow motion. They are steep and severe.

6. Never follow herds. Believe in your research and fundamentals.

7. Biggest investment lesson: When investors are in panic mood, even good companies with strong growth prospectes also fall along with bad overvalued stocks. That does not mean they are bad stocks. They will recover once better senses prevail.

I am requesting readers to share about lessons they learnt in 2008 through comments in the blog.

Look out for opportunities:

Troubled economic times will always produce new giants due to innovative entrepreneurs. Microsoft, Apple and Texas Instruments etc were born when economy was reeling under severe crisis. Investors should lookout for companies in affordable housing, niche sectors, alternate energy and rural economy dependant companies etc for long term investment.

Note: I am not responsible for your investment decisions.

India's top Business publications: 2008

noreply@blogger.com (Krishna) — Thu, 20 Nov 2008 22:24:00 +0000

Indian Readership Survey (IRS) Round 2 gave some important insights about the growth of the business publications. Except Economic Times and Mint, most of the business publications are showing decline in readership numbers. Mint reported highest rise in readership while Business Line suffered big drop in readership.

Top Indian Business Newspapers:

1. Economic times: 7,52,000 readers. ET which lost readers in IRS round 1 but regained readership in round 2 of IRS. It is the numero Uno in this segment.

2. Business Line: 77,000 readers. This business daily from Hindu group lost 30,000 readers in 1 year.

3. Mint: 1,39,000. Fastest growing business publication in India due to its unique position. Bangalore numbers are not included.

4. Financial Express: around 20,000. Exact numbers are not known.

5. Business Standard: Readership numbers are not known.

6. Financial Chronicle: Numbers are not known.

Top Indian Business magazines: They reported big drop in readership.

1. Business Today: 3,26,000. Magazine lost 90,000 readers. Its readership in 2007 was around 5,00,000. Massive drop despite quality content.

2. Business India: 2,40,000. Magazine lost 50,000 readers. Its readership in 2007 was around 3,40,000.

3. Business World: Around 1,70,000. Exact numbers are not known.

4. Outlook Business: 2,04,000 readers.

5. Outlook Money: 1,11,000 readers.

6. Capital Market: 37,000. Magazine lost 11,000 readers. Magazine lost 50% of readers in the last 1 year may be due to collapse in stock markets.

7. Dalal Street: 37,000. Magazine lost 5,000 readers.

8. Business and Economy: around 90,000. Exact numbers are not known.
9. Outlook Profit: Must read to get sound knowledge on stock markets.

Note: Some readers asked me for advice on best Indian business magazine. It is very difficult to recommend a single magazine as I read all of the above magazines and got interesting investment ideas from all the magazines. I read them to understand about companies and businesses but not to get quick stock tips. Investors should try to gain business knowledge by reading good business publications which will help them over long term in taking good investment decisions.

Investment advice:

Investors should get rid of the habit of asking for stock tips. There are no shortcuts for success in stock markets as in any field in life. Can you show me a single successful investor who took 80% of successful decisions in their lifetime?

Successful investors minimize losses by exiting bad stocks when they understand that it is a bad investment decision. They maximize profits on successful investment picks. They constantly learn about businesses especially from failures and bad investment decisions.

Warren Buffett: Never invest in a business which you cannot understand.

Note: I am not responsible for your investment decisions.

Sector and Stock Market Investment

noreply@blogger.com (Krishna) — Mon, 17 Nov 2008 17:19:00 +0000

Investors in power sector got bumper returns in the December, 2007 rally. Textiles are the hot stocks in early 90’s, while IT stocks are the hot ones in late 90’s. Metal stocks are star players in 2007 while they are the worst performers in 2008.

Why sector is important?

1. 2001: Nifty gave -16% returns while top sector, Auto, gave 29% returns. Hero Honda was a star in those days.
2. 2002: Nifty gave just 4% returns while top sector, Energy, gave 74% returns and Metals and Banks gave 50% returns.
3. 2003: Nifty gave 74% returns while top sector, Metals, gave 238% returns. Real Estate and Capital goods gave 170% returns.
4. 2004: Nifty gave just 9% returns but top sector, Real Estate, gave 144% returns. Telecom gave 63% returns.
5. 2005: Nifty gave 36% returns while top sector, Real Estate, gave 290% returns. Capital goods stocks gave 110% returns.
6. 2006: Nifty gave 40% returns but top sector, Real Estate, gave 200% returns. Metals and Telecom gave 70% returns. Unitech and Bharti Airtel investors may not forget those days.

7. 2007: Nifty gave 55% returns while top sector, Metals, gave 190% returns. Capital goods and energy stocks gave 110% returns.
8. 2008: Nifty gave big negative returns but investors in FMCG and sugar stocks escaped from big losses.
Statistical source: Business Line.

I am requesting readers to share their views and data on the importance of sector. I am eager to see which sector will outperform in 2009. Will commodities bounce back? Will defensive sectors like Pharma and FMCG continue to rule?

Analysis: Stock Market trends

noreply@blogger.com (Krishna) — Thu, 23 Oct 2008 04:05:00 +0000

Psychology and confidence plays vital roles in changing the stock market direction. In Bull Run, investors prefer to invest at any valuations and everyone talks about shares. But in bear markets, investors prefer to stay away from stock investments even though valuations are attractive. Stock market trends give interesting insights about the investors and their behaviour.

Stock Market interest:

This chart is giving clear idea about the declining interest among investors on stock markets. Stock market interest which was peaked during January 2008 and is gradually declining along with falling Sensex. Stock market related searched are declined by more than 50% since January.

Stock market popularity is gradually gaining ground since 2004 and it was peaked in late 2007. Sensex rise is directly proportional to investor’s interest and vice versa. Stock market popularity is gradually declining in Ahmedabad in the last 12 months while it is unchanged in Surat and Mumbai.

Stock Market popularity:

Gujarat is far ahead as expected but Orissa surprisingly stands in the second place followed by rich states like Punjab and Maharashtra. My state “Andhra Pradesh” is not in top 10. Why Orissa people are more interested in Stock Markets? Tamil Nadu is the top Southern state and is in the 10th place. South Indians are conservative type unlike other Indians despite rising incomes.

Surat is the top city in the stock market popularity followed by Mumbai, Delhi and Mangalore. Chennai is the top South Indian city in the 7th place. Ahmedabad which was once in top place but now failed to find a place in top5.

But stock market interest increased by 500% in the last one month across the world due to current economic crisis. While most of the world is searching for "Stock markets", Indians are moving away from stocks.

Rising Stock Market searches: People are clearly in panic state and are interested in knowing about happenings in US Stock markets.

These things reveal about what investors are searching for. In 2007, more people searched for “Asian Stock market” but in 2008, they are searching for “US Stock market”. This is another interesting trend. “China Stock market” is popular search query in 2007. Madhya Pradesh and Haryana people generally use word “Share market” instead of “stock market”.

World Stock market trends:

There is a steep rise in stock market related searches across the world due to current turmoil. Wall Street Journal is reporting abnormal rise in traffic in the last one month. Indian investors are acting in opposite direction.

India is in the second place in the stock market related queries. Like Orissa, poor African counties, Nigeria, Zimbabwe and Kenya, are in the first, third and fifth places. Stock market interest is no way related to richness of state or country. USA and Singapore are in the 9th and 10th places. In 2008, Nepal is in the fourth place while 9 out of top 10 are occupied by poor countries from Asia and Africa. This is an interesting trend. China was left out due to language problem.

Mumbai and Delhi are the top cities in stock market interest and other top 10 slots are filled by American Cities. There is a steep rise in stock related searches in America in the last 1 month. New York, Atlanta and Boston are top cities in Stock market related searches. Like Madhya Pradesh, Nepal people prefer to use word “Share market”.

China, Japan and Korea are left out as english is not their primary language.

All the global markets crashed in the last one month and investors across the world are in panic state. But global investors are searching more to know about stock markets while Indians are not interested to know about credit crisis and global economic problems.

Note: I am not responsible for your investment decisions. Interaction should be done only through comments in the blog.

One up on Wall Street - I

noreply@blogger.com (Krishna) — Tue, 21 Oct 2008 05:29:00 +0000

As you all know, "One up in wall street" by Peter Lynch is one of the classics and one of the best written books about value investing. It defines a set of rules about what to do to pick good stocks. It talks about various categories of stocks: starts by defining them, advantages/disadvantages each one has, along with how to invest in each category. At the end he also gives us a list of conditions at which a stock should be sold. So, how is this different from the other books I have read so far? The first obvious point is that it talks about growth investing rather than value investing.

Second, it talks about when to exit, along with the selection techniques, which lacks in others as they all discussed about buy-and-hold strategy. Reading this book along with "Beating the street" is a great experience as this book gives you a set of rules for investing (along with good justification obviously), whereas the other one talks about how he did it and his personal experiences.

Lynch is more towards selecting the stocks whose products you like. He claims that if you like a product, you will probably like the stock too. However, you should check whether the product you like contributes significant amount to the bottom line of the company. If it adds only negligible amount, there is no point in making a buy based on this product alone.

The first step in stock selection is to find out the size of the company relative to its peers. You can get bigger moves only in smaller companies. Lynch is attracted towards smaller companies than larger, as more profits are found only in them. The other category may give you stability but may not give you profits.

The next step is to categorize the stock into one of the following six categories -

1. Slow growers - The growth of these companies is proportional to the growth of the economy. Lynch picks such companies very rarely as if the company doesn't grow, how come its share will?

2. Stalwarts - They show mediocre growth - around 10% to 15%. You can't find multibaggers in this category. But they definitely give stability to your portfolio during recession and other harder times. Lynch has certain percent of them. He sells them when he gets 30% to 50% gain, because, the company can't expand too much, and 30% gain itself ensures that the stock is over heated.

3. Fast growers - They show great growth (20% to 25%). They need not be in a fast growing industry. A lot of fast growers are found in slow growing industry too. Hot industry always attract people, thus resulting in too much competition where companies have to struggle for its share of customers. Invest in only those companies that have very strong balance sheet.

4. Cyclicals - Autos, Airlines, Tyres, Chemicals, Steel, Defense industry are cyclical. The price of cyclicals raise very high while coming out of recession. The difficult part in such stocks is timing them correctly. If you get stuck in the wrong direction of the cycle, you will get completely washed out.

5. Turn arounds - They make up lost ground very quickly. These are the companies waiting for bailout plans by the government. Or the companies which didn't see a big thing going wrong that they got stuck in a bad situation. While they bounce, they become multibagger. Perfectly good companies in a bankrupt one also are turnarounds. Bad companies which when restructured for shareholders interest also become turn arounds.

6. Asset plays - Those companies which have a lot of hidden assets whose value is not known to the public. You should have a local edge - know the assets and their values personally.

Treating each one of these separate is always tricky. Also there is no generic formula that apply to all of them; each one has to be treated separately.

Selecting the stock:

The following are some of the points you need to keep in mind while selecting a company. They are good signs for the company.

1. Companies having boring/ridiculous names are overlooked by public.

2. People generally overlook boring/disagreeable/ridiculous business. (Eg. Waste management, Rust cleaning, etc)

3. Spin off - They are generally healthy and are worth investigating.

4. Institutions do not own it, and analysts do not follow it.

5. The company is in no growth industry.

6. It's got a niche.

7. People have to keep buying it.

8. Instead of creating a new technology, the company has to adapt itself to the latest technology so as to cut costs

9. Company often buys back its own stock

Stocks you should not buy:

1. "If I could avoid a single stock, it would be the hottest stock in the hottest industry". All stocks in a hot industry will be trading for very high value, that no one is a bargain anymore. People expect unrealistically from hot stocks, and push its price to sky high, and the only place for it to go is downwards.

2. Stocks that are predicted to be THE NEXT SOMETHING. The something can be Microsoft, Infosys, Airtel etc. Because none of them have ever succeeded.

3. Companies that make foolish acquisitions with very high price, and into an unrelated business.

4. Whisper stocks - Those who claim to provide a solution for global problem like AIDS etc. Let the company prove that it can do it, and then make your step.

5. Companies that completely depend on a single customer.

6. Stocks having exciting names.

Guest author: Madan Kumar Rajan

Top Indian Companies: 1998 Vs 2008 Vs 2018

noreply@blogger.com (Krishna) — Fri, 01 Aug 2008 17:58:00 +0000

Decade is a very long period in the globalised business environment. Top companies which fail to adopt to the ever changing business dynamics will be replaced by new companies with strong dynamic management. “Looking back” sometimes gives valuable information about future trends.

I compared the top Indian companies by market capitalization in 2008 Vs 1998. Except Reliance and ONGC, none of the top 10 companies in 1998 made it to the top 10 list in 2008. It is surprising to see how fast the emerging companies are replacing the old giants!

Important statistics about 1998:

1. Inflation was around 3.5%.

2. Third most attractive investment destination after Brazil and Mexico – Morgan Stanley.

3. 1 Dollar= 39 rupees.

4. India was preparing for Parliamentary polls.

5. Asian countries like Korea and Japan are reeling under currency crisis.

6. China was nowhere in sight.

7. Infosys was just listed in the exchanges.

8. Big companies successfully recovered from the economic slowdown in 1996-97.

Top 10 companies in 1998:

1. ONGC

2. IOC

3. Reliance Industries

4. GAIL

5. HPCL

6. TELCO

7. BPCL

8. SAIL

9. TISCO

10. Larsen and Toubro.

Source: Business India, 1998 special edition.

Only 2 companies from the 1998 list (Reliance and ONGC) succeeded in making to the 2008 list. So probably 3-4 companies from the 2008 list may make it to the 2018 list. Long term investors should always look to find out those emerging giants.

How many of us can really think and invest with such a vision? Most of the new age investors have neither vision nor patience. They are just "day dreaming" by particpating in "Day trading".

Top stocks by market capitalization on July 31st 2008:

1. Reliance Industries

2. ONGC

3. Bharti Airtel

4. NTPC

5. NMDC

6. MMTC

7. Reliance Communications

8. Infosys Technologies

9. SBI

10. DLF

11. BHEL

12. TCS

13. Larsen and Toubro

14. RPL

15. ITC

16. ICICI Bank

25. Sterlite Industries.

28. Suzlon Energy

29. Reliance Capital

42. Reliance Infra

50. GMR Infra.

Top 10 companies in 2018: If you can able to imagine them, you will become another Rakesh Jhunjhunwala.

Request: I am requesting users to share their stock picks for 2018.