Dear Investors,
Many new members have started reading this blog. I have already sent lesson No. 1, 2 & 3. I am, however, giving below summary of lessons 1, 2 & 3, followed by lesson 4.
SUMMARY OF LESSON NO. 1
i) The company should have regular income/profits from their core competence.
ii) It is preferable to select companies which have near monopolies rather than companies facing stiff competition.
iii) Look at the Promoters group or Management. Companies belonging to promoters like TATAs etc. are safe. Nowadays companies belonging to Reliance Group are hot cakes.
iv) The company’s products should be of regular use/disposable so that the demand always remains.
v) In case of export oriented companies various internal and external factors which may affect the company should be considered.
vi) The raw materials for the company should be available easily without any hindrances, so that the production cycle is not hampered.
vii) The demand for the product should be ever lasting.
SUMMARY OF LESSON NO. 2
1. If a company is capital intensive, prefer them for longer term investing (at least 3-4 years).
2. If the company has come out of red into black and sustains the profitability, you have to look at the following few ratios : equations etc.
Earning per share (eps) : It is net profit divided by number of equity shares of a company.
P.E. Ratio : It is share price in the market divided by eps
Sales to Net profit ratio : It is the percentage of net profit in relation to Sales. If it is very less, it implies that the company is incurring huge expenses. On a safe side, if this ratio is above 25% on a sustained basis, we can safely enter.
3. Book Value. This is made up of Share capital plus reserves divided by number of shares. Higher the book value, stronger is the fundamental health of a company.
4. Price to book value ratio. If the share price is less than book value, and the company is consistently making profits/paying dividends, one can safely accumulate the scrip.
5. Market capitalization : It is price of the shares traded multiplied by the outstanding shares (other than promoters’ stake).
SUMMARY OF LESSON NO. 3
i) Debt Equity Ratio. If the ratio is less than one, it means that the company’s borrowings are less than the Equity.
ii) Analysis of share holding pattern :
a) Companies with reasonably high promoters’ holding are safe bets.
b) Some companies may be part of a group of companies where cross holdings will be seen. Such companies are reasonably safe for investment.
c) In companies where Government or some Statutory Body is also a share holder, we can safely consider investing in the shares of such companies.
iii) For comparing the performance of a company, it is always advisable to compare the Year on Year growth rather than Quarter on Quarter growth.
iv) In many cases, there may be an impending news of promoters or persons associated with the promoters who may acquire shares of the company and increase their holdings. This is good news and the company’s shares can be acquired.
vi) If a holding company floats a subsidiary company and the latter’s shares are issued at a premium in the market and fully subscribed, the holding company’s shares will also get an automatic re-rating.
FUNDAMENTAL ANALYSIS AND GUIDELINES FOR INVESTING
LESSON NO. 4
Many new members have started reading this blog. I have already sent lesson No. 1, 2 & 3. I am, however, giving below summary of lessons 1, 2 & 3, followed by lesson 4.
SUMMARY OF LESSON NO. 1
i) The company should have regular income/profits from their core competence.
ii) It is preferable to select companies which have near monopolies rather than companies facing stiff competition.
iii) Look at the Promoters group or Management. Companies belonging to promoters like TATAs etc. are safe. Nowadays companies belonging to Reliance Group are hot cakes.
iv) The company’s products should be of regular use/disposable so that the demand always remains.
v) In case of export oriented companies various internal and external factors which may affect the company should be considered.
vi) The raw materials for the company should be available easily without any hindrances, so that the production cycle is not hampered.
vii) The demand for the product should be ever lasting.
SUMMARY OF LESSON NO. 2
1. If a company is capital intensive, prefer them for longer term investing (at least 3-4 years).
2. If the company has come out of red into black and sustains the profitability, you have to look at the following few ratios : equations etc.
Earning per share (eps) : It is net profit divided by number of equity shares of a company.
P.E. Ratio : It is share price in the market divided by eps
Sales to Net profit ratio : It is the percentage of net profit in relation to Sales. If it is very less, it implies that the company is incurring huge expenses. On a safe side, if this ratio is above 25% on a sustained basis, we can safely enter.
3. Book Value. This is made up of Share capital plus reserves divided by number of shares. Higher the book value, stronger is the fundamental health of a company.
4. Price to book value ratio. If the share price is less than book value, and the company is consistently making profits/paying dividends, one can safely accumulate the scrip.
5. Market capitalization : It is price of the shares traded multiplied by the outstanding shares (other than promoters’ stake).
SUMMARY OF LESSON NO. 3
i) Debt Equity Ratio. If the ratio is less than one, it means that the company’s borrowings are less than the Equity.
ii) Analysis of share holding pattern :
a) Companies with reasonably high promoters’ holding are safe bets.
b) Some companies may be part of a group of companies where cross holdings will be seen. Such companies are reasonably safe for investment.
c) In companies where Government or some Statutory Body is also a share holder, we can safely consider investing in the shares of such companies.
iii) For comparing the performance of a company, it is always advisable to compare the Year on Year growth rather than Quarter on Quarter growth.
iv) In many cases, there may be an impending news of promoters or persons associated with the promoters who may acquire shares of the company and increase their holdings. This is good news and the company’s shares can be acquired.
vi) If a holding company floats a subsidiary company and the latter’s shares are issued at a premium in the market and fully subscribed, the holding company’s shares will also get an automatic re-rating.
FUNDAMENTAL ANALYSIS AND GUIDELINES FOR INVESTING
LESSON NO. 4
Here are some basic rules you should adhere to in order become a successful investor in this market:
NEVER INVEST MORE THAN YOU CAN AFFORD TO LOSE. Since equities as a whole are somewhat risky and small and micro cap stocks are highly risky, only a small percentage of your assets should be committed to such stocks. Most of your investments should be in fundamentally strong companies. Some small cap/micro cap (penny stocks) had a dream run recently but you may be caught unawares when they start hitting lower circuits, because in such a situation there will be no buyers.
BE PREPARED TO INVEST WITH AT LEAST A ONE TO TWO-YEAR TIME HORIZON.
The heading speaks for itself. There are so many examples. Tata Tele was hovering around 17-19 in October 2006. Just one year before (2005), people had invested at 25-28 and were getting impatient. Had they held it for one more year (2007) they could have seen a level of 55. Therefore, the funda is, the market takes a full cycle in 1 year and patience is the name of the game. There are so many other examples.
BE PREPARED TO ACCEPT LOSSES.
Many investors are happy in booking profits but they should learn to accept losses also. If the company is profit making and the operations are good, it will take a full cycle. But if there is any wrong signals, be prepared to book losses in such shares.
BOOKING PARTIAL PROFITS IS GOOD.
If you buy 1000 shares of a company at 25.00 and the value rises to 50.00, there is nothing wrong in disposing of 500 shares. This is partial booking of profits. In this way, after selling part of the shares, if the share price falls down, you may pick them up again from the market, thus making a short term trading profit. However, in a performing company, you should never sell all the shares.
LEARN TO TOLERATE BEAR MARKETS.
If there is a bull market, bear market will also be there. We should learn to accept this fact. Therefore, if you have about Rs.1,00,000.00 to invest, investment should be done in small lots only. If the market falls, you can add on dips that too in fundamentally strong and profit making companies.
SOME MORE BASIC RULES :
STRONG CASH FLOW STATEMENTS
Invest in companies with consistent strong cash flows. Companies with strong cash flows, after it has paid for its expenses and reinvested into the company, can determine the financial health of a company. Consistent, positive cash flow statements can mean real cash for its owners / shareholders.
LOOK FOR LOW DEBT AND CONSEQUENT LOW DEBT EQUITY RATIO
Companies that have low debt will have the capability of investing more cash into the company for either growth, research and development, expansion, etc.
HIGH RETURN ON EQUITY
The most common measure of a company's profitability is the return on equity or ROE. This is net income divided by shareholder’s equity. This is almost like eps. Higher the ROE, better the performance. ROE reveals how much a company generates profits with the money that shareholders have invested in it.
EVEN AFTER CONSIDERING ALL THE ABOVE, IT IS ADVISABLE TO DO YOUR STUDIES PROPERLY AND TAKE INVESTMENT DECISIONS. DO NOT ACT ON MERE TIPS OR ASTRONOMICAL VALUATIONS GIVEN BY RUMOURS ETC.
KASHIWALA
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