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Monday, October 14, 2013

Smart Investors Always Focus on Fundamentals

Fear or greed may move the market over the short term, but sooner or later economic fundamentals take control.

Stock market bubbles happen when greed (or at least the excitement of money to be made) pushes prices to unrealistic heights.

Conversely, bear markets, when there is more pressure on the sell side than the buy side, happen when investors become disillusioned with over-priced equities.

Bull and bear markets tend to raise or lower all stocks, but often hit some sectors harder. Not surprisingly, the stock sectors that take the biggest hits are often those previously floating on the bubble.

We all have experienced last bubble which was lead by Realty Stocks. Stocks like Unitech, DLF, HDIL which were the darling of many Investors in last bull run are making new lows today. These stocks have massively eroded the capital of investors since 2008.

HDIL - A mumbai based realty company, was trading at 4 digit price in Jan 2008, made all time high of Rs. 1114 on 10th Jan 2008, couple of months after listing in stock exchanges, today trades at price of Rs. 43. Investors who bought this stock on that day have lost almost 96% of their capital as on date, Rs. 1 lakh invested in HDIL in Jan 2008 is less than Rs. 4,000 today. Investors during that period was fascinated to invest in these companies.  Every thing was rosy in terms of realty stocks, huge land bank, mega township projects, expansion in tier 1, tier 2 cities etc. No body wants to think and analyse the changed scenario as of today.  

It is easy to assume that markets are either driven solely by fear or greed. While that may be the case when markets are expanding or contracting, it doesn’t explain how the markets behave in between raging bulls and roaring bears.

Stock Fundamentals Rule

During these times, fundamentals rule rational investing - there will always be those who impulsively jump into and out of the market.

It is easy to overlook the fundamentals, both economic and market related, in the heat of a soaring or crashing market, but you do so at your own peril if you are a long-term investor.

Just as in the dot.com boom, companies still need to earn a profit and pay their bills to prosper. There is no excuse for dismissing these fundamental truths.

Point to Ponder

No matter what the market is doing, companies that have a sustainable business model, strong cash flow and little debt are going to come out of any boom or bust in good shape.

Investment Truths

It is worth repeating these investment truths:

• The economy is not the stock market
• Stock prices may or may not represent a company’s true value
• Good companies are long-term good investments

A stock’s price is only important in establishing when is a good time to buy or sell.

Long-term investors have time on their side - time to let aberrations in the market work themselves out. Take advantage of time and let good companies show their true value. Don't be in a hurry to make lot of money from stock market.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 12:00:00 PM
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Thursday, October 10, 2013

History of Black Monday - US Stock Market Crash

On Monday, October 19, 1987, the Dow Jones Industrial Average declined 22.6% in the largest single-day drop in history.

This one day decline was not confined to the United States, but mirrored all over the world. By the end of October, Australia had fallen 41.8%, Canada 22.5%, Hong Kong 45.8%, and the United Kingdom 26.4%.

Black Monday, as it has become known, was almost twice as bad as the stock market crash of October 29, 1929. The 1929 decline approximated 11.7% and started the Great Depression.

The Securities Exchange Commission, academic professors, financial writers and every financial security firm has analyzed the stock market crash of 1987 in about every way possible.

Some believe the market crash was caused by an irrational behavior on the part of investors. Some analysts believe that excessive stock prices and computerized trading were the cause.

The key finding is that no single news event occurred that could account for the crash.

The stock market was doing quite well for the first nine months of 1987. It was up more than 30%, reaching unprecedented heights. That was after two consecutive years of gains exceeding 20%.

By 1987, interest rates began to climb. Three days before Black Monday, the stock market gains for the year dropped by 11.6%, including the effects of a 9.5% drop on October 16, 1987.

The three day drop was caused by several macroeconomic factors. Long-term bond yields that has started 1987 at 7.6% climbed to approximately 10%. This offered a lucrative alternative to stocks for investors looking for yield.

The merchandise trade deficit soared and the value of the U.S. dollar began to decline. After a speech by Treasury Secretary Jim Baker, investors began to fear that the weak US dollar would cause further inflation.

On Monday, the Dow dropped about 200 points or 9% in the first hour and half. During the day, most institutional investors implemented various computer-based portfolio insurance programs.

Portfolio insurance was destabilizing because it required selling stock as prices declined. The more stocks fell, the more stocks were sold. As the market did not have the liquidity to support the sales, the stock market fell even further.

Buyers waited, knowing the more the market dropped, the more selling would have to take place. By the end of the day, the Dow had lost 508 points.

One important lesson came out of this 1987 stock market crash: Investors who sold, were taken to the cleaners. Those who held and continued a disciplined and systemic approach received rewards.

In fact, by the end of 1987, total return for the year, including dividends, approximated 5%.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 8:45:00 PM
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Sunday, October 6, 2013

Do Not Invest in Indian Equities

An advice to investors who are still cashing out and staying off from Equities.

Are you investing in equities? If we look at current scenario, many retail investors are either afraid of investing in equities or have been cashing out after the recent run-up in stock market.

Many experts and advisers on television and other media advise retail investors to invest in equities, but to no avail. There is absolutely no interest in equities at the retail level and mutual funds, too, are seeing record redemptions.

As it happens, retail investors are helping markets more by staying out than by investing in equities, so, from a purely selfish point of view, we (current equity market participants) do not mind if you stay away from equities. Keep your money in low-interest bearing savings accounts and this will help bank raise cheap funds. Then, while you earn taxable 9% per year in fixed deposits and 4% in savings accounts, we will continue to buy HDFC Bank, IndusInd Bank, Yes Bank and the like, which are up 3.5 times, 11 times, and 5 times, respectively since December 2008. Also, remember to pay all your EMI installments on time so that retail loans made by the private banks do not get into trouble and we can continue to do well owning their stocks.

Indian retail investors are more or less completely out of equities, and would rather buy gold instead. So, keep buying gold so that we can do better than you by owning stock in Titan Industries and other jewellery companies. You should not care at all that while the gold that you bought is up 2.58 times in four years, the stock of Titan Industries, which sells gold to you, is up 6.9 times during the same period. If Rakesh Jhunjhunwala had bought physical gold instead of shares in Titan when he did, he would not be a billionaire today.

In fact, go ahead and buy real estate, taking mortgages from HDFC and LIC Housing Finance. How else would we have made 2.8 and 5.7 times in these stocks in five years? And when you do buy these apartments and houses, do insist on using the best construction material – cement, sanitary ware and so on. It is only because you do not buy equities and spend on real things that we could make 192% on ACC and 4.5 times on Hindustan Sanitary ware since 2008. A house is not done until it’s painted, so remember to keep a good budget for decorative paints from Asian Paints (stock is up 4.8 times in four years).

Why should you invest in equities when you can buy insurance products? This world is interesting precisely because we think differently from each other – while you are happy buying insurance, we are happy owning shares in companies that sell you insurance. Thanks to you, shares in Bajaj Finserv are up 6 times in value and shares in Max India are up 2 times in the past four years.

Follow your heart and we will follow you. If you like going to malls and spending time there please do some shopping as well – some of us own shares in Phoenix Mills, which is up 2.7 times since 2008. In fact, it may be time for you to upgrade your car. Why buy equities when you can spend the same money on a new car or motorcycle? Let us do the more boring job of continuing to own stocks in Maruti and Bajaj Auto, which are up 2.9 and 10.8 times, respectively, since 2008. Why not add your name to the waiting list for an Enfield this year while we own shares in its manufacturer, Eicher Motors, which is up 12 times since 2008?

Life isn’t just about making and investing money; it’s important to enjoy life’s little pleasures. So go watch a movie at the multiplex and much some popcorn while you are there. Meanwhile, we will buy shares in PVR (up 6 times in four years). You’d rather spend time at home in front of the television? We’ll still love you – shares in Zee Telefilms and Sun are up 3 and 3.5 times because of loyal viewers such as you. Call for pizza delivery at home – Jubilant Foodworks (which owns Domino’s) is up 5.4 times since its IPO in 2010.

While you’re in the mood to be sinfully self-indulgent, don’t make any resolutions to give up smoking or drinking. You may not want to invest in equities, but spare a thought for investors in these stocks. Your actions so far have helped these investors make 3.8 times in ITC, 10.3 times in United Breweries and 2.2 times United Spirits in four years but they still look for your continues patronage of these businesses.

We wish you a very happy and healthy life. In case if you fall sick in 2014, take comfort in the fact that you are helping investors in stocks of companies such as Dr Reddy’s (stock up 4 times) and Cipla (stock up 3 times).

We invite you over to our side but still love you for choosing instead to be loyal customers of the businesses we own.

Now it’s up to you to decide who you would rather be – part owners of Indian companies or just their loyal customers.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 11:45:00 AM
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Friday, October 4, 2013

What is ROA - Return on Assets?

When you are considering stocks to buy, there are certain metrics and numbers that are more important than others.

They can’t be used as the sole qualifier to determine great stocks, but you can use them to eliminate poor performers.

You must always look at the big picture when considering a stock and that means considering a number of metrics.

Return on Assets

Return on Assets is one of the handful of really important metrics every investor should know.

Return on Assets (ROA) tells you how efficiently (or inefficiently) a company turns assets into net income. It is a way to tell at a glance how profitable a company is.

Consider that companies take capital from investors and turn it into profits, which are in turn returned to the investor in one form or another.

ROA measures how efficiently the company does this. Obviously, the more efficient a company is in converting assets (capital) into profits, the more attractive it will be to investors.

That’s about as simple as it comes: companies that make more money for the owners are worth more than companies that don’t make as much money.

ROA is made up of two components: net margin and asset turnover. When used together, these two metrics tell an important story.

Net Margin:

Net margin is found by dividing net income by sales. Net margin reveals what percentage of each Rupee in sales and company retains.

Asset Turnover:

The other component is asset turnover, which gives you an idea of how well a company does in producing sales from its assets. You find asset turnover by dividing sales by assets.

Once you have net margin and asset turnover, multiply them together to determine ROA. You now have an idea how well a company can convert assets into profits. Companies with high ROA compared to their peers, are more efficient at using assets to generate profits.

You can calculate ROA for yourself or you can use one of the Web sites that has done all the math for you.

Even if you don’t do the calculations yourself, it is important to know how the numbers are generated.

Improving Efficiency

ROA shows how companies have two choices in improving efficiency.

Companies can raise prices and create high margins or rapidly move assets through the company. Either way (or both) improves ROA.

It is important to compare companies in the same industries. Some industries traditionally have higher margins or asset turnover than other industries do.

ROA is an important measure to use and understand, but its flaw is that the metric does not consider the effect of borrowed capital.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 9:00:00 PM
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Are you Investing in Indian Stock Market?

Unfortunately, many investors who are seduced by the lure of easy money try to become "active" investors before they have the skills, the resources, or the appropriate intellectual framework to do so.

This is not to say that investing in stocks is extraordinarily difficult, It is not!

However, beating the market on a regular basis is far from easy and requires that an investor bring to the investing process a singular discipline, knowledge, or passion that will allow him to rise above the herd.

Like in any other competition, not everyone can win! In fact, for every amount of money that outperforms the market, somebody else's money is not doing quite so well!

How can you tell if you are ready to become an "active" investor?

Not an investor who buys and sells stocks on a regular basis, but active in the way the academics mean it, someone who selects his own stocks.

It is not like there is a licensing process or anything. In fact, there is not even a formal course of instruction.

Much like parenting, you tend to find out if you are really cut out to be an investor only after you have made a pretty substantial commitment.

In our opinion, you should not be investing in stocks:

1. If you need the money within two to three years at the least.

2. If you don't like to do math.

3. If you use the word "play," "gamble," or any similar speculation-oriented word when you describe your investments.

4. If you think indexes matter more than what companies you own.

5. If you are unprepared for volatility.

A lot of people look at the returns for the stock market only to turn pale at the first loss. If you cannot stand to lose money, you should not own stocks.

If you think you will only ever buy stocks that go up, you are not perfect. No system is perfect. No provider of advice is perfect.

You can and will lose money at some point during your investment career. You can minimize this loss only if you do your homework and are careful about valuation.

But money lost is money lost.

Our Services: Hidden Gems | Value Picks | 15% @ 90 DAYS | WEALTH-BUILDER

Posted by Saral Gyan at 8:30:00 PM
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