Investor Education First Invest in Yourself Markets come second Presentation by CA Rajesh Rampal (With special reference to Stock Markets)

Investor Education First Invest in Yourself Markets come second Sir Isaac Newton, the famous scientist, lost some of his money due to speculation in The South Sea Company stock in the 1720s. Isaac Newton lost over 20,000 pounds (£1.68 million in today's money) of his fortune. As a result of this crisis, he stated "I can calculate the motions of heavenly bodies, but not the madness of people".

Investor Education First Invest in Yourself Markets come second Basic Economic Principles GNP= C + I + Govt.exp.+ Net Exports. Where GNP is Gross National Product, C is Consumption and I is Investment. (MACROECONOMICS by William Branson) Hence Investment adds to GNP and is a must for any growing Economy and as Citizens of India we must save and Invest for a better tomorrow for our country’s future generations.

Investor Education First Invest in Yourself Markets come second Stock Market Fundamentals Functioning Investment in shares helps Industry and economy Small Investor can gain by investing in Stock Market provided he follows some basic Investment Management Principles.

Stock Market

Fundamentals

Functioning

Investment in shares helps Industry and economy

Small Investor can gain by investing in Stock Market provided he follows some basic Investment Management Principles.

Investor Education First Invest in Yourself Markets come second Warren Buffett’s Gameplan Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by 2005? By comparison, $10,000 in the S&P 500 would have grown to only about $500,000. Warren Buffett descends from the Benjamin Graham school of value investing. "In the short term the market is a popularity contest; in the long term it is a weighing machine Buffett's Methodology Has the company consistently performed well? Has the company avoided excess debt?

Warren Buffett’s Gameplan

Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by 2005? By comparison, $10,000 in the S&P 500 would have grown to only about $500,000.

Warren Buffett descends from the Benjamin Graham school of value investing.

"In the short term the market is a popularity contest; in the long term it is a weighing machine

Buffett's Methodology

Has the company consistently performed well?

Has the company avoided excess debt?

Investor Education First Invest in Yourself Markets come second Warren Buffett’s Gameplan 3. Are profit margins high? Are they increasing? 4. How long has the company been public? 5. Do the company's products rely on a commodity? Competitive advantage or what he calls moat. 6 . Is the stock selling at a 25% discount to its real value? 7. Conclusion Buffett's investing style, like the shopping style of a bargain hunter, reflects a practical, down-to-earth attitude. He doesn't live in a huge house, he doesn't collect cars and he doesn't take a limousine to work. Do note that the most difficult thing for any value investor, including Buffett, is in accurately determining a company's intrinsic value.

Investor Education First Invest in Yourself Markets come second Types of Investments Every Investor is a Fund Manager Types of Investment – Deposits-PO, Banks, Companies, PPF, Bonds, Equity, Debentures etc. Selection of quantum and and the right Investment- A fair mix based on risk bearing capacity, LIC, Housing, FD’s and then Equity. Comparisons of Returns and risks- Equity has downward risk and has no Guaranteed returns. Benefits of short term vs Long term Investment and Timing. Has anybody made short term profits in the audience and maintained them? Speculation and Investment- New age definition of Speculation - is the Art of making short term trading and investment decisions based on knowledge, research and trading philosophies. How? We can see in the ensuing study.

Types of Investments

Every Investor is a Fund Manager

Types of Investment – Deposits-PO, Banks, Companies, PPF, Bonds, Equity, Debentures etc.

Selection of quantum and and the right Investment- A fair mix based on risk bearing capacity, LIC, Housing, FD’s and then Equity.

Comparisons of Returns and risks- Equity has downward risk and has no Guaranteed returns.

Benefits of short term vs Long term Investment and Timing. Has anybody made short term profits in the audience and maintained them?

Speculation and Investment- New age definition of Speculation - is the Art of making short term trading and investment decisions based on knowledge, research and trading philosophies. How? We can see in the ensuing study.

Investor Education First Invest in Yourself Markets come second Investment Risks and Returns A. Quantifying weightage to Equity - No hard and fast rule but should vary with timings. B. Mitigating Risks by a diversified Portfolio- Spread your risk by putting your eggs in different baskets. C. Risks in Equity Markets- Be prepared to loose your Investment upto 50% at any given point of time. Timing of Investment is very important. D. Protecting the Portfolio during market volatality.- Beta of your portfolio, Selling Equivalent Nifty Futures. Options trading/hedging is for the mature Investor - one who understands these products.

Investor Education First Invest in Yourself Markets come second Company Analysis Choosing the Sector Choosing the Company Growth in Sales and Profts Scale up Timing Studying a Balance Sheet – a historical view, Director’s Report,CWIP Evaluate a company’s performance. Keep away from Z category/penny stocks

Company Analysis

Choosing the Sector

Choosing the Company

Growth in Sales and Profts

Scale up

Timing

Studying a Balance Sheet – a historical view, Director’s Report,CWIP

Evaluate a company’s performance.

Keep away from Z category/penny stocks

Choosing the Sector Auto anciliarries Automobiles Banks Capital Goods Cement Chemicals Construction Consumer Durables FMCG Fertilisers Hospitality Infotech Logistics Media Metal NBFC Oil and Gas Pharma Power Realty Retail Shipping Sugar Teleservices Textiles

Auto anciliarries

Automobiles

Banks

Capital Goods

Cement

Chemicals

Construction

Consumer Durables

FMCG

Fertilisers

Hospitality

Infotech

Logistics

Media

Metal

NBFC

Oil and Gas

Pharma

Power

Realty

Retail

Shipping

Sugar

Teleservices

Textiles

Sector Churning Never trade against the trend. Tracking the broad market trend is one of the most important tasks of an investor. -------------------------- Move into strong stocks in strong sectors in an upward-trending market. e.g. Cairn India Oil at USD 140- Strong Cairn was at 250 Move out of weak stocks in the weak sectors in a downward – trending market. E.g Cairn India Oil at USD 65 Weak at less than 100 WHAT IS STRONG TODAY MAY BE WEAK TOMORROW

Never trade against the trend.

Tracking the broad market trend is one of the most important tasks of an investor.

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Move into strong stocks in strong sectors in an upward-trending market. e.g. Cairn India Oil at USD 140- Strong Cairn was at 250

Move out of weak stocks in the weak sectors in a downward – trending market. E.g Cairn India Oil at USD 65 Weak at less than 100

WHAT IS STRONG TODAY MAY BE WEAK TOMORROW

Choosing a Winner Esab from 27 to 567 in 3 Years

Bottom Up Analysis Bottom Up Analysis consists of analyzing each individual company based on: - earnings - cash flow - growth prospects - Review of its balance sheets - Profit and loss statements It is generally used by fundamental analysts and other market players who are hunting for value.

Bottom Up Analysis consists of analyzing each individual company based on:

- earnings

- cash flow

- growth prospects

- Review of its balance sheets

- Profit and loss statements

It is generally used by fundamental analysts and other market players who are hunting for value.

Basic Principles Price-to-Sales Ratio - For valuing a stock relative to its own past performance, other companies or the market itself Price-to-Book Ratio - Is used to compare a stock's market value to its book value. A lower P/B ratio could mean that the stock is undervalued or something wrong with the company. Avoid any company which is selling several times its past ratios

Price-to-Sales Ratio - For valuing a stock relative to its own past performance, other companies or the market itself

Price-to-Book Ratio - Is used to compare a stock's market value to its book value.

A lower P/B ratio could mean that the stock is undervalued or something wrong with the company.

Avoid any company which is selling several times its past ratios

Market – Sector- Stock method All assets which attract money, continue to attract money till they become very expensive. Conversely, all assets which lose investor interest continue to slide till they bottom out. Use ROC for identifying the strong sectors and stocks

All assets which attract money, continue to attract money till they become very expensive. Conversely, all assets which lose investor interest continue to slide till they bottom out.

Use ROC for identifying the strong sectors and stocks

Market – Sector- Stock method Look at stocks which are priced over Rs. 200 – this reduces the chance of a stock being cornered and manipulated, though it is still possible – and those that have an average daily volume of at least 1 lakh shares. Stocks which have the highest rate of change are obviously the ones attracting the most amount of money. The stocks with the lowest rate of change are the ones which are either not attracting money, or money may even actually be deserting them. Knowing the market’s direction and the strength of different sectors It is important to understand whether the market is trending or range bound before you can decide how you will look at the list.

Look at stocks which are priced over Rs. 200 – this reduces the chance of a stock being cornered and manipulated, though it is still possible – and those that have an average daily volume of at least 1 lakh shares.

Stocks which have the highest rate of change are obviously the ones attracting the most amount of money.

The stocks with the lowest rate of change are the ones which are either not attracting money, or money may even actually be deserting them.

Knowing the market’s direction and the strength of different sectors It is important to understand whether the market is trending or range bound before you can decide how you will look at the list.

Other Parameters Growth in Sales and Profts- ET, CMIE, Scale up – Sectoral outlook, Economic outlook, RBI quarterly Reports. Timing- Charts to be covered in next session Studying a Balance Sheet – a historical view, Director’s Report,CWIP, Turnaround cases. Evaluate a company’s performance. Keep away from Z category/penny stocks

Growth in Sales and Profts- ET, CMIE,

Scale up – Sectoral outlook, Economic outlook, RBI quarterly Reports.

Timing- Charts to be covered in next session

Studying a Balance Sheet – a historical view, Director’s Report,CWIP, Turnaround cases.

Evaluate a company’s performance.

Keep away from Z category/penny stocks

Investor Education First Invest in Yourself Markets come second Mutual Funds Functioning of MF’s Types of schemes. Sectoral funds Diversified Funds SEBI, NSE, BSE Depository services NSDL,CDSL and DP’s Benefits and Cost of Demat Services Study on your own ETF’s

Mutual Funds

Functioning of MF’s

Types of schemes.

Sectoral funds

Diversified Funds

SEBI, NSE, BSE

Depository services NSDL,CDSL and DP’s

Benefits and Cost of Demat Services

Study on your own ETF’s

MF Selection Methodolgy The broad parameters used to measure MF performance and selecting good funds is Return analysis and consistency. Qualitative analysis involves Fund Manager track record, Stock selection, Sect oral allocation, and fund corpus. Fund corpus should be greater than 100 crores as small corpus funds are neglected and have high expense ratios. Ratios Standard Deviation- Measure of risk/ Shows volatility of fund. More the SD more the volatility Sharpe Ratio- Indicates risk adjusted returns of a fund. It shows if returns are due to smart investment or excess risk. The greater the ratio the better is the risk adjusted return Beta- Measures the sensitivity of the portfolio with the market. A beta of 1 denotes moves with the market in tandem. Value of less than 1 implies less volatility.

The broad parameters used to measure MF performance and selecting good funds is Return analysis and consistency. Qualitative analysis involves Fund Manager track record, Stock selection, Sect oral allocation, and fund corpus.

Fund corpus should be greater than 100 crores as small corpus funds are neglected and have high expense ratios.

Ratios

Standard Deviation- Measure of risk/ Shows volatility of fund. More the SD more the volatility

Sharpe Ratio- Indicates risk adjusted returns of a fund. It shows if returns are due to smart investment or excess risk. The greater the ratio the better is the risk adjusted return

Beta- Measures the sensitivity of the portfolio with the market. A beta of 1 denotes moves with the market in tandem. Value of less than 1 implies less volatility.

Sample MF details online http://www.moneycontrol.com/india/mutualfunds/mfinfo/11/07/snapshot/imdesc/Reliance%20Growth%20Fund%20-%20Retail%20Plan%20(D)/ffdesc/Reliance%20Capital%20Asset%20Management%20Ltd.%20/imid/MRC009/imffid/RC

http://www.moneycontrol.com/india/mutualfunds/mfinfo/11/07/snapshot/imdesc/Reliance%20Growth%20Fund%20-%20Retail%20Plan%20(D)/ffdesc/Reliance%20Capital%20Asset%20Management%20Ltd.%20/imid/MRC009/imffid/RC

Investor Education First Invest in Yourself Markets come second Hedging and Derivatives Derivatives- Financial Instruments whose value is dependent on another underlying asset. Futures- Index future or Equity future depending on its underlying Options- Call and put options. Trading- We discuss this in the second part on Technical Analysis Hedging- comes at a cost hence expensive. Most players suggest move out rather than hedge. Currency markets and Commodity markets are more open to hedging methods. Mark to Market margins- Daily profit or loss is either debited or credited to your account.

Hedging and Derivatives

Derivatives- Financial Instruments whose value is dependent on another underlying asset.

Futures- Index future or Equity future depending on its underlying

Options- Call and put options.

Trading- We discuss this in the second part on Technical Analysis

Hedging- comes at a cost hence expensive. Most players suggest move out rather than hedge. Currency markets and Commodity markets are more open to hedging methods.

Mark to Market margins- Daily profit or loss is either debited or credited to your account.

Some Important Macro Information essential for all Investors CRR, SLR, Repo rate, reverse Repo rate, Call money rate, Bank PLR IIP numbers Inflation numbers Oil and commodity prices. World Financial markets FII action Govt. Policies. Budget Taxation policies and Incentives. Forex- Yen trade, USD movement, Swiss franc. Political stability Deficits in -Fiscal, Revenue, Trade, Capital Forex Reserves And much more

CRR, SLR, Repo rate, reverse Repo rate, Call money rate, Bank PLR

IIP numbers

Inflation numbers

Oil and commodity prices.

World Financial markets

FII action

Govt. Policies.

Budget

Taxation policies and Incentives.

Forex- Yen trade, USD movement, Swiss franc.

Political stability

Deficits in -Fiscal, Revenue, Trade, Capital Forex Reserves

And much more

Investor Education First Invest in Yourself Markets come second Understanding Investment Related Tools Ratios- PAT/Sales, RM/Sales, Cash profits by adding non-cash charges. Balance Sheet ratios- Current Ratio, debt/Equity, Debt Service coverage ratio, Forex Loans and loss/gain from Forex, ROCE, Long term funds to Fixed Assets ratio. Investment related terms Price Earnings Ratio- Refer to ET Sectoral PE ratios and Individual ratios. EPS- Earnings per share comparisons, Diluted EPS, Extraordinary Items exclusion from EPS Dividend Yield- Dividend per share / Price per share * 100- High Dividend Yield companies, Unbroken Dividend History.

Understanding Investment Related Tools

Ratios- PAT/Sales, RM/Sales, Cash profits by adding non-cash charges.

Balance Sheet ratios- Current Ratio, debt/Equity, Debt Service coverage ratio, Forex Loans and loss/gain from Forex, ROCE, Long term funds to Fixed Assets ratio.

Investment related terms

Price Earnings Ratio- Refer to ET Sectoral PE ratios and Individual ratios.

EPS- Earnings per share comparisons, Diluted EPS, Extraordinary Items exclusion from EPS

Dividend Yield- Dividend per share / Price per share * 100- High Dividend Yield companies, Unbroken Dividend History.

Trading on Equity Particulars A B__ Equity 100 900 Debt (10%) 900 100 Cost of Project 1000 1000 PBIT 1000 1000 Interest 90 10 PBT 910 990 Tax 50% (Say) 455 495 PAT 455 495 Return 455% 55% Analyse what happens in a loss situation. Company A will be insolvent within a year.

Particulars A B__

Equity 100 900

Debt (10%) 900 100

Cost of Project 1000 1000

PBIT 1000 1000

Interest 90 10

PBT 910 990

Tax 50% (Say) 455 495

PAT 455 495

Return 455% 55%

Analyse what happens in a loss situation. Company A will be insolvent within a year.

Some readings from the ET Market Snapshot Advances and decline High and Lows Turnover FII activity MF activity Emerging Markets & Developed Markets Sensex vs Nifty PE Sectoral PE Ratios Best and worst /Turnover toppers/Highest Delivery/Bulk deals Positive/Negative breakouts Cash Future Arbitrage. Profit from Irrationality in Markets. Quotes and Qtly. Quotes Insider Trading Bulk deals

Market Snapshot

Advances and decline

High and Lows

Turnover

FII activity

MF activity

Emerging Markets & Developed Markets

Sensex vs Nifty PE

Sectoral PE Ratios

Best and worst /Turnover toppers/Highest Delivery/Bulk deals

Positive/Negative breakouts

Cash Future Arbitrage.

Profit from Irrationality in Markets.

Quotes and Qtly. Quotes

Insider Trading

Bulk deals

Some important words As John Maynard Keynes succinctly comented, "Markets can remain irrational longer than you can remain solvent." Behavioural finance explains that when entering positions market participants are not driven primarily by whether prices are cheap or expensive, but by whether they expect them to rise or fall. Warren Buffett who has argued that the EMH is not correct, on one occasion wryly saying "I'd be a bum on the street with a tin cup if the markets were always efficient (Efficient Market Hypothesis) The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted. Kendal a British Statistician Said Stock prices behave like a drunk man walking in a blind alley bending on one knee once and on another the second time. Let us see if this opinion is still valid in the second part of our study. The Market is always right – If you are out of line fall in line immediately.

As John Maynard Keynes succinctly comented, "Markets can remain irrational longer than you can remain solvent."

Behavioural finance explains that when entering positions market participants are not driven primarily by whether prices are cheap or expensive, but by whether they expect them to rise or fall.

Warren Buffett who has argued that the EMH is not correct, on one occasion wryly saying "I'd be a bum on the street with a tin cup if the markets were always efficient (Efficient Market Hypothesis)

The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted. Kendal a British Statistician Said Stock prices behave like a drunk man walking in a blind alley bending on one knee once and on another the second time. Let us see if this opinion is still valid in the second part of our study.

The Market is always right – If you are out of line fall in line immediately.

Investor Education First Invest in Yourself Markets come second Market’s Behaviour Optimum time for buying and selling Market fluctuations Analysis of Price Movement When to enter and when to exit Warning signals to short term and even Long term Investors ---------------------------------------- We shall study all these aspects under the next part i.e. on Technical Analyis. We shall also try and do a live coverage of the market movement for the day if possible.

Market’s Behaviour

Optimum time for buying and selling

Market fluctuations

Analysis of Price Movement

When to enter and when to exit

Warning signals to short term and even Long term Investors

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We shall study all these aspects under the next part i.e. on Technical Analyis.

We shall also try and do a live coverage of the market movement for the day if possible.