Investment Techniques in Current Market Scenario Sunny Sabharwal

Investor Investor Vs Speculator Former invests based on underlying fundamentals Speculator buy & sell based on whims & fancies may buy in overvalued market; sell otherwise Classification Based on time – Long-term : depends Short-term : depends Based on risk Aggressive : Usually young or sector experts Conservative : preservation of capital is pertinent Based on nature Active : plan, research & execute their on own Passive : don’t invest directly; use investment vehicles

Investor Vs Speculator

Former invests based on underlying fundamentals

Speculator buy & sell based on whims & fancies

may buy in overvalued market; sell otherwise

Classification

Based on time –

Long-term : depends

Short-term : depends

Based on risk

Aggressive : Usually young or sector experts

Conservative : preservation of capital is pertinent

Based on nature

Active : plan, research & execute their on own

Passive : don’t invest directly; use investment vehicles

What an investor should know Basics of investment – Types of investments Constructing a portfolio Calculation of returns Judging state of economy GDP growth rate, Interest rates, inflation, etc. IIP fell by 2.3% in Mar ‘09 Judging state of sector Problems faced by DLF and EMAAR Evaluating stocks, MFs, etc. RBI policies Anything else that affects your money

Basics of investment –

Types of investments

Constructing a portfolio

Calculation of returns

Judging state of economy

GDP growth rate, Interest rates, inflation, etc.

IIP fell by 2.3% in Mar ‘09

Judging state of sector

Problems faced by DLF and EMAAR

Evaluating stocks, MFs, etc.

RBI policies

Anything else that affects your money

Investment Options Equity Public Shares Private Equity – new for some! Bonds Tax-saving like NHAI, NABARD, etc. Mutual Funds Debt, Gilt, Commodities, Index Equity Real Assets Gold Realty Post Office Savings, PPF Bank Savings Insurance

Equity

Public Shares

Private Equity – new for some!

Mutual Funds

Debt, Gilt, Commodities, Index

Equity

Real Assets

Gold

Realty

Developing a Portfolio First thing to do before opening a Demat A/C! “ One size fits all” does not work! Depends mainly on – Funds – Initial Corpus Regular investments Risk Tolerance Thumb-rule : Deduct your age from 100 and invest the difference in equity Time (Are you nearing retirement!) Long-term Short-term Knowledge Can be gained! This is something that most people resist…and even if they eventually force themselves through the process…they do not review (control) their progress over time!

First thing to do before opening a Demat A/C!

“ One size fits all” does not work!

Depends mainly on –

Funds –

Initial Corpus

Regular investments

Risk Tolerance

Thumb-rule : Deduct your age from 100 and invest the difference in equity

Time (Are you nearing retirement!)

Long-term

Short-term

Knowledge

Can be gained!

Reviewing a Portfolio Decide a time interval of review and stick to it Measure total portfolio’s performance Ultimately it is wealth that is focus How to measure Compounded Annual Growth Rate (CAGR) Compare against some benchmark Take opportunity cost into consideration Change your strategy in case of failures

Decide a time interval of review

and stick to it

Measure total portfolio’s performance

Ultimately it is wealth that is focus

How to measure

Compounded Annual Growth Rate (CAGR)

Compare against some benchmark

Take opportunity cost into consideration

Change your strategy in case of failures

Stocks …

Stocks …

Common Mistakes Not starting to invest!!! Going for tips Buying penny stocks Trying to predict the market Relying on others’ analysis Short-term horizon Thinking that fundamentals do not work

Not starting to invest!!!

Going for tips

Buying penny stocks

Trying to predict the market

Relying on others’ analysis

Short-term horizon

Thinking that fundamentals do not work

Some Facts Market sentiments discount everything!!! Institutional Investors have a greater control Pay for research Have links with CEOs Do extensive analysis Research reports, TV Shows, articles in media Lesser truth than hype But in the long-run (?), market seem to come back to fundamentals No one strategy wins the market It is possible to earn a decent return above market return!

Market sentiments discount everything!!!

Institutional Investors have a greater control

Pay for research

Have links with CEOs

Do extensive analysis

Research reports, TV Shows, articles in media

Lesser truth than hype

But in the long-run (?), market seem to come back to fundamentals

No one strategy wins the market

It is possible to earn a decent return above market return!

Institutional Investors Who all – Mutual Funds Hedge Funds Banks Pension Funds HNIs NBFCs Foreign Banks, MFs, HFs, etc. Research : prices of stocks in which IIs invest rise But should we follow them Can’t; difficult to predict their movements

Who all –

Mutual Funds

Hedge Funds

Banks

Pension Funds

HNIs

NBFCs

Foreign Banks, MFs, HFs, etc.

Research : prices of stocks in which IIs invest rise

But should we follow them

Can’t; difficult to predict their movements

Truth behind ups & downs Market at 8,000 Slowly prices rising (with or w/o reasons) Market professionals in media Creating illusionary bullish market Prices going beyond facts media, brokers, advisors tell to buy Retailers entering at peaks Operators make a killing

A small story Once upon a time in a village a man appeared who announced that he would buy monkeys for Rs 10. The villagers seeing that there were many monkeys went out in the forest and started catching them. The man bought 1000 monkeys @ Rs 10 and as supply started to diminish, villagers started to stop their effort. He announced that now he would buy for Rs 20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to farms. The offer rate increased to Rs 25 and the supply of monkeys became so low, that it was an effort to even see a monkey let alone catch it. The man now announced that he would buy monkeys at Rs 50! However, since he had to go to the city on some business, his assistant would now buy on behalf of the man. In the absence of the man, the assistant told the villagers "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs 35 and when the man returns you can sell them back to him for Rs 50." The villagers queued up with all their saving to buy the monkeys. Phir na woh aadmi mila, na us ka assistant........... Sirf bandar hee bandar..... 50 wala tha FII; 35 wala tha apna Domestic Operator Baki sab.....???...main-aap aur BAGPIPER

Once upon a time in a village a man appeared who announced that he would buy monkeys for Rs 10. The villagers seeing that there were many monkeys went out in the forest and started catching them. The man bought 1000 monkeys @ Rs 10 and as supply started to diminish, villagers started to stop their effort. He announced that now he would buy for Rs 20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to farms. The offer rate increased to Rs 25 and the supply of monkeys became so low, that it was an effort to even see a monkey let alone catch it. The man now announced that he would buy monkeys at Rs 50! However, since he had to go to the city on some business, his assistant would now buy on behalf of the man. In the absence of the man, the assistant told the villagers "Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs 35 and when the man returns you can sell them back to him for Rs 50." The villagers queued up with all their saving to buy the monkeys. Phir na woh aadmi mila, na us ka assistant........... Sirf bandar hee bandar..... 50 wala tha FII; 35 wala tha apna Domestic Operator Baki sab.....???...main-aap aur BAGPIPER

Analysis Fundamental Taking past performance of company, sector and economy into cognizance Technical Charts None Most common approach Invest based on tips, hunch, etc.

Fundamental

Taking past performance of company, sector and economy into cognizance

Technical

Charts

None

Most common approach

Invest based on tips, hunch, etc.

Screening Stocks – An Approach Financials – First, Price to BV Ratio P/E Ratio : historical, sector Cash Flows & Dividends D/E Ratio 52 week High/Low VC/PE Investors (if any) – PIPE deals USP Institutional Investment Want it or not !

Financials –

First, Price to BV Ratio

P/E Ratio : historical, sector

Cash Flows & Dividends

D/E Ratio

52 week High/Low

VC/PE Investors (if any) – PIPE deals

USP

Institutional Investment

Want it or not !

Stock Valuation Countless theories Most common – DCF – Scientific & Preferred Relative – Difficult to use as finding exact company is difficult Net Asset – Least preferred as based on historical values And markets are all about future Basically two ways to invest – Buy lower than fair value Value investing Conservative as based on available facts Sell higher than expected value Growth investing Based on future earnings and price riskier as markets might go up or down; even if go up, no guarantee the stock will go up

Countless theories

Most common –

DCF – Scientific & Preferred

Relative – Difficult to use as finding exact company is difficult

Net Asset – Least preferred as based on historical values

And markets are all about future

Basically two ways to invest –

Buy lower than fair value

Value investing

Conservative as based on available facts

Sell higher than expected value

Growth investing

Based on future earnings and price

riskier as markets might go up or down; even if go up, no guarantee the stock will go up

Stock Averaging Purchasing more of a stock at different prices changes its avg cost Averaging down – Buying more when price is falling Belief that fundamentally stock is good; But getting hit with market Caveats : one can’t guess the bottom Maybe our belief is wrong Averaging up – Buying more when price is rising Check for the valuation; is it reaching saturation Good as one is in consensus with the market

Purchasing more of a stock at different prices changes its avg cost

Averaging down –

Buying more when price is falling

Belief that fundamentally stock is good; But getting hit with market

Caveats :

one can’t guess the bottom

Maybe our belief is wrong

Averaging up –

Buying more when price is rising

Check for the valuation; is it reaching saturation

Good as one is in consensus with the market

Simple techniques Don’t expect profits every time Losses are part of the game But this is no escape for turning into a speculator If investing, not trading , look for long-term perspective Do your own analysis (won’t take much time) Sell some at top; buy some at bottom Stock Averaging – discussed Go for buy if convinced about fundamentals Place a return expected out of a purchase Don’t be greedy even, sell overvalued item Diversify – Recommended but not compulsory

Don’t expect profits every time

Losses are part of the game

But this is no escape for turning into a speculator

If investing, not trading , look for long-term perspective

Do your own analysis (won’t take much time)

Sell some at top; buy some at bottom

Stock Averaging – discussed

Go for buy if convinced about fundamentals

Place a return expected out of a purchase

Don’t be greedy even, sell overvalued item

Diversify –

Recommended but not compulsory

Mutual Funds…

Mutual Funds…

Mutual Funds Expensive for active investors ELSS still better for tax-savings Also have provided superb returns Better be diversified here too Sharpe’s ratio = (Rp –Rf)/S.D. Easily available from net Source : Moneycontrol.com (Rs/unit) Date Returns SBI Magnum Tax Gain (G) 36.780 14-05-2009 358.80% Sundaram Tax Saver (G) 27.314 14-05-2009 276.60% Can Robeco Equity TaxSaver (G) 13.660 14-05-2009 234.60% HDFC Tax Saver (G) 118.041 14-05-2009 224.40% ICICI Pru Tax Plan (G) 68.460 14-05-2009 199.10%

Expensive for active investors

ELSS still better for tax-savings

Also have provided superb returns

Better be diversified here too

Sharpe’s ratio = (Rp –Rf)/S.D.

Easily available from net

Exchange Traded Funds (ETF) Combine features of – MF: as an investment vehicle Stocks: facilitate buying and selling thru stock exchange Types – Index: replicate performance of an index Boarding the bandwagon or Gold: Track the real time price of gold Better than buying gold – No making charges Real-time prices available No purity/certification issues No deduction on change of vendor No security concerns

Combine features of –

MF: as an investment vehicle

Stocks: facilitate buying and selling thru stock exchange

Types –

Index: replicate performance of an index

Boarding the bandwagon or

Gold: Track the real time price of gold

Better than buying gold –

No making charges

Real-time prices available

No purity/certification issues

No deduction on change of vendor

No security concerns

How to do disciplined investment? Plan for short-term and medium term requirements – Marriage, child, house, education, car, etc. Plan for retirement Requires to estimate long-term goals Subscribe to SIPs Make investment in proportion to income On hikes; invest more Take life insurance policies – For long-term (20-25 yrs) As soon as possible for children ULIPs are expensive in short-term Take medical insurance

Plan for short-term and medium term requirements –

Marriage, child, house, education, car, etc.

Plan for retirement

Requires to estimate long-term goals

Subscribe to SIPs

Make investment in proportion to income

On hikes; invest more

Take life insurance policies –

For long-term (20-25 yrs)

As soon as possible for children

ULIPs are expensive in short-term

Take medical insurance

Sources of information RBI website and journal SEBI website Financial sites like moneycontrol Blogs People

RBI website and journal

SEBI website

Financial sites like moneycontrol

Blogs

People

Thank You Please feel free to contact me at Cell : +91 99586 77766 Email: sabharwal.sunny@yahoo.com