Hult Finance Club Investment Contest 2010

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Hult Finance Club Investment Contest 2010

  1. 1. Investment Contest 2010 Boston-Dubai-London HULT Financial Club, Boston 02/01/2010 Dhairya Mitawalkar (DK)
  2. 2. Aim Provide a basic overview of the investment market and steps to decide on stock investments Agenda  Investments  Steps in investment analysis  Commonly used stock picking tools  Fundamental analysis  Value investing  Growth investing Dhairya Mitawalkar (DK)
  3. 3. Investment Basics  Components of investment decision:  Type of investment  Real or financial  Markets  OTC, Exchanges  Securities  Types and risk/return profiles  Factors affecting investments  Macro-economic, micro-economic, non-economic  Investment analysis  What, when, how much to buy and for how long Dhairya Mitawalkar (DK)
  4. 4. Financial Securities  Investment is buying of financial assets in:  Money markets (short-term credit)  Capital markets (long-term funds)  Security types:  Stocks  Bonds  Derivatives  Forex  Commodities  Real-estate  Risk-return profiles  http://www.bankers.asn.au/smarterinvesting/images/risk-return-comp.gif Dhairya Mitawalkar (DK)
  5. 5. Investment management process 5. Monitor and 1. Understanding update portfolio risk/return profile (as per changes) (expectations) 2. Economic, 4. Construct political, social portfolio analysis (diversify) (trends) 3. Industry and stock selection (impact) Dhairya Mitawalkar (DK)
  6. 6. Investment analysis Economic • Which countries to invest in? Analysis • What securities to invest in? • Which industries are impacted? Industry Analysis • How are they impacted? • Which companies affected? Company Analysis • Future outlook? Dhairya Mitawalkar (DK)
  7. 7. Economic Analysis Usually involves the study of economic indicators, monetary policy and fiscal policy Economic Indicator  Any economic statistic: unemployment rate, GDP, or the inflation rate  Indicates how well the economy is doing and how well the economy is going to do in the future Types  Procyclic  Same direction as economy. E.g. GDP  Countercyclic  Opposite direction to economy. E.g. Unemployment rate  Acyclic  No relation. Dhairya Mitawalkar (DK)
  8. 8. Economic indicators  Leading indicators  Provides idea of future direction of economy  Change before economy changes  E.g. Stock market returns  Lagging indicators  Does not change direction until sometime after economy does  Reinforces view of economy  E.g. Unemployment rate  Coincident  Moves with the economy  E.g. GDP Dhairya Mitawalkar (DK)
  9. 9. Economic analysis – examples  Expansionary monetary policy (control of interest rates) Economy grows Interest rates Money easily (unemployment/ lowered available inflation?)  Expansionary fiscal policy (government spending and taxation) Governments Jobs created  invest money in Unemployment Multiplier effect projects reduced  Currency exchange rates Interest rates: USD deposits Cheaper to attractive (USD import from US > Japan appreciates) Japan Dhairya Mitawalkar (DK)
  10. 10. Industry Analysis  Important step before stock picking  Avoid comparing apples to oranges  E.g. P/E ratios differ for different industries Economic climate effects  Includes analyzing factors affecting particular industry  Porter’s five-forces model  Understand how much industry affected due to given economic climate  Cyclical or counter-cyclical to economy  Understand where industry is in its life cycle  http://www.osovo.com/diagram/part_t3.gif Dhairya Mitawalkar (DK)
  11. 11. Industry life cycle Market growth life cycle Product/Business life cycle http://www.blurtit.com/var/question/q/q7/q72/q724/q7243/q724306_374408_product-life-cycle.png Dhairya Mitawalkar (DK)
  12. 12. Company Analysis 2 analysis styles..  Fundamental Analysis  Economic Climate and Indicators  Industry maturity  Company Financial Statements  Management decisions  Investor Sentiment  Technical Analysis  Moving Averages, Volume Indicators, Quantitative methods  Complicated and Out of Scope! Dhairya Mitawalkar (DK)
  13. 13. Stock picking strategies  Fundamental analysis  Find the intrinsic value of stock (actual worth v/s market price)  Stock should be worth its discounted cash flows  Assumptions: Cash flows, discount rate, growth rate, no. of years  Understand that growth rate changes as company enters different phase in its life cycle Dhairya Mitawalkar (DK)
  14. 14. Fundamental analysis Implementation is a bit tricky  Cash flows considered depend on the type of company  Dividend paying companies  Use dividend discount model  E.g. GE, Exxon Mobil, Citigroup, BoA  Free Cash Flow (FCF)  Cash generated after spending on maintenance and expansion  (Operating cash flow – capital expenditures)  EBITDA & Net Income  Vanilla techniques  Prone to manipulation through creative accounting Dhairya Mitawalkar (DK)
  15. 15. Value investing – Warren Buffet way!  Basics  Stocks with strong fundamentals  earnings, dividends, book value, and cash flow  Undervalued companies with high potential of growth  Buying into businesses for long-term growth  Guidelines:  Stock price < (2/3) intrinsic price  Stock price < book value  Debt/Equity ratio < 1  (P/E)/y-o-y earnings growth  less than 1 (cheap while considering growth)  Current assets = 2 * current liabilities  Dividend yield should be at least two-thirds of the long-term AAA bond yield.  Earnings growth over past 10yrs > 7% pa compounded Dhairya Mitawalkar (DK)
  16. 16. Growth investing  Very different from value investing  Focus on future growth potential – present price ignored  Companies with intrinsic value > stock price  Future growth will exceed current valuations  Companies undergoing rapid expansion  Capital gains, no dividends.  Compare company’s past performance to industry average  Things to look for:  Historical earnings growth  Future earnings potential  Strong balance sheets  Potential for stock price doubling in 5 years  E.g. Microsoft, Google, Apple Dhairya Mitawalkar (DK)
  17. 17. Resources (websites) Investing basics  http://www.investopedia.com/  http://www.abcstockinvesting.com/ Research  http://www.morningstar.com/  http://seekingalpha.com/  http://www.contrarianprofits.com/  http://www.bloomberg.com Value investing resource: Buffett’s shareholder letters  http://www.berkshirehathaway.com/letters/letters.html Dhairya Mitawalkar (DK)
  18. 18. Resources (books)  The intelligent investor – Benjamin Graham  Beating the street – Peter Lynch  Fooled by Randomness – Nicholas Taleb  Liar’s Poker – Michael Lewis  Common stocks and uncommon profits – Philip Fisher Dhairya Mitawalkar (DK)

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