We all periodically go to a dentist/general practitioner to validate our well being, also check our credit card statement to make sure they make sense- why should investing be any different ?!
As an investor we need to periodically do a 'health check' for the stocks we hold. If the health has got better we have an excuse to hold/add, If the patient needs medication -are the management up to it? .I mean that just holding the stock without any reason for doing so will not help your portfolio, also helps us to look back at our decisions and review the factors which made us to invest in first place.
Few points to check:
• Is the original investment logic still valid.
• Is the company generating adequate cash flow.
• Is the company is getting into areas which are unrelated diversification and reducing focus.
• Are the managers allocating capital rationally.
• Debt and tax levels.
• Profitability (ROE,ROIC) is it reducing/improving.
• Is the stock is valued much more that the business is worth..
You may have your own checklist but it has to based on price vs. value equation in mind. As Warren says -In investing, just as in baseball, to put runs on the scoreboard, one must watch the playing field, not the scoreboard.
Tuesday, June 8, 2010
Wednesday, June 2, 2010
Investment Idea: Zen Technologies
Business: Zen is 16 yr old company, primarily into simulation space for Police, Army, Navy so its sort of defense sector play. They like to call themselves as a ‘System Engineering’ company having skills in mechanical, software and electronics.
It’s important not to confuse them with other companies who work on off shoring model, Zen invests heavily in R&D and skills so that they can be at the cutting edge of innovation They are setting up a subsidiary for making games for platforms like PS/3 etc, will be launching their first game by end of 2010. .
Moat: Low cost producer and familiarly with Indian procurement cycle and customer behavior. Any foreign company investing in defense sector needs have an offset cost. Not a great moat but building a brand takes time.
Competition: BEL (Bharat electronics) is partially into similar space however Zen is in niche sector.
Financials: The results reflect that the company has graduated to a higher sales and growth path last couple of years (prior years the sales growth was flat) they seem to have gained a critical mass to at least remain at this level. FY10 sales is about 52 crore, profits 16 crore, the results are flat to marginally lower as compared to last year. Debt is minimal and margins are high.
Risks: Threat from competition and due to over dependence on govt. orders earnings will be lumpy (fourth quarter bias)
So should you buy ?
This is a kind of stock you want to track and buy as the business improves, its hard to ‘load the truck’ considering lumpy results and evolving nature of the business. At Rs 190 and mcap of 180 crores is value for money as a small exposure.
It’s important not to confuse them with other companies who work on off shoring model, Zen invests heavily in R&D and skills so that they can be at the cutting edge of innovation They are setting up a subsidiary for making games for platforms like PS/3 etc, will be launching their first game by end of 2010. .
Moat: Low cost producer and familiarly with Indian procurement cycle and customer behavior. Any foreign company investing in defense sector needs have an offset cost. Not a great moat but building a brand takes time.
Competition: BEL (Bharat electronics) is partially into similar space however Zen is in niche sector.
Financials: The results reflect that the company has graduated to a higher sales and growth path last couple of years (prior years the sales growth was flat) they seem to have gained a critical mass to at least remain at this level. FY10 sales is about 52 crore, profits 16 crore, the results are flat to marginally lower as compared to last year. Debt is minimal and margins are high.
Risks: Threat from competition and due to over dependence on govt. orders earnings will be lumpy (fourth quarter bias)
So should you buy ?
This is a kind of stock you want to track and buy as the business improves, its hard to ‘load the truck’ considering lumpy results and evolving nature of the business. At Rs 190 and mcap of 180 crores is value for money as a small exposure.
Sunday, May 2, 2010
Are you scared ?
Are you scared of adding money into the market fearing that you will lose it? Are you thinking of buying XYZ because its a hot stock ?
As Peter Lynch says - The key to making money in stocks, is not be scared of them. This point cannot be emphasized enough. He is right,its important to understand this while investing into the market.
Think of yourself to be a part owner of a business and monitor the progress of the business periodically.Stock market is a strange place, as the price goes up more buyers will show-up to buy your share but if the business is doing good you would not like to sell your ownership.
I would not say its easy to figure out the value of a company before the market discovers it but then we all work is some industry which we know a lot about. Try to start buying undervalued stocks in the industry you know and understand much better that any analyst who is trying to make predictions sitting in his office. As you get more confident about your decisions you will feel better.
Just like all other fears,'fear of stocks' too needs to be overcome by doing(not just dreaming or thinking)
As Peter Lynch says - The key to making money in stocks, is not be scared of them. This point cannot be emphasized enough. He is right,its important to understand this while investing into the market.
Think of yourself to be a part owner of a business and monitor the progress of the business periodically.Stock market is a strange place, as the price goes up more buyers will show-up to buy your share but if the business is doing good you would not like to sell your ownership.
I would not say its easy to figure out the value of a company before the market discovers it but then we all work is some industry which we know a lot about. Try to start buying undervalued stocks in the industry you know and understand much better that any analyst who is trying to make predictions sitting in his office. As you get more confident about your decisions you will feel better.
Just like all other fears,'fear of stocks' too needs to be overcome by doing(not just dreaming or thinking)
Saturday, January 16, 2010
Dont worry be Happy :)
As an employed person we have few limitations –
1.You don’t have time to plan investments.
2.Typically you run from pillar to post during Jan to March period so that you can somehow achieve 1 lack saving allowed under 80 c.
3. You do manage to save at least 20% of our salary monthly but don’t know what to do with the money. It keeps your bank happy.
There is a better way –
Happiness is not a function of the money you make; you can happy today and now. So choose to be happy make sure you buy some peace of mind as you go along enjoying life.what can you do to steer clear from these limitations and allow yourself to be happy.
1.Buy Term Life Insurance: Term insurance is the cheapest form of life insurance. If you the primary earner for your family you would want to secure your family in case the un-thinkable happens. This policy will protect them from this low probability but high impact event.
Typically for a 30 to 32 yr male it will cost about 25 to 27K for a 50-60 lack policy. SBI Life and Aviva have few policies whose sum insured keeps growing at 5% to 10% every year while the premium remains constant.
2.Buy a house : Housing is a basic need while people keep arguing that renting is better showing “cash flow” calculations. The current tax laws give you rebate under 80c for principal repayment of hosing loan and 80d gives rebate for interest repayment. This basically means you do not have to worry about the tax saving until the tenor of your house loan. You can rather invest that money saved into equity funds /shares which will give you a decent return in the long term.
Having a house of your own also works like an insurance policy since your family does not have to worry about accommodation or rent if the unthinkable happens.
(provided you have repaid the loan or your term insurance takes care of repaying the balance pending ). Keep the EMI in mind while deciding- use this sheet to determine yours.
3. Buy a index fund/ETF: I have discussed about ETF’s earlier. If you don’t have time to evaluate business and determine which is better than other then it’s prudent to buy a ETF or index fund. This basically means that you a buying a slice of India so you will at least keep pace with market returns.
Thursday, September 10, 2009
How to be a better Investor part I
When you learn do drive a car there are some thing you have to know – like steering wheel, brake, clutch and how to use them. Why should investing be any different?
Having a firm grip on fundamentals will help you when in doubt. Let’s look at the following, one post at a time.
• Time value and Compound interest
• Asset allocation
• Industry dynamics
• Reading Financial Statements
• Valuation and Market capitalization
Time value of money
In an inflationary environment -Money is hand today is better than tommorow.Inflation as you know reduces the purchasing power of money. It’s happening all the time just that we tend to forget it and don’t adjust our returns for inflation. Some people buy gold as hedge against inflation, China is buying base metals.anyways.
There are lot of concepts and formulas to calculate the future and present value of money but I will spare you the punishment!
Compound Interest
Understanding compound interest is at the basis of understanding investing.
Let me ask you this - If I gave you the choice to buy Manhattan Island,NY for $24 would you do it ?
And a guy called Peter Minuit actually did just that. Sounds like a great deal! but the catch is that the year was 1626. Now suppose he had put this $24 bucks it in a saving account giving 8% compound interest - it would be worth $ 151 trillion today. That’s compound interest for you.
A company estimated to compounding its earnings by 21% over 10 yrs is better than a company doing the same@ 20% for 10 yrs. Simple huh!. Point to remember is -Effect of compounding is small for a small number of periods, but increases as the number of period increases.
Estimates cuts both ways though – at times the rate of growth can be fast so that the risks one take takes while buying the stock may not be risks at all if the growth forecasts are approximately correct. On the other hand if the rates are precisely wrong one can loose a lot of money – very quickly too.
As an investor you must look at what a company has done in the past because as in life, stocks need to be understood backwards but lived forward. You can use a scientific calculator or FVIV tables to make these compound interest calculations simple. One easy way is the rule of 70 or 72 (which ever is divisible)
Rule of 72
I use this approach to eliminate lot of investment candidates, you can use it too!
This is not accurate but handy tool to guesstimate – about how soon the money will be doubled. Let’s say Infosys declared an EPS of Rs 100 this year and expects to earn 200 in year 2018 - At what rate is it compounding?
The answer is 72 divided by 9(no of yrs to double) = 8% so if this is true I may be better of investing in savings accounts giving me 8% annually since its risk free. However the opposite is true if the company is able to do it in say 4 yrs (18%). Seems farley obvious but this is often forgotten by investors and institutions alike especially when they try to chase the latest fad.
I will discuss about asset allocation in the next post – although volumes of books have been written on each of these topics but you can better off from the completion by this knowledge, if you are still awake that is!
What do you think, would love to know your thoughts.
Having a firm grip on fundamentals will help you when in doubt. Let’s look at the following, one post at a time.
• Time value and Compound interest
• Asset allocation
• Industry dynamics
• Reading Financial Statements
• Valuation and Market capitalization
Time value of money
In an inflationary environment -Money is hand today is better than tommorow.Inflation as you know reduces the purchasing power of money. It’s happening all the time just that we tend to forget it and don’t adjust our returns for inflation. Some people buy gold as hedge against inflation, China is buying base metals.anyways.
There are lot of concepts and formulas to calculate the future and present value of money but I will spare you the punishment!
Compound Interest
Understanding compound interest is at the basis of understanding investing.
Let me ask you this - If I gave you the choice to buy Manhattan Island,NY for $24 would you do it ?
And a guy called Peter Minuit actually did just that. Sounds like a great deal! but the catch is that the year was 1626. Now suppose he had put this $24 bucks it in a saving account giving 8% compound interest - it would be worth $ 151 trillion today. That’s compound interest for you.
A company estimated to compounding its earnings by 21% over 10 yrs is better than a company doing the same@ 20% for 10 yrs. Simple huh!. Point to remember is -Effect of compounding is small for a small number of periods, but increases as the number of period increases.
Estimates cuts both ways though – at times the rate of growth can be fast so that the risks one take takes while buying the stock may not be risks at all if the growth forecasts are approximately correct. On the other hand if the rates are precisely wrong one can loose a lot of money – very quickly too.
As an investor you must look at what a company has done in the past because as in life, stocks need to be understood backwards but lived forward. You can use a scientific calculator or FVIV tables to make these compound interest calculations simple. One easy way is the rule of 70 or 72 (which ever is divisible)
Rule of 72
I use this approach to eliminate lot of investment candidates, you can use it too!
This is not accurate but handy tool to guesstimate – about how soon the money will be doubled. Let’s say Infosys declared an EPS of Rs 100 this year and expects to earn 200 in year 2018 - At what rate is it compounding?
The answer is 72 divided by 9(no of yrs to double) = 8% so if this is true I may be better of investing in savings accounts giving me 8% annually since its risk free. However the opposite is true if the company is able to do it in say 4 yrs (18%). Seems farley obvious but this is often forgotten by investors and institutions alike especially when they try to chase the latest fad.
I will discuss about asset allocation in the next post – although volumes of books have been written on each of these topics but you can better off from the completion by this knowledge, if you are still awake that is!
What do you think, would love to know your thoughts.
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