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Financials Signals That A Company May Be Declining cover

3 Financial Signals That A Company May Be Declining.

Do you know that out of the 30 companies in the constituents of Sensex in 1992, only seven are still the part of it?

Yes, that’s true. The remaining companies couldn’t maintain their growth & value and hence were thrown out of the list of the biggest thirty companies in India with time. (Read more here: The Sensex story in the 25-year reform period —The Hindu Business Line) .

Although becoming a large-cap company is a dream of most of the businesses, however, after becoming a mature company, many companies find it a little challenging to maintain their growth.

Moreover, the problem arises when they are not able to sustain their profitability and starts declining. There are a number of examples of companies which were once a market leader, however, couldn’t keep a sustainable profit margin and later either shut down or went bankrupt. The most common example is Kingfisher. 

Declining companies do not have much growth potential left and even the returns (and value) of their existing assets keep on sinking.

Therefore, as investors, it’s really important for us to continuously monitor the growth of our invested company. And if we are able to find some signals that the company is declining, it might be the time for exit from them.

After all, no matter how much we love our invested company, the main goal of our investments is to make money and if the company is continuously declining, there’s no point remaining invested. It’s really difficult for the declining companies to reward their shareholders. Further, we as investors have thousands of other options available to invest in the market. Then, why to stick with the declining companies?

In this post, we are going to discuss three clear signals that you can study from the financial statements which show that a company may be declining.

Besides, these financial signals are very simple to identify (even for the beginners). Therefore, make sure that you read this post till the very end. Let’s get started.

3 Financial Signals that a company may be Declining.

Although evaluating the exact financial health of a company requires a serious study of the statements of profit & loss, balance sheet and cash flow statement of the company. However, there are a few financial tools which send an easy signal for the investors to identify the declining companies. If all these three financial signals are negative for a company, then the company might be in a little trouble.

Here are the three simple financial signals that you can study to evaluate if a company is declining:

1. Declining Revenue:

If a company’s revenue is continuously declining for the past multiple years, it may be a warning sign for the investors.

The revenue of a company is the TOP LINE of the income statement. And if the TOP LINE is declining, in general, all the lower levels will follow the same trend.

Even a stagnant (flat) revenue for a continued longer period of time is a sign of caution for the investor. After all, there’s a fixed extent up to which a company can control its expense. And if the company want to increase its profit, then it has to increase its revenue eventually.

A flat or declining revenues for past multiple years is an indicator of operating weakness. Moreover, if you can find that the revenue of the competitors (and the industry) is growing over the same perio, then it sends even a stronger signal of a weak management and poor health of the company.

For example- here is the income statement of Reliance communication for the last five years. Here, you can easily notice the declining net sales (and total revenue) for the past multiple years.

And this decline is in line with the stock return of this company. In the last five years, Reliance communication’s share price has shrunk by over 88%.

2. Negative Profit margin:

If the profit margin of a company is negative, it shows that the company is not able to generate profit from its regular business. A negative or declining profit margin of the company for a continued longer period of time can be taken as a warning sign for the investors.

Declining companies generally lose their market share to their competitors. And in order to keep up their sales, they often have to either give bigger discounts or to cut their profits. Moreover, they also lose the pricing power which further leads to a fall in the margin.

While evaluating companies, you can look into the three level of the profit margins- Gross profit margin (GPM), Operating profit margin (OPM) and Net profit margin (NPM), each being a more refined level of profitability. As a rule of thumb, avoid investing in companies with a negative profit margin.

Anyways, if you’ve already invested and now find that the profit margin of the company is continuously declining for the past multiple years, then it might be a signal that this company is declining.

3. Big dividend payouts:

Dividend payout is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company.

It can be calculated by dividing the dividend per share (DPS) by earnings per share (EPS) of a company in a year. For example, if the DPS of a company for the current year is Rs 2 and its EPS is Rs 10, then the payout ratio is equal to 2/10 i.e. 20%.

If a company gives a consistent dividend to its shareholder, it is a healthy sign.

However, the problem arises when the company starts paying a major portion of its net income as dividends. In such a scenario, the company is not retaining enough income for investment in its growth or future plans.

There should be a balance between rewarding shareholders and the retaining income for its own growth. After all, if the company is not investing enough in itself, it will eventually become difficult for them to increase (or to maintain) their profitability in the future.

Declining companies generally pay out large dividends to their shareholders as they have a very little need (or scope) of reinvestment. As a rule of thumb, payout ratio greater than 70% for a company can be a warning sign for the investors.

Other financial signals:

Another financial tool that can give you a better picture of the financial situation of a company along with the above three financial indicators is the company’s debt level.

If the debt level of a mature company is continuously increasing at a high pace, it is a sign that the company has been aggressively financing its growth with debt. You can use debt to equity ratio to evaluate the debt level of a company. A high debt to equity ratio (greater than one) can be considered a high risk for the company.

Apart, there are also a few handfuls of financial ratios like Return on assets (ROA), Return on equity (ROE), interest coverage ratio etc that you can also study to check if your company is declining. A continuously declining ROA, ROE and interest coverage ratio can be a warning sign.

Also read:

Closing thoughts:

Even big mature companies are capable of declining over time and losing their value. And that’s why, it is important for the investors to continuously monitor the growth of their invested company.

In general, a flat or declining revenue, negative profit margin and huge dividend payout can be considered signs of a declining company.

Anyhow, if the company takes necessary steps, it may recover back on track or even become a turn-around. However, if the management doesn’t take the significant steps in time, the company may decline further destroying the shareholder’s investment. 

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

what are intangible assets

What You Need To Know About Intangible Assets!

Evaluating the intangible assets of a company is a crucial part of the fundamental analysis, especially in a generation with a lot of leading companies in the technology and service-based industries.

However, most investors ignore this part and focus more the physical assets like land, building, equipment etc. One of the major reasons why people skip the part of studying intangible assets is because these assets are a little difficult to evaluate. After all, how would you correctly measure the value of a brand or non-physical assets of a company?

In this post, I’ll try to demystify intangible assets in simple words so that you can understand what exactly are intangible assets, why are they valuable for a company and how can you evaluate the intangible assets of a company.

Overall, it’s going to be an exciting post. Therefore, please read it till the end because I’m sure it will be helpful to you in assessing companies better.

What are intangible assets?

Intangible assets are those assets that are not physical in nature, yet are valuable because they contribute to the potential revenue of the company.

A few of the common examples of intangible assets are brand recogintion, licenses, customer lists, and intellectual property, such as patents, franchises, trademarks, copyrights etc.

Quick Note: Contrary to these, TANGIBLE Assets are those assets that have a physical form. For example- land, buildings, machinery, equipment, inventory etc. Further, financial assets such as stocks, bonds etc. are also considered tangible assets.

Although intangible assets do not have an obvious physical value such as land or equipment, however, they can be equally valuable for a company for its long-term success or failure. 

For example, companies like Apple or Coca-Cola are highly successful because of the significant brand equity. Since it is not a physical asset and tricky to calculate the exact value, still brand equity is one of the primary reasons for the high sales of these companies. In India, companies like Hindustan Unilever, Colgate, Patanjali, etc also enjoy benefits of enormous brand value.

Further, a few more examples of intangible assets can be marketing-based (ex- Internet domain names, non-competition agreements etc), artistic-based (ex- literary works, musical works, pictures etc), Contract-based (ex- franchise agreements, broadcast rights, use rights etc) and technology-based (example- computer software, trade secrets like secret formulas and recipes etc). [Credits: Examples of intangile assets- Accounting tools]

what you need to know about intangible assets cover

Moreover, in a few industries, intangible assets are more valuable.

Unlike manufacturing companies where inventories and fixed assets contribute to the majority of their total assets, in a few industries the intangible assets are more valuable:

  • Consumer product companies depend on the brand name. For example- Hindustan Unilever, Godrej, Colgate, etc. The bigger the brand name, the easier are the sales. 
  • Technology companies get the most success by their technical know-how and skilled human resource. Ex- Infosys, TCS, etc.
  • Banking companies have their computer software license, stock exchange cards and electronic trading platform (websites). Ex- HDFC bank.
  • Telecom industries use their bandwidth licenses (including spectrum) to enjoy benefits. Example- Bharti Airtel
  • Drugs and pharmacy companies protect their sales through patents, which means that they can sell unlimited medicines of patented drug and their competitors can’t enter or replicate the same. Ex- Dr. Reddy’s Laboratory, Glenmark Pharma etc.

And that’s why, the leading companies in these industries spend a lot of money in building these intangible assets. 

For example, in the IT industry, training and recruiting are more prominent than investing in physical assets like buildings.

Similarly, the pharmaceutical companies spend a lot of capital in the Research and development (R&D) which may help them get a patent on a revolutionary drug. And that’s why, while evaluating companies in this industry, the capital expenditure of the different companies/competitors in their R&D work should be carefully evaluated. 

If you look into the consumer product companies, they spend a lot of money in advertisement just for brand awareness. Although, this may not lead to instant sales and may add overhead expenses, However, over the long term. branding help these companies to generate more profit. 

Valuing Intangible Assets:

Intangible assets of a company can be found on the asset side of the balance sheet of a company. For example- here is the intangible assets for Hindustan Unilever (HUL)

hul balance sheet

Source: Yahoo Finance

You can use the intangible to total asset ratio to evaluate the worth of intangible assets in a company. For example- in the case of Hindustan Unilever, its intangible assets make around 2.05% percent of its total asset.

However, valuing intangible assets are easier said than done. One of the biggest reasons equipment high sales of HUL in India is its prominent brand recognition. A few of the popular brands of HUL are Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality the and Pureit

Here, do you really think that the brand value of HUL contributes only around 2% of its net assets? I don’t think so. It must be worth more. However, there’s no easy way to correctly evaluate the worth of the brand recognition and other non-physical assets. 

Quick fact: According to Forbes, COCA COLA’s brand value amounted to 57.3 billion U.S. dollars. It is the only company in the top seven list that sells carbonated sugar water beverages. Rest all are technology companies with Apple and Google as leaders. This is the power of branding. Read more here: The world’s most valuable brands. 

Also read:

Bottom Line:

Although intangible assets do not have a physical presence, they add a huge value to the company. There may be even cases where the intangible assets are of far greater value than the market value of the company’s tangible assets. 

However, while valuing such companies, you may have to put some efforts to study these assets as the accounting conventions do not always value the exact worth of a few intangible assets and they may be reported below their true value in the balance sheet.

Any how, look for the intangible assets that are definite (i.e. stays with the company for as long as it continues operations) and difficult to replicate.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

top down and bottom up investing approaches

What is Top Down and Bottom Up approach in stock investing?

While performing the fundamental analysis of companies, two of the most common strategies to research stocks that are used by investors are top down and bottom up approach.

In this post, you’ll learn what exactly is top down and bottom up approach, how they work and which one may be more suitable to you.

Top down approach

Have you ever heard any investor/analyst saying something like- “The electric vehicle industry looks particularly promising now. The industry is growing at a fast pace and I should invest in this industry”.

Well, here the investor is following the top down approach to find stocks.

In the top down approach, the investors first look into the macro picture of the economy and later work down to research the individual stocks.

The overall steps involved in top down approach is to first look at the big picture of the world i.e. which economy is doing great, then look at the general market in that economy, next find the particular sector that may outperform and finally research the best stock oppotunity to invest within that sector.

For example, let’s say you studied that the European economy is growing at a very fast rate. Next, when you looked further into the European market, you found that especially the biotechnology industry in outperforming. And finally, you researched some appealing stocks in that industry to invest. This is the top down approach for stock investing.

Here, you start with the big picture and ultimately move down to find the suitable investing opportunity. Top down approach looks at the performance of the economy & sector and believes that if the industry is doing good– the chances are that the stocks in that industry will perform too.

A few of the major areas where the top down analysts pay attention are economic growth, GDP, monetary policy, inflation, prices of commodities, bond yields etc before moving into the specific industry study.

top down approach investing

The biggest advantage of top down approach is that there’s no pre-conceived notion about what may work and the selection of economy, industry & stocks are based on the real-time studies. Further, as they focuses on the strong sectors, the chances of underlying companies performing well are favorable.

However, one of the major flaw of top down approach is that here you may miss out a few good bargain stocks in the eliminated industries.

Also read: 

Bottom up approach

This approach is exact opposite of the top down approach. Here, you first start with company research and later move up to find the other details.

Bottom up approach tries to study the fundamental of the company regardless the market conditions, industry or the macroeconomic factors. While performing the bottom up approach, the investors studies how fundamentally strong the company is by focusing on its revenues, earnings, financial ratios, products/services, sales growth, management etc.

The key here is to find the potentially strong company which may outperform the industry and market in future. If the fundamental factors are good, then regardless of what the industry is doing, the bottom up investors will pick such companies to invest.

The biggest advantage of the bottom up approach is that the investors may find the best potentially strong company which can outperform even if the economy or industry as a whole declines. Bottom up approach helps in picking quality stocks.

On the other hand, one of the cons of bottom up approach is that the investor may have some pre-conceived notion of the company and in such condition, their investment decisions may be a little biased. Further, as these investors ignore the longer economic influence and market conditions, some investment returns may be adversely affected because of these factors.

Closing Thoughts

Top down and bottom up are entirely different approaches to analyze and invest in stocks. However, both have their own advantages and disadvantages.

The top down approach first looks at the broader economy and macroeconomic factors, and then move to the specific industry and the company within. On the other hand, bottom up approach starts at the company level and later moves up for the other important details.

In general, top down approach can be little easier for the less experienced investors as they do not have to perform the intense stock research and analysis. They can start studying the most appealing industry and find the companies within to invest.

Anyways, both approaches have their own effectiveness and hence, difficult to say which one is better. Moreover, it also depends on the knowledge and preference of the investor. My final advice would be to better try out both the approaches and find out which one suits you the best for your investment strategy.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

swot analysis for stocks cover

SWOT Analysis for Stocks: A Simple Yet Effective Study Tool.

SWOT Analysis for stocks is one of the most widely used tools for performing the ‘qualitative’ study of the company. It helps to understand the company’s market position and competitive advantages.

In this post, we are going to discuss what is SWOT analysis and how to use this tool for qualitative analysis of a stock.

What is SWOT Analysis?

SWOT Analysis focuses on four important factor while evaluating the quality of a company. Here’s what SWOT Analysis for stocks looks at:

  • S—> Strength
  • W—> Weakness
  • O—> Opportunity
  • T—> Threat

swot analysis for stocks

Our of the four factors of SWOT analysis, ‘strength’ and ‘weakness’ are the internal factors of a company and hence are controllable.

On the other hand, ‘opportunities’ and ‘threats’ are external factors and it’s little difficult for a company to control these factors. However, using the SWOT analysis of stocks, the management can identify the threat and opportunities and hence can take proper actions within time.

For example, Bharat Stage (BS)- IV fuel was launched in India in April’2017. This means the ban on the sale of all the BS-III compliant vehicles across the country after the launch date.

Those automobile companies who have already realized this big opportunity might have started working on the BS-IV vehicles months before the expected launch date. On the other hand, companies who haven’t done the opportunity/threat analysis properly would have faced a lot of troubles. They cannot sale the old BS-III model vehicles. Hence, a big loss of the finished products and the inventories.

Also read: BS-III vehicles: Auto-industry to absorb losses over Rs 12,000 crore.

Why use SWOT Analysis for stocks?

Here are few reasons why SWOT analysis for stocks is beneficial:

  • SWOT analysis is one of the simplest yet effective approaches for the qualitative study of a stock.
  • It helps in identifying weak points of a company that may become an issue in future.
  • It helps in finding the durable competitive advantage i.e. moat that will help to protect your investment in future.

Quick Note: During swot analysis for stocks, only include valid/verifiable statements. Do not add rumor/misleading pieces of information in the study.

Components of SWOT Analysis for stocks:

1. Strength

The strength of a company varies industry-to-industry. For example, a low non-performing asset (NPA) can be the strength of a banking sector company. On the other hand, cheap supplier or cost advantages can a big strength for an automobile company.

Here are few other strengths of a company that you should take notice while performing SWOT analysis of stocks:

  • Strong financials
  • Efficient Management (People, employees etc)
  • Big Brand recognition
  • Skilled workforce
  • Repeat clients
  • Cost advantages
  • Scalable business model
  • Customer loyalty

Also read: Why You Need to Learn- Porter’s Five Forces of Competitive Analysis?

2. Weakness:

The ‘reverse’ of everything discussed in the ‘Strengths’ can be the weakness of a company. For example- Weak financials, in-efficient management, poor brand recognition, unskilled workforce, non-repetitive clients, un-scalable business and disloyal customers.

Besides, there are few other weaknesses that may affect the company:

  • Outdated technology.
  • Lack of capital
  • High Debt

For example- many companies in telecommunication industry ran out of business as they were using outdated 2G/3G technology. Similarly, in the energy sector, renewable power generation is the future technology and those companies who are ‘not’ working on the new technology might get outdated soon. In short, outdated technology adversely affects most of the industry.

3. Opportunity:

A company with a lot of opportunities has a lot of scopes to succeed and make profits in future. Here are few points that you need to consider while evaluating opportunities for a company:

  • Internal growth opportunity- (New product, new market etc)
  • External growth opportunity (Mergers & Acquisitions)
  • Expansion (Vertical or horizontal)
  • Relaxing government regulations
  • New technology (Research & Development)

4. Threats:

In order to survive (and moreover to remain profitable), it’s really important for a company to analyze its threats. Here are few of the biggest threats to a company:

  • Competition
  • Changing consumer preferences/ new trends
  • Unfavorable Government regulations

The changing consumer preferences are one of the repetitive threats that many industries face. Here, if no proper action is taken to retain the customer, then it might unfavorably affect the profitability of the company.

For example-  The new trend of ‘health awareness’ among the people may result in a decline in the sales of beverages/Soft drink companies. (These companies are fighting back this threat by introducing ‘DIET-COKE’).

Similarly, a preference towards ayurvedic products in India has already reduced the sales of non-ayurvedic FMCG companies (and a rise of PATANJALI).

Also read: How to Invest Your First Rs 1,000 in The Stock Market?

How to use SWOT ANALYSIS of stocks to study companies?

Swot analysis of stocks is quite useful while performing the comparative study of companies. Using these analyses, you can study the comparative strengths and weaknesses of different companies.

Let’s say there are two companies- Company A & Company B.

‘Strength’ of COMPANY A can be the ‘Weakness’ of COMPANY B. Similarly, ‘Opportunity’ for COMPANY A can be a ‘Threat’ to COMPANY ‘B’. For example-

  1. The loyal customers can be the ‘strength’ of company A. Whereas, disloyal customers can be a ‘weakness’ for company B.
  2. A new Merger & Acquisition (M&A) is an opportunity for company A. However, it is a threat to company B.

Also read: SWOT Analysis of FORD Motors.

CONCLUSION:

SWOT Analysis of stocks is a useful tool to analyze stocks based on their strengths, weakness, opportunities, and threats. If done properly before investment, SWOT Analysis can help an investor to understand the competitive advantages/disadvantages in order to make a reasoned decision.

New to stocks? Want to learn how to invest in Indian stock market from scratch? Then, here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your share market journey today.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

winner's curse- investing psychology

Investing Psychology: Winner’s Curse

Investing Psychology- Winner’s Curse :

Have you ever had a chance to participate or witness an auction?

If yes, then you would relate to this better! As interesting as the name of this phenomenon sounds, the outcomes are pretty relatable too.

Many statisticians, mathematicians, and successful investors have discovered and scribbled a pretty common sequence of scenarios that happens mostly during the auction. Let’s try to give you an overview of this:

A bidder sitting in an auction and trying to repeatedly bid on an asset often gets intimidated to continue his bidding even if it is not profitable.

As obvious, in such scenarios, the last one to bid gets the asset and hence gets the title of “the winner”.

But has he actually won? What do you think? The inference can be a bit deeper than you are assessing it to be.

Such scenarios are quite noticeable everywhere – from IPL auctions to jewelry auctions to the real estate to the stock market, you might get to see this every time. The phenomenon could be explained clearly with the use of a couple of suitable examples in this article.

“Winner’s Curse” is quite noticeable in the domain of investing. Generally speaking, a newbie tends to fall in such pitfalls quite often! Keep reading this article to know more about the winner’s curse!

Also read: How to Earn Rs 13,08,672 From Just One Stock?

The Auction Scenario:

If you haven’t had a chance to witness an auction yourself then you have a chance to virtually experience it over here!

Basically, an auction is a set up organized by the “current owner” of an asset who is interested in selling the asset to one of the bidders who are participating in the auction. The owner can be a bank or any other financial institution as well.

A set of people who are interested in purchasing the “on sale” entity are called bidders who have the leverage of placing the bids on the entity. The bidding starts with a base price (the one put forward by the “current owner”) and the bidders have to one-up their biddings to own the asset/entity.

The mentioned set of actions is repeated until no bidder out rules the last bidding. As a result, the final bidder gets the asset – sound simple?

Where is the loophole?

Suppose if the real (true value) price for the asset was 1 hundred thousand dollars and if the final bidder claims it for two hundred thousand dollars, would he still be called as a winner?

Psychologically speaking, the overwhelming and competitive environment of bidding in an auction makes the bidder claim the entity at a higher price than what is profitable (admissible).

This overestimation of the final bid for an entity is actually the cause of “winner’s curse”.

winner's curse graph

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

What triggers this curse?

They say, “Emotional stability is one key factor when it comes to investing”.

You would have seen various collaborations of multinational companies. In fact, the whopping amount for which the shares for a certain company get sold is quite huge, right? Well, the winner’s curse is actually playing the cards for it sometimes.

In fact, various multinational giants get caught in this trap. Is it emotional friction or winning at any cost? I’d say both.

The human brain works in a pretty competitive way and the reason can be delved into the core of cognitive science. After the “successful bidding” one gets to realize the loss incurred but the dust gets settled by then.

A rapid increase in an entity’s price followed by its contraction is a sequence followed by various financial experts. The strategy works when a number of people get lured by the so-called “lower prices” of the assets and end up paying for it.

Also read: Efficient Market Hypothesis -The Only Theory That You Need to Read Today.

Winner’s Curse in the Stock Market:

Winner’s curse is not new to the stock market. You can notice multiple scenarios in the stock market where the investments of the people are influenced by the winner’s curse. Few of the best examples are:

1. Buying stocks at a high price.

In the stock market, every now and then, you may come across a storyline where people are buying expensive stocks because they don’t wanna lose the opportunity. Here, they are ready to bid a huge price to win that stock. However, purchasing an overvalued stock (only for the sake of winning) is never advantageous for the investors.

2. Investing in IPOs where the insiders are selling their stakes and public is bidding.

IPO is a scenario where a company offers its shares to the public for the first time. During an IPO, insiders like Promoters, Family, Early Investors- Angel capitalist, Venture capitalist etc are selling their stakes to the public.

However, do you really think that the insiders will sell their stakes to the public at a discount?

Anyways, in order to win, the public is ready to bid a high premium (most of the time) for that IPO. However, after the IPO gets allotted to the people, the winner’s curse starts playing its role.

Also read: Is it worth investing in IPOs?

stock market bidding

You might want to steer clear of this the next time you go for a hefty investment, right? Don’t worry you can try out some precautionary measures with which you should do fine at the “war zone”.

Things to Remember while Bidding:

1. Just as analysis and research are two important things to do before making an important investment. Similarly, knowing the true value of the asset you are bidding for is quite important before you even go for it. You should know that you stick to your actions even better once you have the basics cleared in mind.

There must be a fair standard price of the commodity you’d be bidding for. Get to know about it beforehand.

2. Draw a line: Putting aside an emotional mindset is the best thing that you can do while bidding for an asset as emotions and finance don’t mix well together. As soon as you start placing your first bid, you should know where to draw the line. This would help you hold your grounds in a much better way.

3. Know how important it is for you to win: Rational arguments are always better when you are in a confused state of mind. Ask yourself why does winning actually matter to you?

Also read: Loss Aversion- How it Can Ruin Your Investments?

How To Make Money From Dividends -The Right Way

How To Make Money From Dividends -The Right Way?

How To Make Money From Dividends -The Right Way?

Everyone who enters the stock market wants to make money from their investments. And in order to do that, first, they need to understand how people really make money from stocks. Basically, there are two ways to make money from the stock market.

  1. Capital Appreciation (Buy low and sell high)
  2. Dividends

When it comes to capital appreciation, most of the people knows this method to make money from stocks. Purchase a good stock at a low valuation and wait until the price goes up. The difference in the purchase and selling price is the profit (capital appreciation).

buy low and sell high

This is the core principle of value investing. Find an amazing stock at a cheap valuation and hold it for a long time until the market realizes its true/real value.

However, there is also a second method to make money from the stock market which is (generally) ignored by most newbie investors. It is called dividends.

In this post, we are going to discuss how to make money from dividends -the right way.

Important terms to learn regarding dividends:

Before we dig deeper, first you need to learn few important terms regarding dividends-

Dividends: Dividends are the profits that a company shares with its shareholders as decided by the board of directors.

Dividend yield: Dividend yield is the ratio of annual dividend per share divided by the price per share. The formula for dividend yield is given below:

             Dividend yield = (Dividend per share/ price per share)

For example, if a company gives an annual dividend of Rs 10 and its current market price is Rs 200, the dividend yield of the company will be 10/200 = 5%.

Also read: Dividend Dates Explained – Must Know Dates for Investors

Here are the annual dividends of few famous companies in India (2017).

  • Hdfc bank – Rs 11 per share
  • Coal India – rs 19.90 per share
  • Hindustan Unilever – Rs 17.00 per share
  • Reliance Industries- Rs 11 Per share
  • Ongc- Rs 6.05 per share

dividends

Now, if you calculate the dividend yield given by the above companies, you may find it very small.

If a company gives a dividend yield of 2% per year, it’s really difficult to build a livelihood using this income, right? For example, if you want an annual income of Rs 2 lakhs in dividends, then you have to invest Rs 1 Crore in that stock. This is not feasible for most of the average Indian investors.

However, there’s an important lesson that you need to learn here—

Dividends increase over time…

This means that a good fundamentally strong company will increase its dividends with time.

For example, if a healthy company gives a dividend of Rs 10 this year and makes more profit in upcoming years, then it will increase its dividends in future.

Another important lesson to learn here is that– your dividends are going to increase. But your purchase price is going to remain constant throughout your holding time frame.

Therefore, if you look at the dividend yield, the numerator (dividends) is going to increase with time. But the denominator (purchase price of the stock) is going to remain constant for you. In short, the dividend yield for that stock is going to increase in future.

Also read: How to Earn Rs 13,08,672 From Just One Stock?

Let us understand this better with the help of an example.

How To Make Money From Dividends?

Suppose you purchased 100 stocks of a company at Rs 200. The annual dividend for that year was Rs 10. So, for the first year, the dividend yield will be 5%. This yield is small here compared to the returns from most of the debt investments. 

Nevertheless, let us assume that the company is fundamentally healthy and going to give a consistent (increasing) dividends in the upcoming years. Here is a table describing the annual dividends in the upcoming years.

Dividend Purchase Price Dividend Yield Total Annual Dividends
YEAR1 Rs 10 Rs 200 5% Rs 1,000
YEAR2 Rs 12 Rs 200 6% Rs 1,200
YEAR3 Rs 15 Rs 200 7.5% Rs 1,500
YEAR4 Rs 18 Rs 200 9% Rs 1,800
YEAR5 Rs 21 Rs 200 10.5% Rs 2,100

Moreover, along with the dividends, your capital will also appreciate in value as you are holding the stock for a long time. In the next 5 years, maybe the purchase price of Rs 200 has now appreciated to Rs 400, 500 or whatever high price.For the investors, who buy that stock directly in the fifth year (at an appreciated price- let’s say Rs 500), the dividend yield for them might be low. However, for you have purchased that stock long ago at a decent price, the dividend yield will be quite high (even higher than the fixed deposits).From the above table, you can notice the increase in the dividend yield as the dividend increases.

In short, here dividends are allowing you to receive a healthy income without selling your original assets.

Also read: 11 Must-Know Catalysts That Can Move The Share Price.

Few points of concerns regarding dividends:

The biggest point of concern regarding dividend stocks is that dividends are not obligations. This means that the company may reduce or discontinue the dividends in future.

For example, if a company suffers a heavy loss in a year or if the company is planning to invest its profit in some new project/plant, then it might reduce the dividends or do not give any dividends to its shareholders.

Therefore, if you are investing in any dividend stock, then first make sure to look at the dividend history of that company. A consistently increasing dividend for the last 10-12 years can be considered a healthy sign.

Also read:  10 Best Dividend Stocks in India That Will Make Your Portfolio Rich.

Conclusion:

Buy low and sell high is not the only way to make money from the stocks. There are many long-term investors who are generating big wealth through their annual dividends.

If you want a good consistent return on your stocks without selling it, then investing in a healthy dividend stock can be a good strategy.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

Tags: Dividend Investing, make money from dividends, dividend stocks, how people make money from dividends, dividend

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Dupont Analysis - A powerful tool to analyze companies

Dupont Analysis: A powerful tool to analyze companies.

How to incorporate the Dupont analysis while researching stocks?

As investors in the stock markets, it is important to find high-quality along with fairly valued companies to invest our capital. The rationale behind this is simple. Our aim in the markets is to always preserve our capital first and then produce profits.

There are several robust tools that investors use during their stock analysis.

In this post, we will make an attempt to share one such powerful framework to assess the quality of stocks that we target for our portfolio -The Dupont Analysis.

The topics we shall aim to cover are as follows-

  1. What is the DuPont Analysis? Who made it?
  2. The technical background of the DuPont Analysis.
  3. Real world DuPont Analysis of Eicher Motors
  4. Conclusions

The post should be an easy read and we hope our readers find this to be of great value to their time. Feel free to reach out to us or post comments in case of any doubts or clarifications.

1. What is the DuPont Analysis? Who made it?

DuPont analysis was created around the 1920s by Donaldson Brown of Dupont Corporation. Initially, when Brown invented the framework it was used for assessing the managerial efficiency of the company before it got adopted by public market investors. His genius was breaking down the formula for Return on Equity (ROE) into its constituent parts to analyze the root cause of ROE.

2. The technical background of the DuPont Analysis

Breaking ROE into its constituents helps us investors analyze the company’s business model and how it manages to achieve excess returns for its shareholders.

Since most investors (including Warren Buffett) use ROE to judge the quality of a stock it would be of great use to us to understand how deep “Quality” actually runs within the business.

To understand how the analysis technique is used let’s start with the very basics. As most of us already know, Return on Equity (ROE) is calculated from the following formula –

ROE formula

Now, our friend Brown brown multiplied and divided the expression to get the following–

DuPont Analysis 1

This expression is now also summarised as below-

DuPont Analysis 2

But Brown did not stop there, he took this expression and went one step further. This time he multiplied and divided the expression with Total Assets to give us the DuPont formula-

DuPont Analysis 3

Which is again summarised as,

DuPont Analysis 4

From the last expression, it becomes clear that ROE is not merely a ratio (as per the formula we started with) but a framework to understand the business and capital position of the company as a whole.

Valuable insights can be derived from knowing which of the attributes drives the rise or deterioration of ROE over a period of time.

It can also be used to compare companies with their peer sets to get a deeper understanding of the differences in the business models between the companies.

Also read: How to read financial statements of a company?

3. Real world DuPont Analysis on Eicher Motors:

Let us perform the DuPont analysis on Eicher motors for the period 2014-2018.

The summary table and the evolution of the three attributes from the analysis is as given below.

Financial Ratio 2014 2015 2016 2017 2018 Net Effect
ROE 19.2 24.5 31.3 31.2 27.9 Increased
Net Profit Margin 5.8 7.0 21.9 23.7 21.9 Increased
Asset Turnover 203.3 222.4 105.5 100.3 94.1 Decreased
Leverage Ratio 162.9 156.2 135.2 131.1 135.5 Decreased

From the table, we can see that the company has improved its ROE from 19.2% to 27.9% in 5 reporting periods.

We can also see that the company decreased its leverage and asset turnover but this drop was offset by close to 3.7 times rise in the net profit margins.

Further, notice that the leverage ratio has been stable since 2016 while asset turnover has seen a drop in 2015-2016 and then moderate decreases from 2016-2018.

This analysis can now set the foundation for further analysis, the questions raised from the above figures could be as below ( this may not be very exhaustive but may give an idea as to how the framework is used)-

  1. What is causing the decrease in asset turnovers? Is it because of rising inventory? A fall in efficiency? Or perhaps a decrease in capacity utilisations at manufacturing facilities?
  2. Is the Net Profit Margins led by rise in prices or decrease in costs of goods sold?
  3. What caused the spike in net profits and the corresponding drop in asset turnover?

Answering the above questions in additions to questions generated by assessing the financial statements could help the investors analyze Eicher Motors in greater depth.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

4. Conclusion

Since ROE is used as a measure of the quality of management by many investors, the incorporation of DuPont Analysis could help quell any illusions developed by using ROE at face value.

According to DuPont formula, ROE is a function of net profit margins, asset turnover, and the leverage ratios. A rise or dip in ROE could be because of a corresponding rise/fall in any of these metrics and hence a high ROE doesn’t always indicates a better performance.

Our readers are advised to use DuPont Analysis along with the other stock evaluation frameworks and not to solely depend on data provided by the financial websites.

That’s all for this post. I hope it was helpful to you. Happy Investing!!

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

10 Best Blue Chip Companies in India that You Should Know.

… but blue chip companies are boring. It’s better to invest in growth stocks with huge upside potentials.”, Gaurav argued energetically.

Yes, blue chips are not the ‘hot’ stocks in the market. However, they are a good option for the investors who are looking for low-risk investments with decent returns.”, I replied.

Gaurav has been investing in the stock market for the last two years and he likes to discuss his investment strategies with me. Nevertheless, his investment style is totally different from that of mine. Gaurav loves to invest majorly in mid-caps and small-cap companies (including penny stocks) which can grow at a fast pace. On the other hand, I like investing in a diversified portfolio.

That’s true, dude. But most of these blue chip companies have already reached a saturation point. They can not continue to grow at the same pace and hence can’t similar returns as they used to give in the past. Once a company has sold a billion products, it’s difficult to find the next billion customers.”, Gaurav challenged me with his witty reply. 

I know the rule of large numbers, Gaurav. Thank you for reminding me. Moreover, I agree that the large-cap companies cannot maintain the same pace of growth forever. But bro, it doesn’t mean that they won’t be profitable in future or can’t give good returns to their shareholders… They have already established their brand. If they use their resources efficiently, they can make huge fortunes for themselves as well as for their shareholders… 

For example- take the case of Reliance Industries. Reliance is a market leader in its industry and has a lot of customers. But they are also using their capital efficiently to grow their business. Two years back, they entered a new market- Telecommunication Industries, and now they are also a leader in that industry.

Because of their strong financials- they were able to bring the latest 4G technology to the Indian market and hence were able to quickly acquire a lot of customers. As the initial set-up cost in this industry is very high, they have created an entry barrier for the small and mid-cap companies. This is what a blue-chip company can do if they use their resources properly.

Gaurav looked a little mind-boggled. That’s why I thought better to give him another example to make him understand the capabilities of blue chip companies.

Let’s discuss another example- Hindustan Unilever. If you think that HUL cannot grow any further because it is a large-cap company, then you might need to reconsider it. HUL already have popular products in the market like Lux, Lifebuoy, Surf Excel etc which are generating them a good revenue from those products. But, they still have a large rural area to cover. They are not so popular in the village areas, are they? So, they can definitely grow in the rural areas…”

…besides, as they have enough resources and financials, they are also continuously working on new product development in their Research & development (R&D) department. If they can make another great product, their profits will add-up in the future….

Finally, when Gaurav didn’t argue further, I concluded-

…a good blue chip company is like Rahul Dravid. If you want fast scorers (or T-20 players), then you may not like his batting style. However, if you are looking for dependable players, then you will definitely appreciate Rahul Dravid’s consistency.”

Blue Chip Companies in India:

If you start counting the numbers, you’ll find that the stocks can be categorized into many groups. Based on the market capitalization, they can be defined as small-cap, mid-cap, and large-cap companies. Based on the stock characteristics, there are categorized as growth stocks, value stocks, and dividends (income) stocks.

However, there is one particular type of stocks which gets a lot of attention from every kind of investors (beginners to the seasoned players)- and they are the BLUE CHIP stocks. In this post, we are going to discuss what are blue chip companies and the ten best blue chip companies in India. Here are the topics that we will cover in this post-

  • What are the blue chip companies?
  • Why are they called blue chips?
  • Key characteristics of blue chip companies.
  • 10 Best Blue chip companies in India.
  • Summary.

This is going to be a long post, but I promise that it will be worth reading. So, without wasting any further time, let us understand the blue chip companies in India.

What are Blue Chip companies?

Blue chip companies are large and well-established companies with a history of consistent performance.  These companies are financially strong (usually debt-free or very low debts) and are capable to survive in the tough market situations.

Most of the blue chip companies are the market leaders in their industry. Few of the common examples of blue chip companies in India are HDFC Bank, ITC, Asian Paints, Maruti Suzuki etc.

Top 10 Companies in India by Market Capitalization

Signature Characteristics of Blue Chip Companies-

Here are few signature characteristics which you can look forward while researching blue chip companies—

  1. They are large reputed companies.
  2. They have a widely used products/services.
  3. Most of these companies are listed in the market for a very long time.
  4. Blue chip companies have survived a number of bear phase, market crisis, financial troubles etc. But they are still going strong.
  5. Blue chip companies have a strong balance sheet (a large number of assets compared to liabilities) and a healthy income statement (revenues and profits continuously growing for the last few decades).
  6. These companies have a good past track record of stable growth.

Almost all blue chip stocks are older companies. You might already know many of the blue chip companies in India and have been using their products/services in your day-to-day life.

For example-  Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit —- all these products are offered by the same blue chip company in India – Hindustan Unilever (HUL).

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

Why are they called blue chips?

Oliver Gingold- who worked at Dow Jones, is credited to name the phrase ‘Blue Chip’ in 1923. The term ‘blue chips’ became popular after he wrote an article where he used ‘Blue chips’ to refer the stocks trading at a price of $200 or more.  

Quick Note: There are other sets of investors who believe that blue chip companies got its name from the Poker game, as in that game- blue chips are relatively more valuable. Similar to the game, the stocks which are more valuable in the market are termed blue chip stocks.

Although Oliver Gingold used the term ‘blue chips’ for high priced stocks, however, later people started using this word more often to define high-quality stocks (instead of high priced stocks).

What are the financial characteristics of blue chip stocks?

Apart from the signature characteristics discussed above, here are few key financial characteristics of blue chip companies –

1. Blue chip companies have a large market capitalization -As a thumb rule, the market cap of most of the blue chip companies in India is greater than Rs 20,000 Crores.

2. Good past performance: Blue chip companies have a track record of good past performance (like consistently increasing annual revenue over a long-term).

3. Low debt to equity ratio: The bluest of the blue chips are (generally) debt free stocks. However, a lower and stable debt to equity ratio can also be considered as a significant characteristic of blue chip companies.

4. Good dividend history: Blue chip companies are known to reward decent dividends to their loyal shareholders.

5. Other characteristics: Apart from the above four- few other key characteristics of blue chip companies are a high return on equity (ROE), high-interest coverage ratio, low price to sales ratio etc.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

10 Best Blue Chip Companies in India:

Now that you have understood the basic concept, here is the list of top 10 best blue chip companies in India. (Disclaimer- Please note that the companies mentioned below are based on the author’s research and personal opinion. It should not be considered as a stock recommendation.) 

ITC

itcIndian Tobacco Company (ITC) is one of the biggest conglomerate company in India. ITC was formed in August 1910 under the name of Imperial Tobacco Company of India Limited. It has a diversified business which includes five segments: Fast-Moving Consumer Goods (FMCG), Hotels, Paperboards & Packaging, Agri-Business & Information Technology. Currently, ITC has over 25,000 employees.

As of 2016, ITC Ltd sells 81 percent of the cigarettes in India. Few of the major cigarette brands of ITC include Wills Navy Cut, Gold Flake Kings, Gold Flake Premium lights, Gold Flake Super Star, Insignia, India Kings etc.

Apart for the cigarette industry, few other well-known businesses of ITC are Aashirvaad, Mint-o, gum-o, B natural, Sunfeast, Candyman, Bingo!, Yippee!, Wills Lifestyle, John Players, Fiama Di Wills, Vivel, Essenza Di Wills, Superia, Engage, Classmate, PaperKraft etc.

HDFC BANK

hdfc bankHDFC Bank is India’s leading banking and financial service company. It is India’s largest private sector lender by assets and has 84,325 employees (as of March 2017).

HDFC Bank provides a number of products and services which includes Wholesale banking, Retail banking, Treasury, Auto (car) Loans, Two Wheeler Loans, Personal Loans, Loan Against Property and Credit Cards. It is also the largest bank in India by market capitalization and was ranked 69th in 2016 BrandZ Top 100 Most Valuable Global Brands.

Infosys

infosysInfosys Limited is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It has its headquarters in Bengaluru, Karnataka, India. Infosys is the second-largest Indian IT company by 2017 and 596th largest public company in the world in terms of revenue. On April 19, 2018, its market capitalization was $37.32 billion.

Infosys main business includes software development, maintenance, and independent validation services to companies in finance, insurance, manufacturing and other domains. It had a total of 200,364 employees at the end of March 2017.

HUL

hulHUL is one of the largest Fast Moving Consumer Goods (FMCG) Company in India with a heritage of over 80 years. It is a subsidiary of Unilever, a British Dutch Company. HUL’s products include foods, beverages, cleaning agents, personal care products, and water purifiers.

Few famous products of HUL are Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Walls and Pureit.

Nestle India

nestleNestle India is a subsidiary of Nestle SA of Switzerland- which is the world’s largest food and beverages company. It was incorporated in the year 1956. Nestle India Ltd has 8 manufacturing facilities and 4 branch offices in India.  The Company has continuously focused its efforts to better understand the changing lifestyles of India and anticipate consumer needs in order to provide Taste, Nutrition, Health and Wellness through its product offerings.

Few famous products of Nestle India are Maggi, Nescafe, KitKat, MUNCH, MILKY BAR, BARONE, NESTLE CLASSIC, ALPINO etc. (On 8 March 2018, Nestle Indias food brand MAGGI completed 35 years of existence in India.)

Eicher Motors

Eicher Motors is an automobile manufacturer and parent company of Royal Enfield, a manufacturer of luxury motorcycles. Royal Enfield has made its distinctive motorcycles since 1901 which makes it the world’s oldest motorcycle brand in continuous production. Royal Enfield operates in over 40 countries around the world.

The Eicher Group has diversified business interests in design and development, manufacturing, and local and international marketing of trucks, buses, motorcycles, automotive gears, and components.

Reliance Industries

reliance industriesThis company needs no introduction. Reliance Industries is an Indian conglomerate holding company and owns businesses across India engaged in energy, petrochemicals, textiles, natural resources, retail, and telecommunications.

In December 2015, Reliance Industries soft-launched Jio (Reliance Jio Infocomm Limited) and it crossed 8.3 million users as of January 2018.

Reliance is one of the most profitable companies in India and the second largest publicly traded company in India by market capitalization. On 18 October 2007, Reliance Industries became the first Indian company to reach $100 billion market capitalization. It is also the highest income tax payer in the private sector in India.

Asian Paints

Asian paint is one of the largest Indian paint company and manufacturer. Since its foundation in 1942, Asian paint has come a long way to become India’s leading and Asia’s fourth-largest paint company, with a turnover of Rs 170.85 billion. It operates in 19 countries and has 26 paint manufacturing facilities in the world, servicing consumers in over 65 countries.

Asian Paints is engaged in the business of manufacturing, selling and distribution of paints, coatings, products related to home decor, bath fittings and providing of related services.

TCS

Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) service, consulting and business solutions company. It was established in 1968 as a division of Tata Sons Limited. As of March 31, 2018, TCS employed 394,998 professionals.

TCS is one of the largest Indian companies by market capitalization (Rs 722,700 Crores as of June 2018). It is now placed among the most valuable IT services brands worldwide. TCS alone generates 70% dividends of its parent company, Tata Sons.

Bajaj Auto

bajaj autoBajaj Auto is a global two-wheeler and three-wheeler Indian manufacturing company. It manufactures and sells motorcycles, scooters and auto rickshaws. Bajaj Auto was founded by Jamnalal Bajaj in Rajasthan in the 1940s. It is the world’s sixth-largest manufacturer of motorcycles and the second-largest in India. 

Few of the popular motorcycle products of Bajaj Auto are Platina, Discover, Pulsar and Avenger and CT 100. In the three-wheeler segment, it is the world’s largest manufacturer and accounts for almost 84% of India’s three-wheeler exports.

Also read: Best Stocks for Long term Investment in India.

Summary:

Most people invest in blue chip companies become of their long history of consistent performance and a similar expectation of standard performance in the future. Blue chip companies are low-risk high return bet for the long term.

Many blue chip companies in India like Tata, Reliance, Infosys etc are considered as ‘Too-big-to-fail’ companies as they have survived and remained profitable for a very long time. Nevertheless, this is not always true!!

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Why should you invest in the stock Market in your 20s

Why Should You Invest in the Stock Market in Your 20s?

Why should you invest in the Stock Market in your 20s?

For the people who are in their 20s- stock market investing might seem too early. Plenty of years left to invest, right?  Why get involved in the complex world of the stock market so soon? Most youngsters believe that either it is too soon or they do not have too much money to start investing in their 20s.

However, both of these assumptions are wrong.

The best time to start investing in the stock market is when you are in your 20s. Why? Let’s find out!!

Why should you invest in the Stock Market in your 20s?

1. Stock market investing gives the best returns:

Do you know that if your parents have invested Rs 10,000 in the stocks like WIPRO or Infosys in the early 1990s, it’s worth would have been turned out to be over crores by now? (Here’s a case study on WIPRO and Infosys). Note that we are not even talking about hidden gems. Few other common stocks like Eicher Motors (Royal Enfield Parent Company), Symphony, Page Industries (Jockey) etc has given even better returns than Infosys and WIPRO.

Historically speaking, the stock market has outperformed all the other investment options in the long run. If you buy an amazing stock in your 20s and have the patience to hold it for long-term (20-30 years), you can also get a fantastic return. Here, you’re giving your investment enough time to grow.

2. You won’t require extra money anytime soon.

When you are in your 20s, you won’t need to worry about a lot of things like kids, house loans, kids college fees, retirement plan etc. Moreover, at this phase of time- most of the people do not have any dependents like spouse or kids. When you invest in your 20s, you won’t require to sell that stock anytime soon. You can easily invest and forget that money.

3. It’s a great way to plan your future goals.

Planning to buy a beach house by your 30s or become a millionaire by 40s or just having enough saving to retire early — all these can be achieved if you start investing early. Set a definite future goal in your 20s and invest systematically to attain it.

4. You can take a lot of risks.

When you are in your 20s, you can take a lot of risks while investing in stocks.

Instead of investing in just large caps or blue-chip stocks, you can also invest in small caps like promising startups which recently got listed in the stock exchange and have a huge upside potential. Although, the risk associated with small caps are relatively high compared to the well settled and trustable large caps- however, the rewards are also higher.

low risk low reward

When you are in your 20s – even if you incur some loss, you have plenty of time to learn and recover from your mistakes. At this stage of time, while you can handle more risks you can also earn great rewards.

Bottom line:

It’s always advantageous to start investing early. One of the greatest investors of all time started investing at an age of eleven.

“I made my first investment at age eleven. I was wasting my life up until then.” -Warren Buffet

Eleven might be a little soon for an average investor in India. However, the 20s is most suitable to start investing in the stock market. At this stage, most of the people have money with no responsibilities.

In the end, here is the golden rule of investing to make build amazing money in the long term—“Invest early, invest consistently and invest for the long term…” #HappyInvesting.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

3 Simple Tricks to Stock Research in India for Beginners cover

3 Simple Tricks to Stock Research in India for Beginners.

3 simple tricks to stock research in India for beginners: Hi Investors. It’s been a while since I have written a blog post. This is because I’ve been working on a new project.

Since launching this blog ‘Trade Brains’ in January 2017, I have received a tremendous amount of emails, messages, and calls concerning stock market investment. Most of my readers are facing a similar problem- how to pick a stock to invest from a pile of over 5,500 stocks listed in the Indian stock market.

Though I have helped most of my readers, who have asked this question; however answering the same question, again and again, is little tiresome and mundane. Further, as this is a big topic, it took lots of hours to explain the same to every individual.

That’s why I created this video course on how to select stocks to invest in Indian stock market. Earlier I decided to include this post- ‘3 simple tricks to stock research in India’ in my course module. However, I felt that this content deserves to be publicly available on my blog as it can be quite helpful to the beginners to start stock research in India.

In this post, I will show how you can research good stocks in India to invest in using three simple implementable tricks. So, let’s get started.

3 Simple Tricks to Stock Research in India

1. Money control- Index composition.

If you want to investigate the stocks in a given industry/sector, why not to start with the market index composition of that sector.

An index composition of an industry consists of all the top companies that are included in that index.

For example, if you want to invest in a company in the metal industry, you should first start by investigating the stocks in the market index- S&P BSE Metal or Nifty Metal. Here S&P BSE Metal consists of companies like Hind Zinc, Coal India, Hindalco, Jindal Steel, JSW Steel, NALCO, SAIL, etc.

The index composition will give you a list of companies that you can investigate further in the industry.

Now, there’s a simple way to find out about the index composition of the different industries (Capital Goods, FMCG, Healthcare, Banks, Auto, Energy etc).

Either you can search for ‘money control index composition’ on google and click on the first link.

money control stock research in india 1

This will open the money control index composition page.

money control stock research in india 2

Or, you can directly visit the index composition linked here.

On the same page, you can navigate through different industries to know their composition.

money control stock research in india 3

Further, you can find the same information on NSE India website.

Here are the steps to find the index composition on NSE India:

nse stock research in india 1

  • Change the view to find the composition of the specific index.

nse stock research in india 2

  • Select the industry which you want to investigate.

nse stock research in india 3

Also read: 7 Must Know Websites for Indian Stock Market Investors.

2. Mutual Funds Portfolio:

This is the easiest way for stock research in India. Just look at the portfolio of the top mutual funds and find out its holding stocks.

If the mutual fund is performing good, then the chances are that its top holding stocks will also be doing good.

Check the portfolio of few of the top ranked mutual funds in India and you can get an idea of the portfolio allocation for stock research.

Now, the next question is, where can I check the portfolio of top mutual funds?

The answer is- there are a number of financial websites where you can find the details about the mutual fund portfolio. For example- Value research online, Money Control, Economic times market etc.

However, in this post, I’m going to describe how you can find the portfolio of the mutual funds on money control website.

Here are the steps to find the portfolio of the mutual funds for stock research in India:

  • Go to money control website.
  • Click on ‘Mutual Funds’.

mf holdings stock research in india 1

  • ‘Best Funds to Buy’ page will be opened. Click on ‘complete details’ link.

mf holdings stock research in india 2

  • Select the fund whose portfolio you want to check.

mf holdings stock research in india 3

  • The fund home page will open.

mf holdings stock research in india 4

  • Navigate down and select ‘Holdings’.

mf holdings stock research in india 5

  • Portfolio Holdings will be shown.

mf holdings stock research in india 6

Similarly, you can check the holdings of different mutual funds that you are interested in.

Studying the holdings of the top mutual funds is the simplest way to stock research in India.

In short, if you do not know where to start, which stocks to investigate; then start with investigating the holdings stocks of these top ranked mutual funds.

New to stock market? Here is an amazing book on Indian stock market for beginners which I highly recommend to read: How to Avoid Loss and Earn Consistently in the Stock Market by Prasenjit Paul.

3. Screener:

Url: https://www.screener.in

Screener.in is a stock analysis and screening tool to see information of listed Indian companies in a customizable way.

This is one of the best websites for stock research in India. Screener gives you the facility to screen various stocks based on different criteria like growth, dividend, PE etc.

You can find the list of stocks based on different screens like- ‘The Bull Cartel’, ‘Growth Stocks’, ‘Loss to Profit Companies’, ‘Undervalued growth stocks’, ‘highest dividend yield share’, ‘bluest of the blue chips’ etc.

How to use screener website for stock research in India?

screener stock research in india 1

  • Click on screens on top menu bar.
  • Select the suitable screen according to your preference. For example, if you want to investigate companies with a good quarterly growth, select ‘The Bull Cartel’.

screener stock research in india 2

  • Navigate through the list and investigate the stocks.

screener stock research in india 3

Screener also gives you a facility of Query Builder, where you can customize the query according to your preference. We will discuss more how to write a query in Screener in another post.

Using the screens on the Screener website, you can undergo the stock research in India. Further, the different screens help the investors to investigate different stocks based on their choice.

Also read: How to do Fundamental Analysis on Stocks?

That’s all for this post. I hope these simple tricks for stock research in India is helpful to the readers. Please comment below if you have any doubts. Happy Investing!!

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Investing in Bad News- Is it worth being contrarian cover

Investing in Bad News: Is it Worth Being Contrarian?

Investing in Bad News: Is it Worth Being Contrarian?

“To succeed as a contrarian you must recognize what the crowd believes, have concrete justification for why the majority is wrong, and have the patience and conviction to stick with what is, by definition, an unpopular bet.” -Whitney Tilson

Hello Readers. Contrarian investing in one popular strategy which has definitely build wealth for all those who have followed this strategy strictly. However, being a contrarian is easier said than done. 

For today’s article, we will be exploring the strategy of investing in bad news, which also happens to be a common investing strategy used by most retail investors when dabbling in the stock markets.

The topics we shall be exploring today are as follows:

  1. What is bad news investing?
  2. Can bad news investing go wrong? If so, how?
  3. Cockroach Theory
  4. A thinking model for investing during bad news
  5. Conclusions

It’s going to be a very interesting article, especially in the dynamic market scenarios like that of late. Therefore, make sure that you read the article till the end so that you do not miss out any important concept. Let’s get started.

1. What is bad news investing?

Bad new investing is a simple strategy followed by investing across experience level where they buy stocks of companies that have been beaten down by negative sentiment in the media.

Most investors buy such companies when they believe that the news surrounding the company is only temporary in nature and the company can resume its past stock levels in time.

This is a strategy that was espoused by Benjamin Graham and has been followed by many of the great investors ever since including Warren Buffett, Peter Lynch, Carl Icahn, Mohnish Pabrai among others.

2. Can Bad News investing go wrong? If so, how?

Like all investing strategies, this one too is not without flaws. The strategy if not employed properly can result in losses or worse in permanent loss of capital. 

Although it takes courage to go against the herd and a lot of the times it pays handsomely to do so. But, when deciding to invest in a stock surrounded by negative sentiment, it is important to realize that sometimes the stock would have fallen in price because it deserved to be priced lower.

A lot of times investors (including myself) tend to anchor to the price a stock was trading prior to the emergence of the bad news that price that is available at a significant discount to that price may seem to a buying opportunity (Also read- Value Traps).

A lot of times we tend not to redo our homework and perform the valuation for the company factoring in the effect of the news that has emerged instead we buy the stock based on the valuation we may have performed months before to make a buying decision.

3. Cockroach theory, Murphy’s law, and probabilistic thinking

Learning from my experience, a conservative investor would do well to keep these two thumb rules in mind when analyzing investment opportunities arising out of bad news.

The Cockroach Theory is a market theory that states that when a bad news is revealed about a company there is usually many more around the corner. This comes from the common belief that when a cockroach is spotted in a household, it is likely that there are many more in the vicinity.

Murphy’s law is pretty simple and straightforward compared to the former, it posits that whatever can go wrong, will go wrong.

Since investing is an imperfect art and it is impossible to state anything with certainty, investors would do well to think probabilistically to ascertain possibilities of thing going more wrong with the company.

For example, If a company’s management has been accused of fraud, then in all likelihood it is possible that the fraud has been happening for years and not a one-time thing.

On the other hand a factory being shut down due to worker protests could be a major event but the probability of such events impacting a major manufacturing company for the long term is pretty low since managers usually try to solve such issues by entering into contractual agreements with trade unions on new terms of operations and not just a non-written understanding of sorts.

4. A thinking model for investing during bad news

Many a time Warren Buffett has made an compared his investing style to Ted William’s baseball style in ‘The Science of Hitting’. Ted, famously proclaimed that he would wait for a fat pitch before attempting to hit a shot and ignore everything else.

We believe this concept is best explained in his own words, kindly refer to the excerpt below

the science of hitting

Now building on his concept, let’s try to develop a map of bad news pitches we would receive as an investor.

From a logical perspective, the bad news could be of two types – it could be a temporary or a permanent problem while the impact this could have on the price could be large or small.

Taking different combinations of these would give us four possibilities as shown in the graphic below.

possibilities bad news-min

The sweet spot for us as investors would be to hit only those pitches that come at us from quadrant one since this is likely to be the situation where the market has overreacted to a minor news and has subsequently mispriced the underlying stock.

An investor could then proceed to add the stock into their portfolio all the while averaging down if the price of the stock were to drop below the initial entry price.

New to stocks? Here is an amazing online course for the beginners- How to pick winning stocks? Enroll now and start your journey in the exciting world of the stock market today!!

5. Conclusion

Although Bad news could provide an amazing opportunity for investors to add stocks to their portfolios, it can cause an equally potent damage to the portfolio in the event the buying decision turns out to be a bad one. It is therefore imperative for every investor to take time to think about the new realities the company is faced with before buying its stock.

We believe a prudent investor using a well defined rational process to invest in these situations should be rewarded handsomely over time. Happy Investing…!!

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

what is working capital cover

What is Working Capital? Definition, Importance & More.

What is Working Capital? Definition, Importance & More.

Hello Readers. One of the most important factors to check while analyzing a company before making an investment decision is its working capital.

In simple words, working capital can be defined as the funds available to a firm to finance its regular operations like day to day business activities. Nonetheless, the noteworthiness of working capital is way more than what most people think. 

In today’s article, we will be focusing on the importance of working capital management and how it could be studied to get a deeper insight into the companies we are researching for potential investments. 

Here are the topics that we’ll cover in this post.

  1. What is working capital?
  2. Why is working capital important?
  3. What factors affect the working capital of a company?
  4. When Negative net working capital is actually positive.
  5. Conclusions

Overall, it’s going to a very educational post. Therefore, please read this article till the very end. Let’s get started.

1. What is working capital?

To define the term in the simplest words, working capital is essentially the funds that have been allocated for day to day operations of the firm for the current financial year. These funds need not entirely be held in cash but could also include any asset or liability from which a cash transaction could be expected. This could include account tradables, cash in hand, account payables and short-term borrowing and loans.

The most commonly used formula for working capital is given by the following,

Net Working Capital = Current Assets – Current Liabilities

When an investor wants to look only at the operating level of a company he may prefer to use the following formula for working capital.

Operating Working Capital = Cash + Inventory + Accounts Receivables – Accounts Payables

Please note that the operating working capital excludes the short-term interest and loan payments a company may have to incur in a financial year.

2. Why is working capital important?

Conventionally, the working capital is used as a measure of a company’s liquidity. Since it is calculated on the basis of accounts receivable/payable, cash, borrowing and payments, the working capital of a company could tell us a ton about the management’s approach and commitment to inventory management, debt management, revenue collection, and payments to suppliers.

A positive working capital would imply that a company has got a good control over its transactions and is able to collect and make payments with a large degree of freedom.

A negative working capital, on the other hand, would normally imply the opposite.

3. What factors affect the working capital of a company?

Although working capital is studied to get an understanding of the management and the general thumb rule that positive working capital is always better than negative working capital works most of the times in investing. We, at Trade Brains, believe that investors could get access to more opportunities if they were to take a more holistic approach to study working capital.

Since a company is always involved in a particular business, it is, therefore, logical to assume that all the short/long term factors affecting the industry will determine how managers conduct their operations and hence the working capital. In some industries, managers can offset the risk in operations by choosing a favorable business model. Depending on the kind of model they choose to operate could also determine the working capital of the company.

On a broad level, the list of factors that can affect the working capital of a company are as below (note that this is not exhaustive but may be used as a guide)

  • Nature and type of business
  • Type of Industry
  • Factors of production and their availability
  • Competition
  • Price levels and inflation
  • Production Cycle Time
  • Credit Policy and agreements with suppliers and customers
  • Growth and Expansion strategies
  • Working capital cycle

A more quantitative approach to analyzing working capital would be through a basic ratio analysis. Below are the most useful metrics used by fundamental investors.

4. When Negative net working capital is not so negative!

Imagine a newspaper printing and distribution company with around 2,000 customers in a city. When a customer signs up for a subscription for 1 year, he/she may have to pay the amount up front for the period for which the service is provided. Assume that the subscription cost for one year is ₹1,000, this implies that the company will receive ₹20,00,000 in advance payment. This amount is recorded under accounts payables portion of the balance sheet. Assume that the company holds another ₹8,00,000 in cash and an inventory worth ₹2,00,000.  The net working capital of the company can then be computed to be -₹10,00,000.

In the above example, it can be noticed that even though the working capital happens to be negative the business model of the company allows the company to receive its cash well in advance. This cash could then be ploughed back into the business as investments into new equipment or into marketing to expand its client base.

In general, companies that have high inventory turns and perform a lot of business on a cash basis, such as grocery stores or discount retailers, require very little working capital. These types of businesses raise money every time they open their doors. Because of their advantages, these company can also enter into contracts with vendors and suppliers to lend their products for free for a specified period of time. These partnerships allow the retailers/discounters to keep their cash in hand and employ them elsewhere which trying to sell the products they got through credit. If they are unable to sell them they could just return it back to the vendors before the end of their negotiated period without any cost.

The following sectors are normally observed to operate with a negative working capital.

  • Retail: Due to supplier agreements and high inventory turnover
  • FMCG: Able to leverage their wide brand appeal and customer demand to get retailers to book their products in advance
  • Automobiles: Companies employ “just in time” manufacturing policies to keep efficiency high and inventory at low levels. Also, they normally charge a decent sum as an advance from customers as booking charges.
  • Media: Services are provided only after an upfront subscription fee

5. Conclusions

Although analyzing the working capital and its various components form an essential part of investment research. An investor should always keep in mind to view the company as a business and try to understand the root causes within the business model or the industry which drive the numbers.

Sticking to an individual’s circle of competence may help greatly in this regard which investing in stock markets. Happy Investing!

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

5 Signs That You are Gambling in Stocks cover

5 Signs That You are Gambling in Stocks.

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” -Benjamin Graham

Gambling is not restricted to just casinos or horse racing. In fact, a majority of investing population either speculate or gambles in stocks. However, similar to casinos where the odds are always in favor of house over the long run, gambling in the stock market also have similar results.

While investing in stocks, you should always remember that your returns should be commensurate with the risks that you are taking. If the risks are too high compared to the safety and returns, you are not investing, instead speculating or gambling. A quick note, gambling is not the same as speculating. Gambling is speculating taken to an extreme.

The problem with too many people is that they believe that they are investing in stocks, but in actual they are speculating or gambling.

A typical example of gambling in stocks is people trying to make short profits from the minute market movements by trying to perfectly time the market. Unless you are trained to do so (like technical analysts), it is really difficult for the average investors to time the market precisely and repeatedly.

In this post, we are going to discuss five signs that may prove that you are gambling in stocks.

5 Signs That You are Gambling in Stocks.

1. Taking Free tips/recommendations:

If you are serious about investing in stocks and making money, either devote your time and learn the fundamentals or take the help of registered/certified investment advisors. Investing based on the hot tips or recommendations that you heard on a tv channel or from a colleague is a definite route to lose money. Most of the people who make consistent money from stocks are either do-it-yourself (DIY) investors or the ones who are smart enough to take the help of registered investment advisors. Yes, the advisors will charge you some fee. But consider it as the charge of calculated risk over the un-calculated ones.

2. Betting big money on short-term twitches in market

Investing big money on the hot news that just read on the news website definitely doesn’t come in the category of investing. The future return from stocks is based on many factors which should be carefully studied rather than investing based on single news of a quarterly jump of EPS of a company by 40% or launch of a new hyped product. Serious investors should perform detailed qualitative and quantitative study rather than investing based on short-term market twitches.

Always remember the famous quote by Benjamin Graham- “In the short run, a market is a voting machine, but in the long run it is a weighing machine.”

It simply means that market phonology is hard to predict in short-term as sentiments drive it (similar to voting machine). On the other hand, long-term results can be measured precisely and concretely, if the studies are done correctly (like weighing machine). Focus on the long-term performance of the stocks, rather than short-term turbulence. 

Also read:

3. Putting all in single stock.

Betting all your money in a single stock is the worst form of gambling in stocks. Maybe it seems a great opportunity now. However, there can be thousands of reasons which may prevent the stock from performing. And if that stock doesn’t perform as you wished, for whatever reason, all your hard earned money will be gone. Putting all in a single stock magnifies the risk. The wise approach for intelligent investors is to diversify their portfolio. As the old ones used to say- “Do not put all your eggs in one basket.”

Also read:

4. Using your emergency fund for short-term trades

An investor should understand the risk and reward. Investing your emergency fund to make short-term trades is a definite sign of gambling. After all, no matter how safe is the trade, you cannot predict the outcomes.  If things go wrong, you won’t have any alternatives if you have already used your emergency fund. As a thumb rule, always invest the money that is surplus.

5. Investing based on what big investors are purchasing

It’s challenging to understand the exact strategy of the big players of the market, no matter how carefully you track their investments. Moreover, a regular investor cannot match the resources available to big investors. Investing blindly in what big players are purchasing is undoubtedly a sign of gambling in stocks.

Also read:

Closing Thoughts:

Another way to find if you’re gambling in stocks is by figuring out how much emotionally involved you are. If you’re stuck with your phone/laptop screen throughout the trading hours, checking the stock price continuously, then you might be speculating. Moreover, if your investments are keeping you up all night, then you might be taking too much risk.

Anyways, speculation and gambling are not inherently wrong. Both have their own pleasures, benefits and a role in the financial world. The problem arises which people gamble in stocks and believes that it is a perfect investment. In such scenarios, people don’t know how much risk they are taking and whether those bets are even worth taking financially.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

divergence analysis toolkit

What Drives Stock Returns? (Divergence Analysis)

What Drives Stock Returns? (Divergence Analysis)

Two friends- Rajesh and Suresh, were returning home after a long and tiring day at work.

Rajesh, who happened to be an active investor in the market, turned to Suresh and exclaimed “Avanti Feeds share price has fallen down so much in the last 6 months, it destroyed all the gains it has generated in the last one year. How could this happen?”.

Suresh, a calm and a seasoned investor, who has seen multiple market cycle– listened patiently to Rajesh’s rants but kept reading his novel.

Perplexed by Suresh’s lack of response to his situation Rajesh asked “How can you remain so calm in this market, Suresh? Hasn’t the contagion affected the stocks in your portfolio too?”.

Seeing that he could no longer escape the onslaught Suresh replied– “Yes Rajesh, stocks in my portfolio have also been affected by the ongoing contagion… But I don’t bother much about that because I stayed away from the markets when it was reaching premium valuations. The contagion effect has had only a mild effect on my portfolio.

*********

How many of us have been able to remain calm during the market volatility that we have witnessed in the last six months? Why is it so hard to remain stay put with our investments even when we had high conviction when we invested in them a couple of years ago? 

In fact, what causes the price of a stock to change so drastically? And what can we, as investors, do to prepare ourselves for it? This is exactly what we seek to address in today’s post.

We shall try to understand the various components of stock returns. How each divergence between the components can be used to gain a broader understanding of the market as well as the expectations placed on the script by other investors.

The topics for this post are as below:

  1. What are the components of stock returns?
  2. How do the different components affect the share price?
  3. Could the divergence be used to explain how the mood swings in the market? 
  4. What time period should be used for the divergence analysis?

This is going to a little longer post. But it will be worth reading. So, let’s get started.

Finding Stock Returns Using Divergence Analysis Toolkit:

1. What are the components of stock returns?

Everybody knows that the value of a company is driven by the underlying growth in its earnings.

But, the prices of a stock don’t just depend on the performance of the company. It also depends on the expectations of the investors and the underlying mood regarding the broader economy.

If we were to bring out an actual formula for stock price return for a company it would look something like this –>

Total Return =  Fundamental Return + Speculative Return + Dividend Return + Inflation in the Country

2. How do the different components affect the share price?

The dividend returns are a small component of the overall return achieved from a stock. If the company gives a very little or no dividend, then this component is literally doled out by the company.

The inflation return, however, happens to the black box. But, for growing economy like India, it suffices to take the inflation returns close to 5%.

Now, this brings us to the remaining two components of the equation. The Fundamental Return and the Speculative Return. From empirical evidence, it is has been broadly understood that close to 80 percent of stock returns occur just from these two components.

In a bull market, the speculative return goes over and above the fundamental return. While in the bear market the speculative return goes well below the fundamental return.

Let’s understand this from the example of Avanti Feeds. It was a hot stock in 2017, which means that it was basically a recipe for portfolio disaster.

avanti feeds share price

(Source: TradingView)

For simplicity of calculation let’s assume only the role played by fundamental and speculative return components in our equation.

Total Return =  Fundamental Return + Speculative Return

This equation could also be represented as,

Speculative Return = Total Return –  Fundamental Return

From financial and the stock price data we have created the following chart for our analysis:

Year* Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Aug-18
Stock Price (Rs) 49.5 102.5 131.8 239.2 732.6 426.9
Stock return (%) 0.0 106.9 28.7 81.4 206.3 -41.7
Profit (cr) 70.0 116.0 158.0 216.0 446.0 408.0
Fundamental Return (%) 0.0 65.7 36.2 36.7 106.5 -8.5
Speculative Return (%) 0.0 41.2 -7.5 44.7 99.8 -33.2

divergence analysis stock returns

*(Chart and table are scaled to show the returns starting from March 2014 and adjusted for stock splits and bonus issues. All financial data are shown on the preceding 12 months basis.)

From the above analysis, it becomes clear that whenever the overall stock returns exceed the fundamental returns produced by the company– the stock prices have seen a correction to the true levels denoted by the fundamentals.

3. Could the return divergence be used to explain how the mood swings in the market?

And is it really possible to time the market?

If the above analysis were to be repeated for every single company in the broader market indices, it could give a pretty good idea regarding the ebb and flow of investors’ money into and out of the market.

A possible combination of the PE multiples for the indices with the divergence analysis could be better used to indicate the overvalued/undervalued status of the market. And this may serve as a leading indicator for bull runs and market crashes.

Also read: Investment vs Speculation: What you need to know?

4. What time period should be used for the divergence analysis?

Since most market cycles last around 5-7 years, we at tradebrains, believe that it suffices to use 5-7 years of data for performing the divergence analysis.

But since a lot of stock splits and bonus issues take place in the markets every year, investors should account for these events in their analysis and use only price data that has been adjusted for these special events.

Closing Thoughts

The financial market, despite on a core level is powered by the fundamental returns generated by a company, it tends to fluctuate wildly from the fundamentals due to cycles of greed and fear that are chained to money investors put into the capital markets.

The divergence analysis can be used in this scenario to understand the cycles and be used as an indicator to make key capital allocation decisions on whether to keep away from the markets or build cash or sell your existing stock positions.

We hope you enjoyed this read, looking forward to your comments. Happy Investing.

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

how to measure your investment performance

How to Measure Your Investment Performance? The Right Way.

How to measure your investment performance? -The Right Way

Hello Readers. Honestly, we at Trade Brains love cricket!. We also happen to love following the latest records and comparing statistics of our favorite players. Which of our players are the most consistent? Who is more likely to score runs and how often? Who plays better against spinners? And who works best on a flat pitch?

Well, these are just some of the questions that we keep asking ourselves right?

This got us thinking, is there anyway, we as investors, could borrow from the sport and rate ourselves? And can we make ourselves as better investors through a defined process? After all, introspection is the best critic we have on our side right?

In this post, we will be covering the different metrics and techniques, we as investors, can use to measure our performance and hopefully identify and strengthen the weak spots in our investment process. An over the top view of the toolkit is as follows:

  1. Hit-rate
  2. Slugging rate
  3. Holding Periods
  4. Performance relative to the benchmark

Overall, this post will give the best ever solution to measure your investment performance. So, without wasting any further time, let’s get started.

How to Measure Your Investment Performance?

Here are the four best and easy metrics that you can use to measure your investment performance over the years in a right way.

1. Hit Rate

Broadly defined, hit rate is the percentage of profitable investments to the total number of attempted investments.

hit rate- How to Measure Your Investment Performance

The keyword in this metric is “attempted investments”. Many a time, retail investors do more harm than good to their portfolios by investing in stocks they do not understand in an attempt to diversify their portfolio. This approach could result in below market performance for the investors in the long run. A better approach would be to make infrequent but highly probably bets in the market.

This sentiment is also paraphrased by master investor Warren Buffett through one of his famous analogies comparing investment performance to playing baseball.

“What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel and you don’t have to swing. No umpire is going to call you out. You can wait for the pitch you want. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard. I’ve never swung at a ball while it’s still in the pitcher’s glove.”

– Warren Buffett

Also read: Why You Should Invest Inside Your- Circle of Competence?

2. Slugging Rate

Quite simply this is a measure of how much you profit when you win and how much loss you incur when you don’t.

slugging rate -How to Measure Your Investment Performance

Logically, any investor who wishes to make positive returns will have to ensure that their gains outdo their losses. The more the outperformance of the gains the better the returns will be for the overall portfolio.

Also read:

3. Holding Period

Although most investors think they need not use this statistic to measure their performance, we at Trade Brains, believe otherwise.

Ideally, you as an investor would want to hold on to your winning picks and exit your losing stocks quickly. While, this doesn’t mean that you drop a stock just because it went down immediately after you bought the stock, a stock that drops 40-50% should be treated as a red flag and reviewed before taking a decision on whether to continue holding the stock or not.

4. Performance relative to the market benchmarks

Since most investors seek to beat the market over time, it would make sense to measure your portfolio’s performance against broader market indices such as NSE Nifty 50 or BSE Sensex.

The performance relative to the market indices can help you decide whether you need to increase your exposure to mutual funds or stop investing on your own entirely.

For a portfolio composed of predominantly large-cap stocks, it would make sense to compare the portfolio relative to large-cap indices (and similarly for mid-cap and small-caps).

But what if your portfolio had exposure to large, mid and small cap segments of the market?

Let us understand the method of evaluation through the following example.

Assume that an investor has 30% exposure to large-cap stocks, 30% to mid-cap and 40% to small-cap stocks.

The best method for evaluating such a scenario would be to take the weighted average returns of indices to measure one’s portfolio performance.

Market Segment Market Index 3-year return Portfolio exposure
Large Cap BSE Sensex 54.20% 30.0%
Mid Cap BSE Mid Cap 62.90% 30.0%
Small Cap BSE Small Cap 62.2% 40.0%

The weighted average returns of the indices for a similar market exposure as the portfolio will be given by the following expression-

Weighted Average returns for 3 Years = [(large cap exposure x large-cap index return) + (mid-cap exposure x mid-cap return) + (small-cap exposure x small-cap return)] x100

= [(30.0% x 54.20%) + (30.0 %x 62.90%) + (40.0% x 62.2%)] x 100

= [0.1626 +0.1887+0.2488]x100

= 60.01%

If the investor’s portfolio achieved returns greater than the 60.01% in three years (that would have been achieved by a similar exposure to the market benchmarks), then it is best for him to continue investing on his own. Otherwise, it would be better for the investor to allocate his capital to Index Funds with similar weighting or change his/her investing strategy.

Closing thoughts

The financial markets are fantastic yet dangerous places to grow your wealth over a lifetime. Any investor who wishes to play the game for the long term will have to continuously adapt their investing process to achieve the most optimum returns.

We hope our readers will add the above methods to their toolkit for measuring portfolio performance. Happy investing.

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

What is Pledging of Shares

What is Pledging of Shares? And Why it can be Dangerous?

Hi Investors. The pledging of shares is one of the many important factors to check before investing- which many investors overlook. A high pledging of shares can be a point of concern for the shareholders.

In this post, we are going to discuss what exactly is pledging of shares and why it can be troublesome for investors. Here are the topics that we will discuss today:

  1. What is pledging of shares?
  2. Why promoters pledge their shares?
  3. Why is pledging of shares risky for the shareholders?
  4. How to find the pledging of shares for Indian companies?
  5. Bottom line

This is going to be an interesting post and I’m confident that you’ll learn many new things concerning pledging of shares in this post. So, without wasting any further time, let’s get started.

1. What is Pledging of shares?

In simple words, pledging of shares means taking loans against the shares that one holds.

This is a way for the promoters of a company to get loans to meet their business or personal requirements by keeping their shares as collateral to lenders. Pledging of shares can be used to meet different needs like working capital requirements, funding other ventures, to carry out new acquisitions, personal obligations and more.

2. Why promoters pledge their shares?

As discussed above, the promoters can pledge their shares in order to meet various business or personal requirements.

Generally, pledging of shares is the last option for the promoters to raise fund. It is comparatively safer to raise fund through equity or debt for the promoter. However, if the promoters are looking forward to pledging their shares, then it means that all the other options of raising fund have been closed.

These situations occur during the economic slowdown. As shares are also considered as assets, hence it can be used as a security to take loans from the banks.

Also read:

3. Why is pledging of shares risky for the shareholders?

While pledging of shares, the promoters use their stake as a collateral to get the secured loans.

During a bull market, pledging of shares may not create many issues as the market is moving upwards and the investors are optimistic. However, the problem arises in the bear market.

As the price of stocks keeps fluctuating, the value of the collateral (against the secured loan) also changes with the change in the share price. However, the promoters are required to maintain the value of that collateral.

If the price of the shares falls, the value of the collateral will also erode. In order to meet up the difference in the collateral value, the promoters have to cover the shortfall by either giving additional cash or pledging more shares to the lender.

Collateral Value (while taking the loan) The collateral value after a 30% fall in share price The collateral value after a 50% fall in share price
Real-time value 100 Crores 70 Crores 50 Crores
Remark No Issue More pledging of shares to cover up the difference of the remaining 30 crores Higher pledging of shares to cover up the difference of the remaining 50 crores

In the worst case, if the promoters fail to make up for the difference, the lender can sell the pledged shares in the open market to recover their money. This minimum collateral value is agreed in the contract between the lenders and the promoters. Hence, it gives the right to the lender to sell the pledged shares in the if the value falls below the minimum value.

What is the risk for the retail investors?

In general, the stock price can fall heavily on the news that lenders are selling shares in the open market that are pledged by the company’s promoters. This may result in a further decline in the collateral value because of the panic selling by the public.

In addition, selling of the pledged shares by the lenders may also result in the change of the shareholding pattern of the company. This may affect the voting power of the promoters as they are holding fewer shares now and their ability to make crucial decisions.

Moreover, pledging of shares can create a disaster if the share price continues to fall. This is because the promoters have to consistently pledge more shares to cover up the difference in the collateral value.

Quick Note: If you are new to stocks and confused where to begin… here’s an amazing online course for fundamental investment- HOW TO PICK WINNING STOCKS? The course is currently available at a discount.

4. How to find the pledging of shares for Indian companies?

You can find the pledged share as the percentage of total holding sharing shares on most of the major financial websites like moneycontrol, screener etc.

However, the best source to find the pledging of Indian shares would be the BSE or NSE website. Publically listed companies are obliged to submit their quarterly shareholding pattern to the stock exchanges. Hence you can find the latest (and correct) information regarding their shareholding pattern on the BSE/NSE website.

Here are the exact steps to find the pledging of shares for the Indian public companies.

  1. Go to BSE India website →
  2. Search the company name in the top search bar →
  3. Click on the ‘shareholding pattern’ tab on the left sidebar of company page→
  4. Open the latest quarter report of the shareholding pattern →
  5. You can find the summary statement holding of specified securities.

For example- Here is the shareholding pattern of Suzlon Energy for the quarter of June 2018. Please notice the current pledging of shares (99.39%) by the promoters.

Suzlon energy

Also read: How to find complete list of stocks listed in the Indian stock market?

5. Bottom line

Pledging of shares is generally seen in the companies where the shareholding of the promoters is high. As a thumb rule, pledging of shares above 50% can risky for the promoters. In short, ignore companies with high pledging of shares to avoid unnecessary troubles.

This is because pledging of shares is a sign of poor cash flow, low-creditability high-debt company and inability to meet the short-term requirements. (If the promoters have pledged a high percentage of shares, then it’s always worthwhile to find out the reason.) A decreasing pledging of shares over time is a good sign for the investors. On the other hand, an increasing pledging of shares can be dangerous for both promoters and shareholders. Even quality companies can become a victim if the pledging of shares is not reduced over time.

Nevertheless, pledging of shares is not always bad for the companies. You can understand this by relating with your personal loans. For example, taking an educational loan, car loan, house loan is not a big issue if you have a steady income or an amazing future earning prospects.

Similarly, if the company has an increasing operating cash flow and good future prospects, then pledging of shares is not a big concern for them. Many times, pledging of shares helps in the expansion of the company or to carry out new projects which result in increased revenue in the future. Moreover, 5-10% pledging of shares in fundamentally healthy companies should not be considered as a problem.

Anyways, the bottom line is to try avoiding to invest in companies with a high (or increasing) pledging of shares. 

That’s all for this post. I hope it was helpful to you. Happy Investing!

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Does Investing take too long to build wealth trade brains

Does Investing take too long to build wealth?

Does Investing take too long to build wealth?

… Even Warren Buffett build most of his fortune after an age of 50. Admit it, Kritesh. Investing takes too long to make money.” Gaurav asked wickedly.

I’m not denying the fact that investing requires time to build wealth. Yes, it does take time. However, it doesn’t mean that it takes too long time.” I defended my argument.

“But what’s the point of getting rich if you are too old to use that money?“, Gaurav replied.

“You do not need to be in your 50s or 60s to build a massive wealth by investing. There are many investors who are able to gain financial freedom in their late 30s or early 40s just by investing intelligently. Here, how much time it takes to build wealth depends on how early you started and how intelligently you’re investing.”, I added.

I could notice that Gaurav was still not convinced. Therefore, I continued.

…Moreover, now that you have started the topic of Warren Buffett, I would like to add that he did become a millionaire by the age of 30. Obviously, it took some time for him for becoming a billionaire and the richest man on the earth… However, being a millionaire in the early 1960s was a big deal. Besides, its a lot of money for most people who aims for a financially independent life.” I summed up.

warren buffett wealth growth

(Source: MarketWatch)

Gaurav seems to understand a little regarding what I’ve been trying to convey for the last fifteen minutes. However, our arguments generally never end within an hour. And hence, Gaurav was ready to fire his next question.

…So you are saying that investing takes time to build wealth; but not too much time?” Gaurav asked with his witty sense of humor.

All I’m saying is that for an intelligent investor- creating money doesn’t mean being wealthy in your 60s. One can achieve it a lot earlier. Obviously, value investing is not a get rich quick scheme. However, if you have made the right investments, you’ll start getting decent returns in next few years. Yes, it does take time, but the rewards are also great for those who are willing to be patient.”, finally, I had put my words to meaning.

*******

Does Investing take too long to build wealth?

As a value investor, I understand the importance of investing for the long term. When you invest for a longer time horizon, the power of compounding works in your favor. Moreover, if you have invested in the right companies which and it is giving good returns, it does not makes much sense to sell that stock just to keep the money in the bank account. Keeping the stock for the long term in your portfolio is the key to build wealth. But how long is relative to your goals.

Nevertheless, one should always remember that successful investing is a tricky business. It takes years of time to learn to invest intelligently in the stock market. Most people should not expect to make money investing over the short term. Besides, the majority of the good stocks takes at least 2–4 years to give amazing returns to their investors. Investing for six months is only good for making small profits, not wealth.

Also read: #21 Biggest Wealth Creator of 2017- Up to 1,450% return in a year

Earning from capital appreciation

Most stocks investors know this method to build wealth. Buy low and sell high. While investing in stocks, you can expect to make money through capital appreciation i.e capital gain when the share price rises. The profits can go as high as +1,000% (also known as ten-bagger stocks). However, even for the safest stock, there is no guarantee that the price will go higher in the short term.

Earning from dividends

Apart from capital appreciation, investors can also make income from the dividends. A healthy company distributes profits to its shareholders in the form of dividends. In most cases, the company partially distributes profits and keeps the rest for other purposes such as expansion, buying new assets, share buybacks etc. The dividends are distributed per share. If a company decides to give Rs 10 per share, and if the face value of the share is Rs 10, it is called a 100 percent dividend.

Anyways, an important point to learn here is that dividends grow over time for fundamentally strong companies. And if the dividends from the stocks are consistently increasing over the years, this means that the net income for the investors will also increase over time.

Also read: How To Make Money From Dividends -The Right Way?

Wealth creation over long-term

You might have heard the wealth creation stories of the common stocks like Wipro, Infosys, MRF etc. An investment of Rs 1,000 in these stocks in the early 1990s would have turned out to be worth over multiple crores in next 25–30 years.

Most people argue that no one can keep a stock for so long time frame. And I agree with their logic. Even, if I had invested in such stocks, there might be a few times in the time period of the last twenty-five years when I might have been tempted to sell those stocks and book profits. Overall, I agree with the logic that holding stocks for 25–30 years is a little difficult.

However, people ignore the second assumption that the investment in stocks was just Rs 1,000. This is something worthwhile discussing here. If I was an investor in those stocks, I would have definitely increased the investment amount with time. Investing just Rs 1,000 doesn’t make much sense if you already know its history of consistently making wealth over time. Any intelligent investor would have increased their investments in such stocks.

Therefore, while arguing the time period of investment for such wealth creators, also give a little attention to the investment amount. For simplicity, the analysts consider that people invested just Rs 1,000. However, as a matter of fact, most investors continuously increase their investment amount over time. And that’s why the total returns could be even higher than what mentioned. Even if you had not kept those stock for a long time frame, still the fact is that those stocks would have created a huge wealth for their investors.

Besides, you do not need to sell your stock to build wealth. As discussed above, you would have already made income from the dividends. And moreover, if the value of the stocks in your portfolio is increasing, your net worth will be increasing along with it.

Also read:

Conclusion

While holding stocks for the long term is the key to build massive wealth, however, it would be wrong to say that investing takes too long to build wealth. Even if you are investing for a decent time frame like 8–10 years, still the returns can be amazing.

Besides, if you do not need the money, it would be worthwhile to remain invested in that stock. There are only three reasons when you should sell any stock- 1)If the fundamentals of the stock changes, 2) When you find a better opportunity to invest, 3) When you really need to money. In all other cases, you should remain invested in stocks.

As Warren Buffett used to say- “Our favorite holding period is forever”.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

moat analysis framework

How to Check if a Moat Exist? Use Moat Analysis Framework.

How to Check if a Moat Exist? Use the Moat Analysis Framework.

It is quite strange that a medieval defense strategy employed in the fortifications of forts in England has come to occupy such a central stage in value investing stock analysis.

Come to think of it, if you could picture England as a giant castle and The English Channel as the surrounding moat, you could quickly deduce that once England united the other nations on its island there would be few world powers who could launch massive territorial conquest on its shores especially since amphibious operations always tend to favour the defending side. (Perhaps this enabled them to  expand their empire since not much needed to be done on homeland security front).

As explained in our posts before, Moats are long-lasting competitive advantages a company might have owing to its business model that enable it to resist the onslaught of competition for a great number of years.

Also read: What is an Economic MOAT and Why it’s Worth Investigating?

The evolution of Moat:

In the period around 1950-1960, when great companies such as Walmart and Nike were still startups, the greatest struggle the entrepreneurs faced was the problem of securing a starting capital. Most of the times business in that time had to open a line of credit from banks but the problem was that the banks were highly regulated and only were willing to lend to those companies which had already established their operations and achieved some reasonable scale to their businesses. This gave an advantage to existing businesses since the system stifled the growth and emergence of new competitors.

Come the 70s, the world began to see the rise of venture capital and private equity firms namely Sequoia and Carlyle in the US. These companies were able to pool in money from investors and redirect them to fund the capital of emerging entrepreneurs of Silicon Valley and elsewhere.

In time (that is the last 4 decades), the high capital requirement as a barrier to entry has steadily eroded away and have enabled upstarts and disruptors to challenge incumbent businesses across different sectors.

The other trend (which will get even more relevant in the future) has been the evolution of technology at breakneck speed which has fundamentally brought down the cost of entry into many businesses at the cost of well-established firms.

Since companies face a greater risk to their business models now more than ever, it has become imperative for investors to select the companies with the most resilient business models for their portfolio. Only then it is possible for investors to generate steady returns without painful volatility.

The process of finding moats can be quite arduous and confusing for investors who are starting out, especially when a lot of companies seem to be running profitable operations for extended periods even without any apparent moat. Although moats often come in various forms and sizes, it may sometimes be very difficult to identify and to judge their quality for many companies. In such a scenario it helps to have a decision-making framework to act as a force multiplier in the investor’s toolkit.

Also read: SWOT Analysis for Stocks: A Simple Yet Effective Study Tool.

Moat Analysis Framework

The following moat analysis framework should provide a good starting point for our readers in their analysis. You may feel free to develop this into a more comprehensive and robust framework based on your experiences and understanding of different industrial sectors.

(Please note the framework was developed by Ensemble Capital, an asset management company in the US, it draws greatly from the experiences of the firm’s analysts and books including “The little book that builds wealth” by Pat Dorsey and The Investment Checklist by Michael Shearn)

moat analysis framework

(Source: Intrinsic Investing)

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

Is it the Right Time to Invest in Indian Share Market

Is it the Right Time to Invest in Indian Share Market?

Is it the right time to invest in Indian share market?

Yesterday, Sensex and nifty made its fresh lifetime highs. The Nifty managed to hit 11,500 for the first time ever, while the Sensex comfortably traded above 38,000-mark.

Those who have already invested in the market are enjoying the sweet ride. However, for the beginners- the situation is quite confusing. The big question for them is- Is it the right time to invest in Indian share market? Whether you should start investing in stocks now or should you wait. 

Sensex

In this post, we will answer the question of what is the right to invest in the Indian share market. Let’s get started.

Is it the right time to invest in Indian share market?

Is it the right time to invest in Indian share market?- This question has been asked again and again whenever the market makes a new high (or low). When the market is high, people would want to wait for some correction assuming that the indexes will fall in upcoming days. On the other hand, when it is low, people will expect that the market might go down further. So, in both the situation- people will are confused whether it is the right time to invest or not.

Nevertheless, bulls and bears are part of the market of the market. Even when the market moves sideways, people can argue that there’s not much happening in the market, and hence not a good idea to invest right now.

– Timing the market is really difficult. Especially, for the beginners.

Even for the seasoned investors, timing the market precisely and consistently is not possible. Buying at the lowermost price and selling at the topmost is an investing myth. You can only define a buying or selling zone, not the precise point.

buy low sell high

In short, you’ll never be able to find the best time to enter the stock market. The best approach here is to just get started. Maybe start small and increase your investment with time when the valuation is cheaper.

– Time in the market is more important than timing the market.

Time in the market is always more important than timing the market. Let’s assume that you’ve invested in a stock at Rs 150 and ten years later it appreciated to Rs 1,000. Here, it won’t matter much whether you bought that stock at Rs 120 or Rs 180 as long as the profits are decent. Because you stayed invested for a long time, the power of compounding worked in your favor. However, if you try to time the stock exactly at the bottom- it might be possible that you never invested in that stock at all.

– Invest in companies, not in the share market.

Until and unless you are investing in the index fund, it doesn’t matter much whether Sensex/nifty is high or low.

There are lots of good opportunities to invest outside the index. The market may be high/low, but there will be ample opportunities to invest in the individual stocks. It’s not necessary that all the stocks will be on their 52-week high during a bull market (or at 52-week low during their bear market). There are thousands of listed companies in the Indian stock market. Even during the bull market, you can find good companies at a reasonable price.

In short, focus on investing in companies, not the share market. If you keep looking for good companies, you’ll eventually find a few good ones. On the other hand, if you just follow the market- Sensex and Nifty– you will only keep looking for the answer to whether its the right time to invest in Indian share market or not.

– Follow the Rupee Cost Averaging Approach

As discussed earlier in this post, timing the market is really difficult. It is really burdensome to know the right time to invest in Indian share market and it is next to impossible to buy exactly at the bottom and sell at the top. If someone says he/she has been able to do it, they just got lucky.

An easier approach to follow here is rupee cost averaging. If the company is fundamentally strong and worth investing,  however, you are not sure whether the market will go high or correct, then just make a small position. Add more stocks every month when the price changes significantly.

For example, if you are planning to make an investment of Rs 20k, then do not invest all at once if the market is uncertain. The averaging approach suggests investing 20% of 20k i.e. Rs 4k right now. Add more stocks in the same proportion when the price goes down or up after a regular interval. Following the Rupee Cost Averaging approach will help you avoid the technicalities of timing the market exactly.

Conclusion:

“The best time to invest was yesterday, the next best time is today and the worst time is tomorrow.”

If you are trying to time the market based on the indices, then you might never be able to find the right time to invest in Indian share market. Instead, you should focus on the individual stocks. If you can find a good stock at a decent price, then buy it- no matter whether the indexes are high or low. Further, if you follow the individual stock, you can find good investments. If you follow the indexes, you will find just the numbers.

That’s all for this post. I hope it was useful to you. Happy Investing.

warren buffett quotes

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Types of Stocks That You should Avoid Investing In

4 Common Types of Stocks That You should Avoid Investing In

4 Common Types of Stocks That You should Avoid Investing In:

“The difference between successful people and really successful people is that really successful people say no to almost everything.” -Warren Buffett

Successful stock investing requires a lot of discipline. There are thousands of stocks listed in Indian stock exchanges, and all you need to find is 10-15 good stocks to invest. For the remaining, you just need to say ‘NO’.

In this post, we are going to discuss four specific types of stocks that you should avoid investing in. However, before we discuss these four kinds, let’s first learn the most generic rule of stocks that you should avoid investing.

Rule #1 of stocks that you should avoid investing in:

As an elementary rule, avoid investing in companies that you do not understand. If you can’t figure out how the company is generating its revenue, what is the company’s business model, what are the products/services offered by the company or what is the use of the products- avoid investing in that company?

For example, if you have zero knowledge of semiconductors or microelectronics, and don’t understand the use of Zener diodes, MOSFETs, Amplifiers, etc.  then avoid investing in semiconductor companies that manufacture these products. There’s no way that you can understand the market demand, product quality, future prospects or even the competitors.

Instead, invest in industries that you may understand like banking, FMCG, automobiles, etc.

4 Common Types of Stocks That You should Avoid Investing In

Here are four mainstream kinds of stocks that you should avoid investing to safeguard your returns-

1. Low liquid Companies: 

There are some stocks whose prices may be continuously falling, but the investors are not able to sell that share just because there are no buyers. Exiting from a low-liquid company can be pretty stressful. Avoid investing in companies with low liquidity.

In general, stay away from companies with the daily average trading volume of fewer than ten lacks. The higher the volume, the better it is. (If you are new to this concept, try checking out the volumes of few of your favorite companies on moneycontrol or other financial websites to get a good idea of the daily trading volumes).

Besides, another way to check the liquidity of a company is by noticing the difference between Ask/Bid price. The smaller the difference, the higher is the liquidity.

2. High debt companies: 

Debts in the companies are like big holes in a ship. Until and unless, these holes are filled- the ship cannot go far. Avoid investing in companies with a lot of debt.

As a thumb rule, keep away from companies with a debt/equity ratio greater than 1.

3. Falling knife category companies:

Investing in companies whose share price are falling continuously and significantly (for example- Geetanjali gems, PC Jewellers, PNB, Suzlon energy etc.) is never a good idea. There’s always a reason why the prices of these stocks are falling, and the market is punishing that company. 

Moreover, there are thousands of listed companies in the Indian stock market which you can explore. Trying to catch a falling knife generally results in hurting your own hand if you are not trained on how to do so.

4. Low visibility companies: 

There are few companies in the Indian market whose information is not easily (and transparently) available on the internet or financial websites. This is mostly in the case of small and micro-cap companies.

Researching such companies with low visibility can be a tedious job for the investors. Further, there are also chances of information manipulation if you can’t cross-check the data or when the reference sources are not reliable. Hence, avoid the companies which are less visible.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

BONUS:

For beginners- Avoid investing in Penny stocks

Penny stocks are very risky to invest. Many of the penny stocks become bankrupt and go out of the business. In addition, penny stocks are prone to different scams like pump and dump etc.

There have been plenty of cases of price manipulations in penny stocks where the insiders try to inflate the share price. One can readily manipulate the penny stock prices by buying large quantities of these stocks. Besides, these stock also have a very low liquidity. Overall, if you are a beginner, it is recommended to avoid investing in penny stocks.

(Anyways, if you’re inclined toward any penny stock company- then allocate only a small portion of your net investment (less than 10%) in that stock).

That’s all for this post. I hope it was helpful to you. Happy Investing.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting