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Introduction to business models Arbitrage and Retail

An Introduction to Business Models: Arbitrage and Retail.

Understanding business models – Arbitrage and retail:

Hi Investors. In this post, we will be discussing an arbitrage and how it is exploited in the retail industry. If you have previously analyzed any company in the market you would already know that among the different business models one of the easiest in terms of operation is the business of arbitrage and retail.

Today we shall go a level deeper into the analysis of a retail company and discuss one of its most important metrics and its significance. The topics we shall cover in the post are as follows:

  1. What is arbitrage?
  2. How do retailers use this strategy today?
  3. What metric should we use to analyze whether arbitrage is working out for a retailer?
  4. What is the SSS growth?
  5. How to identify the drivers behind retailers’ business model from SSS growth?
  6. How are business models changing in retail and how to modify our analysis?
  7. Conclusion

On the whole, this will be a long post- but we hope you find this very rewarding and is definitely worth reading. So let’s get rolling.

1. What is Arbitrage?

Arbitrage is a money-making strategy followed by traders since the very ancient times, even today it is sometimes thought to be an almost risk-free strategy. The aim of those traders in business was to profit from the difference in the pricing of goods between two regions or markets.

Let’s take the example of the famed Silk Road.

Traders and merchants used to travel from the Mediterranean, Persia and the Levant to Central Asia and China to buy silk and other products, then they used to travel all the way back to sell these goods in their home markets.

Silk route

Back then a commodity like silk was precious and luckily for all merchants, China had a complete monopoly over the production of Silk. This made them even more precious in some markets than the others. The markets farthest and wealthiest away from the production center became the areas where the silk trade was most lucrative just like ancient Egypt, the Roman Empire, Ottoman Empire etc.

2. How do retailers use this strategy today?

Modern retailers use the same strategy of arbitrage to generate profits (they buy products from manufacturers and wholesalers for lower prices and sell them to consumers at higher prices), but of course with some tweaks.

But since competition is high in the modern landscape, retailers often tweak their business models to gain an advantage over their peers.

3. What metric should we use to analyze whether arbitrage is working out for a retailer?

As we just mentioned, retailers tweak their business models to gain competitive advantage and a lot of the times many retailers follow the same strategies. This spells trouble for us as investors, how do we know which retailer is doing the right thing and who is failing to do so?

Luckily for us, there is a metric that can help us analyze just this question. The metric is called the Same-Store-Sales growth rate.

Also read: 14 Most Frequently Asked Stock Investing Questions by Beginners.

4. What is the SSS growth?

Same-Store-Sales” as mentioned is one of the most important and useful metrics for retail companies. This metric also has other names such as “like-for-like” sales or “Comparable-Store-Sales” and “identical-store-sales”. The concept behind the metric is fairly straightforward: the metric represents the sales growth of stores which were present for more than a single financial year.

Let’s understand this through an example, assume that we operate a retail business with 10 stores spread across Maharashtra in 2016 and as part of our growth strategy we open two more stores in 2017. Let us also assume that our revenues increased by 10% during this period. This 10% growth could be broken down into the following two sub-parts

  1. Growth due to new stores opened in 2017
  2. Growth due to increased sales in existing stores at the beginning of 2017

The second sub-part: the growth from existing stores is what is represented by the SSS growth metric.

In an ideal world, we would want to make sure that our current stores are generating sales growth for many years once they are opened. This scenario will only happen only till the day our customers find value in our products and the SSS metric helps us deduce whether our business is continuing to deliver value to our customers.

5. How to identify the drivers behind retailers’ business model from SSS growth?

In economics, we all know the scenario of perfect competition. It is the market condition where every seller sells their products at the same price as their competitors and profits are marginal. Retail is a highly competitive business since anyone with a sufficient capital and basic knowledge of logistics can become set their own store up (remember the Kirana stores at the corner of your street?).

Retailers try to outdo their competitor by employing various strategies to create an intangible or a tangible value to their customers and deny or gain an advantage over their competitors.

The drivers behind SSS growth could be any combination of the following:

  1. Pricing of products: retailers try to achieve higher pricing power by creating intangible value to customers by selling branded products
  2. The volume of products sold: some retailers do not have much pricing power so they sell large quantities  at slightly discounted prices to make profits
  3. Net store productivity: retailers sometimes sell add-on products and accessories to boost the revenue per each sale that they have

Obviously, the most desirable and profitable route for a retailer would be to improve the pricing of products sold in their stores but most retailers would witness a drop in their volumes. But some company have created such strong brands that they can indefinitely increase their prices without facing a major drop in sales. Examples of these firms would be the sporting giant Adidas and the global luxury firms Tiffany and Gucci.

The second route is that of companies which focus exclusively on volumes, these are usually companies that have achieved economies of scale and can significantly underprice their competitors out of business. Because of their low pricing consumers flock to their stores for cheaper products. Examples of this type of retailers would be DMart, Amazon, Walmart etc.

(Please note here that economies of scale and brands that can charge a premium are significant economic moats for a retail and consumer companies)

The third most common route is to sell increase the products sold to a customer in a single transaction. It may be an auto-retailer who sells you a car and also an insurance scheme or maybe those leather covers on your seats. It could also be the restaurants that sell you the main course with starters and the side drink or even the furniture store from where you bought the table, the chair, and the table lamp.

6. How are business models changing in retail and how to modify our analysis?

With the advent of e-commerce retail players worldwide have witnessed dramatic headwinds in their operations and have begun to change their business models to adapt to the evolving business landscape. Increasingly retailers themselves are opening up their own e-commerce sites and selling products.

Eventually, as companies change so should our analysis techniques, in view of the above development, using the SSS metric along with the online/ e-commerce sales growth metrics to understand companies would better suit our goals.

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

7. Conclusion

Retailers although reliant on arbitrage continue to adopt strategies to give an edge to their businesses. The SSS growth metric helps us identify whether the retailers are able to put theory into practice and also identify the factors driving their growth.

The SSS metric also helps us identify whether companies are able to develop credible economic moats. In companies which have both offline and online retail presence, it would be wise to incorporate online/e-commerce growth and value metrics along with SSS in our analyses. Happy investing!!

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

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 Dilution Affects the Company's Valuation

How Dilution Affects the Company’s Valuation?

Dilution of a company’s shares is a common scenario in the equity market. However, there is multiple effects on the valuation of the company in terms of market value and EPS (earning per share) calculation after dilution. In this post, we are going to discuss how dilution affects the company’s valuation.

We will be covering the following topics in the post today:

  1. What is dilution?
  2. What causes dilution?
  3. How to identify companies where dilution is likely?
  4. Calculation of shares outstanding after dilution.
  5. How dilution affects the company’s valuation?
  6. Bottom line

This is going to be a technical yet interesting post and we would advise our readers to read this carefully. Feel free to reach out to us or post comments in case of any doubts or clarifications.

1. What is dilution?

share dilution

Simply define dilution is the term used to describe the reduction in ownership or voting rights in a company.

Let’s understand this through the following example.

Assume a Company A’s equity is divided into 100 shares and we own 10 shares in the company, i.e we own 10% equity in the company. Now, let us assume that the company decided to fund its expansion plans by issuing new shares in the stock market (follow-on offerings). So, on the day of issue, the company issued 100 new shares in the market and a foreign firm with interests in the Indian market acquired all of the new shares issued.

Now, the company’s new equity is broken up into 200 shares out of which the foreign investor owns 100 shares (50% of equity) while we own 10 shares (5% of equity).

In the example, the follow-on offering is said to be dilutive for the company’s shareholders since their effective ownership has decreased in the firm.

Also read: Shareholding Pattern- Things that you need to know

2. What causes dilution?

Dilution can happen due to various some of the reasons are given below (may not be an exhaustive list)

  1. Follow-on offerings in capital markets
  2. Conversion of options and warrants by the holders
  3. Conversion of convertible bonds into equity
  4. Offerings of new shares to partners during acquisition or Joint-Ventures

3. How to identify companies where dilution is likely?

In most cases dilution happens when the company has desperate needs for infusing capital into its operations. Since modern financial ecosystem provides multiples routes and opportunities to achieve this aim, the most common strategies used by companies are to raise capital through debt offerings or through the issuance of new shares in the secondary public markets.

In case the company raises money through debt, this route need not always result in dilution of equity holdings for the investors. Dilution through debt happens only in case the company pledges to give its equity as collateral for a certain amount of debt.

Also read: How to Find the Shareholding Pattern of a Company?

4. How to calculate the shares outstanding after dilution for calculating market cap?

The shares outstanding after dilution would simply be as per the following equation,

Total dil. shares outstanding = common shares +newly issued shares

where, the newly issued shares could primarily come from (but not limited to) conversion of convertible preferred shares, conversion of convertible debt and also from shares issuable from stock options

This is shown by the following expression,

Newly issued shares
= shares from conversion of conv. preferred shares + convertible debt + issue of stock options

The calculation of the new shares from convertible preferred shares and convertible debt are pretty straightforward since most of the time these shares and debt are issued at a fixed conversion rate.

For example, Assume a Company ABC has issued 1000 preferred shares and 50,000 convertible bonds amounting ₹50 Lakh in debt. Also, the company on the date of issue stated that each of the 10 shares of preferred shares could be converted for 1 common share and 5,000 of the bonds could be converted for 100 common shares.

The newly issued shares post-dilution would be the sum of 100 (from preferred shares) and 1,000 (from convertible bonds) which is equal to 1,100 new shares.

(The shares issued from stock options is slightly complicated and is usually calculated using the treasury stock method. We shall review this method in another post.)

If you are new to stocks and want to learn stock market investing from scratch, then check out this amazing online course- How to pick winning stocks? This course is currently available at a discount. Enroll now and start your journey in the exiciting world of stock market today.

5. How dilution affects the company’s valuation?

Dilution affects the company’s valuation of terms of its different calculations. Here’s how dilution impacts the company’s market value and eps calculation-

Market Value

Due to the rise in the total number of shares outstanding after the dilution, Market Value may change significantly after dilution, depending on the extent of the dilutive effect of the newly issued shares.

The formula for calculating Market Value remains the same, except that we will now use.

Total Diluted Shares Outstanding instead of Total Common Shares Outstanding.

Market Value = Price per share Total Diluted Shares Outstanding

Earnings per share

The impact on earnings per share due to dilution is may become quite profound depending on the extent of dilution and is very important since EPS is very commonly used by investors in the final calculation of the intrinsic value of a stock.

Since companies normally get a tax benefit for interest paid on debt, after dilution this benefit is no longer applicable and we may see our net income being boosted by the after-tax amount of debt.

Another change that happens is due to dilution of the convertible preferred shares, in case the preferred shareholders were paid the dividend out of the net income of the company earlier, they need be paid anymore after dilution since they have the same status and rank as the common equity holders in the company. The change in the formula due to the dilution is illustrated by the following expressions,

The basic EPS of a company is given by the following formula,

The diluted EPS of a company is using from the below formula,

diluted eps

Also read: #19 Most Important Financial Ratios for Investors

Bottom line

In this post. we understood the impact of dilution on the valuation with the help of equity dilution example. Today, we learned that dilution can have a significant impact on the Market Value and EPS calculations of a company and may distort the true value if it is not incorporated during the analysis of a company. 

Since dilution mostly comes at the expense of the common investor, we advise that our readers scrutinize the annual report to find whether dilution is good or bad for them. A careful look at the financial statements is required to make the necessary changes during dilution analysis. Afterall, a decrease in the existing shareholder’s ownership in a company also means a decreased profits. 

That’s all for this post. I hope this is helpful to the readers. 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.

14 Most Frequently Asked Stock Investing Questions by Beginners

14 Most Frequently Asked Stock Investing Questions by Beginners.

14 Most Frequently Asked Stock Investing Questions by Beginners: 

Hi there. Today is the day 30 of my ‘30 days, 30 posts’ challenge, where I’m writing one blog post daily for the 30 consecutive days. And hurray!! I did it.

I’m extremely glad that I took this challenge and was able to complete. But this is not the end, just the beginning. There are many many good investing posts that are going to be published on this blog in the upcoming days. So, stay tuned.

In this last blog of my 30 days series, I want to answer a few of the most frequently asked stock investing questions by beginners. This post will cover the general doubts of a number of newbies so that they can take the next step in their investing journey.

Most Frequently asked Stock Investing Questions by Beginners

1. I’ve bought a stock at Rs 200. Right now, it’s trading at Rs 160. What should I do next?

Sit back and relax. Patience is the key to successful investing. Most stocks won’t start moving upwards from the very next day since you bought it. It’s perfectly okay to see some dip in the stock price. Do not get emotional and give your stock time to perform. Getting emotional leads to poor investment decisions.

Anyways, in such cases- there are two important steps that you need to take next:

1. Validate your investment study

2. Make adjustment to your strategy.

First of all, try to validate the original thesis based on which you bought the stock. Read the current news and find out the reason why the stock is down. If the news is temporary or the stock is down just because of public psychology (people are fearful), then ignore the short-term fluctuations. Moreover, if your initial study is still standing strong, then consider buying more stocks. After all, you are getting that stock at a better-discounted price now.

On the other hand, if you find that your study was wrong or there is some new news that might affect the long-term performance of that stock (for example- new trade rule, change in government policy, change in management, demerger etc) then exit the stock. Reinvest that money in a better and stronger company.

Besides, your wealth creation strategy also governs your next steps. Here, you need to confirm whether your investment was with regard to capital appreciation or was it a dividend stock. If you bought the stock for capital appreciation, then you might need to do a thorough study and adjust your strategy. However, if it was a dividend stock and giving good dividends year-after-year, then price appreciation is not an issue for such stock. For a good dividend stock, a little price dip is not a good reason to sell. Unhealthy dividends are the reason to exit a dividend stock.

2. Where can I get the company’s financial report and other information?

There are three places where you can get the financial reports and other pieces of information of a company– 1) Company’s website, 2) Stock exchange website (NSE/BSE), and 3) Financial websites (like moneycontrol, investing, et market etc)

Besides, the best place to get all the important data related to a company is its website and annual report. This is because those reports and information are periodically scrutinized by independent auditors and SEBI.  On the other hand, financial websites may contain little error while collecting these financial data from the company.

3. How to find good companies as there are thousands of publicly listed companies in the Indian stock market?

An easier approach would be to use a stock screener. By using stock screeners, you can apply few filters (like PE ratio, debt to equity ratio, market cap etc) specific to the industry which you are investigating and get a list of limited stocks based on the criteria applied.

Quick Note: I’ve explained how to use stock screeners in details in my online course. Feel free to check it out here.

4. What is the appropriate amount of time to spend while researching stocks?

It depends whether you are trading or investing in stocks.

If you are trading in stocks then you do not need to spend a lot of time on fundamentals. Rather, here you should read charts, trends, patterns etc and get more involved in the day-to-day market activity. In addition, traders just work 5 days a week as the market is closed on the weekends. Hence, they can’t trade on Saturdays and Sundays.

On the other hand, while investing- you need to spend a lot more time studying stocks compared to trading. Here maybe you have to invest a couple of hours daily to study the company (even on weekends). Choosing stocks for long-term investment is not similar to choosing stocks for intraday. You need to do a rigorous study of the company, its management, financials, competitors etc.

Besides, the time required to research a stock also depends on your knowledge, your familiarity with the industry, your past experience with analysis, and visibility of the company (how easily the company’s information is available). With time and experience, stock research analysis becomes easier and effective.

5. Should I invest in upcoming IPO?

Frankly speaking, investing in IPOs is not very profitable. IPOs are the products of the bull market. They get public only when everything is good like people are optimistic, the economy is doing wonderful etc -in order to get good listing profits. The real test of a company is during the bear market (how they survive the bad economy and falling market)- which IPOs has not faced yet.

Nevertheless, few IPOs has given amazing returns to its shareholders in the past for long consistent years. If you are able to find such IPOs which are very promising (good business model, strong financials, efficient management and leader, decent valuation etc), then feel free to invest in them. However, in general, most IPOs are not worth investing.

6. My stock is down by 60%. How much further down can it can go?

Technically, it can go down 100% and the stock price may fall to zero. There are a number of stocks which has destroyed the wealth of the shareholders by over 90%. The most common example is Suzlon Energy. However, a 100% capital degradation is very unlikely- unless the company files a bankruptcy.

What to do in such case? If you find out that your study was wrong or the fundamentals/circumstances changed after you invested, there is no shame in accepting the truth. If you won’t accept it, then you are the only one who will be affected financially and mentally.  Just accept that it was a wrong investment and move to the next one.

7. Is investing in small caps more profitable than large caps?

Small caps companies have the caliber to grow faster compared to the large caps. There can be a number of hidden gems in the small-cap industry which might not have been discovered by the market yet. However, their true potential is still untested. On the other hand, large-cap companies have already proved their worth to the market.

Anyways, the quality of stock is more important than the size of the company. There are a number of large-cap companies which has consistently given good returns to its shareholders. Overall, investing in small caps can be more profitable than large caps if you’re investing in right stocks. 

8. I’ve invested in a stock at Rs 100 and it has given me a return of 58% last year. How long should I hold this stocks?

“Our  best investment period is forever” -Warren Buffett

Few of the best stock investors hold their winning stocks forever. For example- Warren Buffett bought made his first investment in the Coca-cola company in the late 1890s and he is still holding them.

You should keep your winners in your portfolio as long as possible. These stocks are the ones who will be driving your portfolio upwards. The strategy to build a strong portfolio is simple- ‘hold on to your winners and cut the losers’.

9. Should I use a stop loss on my investments?

This answer varies for traders and investors. If you are a trader, then yes!! Stop loss can help you prevent a lot of damage and you should definitely use it in your traders.

However, if you are a long-term investor, then using stop loss doesn’t make any sense. The stop loss might get triggered because of some unpredictable short-term market fluctuations and result in selling that stock. Further, as a long-term investor, you should consider buying more if the price goes down rather (than exiting the position).

10. Should I invest in stocks when the market is high?

Generally, the question that people ask is- ‘Should I invest in stocks when the market is falling?’ However, these past few months, the market is making new highs and that’s why this question has been modified a little.

Anyways, I’ll answer both the questions.

If the market is falling, then it’s the best time to buy. Imagine this scenario like a super sale on Amazon or Flipkart. On a big sale, what should you do? Buy more or just sit back because you are afraid of more discount in future. There’s a famous quote by Warren Buffett regarding this scenario

“Be fearful when others are greedy, and be greedy when others are fearful.”

On the other hand, if the market is high- then start making your watchlist of stocks. Keep an eagle eye on the stocks with good fundamentals. Anyhow, if you are able to find some good stocks and ready to invest, then avoid lump sum investment. Average out the stocks. This will reduce the chances of buying stocks at the high price.

11. What kind of stocks should I avoid?

You should avoid investing in stocks with low liquidity. There are a number of small-cap stocks where the prices may be continuously falling, but the investors are not able to sell that stock just because there are no buyers.  Avoid investing in companies with low liquidity.

Further, for the beginners- I would also advise avoiding investing in penny stocks. These companies are very risky and prone to different scams like pump and dump etc.

Also read: What are Penny stocks? And should you buy it?

12. How many stocks should I buy?

Your portfolio should not be over or under diversified. Do not invest all your money in a single stock as it increases the risk in your portfolio. Diversify your portfolio by purchasing multiple stocks from different industries.

In general, you should not buy more than 8-10 stocks as it becomes really difficult for a retail investor to monitor more stocks. Besides, over-diversification kills the profit.

Also read: How Many Stocks Should you own for a Diversified Portfolio?

13. How much returns can I expect from the market?

Your stock portfolio will always consist of multiple stocks. At any particular time, some stocks will perform excellently well, while some will not. Your portfolio returns will be the average of both.

During a good market, your portfolio can give you a return as high as 30-35% (the benchmark index nifty alone gave a return of over 26% last year (2017)). However, during a bad market- the returns can be as low as 2-5% (maybe even negative).

If you sum up everything, you can expect an annual return of 15-18%, depending on how good you were at picking stocks. Nevertheless, you can generate even better return if you are ready to put some hard work.

Warren Buffett, the greatest investor of all time, has got an annual return of 22.% for a period of last 5 decades. You can treat his returns as a benchmark.

14. Can I become a millionaire by investing in stocks?

Definitely. Many people have done this in the past and you can do it too. The stock market is popular for creating wealth for the intelligent investors.

However, this is not easy and it requires a lot of hard work. If you are hoping to make great money from stocks, then be ready to spend serious efforts and plenty of time researching companies.

Always remember the old proverb- ‘You will never know if you never try’. Most people don’t even get started investing in stocks just because they are too afraid. Dare to be different and be passionate enough to chase your dreams. The stock market is giving you an opportunity to create wealth if you are willing to take it. 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

gambler's fallacy

What is Gambler’s Fallacy? [Investing Psychology]

What is Gambler’s Fallacy? Investing Psychology:

Statistics is always surrounded by two kinds of events – dependent and independent events. While the dependent event’s calculations are governed by different approaches such as the Naïve Bayes theorem and full joint distribution tables, the calculations involving independent events are quite easy to follow.

New technology and data mining techniques are all about using the past data in order to make the predictions true about the future. However, is this always true? Does the future data always depend upon its correlated past data? Even statisticians were not too sure of this.

Gambler’s Fallacy is one such proof which states that a human mind often interprets the outcomes of a future event judging by its corresponding past events even if the two are completely independent of each other.

Gambler’s Fallacy is inspired by the “failures of gamblers” due to their probabilistic illusions to make decisions in casino games. Also known as “Monte Carlo” fallacy, the gambler’s fallacy has been used a number of times for various conformances and inferences.

In this article, we are going to explain the basics of this fallacy and would also consider a few famous examples to understand the term and its context in a better way. Let’s start!

Also read: The First Golden Rule of Investing -Avoid Herd Mentality.

The Coin Toss Example

Gambler’s Fallacy can be very well explained with the help of a basic example involving a coin. For future reference, let’s suppose that the coin is fair with both sides (heads & tails) having an equal probability of landing on top.

Suppose a coin is flipped 10 times and the result of each event was “Heads”. What would you bet for the next coin flip?

Now, if a human bet on the outcome of the 11th flip of the coin to be “Tails” seeing the past events, there’s a 50% chance of him to fail. 

The above context does only imply a simple rule: The occurrence of an independent event is not dependent on the past events. In this example, the 11th flip of a coin would result in both heads and tails with a 50% chance of being associated with each one of them.

Therefore, the prediction of an event can’t be made seeing its past outcomes if the events are independent of each other.

Psychological Thinking & “The Gut Feeling”

Something which our brain is too good at is making inferences. A human brain is very quick at picking up things, assembling them, joining the pieces together, and making an inference. The probabilistic approach here is not always true, however.

A Human brain is just incredible at churning out new patterns and associations that it might create illusions. To put it in plain and simple words:

Our brain can deduce patterns that even don’t exist in reality.

That alone might cause problems and thus exist fallacies like “The Gambler’s fallacy”. In the coin toss example, our brain might work in two ways:

  1. It could think that on most of the coin flips, heads are turning up so, in the 11th flip, it might show a ‘head’ again. OR
  2. It could think that since most of the coin flips have shown “heads” on them, maybe it is going to show the “tails” now.

Both of them, however, are true BUT ONLY COLLECTIVELY.

In the coin toss example, the probability of the 11th flip showing “Heads” and “Tails” is equal and is exactly 50% for both of them.

Also read: Investing Psychology: Winner’s Curse

Gambler’s Fallacy and Investing:

You would think what do these both terms have to do with each other? However, you must know that it is a common practice in the investing domain as well. Investors tend to liquidate their positions (or their bet) over something which is long overdue – again, a classic example of the Gambler’s Fallacy.

For example, if a stock is continuously making new highs for the last 4 consecutive days, few may think that it will correct on the 5th day, so better to leave the position. On the other hand, the rest might argue that it will continue to rise because of the momentum.

An inaccurate understanding of basic terms related to probability can make one invest in wrong places. Now, I would like to ask you the same question again!

In the coin toss problem mentioned above, how much would you like to bet on heads or tails or both?

The correct answer would be to bet half of your money on heads and half of it on tails – pretty simple, right? Not because tails is overdue, not because heads are on a streak but because both of them are having an exactly equal probability of landing on top.

Also read: Get Rid of- Confirmation Bias For Good!

Summing up:

If you pay heed to the name of this fallacy; the gambler’s fallacy, you would relate it to a casino game. The co-relation is justified!

Most of the games in a casino or gambling games have sequences that are randomly generated and are statistically independent. Making a prediction on the outcomes of the events involving the sequence of these games isn’t easy and sadly can’t be derived from the mathematics of probability. Therefore, one would find it purely random and “lucky” to get a winning sequence – the Gambler’s Fallacy is rolling its dice in the background.

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

Bunty and Babli - A financial story of how Bunty lost Rs 1,29,94,044-min

Bunty and Babli: A financial story of how Bunty lost Rs 1,29,94,044!

Once upon a time, there lived two best friends- Bunty and Babli. Both were born in the same year, the same city, attended the same school and went to the same college. However, things changed when they started working.

Bunty was an impatient type guy who wanted to live his life king size and did care about his savings or future. He enjoyed spending every penny that he earned in different fancy things. On the other hand, Babli was patient and goal-oriented who cared for a secured long-term future.

And that’s why Babli begin investing at an age of 25 when she started getting her first paycheck. As she also enjoyed living a comfortable life, therefore, she only invested a small amount of Rs 3,000 per month in equities (stocks and mutual funds) with an expected return rate of 14% per annum. She advised Bunty to follow the same approach, but he ignored her saying that “what difference an investment of Rs 3,000 per month can make in our lives? I’ll start investing heavily when I have got a big amount to invest.”

When they both turned 40, Babli had built a corpus of Rs 18,28,561 is her portfolio. Realizing his mistake, Bunty decided to start investing from that year with double the amount invested by Babli i.e. Rs 6,000 per month to catch up with Babli. However, because of different responsibilities like Kid’s education, house loan etc, Babli couldn’t increase her investment amount. She continued the monthly investment of same Rs 3,000 per month.

Both Bunty and Babli continued earning an equal return of 14% on their investment in equities.

15 years later, on the 55th birthday, Babli had made a corpus of Rs 1,66,71,166 i.e. over Rs 1.66 Crores. On the other hand, Bunty had made just Rs 36,77,122 in his portfolio.

Please note here that both Bunty and Babli invested the same amount. Babli invested Rs 3,000 per month for 30 years i.e Rs 10,80,000. Bunty also invested the same amount i.e. Rs 6,000 for 15 years (=Rs 10,80,000).

In short, by waiting until an age of 40 to get started investing, Bunty’s portfolio was in loss of Rs 1,29,94,044 i.e. around 1.3 crores.

At 55, Babli retired and moved to live in a beach house. On the other hand. Bunty continued to work for the next few more years to save more money and later moved in with his children.

This is the power of compounding, my friend.

Bunty Bubli
Starting Age 40 25
Investing Each Year Rs 6,000 Rs 3,000
Annual Rate of Return 14% 14%
Total Invested amount Rs 10,80,000 Rs 10,80,000
Total Portfolio Value Rs 36,77,122 Rs 1,66,71,166

3k 30 yrs graph

Source: ClearTax SIP Calculator

Babli started investing 15 years sooner than Bunty, and over those 15 years, her money started to compound. As a matter of fact, Bunty has to continue to work 10 more years to make the same corpus as that of Babli (assuming that Babli stopped investing at 55 and took out all her money).

Quick Note: If you’re a beginner and want to learn how to invest in mutual funds the right way, check out this online course

Conclusion-

The sooner you start investing the better off you will be. Time is on your side so take advantage of it. Even by investing Rs 3,000 per month (just like Babli) you can reap big rewards in future.

Finally, here’s a famous quote by Albert Einstein regarding Power of compounding–

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

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

11 Most Frequently Used Trading Animals in the Share Market

11 Most Frequently Used Trading Animals in the Share Market.

11 Most Frequently Used Trading Animals in the Share Market [Bull, Bear, Wolves & More]:

Have you heard/watched the movie ‘The Wolf of Wall Street” starring Leonardo DiCaprio as Jordan Belfort? If yes, then have you wondered why he has been referred to a wolf in the movie? What’s an animal doing in the stock market-based movie?

Animals in the Stock Market are commonly used terminology to define specific characteristics of the type of traders or investors or market scenario.

In this post, we are going to discuss 11 such most commonly used animals in the stock market. Please read the article till the end as there are some bonuses in the last section of this post.

11 Most Frequently Used Trading Animals in the Share market-

Here are the eleven most frequently used animals in the share market by stock analysts or the authors of investing books.

1. Bulls

bulls and bears

The bulls represent the investors or traders who are optimistic about the future prospects of the share market. They believe that the market will continue its upward trend. Bulls are the ones who drive the share price of a company higher.

2. Bears

Bears are the investors or traders who are totally opposite of the bulls. They are convinced that the market is headed for a fall. Bears are pessimistic about the future aspects of the share market and believe that the market is going to be in RED.

Quick note: The bulls and bears are often used to describe the market condition. A bull market is a scenario when the market appears to be optimistic and climbing new highs. On the other hand, a bear market describes a market where the things are not good and appears to be a long-term decline.

3. Rabbits:

rabbit and turtle

The term rabbits are used to describe those traders or investors who take a position for a very short period of time. The trading time of these traders is typically in minutes.

These type of traders are scalpers and trying to scalp profits during the day. They do not want overnight (or long-term) risk and just looking for an opportunity to make some quick bucks for the market during the day.

4. Turtle:

The turtles are those typically those investors who are slow to buy, slow to sell, and trades for the long-term time frame. They look at the long-term frame and try to make the least possible number of traders. This kind of investors does not care about the short-term fluctuations and most concerned with long-term returns.

5. Pigs:

pigs

“Bulls make money, bears make money, pigs get slaughtered”

These investors or traders are impatient, willing to take high risk, greedy and emotional. The Pigs don’t do any kind of analysis and always look out for hot tips and want to make some quick bucks from the share market. Pigs are biggest losers in the stock market.

6. Ostrich:

ostrich

Ostrich are those kinds of investors who bury their heads in the sand during bad markets hoping that their portfolio won’t get severely affected.

These kinds of investors ignore negative news with an expectation that they will eventually go away and will not impact their investments. Ostrich investors believe that if they do not know how their portfolio is doing, it might somehow survive and come out alright.

7. Chicken:

Chicken refers to those investors who are fearful of the stock market and hence do not take risks. They stay away from the market risks by sticking to conservative instruments such as bonds, bank deposits or government securities.

8. Sheep:

sheep

Sheep are those kinds of investors who stick to one investing style and do not change according to the market conditions.

They are usually the last ones to enter an uptrend and the last one to get out of a downtrend. The sheep like to be on the side of the majority (herd) and follow a guru. They are not interested to develop their own investing/trading method.

Also read: The First Golden Rule of Investing -Avoid Herd Mentality.

9. Dogs:

Dogs are those stocks which have been beaten down by the market due to their poor performance. Many financial analysts look into the dog stocks closely as they expect these stocks to recover in upcoming days.

10. Stags:

stags

This kind of investors or traders are not interested in bull or bear market. They just look out for the opportunities.

Stags are generally the traders who buy the share of a company during its initial public offering (IPO) and sell them when the stock is listed and trading commences. They do stagging with a hope to get listing gains and hence these individuals are called stags.

11. Wolves:

wolves

Wolves are the powerful investors/traders who use unethical means to make money from the share market. Mostly, these wolves are involved behind the scams that move the share market when it comes to light.

For example- Harshad method can be considered as the wolf of Dalal Street. He was charged with numerous financial crimes that took place in the Securities Scam of 1992.

Similarly, the famous Hollywood movie ‘The Wolf of Wall Street’  depicted Jordan Belfort, who was convicted on charges of stock fraud in his penny stock operation and stock market manipulation.

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. 

Bonus

12. Lame ducks

A lame duck is a type of trade or investor who trades and ends up with a huge loss. Lame ducks have either defaulted on their debts or gone bankrupt due to the inability to cover trading losses. The phrase can be traced to the early years of commodity trading and the development of the London Stock Exchange during the mid-1700s.

13. Hawk & Dove :

Hawks and doves are terms used to describe the types of policymakers who take critical stances on the different economic situation. It basically suggests the sensitivity of a policymaker is towards an economic situation. 

A ‘hawk’ wants a tough stance in an economic situation, whereas a ‘dove’ wants to be easy with it.

14. Whale:

These are the big investors who can move the stock price when they buy or sell in the market. You can make a lot of money if you trade alongside the right whale.

15. Sharks:

Shares are those traders who are just concerned about making money. They get into the trades, makes money and exits the share market. The sharks have very little interest in big complicated methods of making money from the market.

16. Dead Cat Bounce:

The dead cat bounce slang is used to refer to a temporary recovery during the bear run. Either it could mean a temporary upswing of the market in the midst of a bear run or it could refer to the particular stock behavior.

Interesting, this phase has been employed from the explanation that if you throw a dead cat against a wall at a high rate of speed, it will bounce – but it is still dead.

17. Dogs of the Dow

This is a popular investing strategy where the investors select the 10 highest dividend-yielding blue-chip stocks from the Dow Jones Industrial Average (DJIA) every year. The main reason to follow the Dogs is that it presents a straightforward formula designed to perform roughly in line with the Dow. This concept was originally published by Michael O’Higgins’ in his book, “Beating the Dow,” in which he also coined the name “Dogs of the Dow.” Similar to this concept, Dogs of the Sensex is used in India.

Footnote (Sources):

That’s all. I hope this post on the trading animals in the share market is helpful to you. Let me know what kind of trading animal you are- in the comment box. #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

pidilite industries

[Case Study] Pidilite Industries: A No-Brainer Stock

[Case Study] Pidilite Industries: A No-brainer stock

General Disclaimer: The stock discussed here is not a recommendation or advisory. This is a quick analysis and there might be much additional information that you need to refer to study the company completely. This case study is only for the educational purpose to teach the practical approach while investigating stocks. Besides, the past performance doesn’t guarantee the future returns. Please research the stock carefully before investing or take the help of a financial advisor.

Company Background:

Fevicol!! I bet you have heard or used this product multiple times in your life. There were many famous advertisements that used to run on our television during the 1990s. Here’s a video compilation (they’re really funny)-

Pidilite Industries is a popular consumer-centric company whose products you might have already frequently used- knowingly or unknowingly. They are the leaders in the adhesive industry and focuses on ease-of-use and value-for-money products.

Few of the popular products of Pidilite Industries are Fevicol Mr, Dr. Fixit, Fevikwik, M-seal, Fevistik, Hobby Ideas, Fevicryl etc.

pidilite industries products

The company started with a single factory that manufactured only one product, Fevicol in 1959. As of today, Pidilite has a diversified product portfolio from adhesives, sealants, waterproofing solutions and construction chemicals to arts & crafts, industrial resins, polymers and more.

As of 2017-18, Pidilite Industries’ top product portfolio consists of 55% in adhesive and sealants, 20% in construction and paint chemicals and 9% in art and craft materials.

pidilite industries products

Source: Pidilite Industries- Annual Report 2017-18

Financials of Pidilite Industries:

If we look at the financials, Pidilite is a financially strong company. Here’s the EPS and book value per share growth trend for the last 5 years (EPS has more than doubled in the last five years).

pidilite industries eps growth

(Quick Note: The financial data has been collected from Pidilite’s Annual report 2017-18)

Next, If we look at the profit before tax (PBT) and PBT as % of net sales (margin), both are showing a positive trend. PBT has also doubled itself in the last five years.

pidilite industries pbt

Further, Pidilite industries is a completely debt-free company for many years. Here’s the debt to equity ratio of Pidilite from 2013-14 to 2017-18.

pidilite industries debt to equity ratio

Besides, if we check the liquidity, we can find that Pidilite industries has high current assets compared to its current liabilities. As of 2017-18, its current ratio is 3 (Quick tip: Current ratio greater than 1 is considered decent)

pidilite industries current ratio

Pidilite Industries last 10 years financial performance-

If we look closely at the last 10 years financial performance of Pidilite industries, we can find a healthy growth trend in sales, operating profit, net profit, and dividends.

The sales and other income of Pidilite Industries has been growing at a compounded annual growth rate (CAGR) of 12.62% for the last 10 years. Besides, the net profit after tax is consistently growing at a splendid CAGR of 23.17% in the same time period. Here is a quick snapshot of the financial performance of Pidilite Industries for the last 10 years.

pidilite industries 10 years performance

Source: Pidilite Annual Report

Valuation: Pidilite Industries is currently trading at a consolidated PE of 57.36 which is a little high. This may be because of its high growth compared to its industry and competitors, that’s why people might be willing to purchase this stock at a premium.

You can learn more about the valuation of stocks on my online course here.

Dividends: Along with growth, Pidilite Industries has also been rewarding its shareholders with healthy dividends per share year-after-year. The company has been maintaining an excellent average dividend payout ratio of 34.74% for the last 5 years. Moreover, the significant point here is a steadily growing dividend over time.

Mar 18

Mar 17

Mar 16

Mar 15

Mar 14

Dividend / Share(Rs.)

6.00

4.75

4.15

2.90

2.70

Source: Moneycontrol

Competitors:

Pidilite is a dominant player in India’s adhesive industry with a market share of ~70% in its leading brand categories (Fevicol,) in the organized segment. Few of the competitors of Pidilite Industries are Tata Chemicals, BASF, BOC India etc.

Competitive advantage:

Here are few key competitive advantages of Pidilite Industries that helps it to remain profitable for the long-term:

  • Strong brand value.
  • Effective advertising and marketing (Fevicol ads have become a viral hit among the masses)
  • Market leaders in adhesives, sealants, polymer emulsions, hobby colors and construction chemicals in India.
  • Loyal customers- (Fevicol has become synonymous with adhesives)
  • Strong R&D center to cater growth and innovations.

Concerns:

Although Pidilite Industries has a strong competitive advantage, however, there are few concerns like over-dependence on Fevicol and M-seal (which alone account for over 50% of the total revenue of Pidilite). This eases the pressure on the sales of other brands and results in reduced investment in other businesses.

Past share performance:

There’s no doubt that Pidilite industries has performed well in that past few decades. And it clearly reflects in its share price. Pidilite has created a wealth of over 1,600% for its shareholders in the last 10 years. Here’s a comparison of Pidilite Industries returns vs BSE benchmark index SENSEX.

Source: TradingView

Bottomline:

From the above analysis, we can conclude that Pidilite Industries in a financially and fundamentally strong company with good ‘moat’ around it.

However, there are a few other aspects that we also need to check before making any investment decision like the company’s management, shareholding pattern, mutual funds holdings, future outlooks etc. For keeping this post simple, I’ve only included a limited study here. Nevertheless, I’ll discuss the remaining aspects in upcoming posts.

Anyways, I believe you would have got a good idea of how to study companies while researching and critical factors to check -through this short analysis.

Final tip- The company’s annual report is the best place to start investigating a stock. If you have noticed, most of the data in this post has been collected from the company’s report. In addition, these reports are more reliable than most financial websites as the company’s annual reports go through a strict scrutiny and audit by both independent auditors and SEBI. In short, start reading the annual reports of the companies.

That’s all for this post. I hope this post is useful to you.

And if you ready, take the #TradeBrainsChallenge- Invest Rs 5,000 in a month. #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

7 Best Value Investing Books That You Cannot Afford to Miss

7 Best Value Investing Books That You Cannot Afford to Miss.

7 Best Value Investing Books That You Cannot Afford to Miss:

Hi there. Welcome to the day 24 of my ‘30 days, 30 posts’ challenge, where I’m writing one interesting investing article daily for the 30 consecutive days.

This post is based on the public demand. Past few weeks, I’ve received dozens of emails regarding the suggestions on best value investing books. That’s why I decided to write this blog discussing my personal favorite value investing books which I highly recommend to my readers to read.

Quick note: There may be chances that I might miss few amazing value investing books in this post. This can be either because I’ve never read that book or just because it might not be so popular with respect to Indian stock market. Nevertheless, if I missed any best value investing book that you think is worth mentioning for the readers, please recommend below in the comment box.

7 Best Value Investing Books That You Cannot Afford to Miss

Here is the list of best value investing books worth reading for the stock market investors.

1. The Intelligent Investor by Benjamin Graham

the intelligent investor -benjamin graham

Warren Buffett considers this one as the best book ever written on investing (check the cover with Warren Buffett’s comment). And, I agree!! This book contains tons of important concepts to build a foundation of value investing.

The author of this book- Benjamin Graham is considered as the father of investing. He’s famously credited for popularizing the concept of value investing in the investing population. Coincidentally, he was also the mentor of Warren Buffett at Columbia Business School. After graduation, Graham hired Warren Buffett to work (and learn) in his investing firm. Warren Buffett inherited the principles of value investing from Benjamin Graham, which later helped him to build a great fortune and becoming one of the most successful stock market investors of all time.

This book contains a number of time-tested lessons like investment vs speculation, the margin of safety, the concept of Mr market (the fictional manic-depressive character), different approaches for defensive and enterprise (aggressive) investors etc. Many people consider this book as the bible of value investing.

Overall, this is definitely one of the best value investing books and for the serious investors- this is a must read. If you want to build a strong value investing foundation, I’ll highly recommend you to read this book.

You can read the complete book review of The intelligent investor here.

Quick Note: Benjamin Graham has also authored another book named Security Analysis, which is also a best-seller. The first edition of this book was published in 1934, shortly after the Wall Street crash and start of the Great Depression in the US. The fact that Benjamin Graham survived the great depression (where dow fell nearly 90% in a stretched period of three years), itself adds credibility to his investing knowledge and experience.

2. The Little Book That Beats the Market by Joel Greenblatt

value investing books -the little book that beats the market -Joel Greenblatt

This is probably the shortest book that I’ve ever read on investing. You can easily finish this book in one sitting.

In this book, the author -Joel Greenblatt explains the concept of value investing and his approach to pick winning stocks. He also shares his strategy of ‘Magic Formula’ (that consists of two financial ratios- Return on capital and Earnings Yield) which helped him to pick fundamentally strong companies year-after-year.

Overall, it’s a nice read and an excellent place to start reading if you have never invested in stocks before. You can read the full book review of the little book that beats the market here.

3. The Warren Buffett Way by Robert Hagstrom

the warren buffett way -Robert

I started reading this book because I’m a fan of Warren Buffett and wanted to learn his value investing principles and strategies. The book contains all the things that it promises.

Hagstrom describes the necessary aspects to achieve similar success like Buffett that you can apply immediately to your own portfolio. The good thing about The Warren Buffett Way is the author tends to stay away from high faulting words that make it understandable to anyone willing to learn value investment.

The book begins by introducing Warren Buffett’s early life and education and also discusses his first investment at the age of 11 (and the lessons that he learned from it). In next chapter, the book covers his journey of how he read ‘The Intelligent Investor’, got influenced by the author Benjamin Graham, and later end up joining the Columbia Business School, just to learn to invest from Graham. The book also mentions Charlie Munger, the business partner of Warren Buffett and the Vice-Chairman of Berkshire Hathaway and how he influenced Warren Buffett’s investing style.

There are a number of key takeaways from this book on management, capital market and business, which can be applied to a wide variety of investing strategies. Overall, The Warren Buffett Way book is a definite guide that can help you to decide how to make critical decisions while researching any company to invest.

4. Value Investing and behavioral finance by Parag Parikh

value investing and behavioral finance -Parag Parikh

This is one of the best books written by an Indian author that I ever read. The book educates the readers about the much-needed topics that are ignored by most financial websites, books, and media.

The Value Investing and behavioral finance book is well structured and contains 12 chapters. Few of the best ones are- Understanding behavioral traits, Behavioural obstacles to value investing, Contrarian investing, Public sector units, Sector investing, Initial public offerings, Index investing & Bubble trap. I particularly enjoyed reading the chapters on Contrarian investing, IPOs and bubble trap.

If you want to get a good insight into value investing in the Indian stock market, then this book is a must-read. You can read the complete book review of Value Investing and behavioral finance book here.

5. The Little Book of Value Investing by Christopher H. Browne

the little book of value investing -christopher

Once you have read the lengthy 600-pages of The Intelligent Investor, this book might seem tiny one with similar powerful concepts.

In the book, Christopher Browne uses the analogy of supermarket shopping to explain the concept of buying stocks. At a supermarket, both glamorous and cheap products (on sale) are available. It totally depends on the buyer behavior whether he’ll buy a well packaged expensive product or will choose an undervalued product on sale. Only the value investors take the effort to dive into the market and look for items on discount.

There are a number of valuable investing concepts in this book like diversification of stocks, creating a margin of safety, preferring value over growth, shareholding, insider’s buying or selling pattern etc that can help you learn a lot of value investing strategies.

Overall, this little book will give you a lot of value investing tips and pieces of advice which can help you to shape your investing strategy.

6. The Dhandho Investor

the dhandho investor -Mohnish Pabrai

The concept of Dhandho Investing changed the way I look at investing. This is one of most simple yet influential book that I’ve ever read. The book is based on the central concept of “Heads  I win, tails I don’t lose much” i.e. ‘low risk, high return’.

The author of this book, Mohnish Pabrai is an Indian-American Investor, businessman, and Philanthropist. He is the Managing Director of Pabrai Investment funds, an investment fund based on the similar model to that of Warren Buffett’s Partnerships in the 1950s. Since inception in 1999, this investment fund has given an annualized return of over 28% and hence has consistently beaten the S&P 500 Index.

Moreover, Pabrai’s idea to invest in businesses with low risk and high returns makes perfect sense. Isn’t the main aim of any investment is to get the maximum returns with minimizing risks?

In the book, The Dhandho Investor, Mohnish Pabrai clearly explains his concept of ‘low risk and high returns’ with the help of few case studies in the first few chapters like Richard Branson of Virgin Company, Laxmipati Mittal of ArcelorMittal- world’s largest steelmaking company and few more.

Overall, this is an amazing book to deepen the basics of value investing principles. The book is quite simple to read and complex investing principles are simplified in an easy-to-understand manner. You can read the complete book review of The Dhandho investor here.

7. Warren Buffett letters to shareholders

letters to shareholders- warren buffett

This is not exactly a book but a collection of letters written by Warren Buffett to his shareholders at Berkshire Hathaway. Warren Buffett has been writing these letters for over the past 50 years. And if you merge all the letters, the learnings are more than that of 50 books combined.

Warren Buffett has never written a book himself. However, if you are interested to learn from him, these letters to shareholders serves the same purpose.

Learning from the wins and mistakes of the greatest investor of all time is itself very pleasing. Overall, it’s the definitive book summarizing the winning techniques of the world’s greatest investor.

Also read: 10 Must Read Books For Stock Market Investors.

Bonus 1: Margin of Safety by Seth Klarman

margin of safety -seth klaarman

This is one of the most recommended books online for value investing and is on my watchlist at Amazon for a long time. It was originally written in 1991 and definitely contains many time-tested principles.

However, I am not able to read it yet because the price of this book is way too high (at least with respect to Indian currency). Right now, I’m not sure whether I can generate enough ROI after reading this book or not. Anyways, feel free to check out this book here.

Quick Note: If anyone wants to gift me this book, I’ll be highly obliged 😀

Bonus 2: Book on valuation

The Little Book of Valuation: By Aswath Damodaran

the little book of valuation -Aswath Damodaran

A short yet comprehensive book to learn how to value a company, pick a Stock and make profits. The author of this book, Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University (NYU), where he teaches corporate finance and equity valuation.

There’s also a long version of the valuation concept written by the same author, named Valuation by Damodaran. Both these books are amazing to build the foundation of valuing stocks.

Besides, Aswath Damodaran is also quite active on his youtube channel (with over 72k subscribers) where he teaches valuation and business modeling. Feel free to check out his youtube channel here.

Bonus 3: Not exactly value investing books, but covers crucial concepts

One Up on Wall Street, Learn to Earn and Beating the street by Peter Lynch

one up on the wall street -Peter Lynch

Probably the simplest, enjoyable, interactive yet highly educative books that I read on investing. Initially, I started with one up on wall street, then fell in love with the way the author describes the share market and end up reading all the three books written by him.

Peter Lynch was a star mutual fund manager at Fidelity investment. He has an amazing track record on a consistent average annual return of 29.2% over a stretched duration of 13 years when he managed the Magellan fund. During this period, the asset under management of his fund which was originally $18 million in 1977 increased to $14 billion. He is one of the rare fund managers who gave a fairly good return to their investors for 13 years in a row.

In his books, Peter Lynch shares his learnings as a fund manager and stock investor. All three of Lynch’s books follow his common sense investing approach, which insists that individual investors if they take the time to do their homework, can perform just as well or even better than the experts.

Few of the top pieces of advice given by Peter Lynch in his books are-

  • Invest in companies, not the stock market.
  • ‘Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future’.
  • There are a few qualities which are required for a successful investor. They are Patience, self-reliance, common sense, open-mindedness, tolerance to pain, detachment, persistence, humility, flexibility, willingness to do independent research, an equal willingness to admit to mistakes, and an ability to ignore general panic.

You can read the complete book review of his book one up on wall street here.

Overall, all these three books written by Peter Lynch will guide you the concepts of investing in a simple, logical, pragmatic and replicable manner.

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

Invest Rs 5,000 in a Month Challenge

Invest Rs 5,000 in a Month Challenge.

Invest Rs 5,000 in a month challenge

Hi. This is the 1st day of August 2018. And today, I have decided to challenge all the beginners who are yet to start their journey in the Indian stock market. I challenge you to invest Rs 5,000 in a month.

I know, this might sound a little difficult. But in actual, it is not so. One month is a long time. And this time is enough for you to get started in the exciting world of stock market.

Further, do not worry. I’ll provide you a specific guide on how to invest your first Rs 5,000 in a month in this post.

Are you ready? Let’s get started!!

The goal of this challenge:

First of all, I would like to mention that the goal of this challenge is not to make you rich quickly or a stock market expert in a month. It takes years to reach that level. The goal of this challenge is to get you started.

Remember, the journey of a thousand miles starts with the first step.

No child starts directly running within days after they are born. First, they crawl, then comes baby steps, then imperfect walks and finally they are able to run. You have to also follow the same procedure. However, in order to do that, first, you need to get started.

You can only make good returns from your investments at some time in the future, if you start today.

Before you get started!!

No stupid investing in Penny stocks!!

Yes, I know! Penny stocks are the darlings of the newbie investors. The idea of investing in stocks worth less than Rs 10 in the stock market sounds appealing. You can buy as much as 500 quantities by investing Rs 5,000 if the share price of a company is Rs 10. However, these stocks are very risky and a majority of the population loses money while investing in these stocks.

Therefore, investing in penny stocks is not a good idea for the beginners. The basic rule for this challenge is to totally avoid investing in penny stocks.

Also read: What are Penny stocks? And should you buy it?

Only join if you’re serious to invest Rs 5,000 in the stock market this month!!

If you have any other commitments- let’s say you are giving some important exam, traveling the world or participating in the marriage of a close relative- then please do not join this challenge.

No one likes FAILING. Moreover, failing because you didn’t try enough is not worth it. Only participate in this challenge if you are wholeheartedly ready to invest Rs 5,000 in the stock market in a month.

Quick note: If you are a student and want to get started in the stock market, you can start with an amount of Rs 2,000. However, if you don’t even have this amount, then please do not start. In such case, first, you need to learn how to save!!

Set up your brokerage account.

I hope you already have opened your demat and trading account by now. If not, don’t worry. In the internet era, you can set up your brokerage account within hours.

If you are a beginner, I’ll recommend starting with discount brokers. These brokers will save you a lot of money as they charge minimal brokerage cost. You can always switch to another broker or open multiple demat accounts in future as there are no restrictions. However, for the beginners, I will recommend opening a brokerage account with discount brokers like Zerodha or 5Paisa.

If you need any help in getting started with the brokerage account, feel free to check out this site: Nifty brokers.

Set a time aside for research

One hour per day- not a big deal, right?

Keep this time for study and research. You can set aside this time either in the morning or after work- whichever suits you.

Quick note: If you are able to steal some extra hours during your lunch break or office time, then it will be considered as bonus time. Those time should not affect your regular research time. Stay disciplined to the time that you set aside for study/research.

Don’t expect to get fully prepared.

Perfection is the enemy of progress. Find me an investor who knew everything before he made his first investment. I bet, you can’t. Investment is a lifelong learning and there will be always more to learn. You are not supposed to learn everything before buying your first investment.

You will never be fully prepared. Just get started and keep improving on the journey.

Do not expect high returns

Again, the motive of this challenge is not to make you rich quick. Do not try to cross a 500-meter wide river in a month when you are just starting to learn how to swim.

With time and experience, you will get good returns on your investment. However, when you are just starting out, try to learn the fundamentals first.

Let’s start the challenge-

By now, you have would have a good idea of this challenge and its rules. However, what to do next? How to get started.

Don’t worry. I’ve planned out everything for you. Here’s are the exact steps to invest Rs 5,000 in a month.

#1. Start thinking about your favorite companies-

There may be hundreds of companies which you love -whose products and services you most frequently use.

Investing in the stock market is not like investing in Bitcoin, Ripple, Litecoin or any other cryptocurrency. Here, you already know the major companies as you have seen them since childhood.

Just look around and you won’t find it difficult to search for companies. From toothpaste, hair oil, edible oil, shampoo to cars, banks, shoes, clothes, petrol pumps etc, everything has a company behind it.

  • Automobiles → Tata Motors, Maruti, M&M, Bajaj Auto, Eicher etc
  • Banks → ICICI, Yes Bank, HDFC Bank, Axis Bank, SBI, IOB etc
  • Personal care —> ITC, Colgate India, P&G India, Dabur, etc
  • Shoes → Bata, Khadims, Shree leathers etc
  • Petroleum → HPCL, IOCL, BPCL, Oil India, ONGC etc…

large cap companies

large cap companies 3-min

You have grown up with the names of these companies. Why not study them and invest? Make a list of at least 30 companies which are your favorite.

#2. Be accountable

Do not ask for recommendations from your friends or advisors. Research yourself.

Maybe, you can have a casual talk regarding your favorite companies with your friends- if you know that they have a good knowledge of investing. But, do not get influenced.

This is your decision. No one cares more about your money and investments than you do. If you can’t make a decision to invest Rs 5,000 in a month today, how will you make decisions to invest lakhs in upcoming years? This challenge aims to make you accountable for your actions.

#3. Research. Research. And Research.

You do not need to be an expert to research the companies.

Just visit the website of any company and you’ll find tons of information there. All the products, services, vision, mission, team, management, future goals, latest announcements, financial reports, current happenings… everything is present on the website of the company. This is the best place to start your research.

For example, if you’re researching Hindustan Unilever (HUL)- go to their website and read everything that you can find about that company. Maybe you won’t understand many things. But do not let it stop you. One month is a long time to research and learn new things.

Further, google search your favorite companies. Use keywords like “Company name +..” founding year, founders, CEO, Board of directors, the latest news, results, competitors etc. This will help you to research the company from all the angles.

Overall, research everything about the company. Stalk it for a month and I bet you will know more about the company than most of the financial experts.

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

#4. Select 2-3 companies that suit you the best

After the research part, you will be able to find a few good companies whom you believe are doing amazing and has a good future potential. Select 2 or 3 such companies to invest.

Further, do not select more than 3 companies. Rs 5,000 is not a big amount to invest. If you increase the number of companies, you’ll waste un-necessary time in researching. Keep the final list of the companies- SHORT!

#5. Finally, Invest

When you are done with your research and have made your final stock selection, make your commitment. Simply invest. Nowadays, using the online stockbrokers, you can buy stocks with a simple click.

As already said, the goal of this challenge is to get you started. Do not care about the returns. Just care about your research that you haven’t missed anything.

Bottomline:

One month is a good enough time to research a company. If you will use this time efficiently, you’ll learn a lot many things that will help you to make smart decisions in the future.

Further, making your first investment is very rewarding. You’ll never forget your first investment. (At least, I never did!!). Seeing all your hard work finally put to test is really an awesome feeling. In addition, even if you lose 20-30% in the market, it won’t hurt you financially. But this challenge will give you an experience of the lifetime.

ARE YOU READY FOR THE CHALLENGE?

start the challenge- invest 5k in a month

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

Difference Between Stock and Mutual Fund Investing

11 Key Difference Between Stock and Mutual Fund Investing

11 Key Difference Between Stock and Mutual Fund Investing:

Hi. Welcome to the day 22 of my ‘30 days, 30 posts’ challenge, where I’m writing one interesting investing blog post daily for the 30 consecutive days.

In this post, we are going to discuss the fundamental difference between stock and mutual fund investing. However, before we start talking about the differences, let’s first define what stock and mutual fund investing is.

What is stock and mutual fund investing?

Stock market investing means investing directly in the stocks of the company. Here, you are purchasing the companies listed on the stock exchange with an expectation to earn profits when the price of that stock goes up.

On the other hand, a mutual fund is a collective investment that pools together the money of a large number of investors to purchase a number of securities like stocks, FDs, bonds, etc. A professional fund manager manages this fund. When you purchase a share in the mutual fund, you have a small stake in all investments included in that fund. Hence, by owning a mutual fund, the investor participates in gains or losses of the fund’s portfolio.

11 key difference between stock and mutual fund investing

Here are the critical differences between stock and mutual fund investing based on eleven crucial factors–

1. Cost of investing  

While investing in mutual funds, you have to pay different charges like expense ratio, load fee (entry load, exit load), etc. For the top mutual funds, the expense ratio can be as high as 2.5-3%.

On the other hand, if you invest in the stock market, you have to open your brokerage account (which includes opening account charges), and you have to pay some annual maintenance charges too. Further, there also different costs while transacting in stocks like brokerage, STT, stamp duty, etc.

Nevertheless, if you compare the charges involved in stock and mutual fund investing, you can find that the costs while investing in stocks are still lower. This is because managing a mutual fund consists of a lot of expenses like management fee, the salary of the managers/employees, administration charges, operational charges, etc. However, for investing in stocks- the most significant burden is only the brokerage.

Also read: 23 Must-Know Mutual fund Terms for Investors.

2. Volatility in investment.

Direct investing in stocks has more volatility when compared to mutual fund investing. This is because when you invest in shares- you generally purchase 10-15 stocks.

On the other hand, the mutual fund consists of a diversified portfolio with investment in different securities like stocks, bonds, fixed deposits, etc. Even the equity-based mutual funds invest in at least 50-100 stocks. Due to the broad diversification, the volatility in the mutual funds is a lot less compared to that of shares.

3. Return potential

Stock market investing has a very high return potential. Most of the successful investors in the world and India like Warren Buffett, RK Damani, Rakesh Jhunjhunwala, etc. have built their wealth by investing directly in the stock market.

However, this is only one side of the story.

The complete fact is that the majority of people lose money in the stock market. Although the return potential is high while investing in stocks, however, the risk is also higher.

On the other hand, most of the good ranked mutual funds have given decent consistent returns to their shareholders. Although the returns are not as high as what many successful investors can make from stocks, however, this return is enough to build a massive wealth for an average person for a secured future.

4. Tax saving

If you invest in ELSS (equity linked saving scheme) under mutual funds, you can enjoy a tax deduction up to Rs 1.5 lakhs in a year under the section 80c of the income tax act.

Another benefit of investing in the mutual fund is that you do not have to pay tax if the fund sells any stock from its portfolio as long as you are holding the fund.

On the other hand, when you sell stock while investing directly in the stock market, you have to pay a tax, no matter what’s the scenario. There are no tax benefits while investing in the stock market. You have to pay a tax of 15% on short-term capital gains and a tax of 10% (above a profit of Rs 1 lakh) on the long-term capital gains.

Also read: Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?

5. Monitoring

Investing in the stock market requires frequent monitoring. This is because stock market investing is a personal thing. Here, no one is going to do this for you and hence you have to monitor your stocks yourself. Moreover, due to the high volatility of the share market, the frequency of the monitoring should be higher. At least every quarter or half yearly.

On the other hand, for the mutual fund -there are fund managers who take care of the investments and make the buy/sell decision on your behalf. That’s why, when you invest in mutual fund, you do not need to monitor your fund much frequently. Anyways, you should watch your funds at least every year so that you can confirm that your fund’s performance is in line with your goals.

Also read: How to Monitor Your Stock Portfolio?

6. SIP Investment   

Mutual funds investment provides you with an option of a systematic investment plan.

A Systematic Investment Plan refers to periodic investment. For example, the investor can invest a fixed amount, say Rs 1,000 or 5,000, every month (or every quarter or six months) to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.

On the other hand, there’s no option of SIP available in stock market investing.

7. Asset class restriction

While investing in the stock market, the only asset where you can spend is stocks of the company.

On the other hand, the mutual fund gives you an opportunity to invest in a diversified portfolio. Here, you can invest in a variety of asset classes. For example- debt mutual funds, equity-based mutual funds, gold funds, hybrid funds, etc.

8. The time required for investing

The total time needed for directly investing in stock is a lot more compared to that of a mutual fund. This is because a fund manager manages a mutual fund.

However, for direct investment in the stock market, you have to do your research. Here, you have to find the best possible stock for investing yourself, and that requires a lot of study, time and efforts.

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

9  Ease of investment

For investing in the stock market, you have to open your brokerage account with the help of a stockbroker. Here, you need to start your Demat and trading account which can take as long as a week to open.

On the other hand, you can start by investing in a mutual fund within 10 minutes. You do not require any brokerage account to start investing in mutual funds. There are a number of free platforms (like Groww or FundsIndia) available on the Internet where you can register within a few minutes and start investing in mutual funds.

10. Time Horizon of investment

Generally, the investment time horizon in mutual funds for long-term like 5 to 7 years. Here, you are not trading funds, but investing for the long-run to make money by capital appreciation or regular income through dividend funds.

On the contrary, if you invest in stocks- it can be a long-term or short term. You can even keep the stock for a week and get good returns.

11. Control on investment

If you are investing directly in the stock market, you will have a lot of power and control. Here, you can make critical decisions like- when to buy, when to sell, what to buy, what to sell, etc.

On the other hand, while investing in the mutual fund, you do not have much control over your investments. It’s your fund manager who makes the decisions like which securities to buy, when to buy, when to sell etc. The highest control that you have is to find and invest in a good mutual fund. However, once you have spent your money, everything will be taken care of by the fund manager.

Further, mutual fund performance depends on the efficiency of the fund manager. If the fund manager is efficient, you can get high returns. Otherwise, if the fund manager is not that good, you might get fewer returns. In addition, there is always a possibility that the fund manager may quit or join some other fund house.

Overall, here you have to be dependent on the fund manager. However, while investing in the stock market, there is no dependency on anyone, and you can make your own decision to buy/sell whichever stock you want.

Check out the upcoming course on mutual fund investing here.

Conclusion

No investment is risk-free. There will always be some risk when you invest in the market or even if you invest in the safest fund. Nevertheless, investing in the mutual fund is comparatively less risky than the stock market. However, the returns are also slightly low in mutual funds compared to the stock market.

If you are a novice and new to the stock market, it would be salutary if you start investing with mutual funds.

For investing directly in the stock market, you will require a good knowledge or at least a strong passion for learning. However, if you have limited time, limited money and not enough passion to invest your money on your own- then you should invest in the mutual funds.

That’s all for this post. I hope it was helpful. #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

Should You Invest in The Stock Market if You Do Not Have Big Money?

Should You Invest in The Stock Market if You Do Not Have Big Money?

Should You Invest in the stock market if You do not have big money?

This is a general question which stops many people from investing in the stock market. Most people believe that investing in the stocks is the thing for the rich people- probably businessman, techies or finance/commerce guy- who has a lot of money to spend.

However, in actual, it is not so. Many successful investors in India started with a minimal amount. Personally, I started investing in stocks with just Rs 1,500 as a college kid. And even that felt a significant amount then.

Case Study:

Let’s assume that you started investing with just Rs 2,000 per month. This is a very small amount for a majority of the salaried/working people and it’s not going to hurt you financially.

In most cases, people tend to increase the investment amount gradually with time when then receive a salary hike or promotion. However, for simplicity, we are assuming that you didn’t raise the investment amount (nor did you decreased it). You invested the same Rs 2,000 per month with discipline.

Besides, we are also assuming that you’ll get a decent annual average return of 14% per year from your investments. (This return can be lower like 2-3% during bear phase/ lousy market and as high as 25-30% during bull market/ right economic conditions. For example- the benchmark index Nifty gave a return of above 26% last year.)

Now, let’s calculate how much wealth you would create in the next 30 years if you regularly invest Rs 2,000 per month with discipline.

Source: SIP Calculator- Paisabazaar (Feel free to try out the calculator yourself).

Your monthly investment of Rs 2,000 is expected to grow over Rs 1.09 crores in the next 30 years. This is a considerably big amount when compared to the small monthly investments that you started.

Quick Note: You might be thinking that 30 years is a too long time frame and what will you do with the money at that age. However, you must remember that these days the life expectancy in India has increased a lot. Most people are easily able to live up to an age of 80-85. So, even if you start to invest at an age of 30 and get this money when you are 60, you still have 20-25 years more to live. And at that age, this money can help you a lot in financial independence. The bigger the amount, the better it is for you.

A small investment in the stock market:

You may call me a conservative (or old-fashioned) investor, but I believe that even a tiny stake in amazing companies can bring a high return to its shareholders.

Apart from your initial investment amount, there are two critical factors which decides how much return you’ll get from your investment- 1) Return on investment (ROI) 2) Time Frame.

If you can maximize the other two factors, you’ll be able to build enormous wealth. 

Even if your initial investment amount is small, however, if the CAGR is decent and you remained invested for a long-term, you can generate a significant return on your investment.

There are many examples of small investments in the Indian stock market done in the 1990’s which later turned out to be worth over Crores in the next 25–27 years. For instance- Infosys, WIPRO, MRF, Eicher Motors etc.

Also read:

mrf share price

Source: TradingView

Conclusion:

Investing even a small amount of money in the stock market is worth it if you are ready to stay invested for a long time. Here, the power of compounding helps you to generate wealth. Even with an above average return, you can build a large corpus if the number of investing years is long.

Moreover, it’s not necessary that you’ll always invest the same amount.

The important thing here is to get started. Maybe, with time you can save more to invest. But if you do not start investing now, even then you’ll feel that this amount is too little to invest in the market.

In the end, here’s a fantastic quote by the legendary investor Warren Buffett which might teach you the power of a small investment over the long term:

 

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

tata motors vs maruti suzuki case study

Case Study: Tata Motors Vs Maruti Suzuki

Case Study: Tata Motors Vs Maruti Suzuki

Hi there. Welcome to the day 20 of my ’30 days 30 post’ challenge, where I am writing one blog post daily for the 30 consecutive days.

Several of my blog readers have requested me to write an analysis on the real companies using the using different financial tools. That’s why in this post I’ve decided to write a case study on Tata Motors vs Maruti Suzuki.

I have chosen these big and well-known companies to show how the performance of the companies are reflected in their respective share prices. Overall, it’s going to be a very interesting post and there are many key takeaways that you can learn from this case study.

1. Tata Motors

tata motors

Tata Motors is a big multinational automobile company in India. We all have grown up seeing Tata Motors automobiles in our lives. It was originally founded in 1945 and currently, it’s headquartered in Mumbai.

Tata Motors has a diversified portfolio in both commercial and passenger vehicles. Its products include passenger cars, trucks, vans, coaches, buses, sports cars, construction equipment and military vehicles. It has auto manufacturing and assembly plants in Jamshedpur, Pantnagar, Lucknow, Sanand, Dharwad, and Pune in India, as well as in Argentina, South Africa, Great Britain and Thailand.

Few of the popular cars offered by Tata Motors are Indica, Indigo, Zest, Bolt, Hexa, Tiago and Nano. (Recently, Tata Motors announced that it will discontinue the production of 10-years old Tata nano, the world’s cheapest car. Read more here.) Besides, the world famous luxury cars- Jaguar Land Rover (the maker of Jaguar and Land Rover cars) is also a subsidiary of Tata Motor

Overall, Tata motors is a big brand in India with a widely diversified product. So, does this makes tata motors a good investment option? Before deciding anything, let’s first look at a few of the key financials of Tata Motors.

Here’s a quick snapshot of the critical financial ratios of Tata Motors for the last 5 years.

Return on Equity Earnings per share (unadj) Debt/Equity Net Margin Book Value /Share
2017 13.0 26.2 1.0 2.8 201.1
2016 14.8 40.4 0.6 4.3 273.5
2015 25.3 51.1 1.0 5.3 202.0
2014 21.3 51.1 0.7 6.0 239.7
2013 26.3 36.5 0.9 5.2 139

(Source:  EquityMaster)

Damn, the financials of Tata Motors doesn’t looks good!!

Quick note: If you are not familiar with the terms mentioned in the above table, here’s a detailed explanation regarding the important financial ratios.

From the above table, you can notice that the Return on equity (ROE) of Tata Motors has been continuously declining for the last 5 years. Further, the earnings per share are also degrading for the same period. It went down from an EPS of 35.6 in 2013 to 26.2 in 2017.

On the other hand, if you look at the debt/equity ratio, you can find that it’s also fluctuating a lot. As a thumb rule, you should always invest in companies with a debt/equity ratio lower than 0.5 (the best scenario is when the company is debt free). However, for the case of Tata Motors, its debts are equity to quite high.

Moving on, if you look at the net profit margin, here again, you can notice a declining trend. The profit margin of Tata Motors has reduced from 5.2% in 2013 to 2.8 percent in 2017. This clearly is in sync with the declining market share of Tata Motors in the automobile industries. Once, Tata used to be a market leader in the commercial vehicle segment with over 60% customer share. However, these days there are a lot of competitors of Tatas and hence it has lost its monopoly and the profit margin along with it.

The competitive position of Tata Motors is a little complex to access because it works in both commercial and passenger vehicle segment. In the commercial vehicle segment, the key competitors of Tata motors are Ashok Leyland, Bharat Benz, Mahindra and Mahindra, Eicher Motors etc. In the passenger vehicle segments, the key competitors are Maruti Suzuki, Hyundai, Honda, Renault etc.  

If we look from the broader aspect, the Tata Group is doing really good with their prime companies like TCS, Tata Steel, Tata Chemicals, Titan, Tata tea, etc. However, the things are not similar in the case of Tata Motors. Tata Sons Chairman, N Chandrasekaran has been trying to improve the profitability of the company with the help of its MD Guenter Butschek, however, the changes are not reflecting in the financials.  

Although Tata Group has been a pioneer in the growing development of India and they have contributed a lot to India’s economy. However, just having a brand name is not enough to survive (and remain profitable) in this competitive business world.

2. Maruti Suzuki

maruti suzuki

The next company in this case study is Maruti Suzuki.

Maruti Suzuki is a leading automobile company in India. The company is headquartered at New Delhi. It is a 56.21% owned subsidiary of the Japanese car and motorcycle manufacturer Suzuki Motor. As of January 2017, it had a market share of 51% of the Indian passenger car market. Few of the popular products of Maruti Suzuki in India are Ciaz, Ertiga, Wagon R, Alto, Swift, Celerio, Swift Dzire, Baleno and Baleno RS, Omni, Alto 800, Eeco, Ignis etc.

Alto and Swift have been consistently ranked as the top-best selling cars in their respective segment (hatchback). In the last few decades, Maruti has built an amazing brand value in the automobile industry by providing best-affordable products and amazing customer service.

Now, let’s have a look at the financials of Maruti Suzuki for the last 5 years.

Return on Equity Earnings per share (unadj) Debt/Equity Net Margin Book Value /Share
2017 20.3 248.6 0 11.0 1227.3
2016 18.0 182.0 0 9.5 1013.5
2015 14.6 126.0 0 7.5 861.4
2014 13.3 94.4 0 6.4 711.6
2013 13.0 81.7 0 5.6 629.9

(Source: EquityMaster)

What!!! The difference in the financials of Tata Motors and Maruti Suzuki is like night and day.

From the above table, you can notice that how Maruti Suzuki has consistently given excellent performance. For the last 5 years, the return on equity (ROE) of Maruti has been continuously increasing. And in the same period, it’s earning per share (EPS) has increased over 3 times. That’s a real healthy sign of a fundamentally strong company.

Another, magnificent point regarding Maruti Suzuki company is that it’s totally debt free. The debt to equity ratio of Maruti is zero for the last five years.

Next, if you look at the profit margin, its also consistently increasing. From 5.6% in 2003, it has increased to 11% in 2017. This is a pre-eminent profit margin for the companies in the automobile industries.

Lastly, if you look at the book value per share, it’s also showing a healthy growth sign. Maruti’s book value per share has doubled in the last 5 years (from 629.9 in 2013 to over 1227.3 in 2017).

Overall, Maruti Suzuki has performed exceptionally well in this last five years.

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

Conclusion: Tata Motors Vs Maruti Suzuki

In this post, we looked at two big companies with amazing products and a big brand name. However, from our analysis, it is clear that Maruti Suzuki fulfills the criteria of a wonderful company to invest while Tata Motors clearly not.

According to the principles of value investing, the stock price should eventually reflect the performance of the underlying company. As 5 years is a sufficiently long time for this effect to apply, let us look at the price performance of both these companies over the last five years.

tata motors vs maruti suzuki

(Source- TradingView)

The above graph exactly shows what is expected. Maruti Suzuki has performed well better compared to the Tata Motors over the past 5 years. Maruti has increased the share price over 7-fold in this time frame. Whereas, the stock of Tata Motors is trading at a loss of around 10% compared to what it was trading 5 years ago.

Quick Note: If you are new to stock market and want to learn stock market investing from scratch, feel free to check out my online course here.

Bottomline:

From the above case study, you can learn that it’s not a rocket science to analyze stocks.

Selecting a winning stock is not a gambling. The returns from the stocks are in line with the performance of the underlying company. If you treat stock as a company and perform a smart analysis before investing, then I assure that the results will largely be amazing. Value investors simply win over the long time frame.

That’s all for this post. I hope it was useful 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

mutual fund taxation

Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?

Mutual Fund Taxation – How mutual fund returns are taxed?

Hi. Welcome to the day 19 of my ’30 days, 30 posts’ challenge, where I’ll be writing one interesting investing article daily for the 30 consecutive days. In this post, we are going to discuss mutual fund taxation.

If you invest in the stock market, you might already know that the taxation on the capital gains through stocks depends on two factors- the type of investment and the holding period. This means that the rate of taxation in ‘delivery’ is different than that of ‘Intraday’. Moreover, the holding period also plays an important role while deciding taxation. Long-term capital gain taxes are lower than short-term capital gains.

Also read: What are the capital gain taxes on share in India?

Similar to stock market investing, mutual fund taxation also depends on the type of fund and the holding period of your investments.

In order to clearly understand the mutual fund taxation in India, first, you’ll need to learn the common types of mutual funds. And then, you will need to understand how short-term and long-term investments are defined based on the holding period of mutual funds.

Here are the topics that we are going to discuss in today’s post regarding mutual fund taxation.

  1. Types of Mutual funds
  2. Short-term vs long-term investments
  3. Taxation on
    • Equity-based Mutual funds
    • Debt based mutual funds
    • Tax Saving Equity Funds (ELSS)
    • Balanced Funds
    • Systematic Investment Plans (SIPs)
  4. Conclusion

Overall, it’s going to be a long post. However, taxation is a very important topic which no one should ignore. Besides, I guarantee it that this post will be worth reading. So, without wasting any further time, let’s get started.

1. Types of mutual funds

Although there are dozens of types of mutual funds in India, however, here is a broad classification based on the asset type and fund characteristics-

A. Equity Funds: These are the funds that invest in equities (shares of a company) which can be actively or passively managed. These funds allow the investors to buy stock in bulk with more ease than they could purchase individual securities. Equity funds have different key goals like capital appreciation, regular income, tax-saving etc.

B. Debt Funds: These are funds that invest in debt instruments (fixed return investments like bonds, government securities etc). Debt funds have low risks compared to the equity funds. However, the expected returns while investing in debt funds are also lower.

C. Balanced Fund: A fund that invests in both equity (shares) and debt instruments (bonds, government securities etc) is known as a balanced fund.

D. SIP: A Systematic Investment Plan refers to periodic investment in a mutual fund. For example, the investor can invest a fixed amount (say Rs 1,000 or 5,000) every month, or every quarter or six months to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.

E. ELSS: It stands for Equity Linked Saving Schemes. ELSS is a diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act (the maximum tax exemption limit is Rs 1.5 Lakhs per annum). However, to avail of the tax benefit, your money must be locked up for at least three years.

Read more here: 23 Must-Know Mutual fund Terms for Investors

2. The short-term and long-term investments in mutual funds

Now, let us understand what is a short-term investment and long-term investment based on the holding period of the funds.

In the case of equity-based mutual funds and balanced funds, if the holding period is less than 12 months, then it is considered a short-term investment. Further, if the holding period is more than 12 months, then it is called a long-term investment. (Holding period is the difference between your purchase date and selling date).

For the debt-based mutual funds, an investment with holding period fewer than 36 months (3 Years) is regarded as a short-term investment. On the other hand, a holding period greater than 36 months for debt-funds are considered as a long-term investment.

Here’s a quick summary of the short-term and long-term investment classification on mutual funds based on their holding period.

Funds

Short-term

Long-term

Equity funds

< 12 months

>= 12 months

Balanced funds

< 12 months

>= 12 months

Debt funds

<36 months 

>= 36 months

3.  Mutual fund Taxation based on fund-type

As mentioned earlier, the mutual fund taxation depends on the type of fund and the holding period. Here is the rate of taxation on different mutual funds in India-

1. Equity-based Mutual funds

Long-term capital gain(LTCG) tax on equity-based schemes is tax-free up to a profit of Rs 1 lakh. However, for the profits above Rs 1 lakh, you have to pay a tax at a rate of 10% on the additional capital gains.

For short-term equity-based mutual funds (where the holding period is less than 12 months), you have to pay a flat tax of 15% on the profits.

Clearly, long-term (holding period greater than 12 months) is a better choice as there is no tax up to a capital gain of Rs 1 lakh. For an average Indian investor, Rs 1 lakh profit is a big amount.

For example, if you invest Rs 5 lakh in mutual funds and get a decent return of 20% in a year, then you’ll make a profit of Rs 1 lakh. This profit will be tax-free. You do not have to pay any tax on the long-term capital gains up to Rs 1 lakh.

In the second case, let’s assume that your profit is Rs 1,10,000 in long-term. Here, you have to pay a tax of 10% on the profit greater than Rs 1 lakh (i.e. Rs 1,10,000- 1,00,000 = Rs 10,000). In short, you have to pay a 10% LTCG Tax on Rs ten thousand.

Quick Announcement: NEW Mutual fund investing course for beginners is launching soon…

2. Debt-based mutual funds

For the debt mutual funds, the long-term capital gain tax is equal to 20% after indexation.

Note: Indexation is a method of reducing the capital gains by factoring the rise in inflation between the years the fund was bought and the year when they are sold. The longer the holding period, the higher are the benefits of indexation. Overall, indexation helps you to save tax on gains from debt mutual funds and enhance your earnings. Read more about indexation here.

For the short term capital gains (STCG) on debt funds (where the holding period is less than 36 months), the profit will be added to your income and is subject to taxation as per your income slab. Therefore, if you’re in the highest income-tax slab, you have to pay a tax up to 30%.

3. Tax Saving Equity Funds

Equity Linked Saving Schemes (ELSS) is used for tax saving along with capital appreciation. It is an efficient tax-saving instrument under section 80C of the Income-tax act of 1961. You can claim a tax deduction of up to Rs 1.5 lakh and save taxes up to Rs 45k by investing in ELSS. However, there is a lock-in period of 3 years for these funds.

After 3 years, LTCG tax will be applicable similar to equity funds. Therefore, the capital gain up to Rs 1 lakh is tax-free. But, profits above Rs 1 lakh is taxable at a rate of 10%.

4. Balanced (Hybrid) Funds

Balanced funds are treated similar to the equity-based mutual funds and hence they have the same mutual fund taxation structure. This is because the balance funds are equity-based hybrid funds that invest at least 65% of its assets in equities. This allocation percentage can differ depending on the goal of the fund.

The long-term capital gain tax on the balanced mutual fund is tax-free up to a gain of Rs 1 lakh. The profits above Rs 1 lakh is taxed at a rate of 10%. The short-term capital gain tax on the balanced funds is equal to 15% of the profits.

5. Systematic Investment Plans (SIPs)

You can start a SIP with either of an equity fund, debt fund or balanced fund. The gains made from SIPs are taxed as per the type of the mutual fund and holding period.

Here, each SIP is treated as a fresh investment and they are taxed separately. For example, if you are investing monthly Rs 5,000 in equity funds, then all the monthly investments will be considered as a separate investment. This simplifies the holding period.

Assume that you bought your first SIP in January 2017 and consequently SIPs in the upcoming months. Then by the end of Jan 2018, only the first investment will be considered as long-investment. The other investment is for a period of fewer than 12 months and hence, you have to pay an STCG Tax of rest SIPs if you redeemed all of them in Jan 2018.

In short, each SIP is considered a separate investment and their holding period are calculated accordingly to define the taxation.

3. Conclusion

Here is the summary of the mutual fund taxation in India.

taxes

(Source: Clearfunds)

The secret to save taxes and build wealth is still the same- Invest for the long term.

In most of the equity-based funds, you can enjoy a tax-exemption for a profit up to Rs 1 lakhs when you invest for the long term. Further, while investing in the debt-funds for the long-term, you can enjoy the benefits of indexation to save taxes. Overall, if you want to save more taxes – Invest longer.

I hope this post is useful to you. #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

Is Mr. Market Ripping you off

Is Mr. Market Ripping you off?

Hi there. Welcome to the day 18 of my ’30 Days, 30 Posts’ challenge- where I’m writing one post daily for the 30 consecutive days.

Today, I’ve got an amazing opportunity to introduce you to one of my old friend- Mr. Market. Many of you might already know him. However today, you are getting an amazing chance to personally meet him.

Mr. Market: My old Emotional Manic Friend

First of all, I would like to mention that Mr. Market is a fictional character created by the father of value investing- Benjamin Graham in his best selling book- “The Intelligent Investor’. Knowing this character can radically change the way you look at investing.

Quick Note: If you haven’t read ‘The Intelligent Investor’ book yet, I’ll highly recommend you to read this wonderful book. This is one of my favorite books on investing.

In the book ‘The Intelligent Investor’, Benjamin Graham tells a story of a man whom he calls Mr. Market.

mr. marketHere, Mr. Market is the business partner of yours (Investors). Every day Mr. Market comes to your door and offers to either buy your equity in the partnership or sell his stake.

But here’s the catch: Mr. Market is an emotional maniac person who lets his enthusiasm and despair affect the price he is willing to buy/sell shares on any given day. Because of his nature, some days he’ll come to the door feeling jubilant and will offer a high price to buy your share of the business and demand a similarly high price if you want to buy his stake.

mr market emotionalOn other days, Mr. Market will be inconsolably depressed and will be willing sell his stake at a very low price, but will also offer to buy your share at the same low ball offer if you want to sell your equity.

Overall, when he is in a good mood, he gets greedy and quotes ridiculously high prices. But when he is feeling depressed and emotional, he is willing to sell you the same stocks for rock bottom prices.

On any given day, you can either buy or sell to Mr. Market. But you also have the third option to completely ignore him i.e. you don’t need to trade at all with Mr. Market. If you ignore him, he never holds it against you and always comes back the following day.

What should you do with Mr. Market?

An intelligent investor will attempt to take advantage of Mr. Market’s emotional behaviors by buying when he is depressed and selling to him when he is maniacally optimistic.

There is no need to feel guilty as otherwise, Mr. Market will ‘willingly’ rip you off during his peak times. Moreover, you do not feel pity because Mr. Market is the one who is setting the price. As an intelligent investor, you should do business with him only when it’s to your advantage. That’s all.

The key point to note here is that though Mr. Market offers some great deals from time to time. The investors just have to be alert and ready when those offers come up.

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

How to apply this to your own investment strategy?

Like Mr. Market, the stock market also behaves in the same manner.

The market swings give an intelligent investor the opportunities to buy low and sell high. Every day you can pull up quotes for various stocks or for the entire market as a whole. If you think the prices are low in relation to value, you can buy. If you think prices are high in relation to value, you can sell. And if prices fall somewhere in the grey area in between- you’re never forced to do either.

This is a value-oriented disciplined investing. Don’t fall victim to irrational exuberance. Don’t panic, don’t sell. Remain calm during the hyperboles of the market’s daily fluctuations.

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

decrease in the Promoter’s share a bad sign for the investors-min

Is a decrease in the Promoter’s share a bad sign for the investors?

Is a decrease in the Promoter’s share a bad sign for the investors?

One of the biggest corporate scams in the Indian stock market where thousands of investors lose their money was the Satyam Scandal.

In this scandal, the Satyam computer services chairman Ramalinga Raju confessed that the company’s accounts were falsified and they manipulated the reports of Rs 14,162 crore in several forms.

The confession was shocking for the both corporate and the investing community. However, if the investors had carefully looked at the shareholding pattern of the company, they might have realized that something terrible was cooking inside.

During the scandal period, the promoters were gradually decreasing their stakes from their own company year-after-year.

satyam scandal

A look at the shareholding pattern of the company over the years reveals that the promoters held 25.60 percent equity as of March 2001 but reduced their stake every subsequent year (Ramalinga Raju sold 4.4 crore shares in the 2001-08 period). By March 2002, the promoter’s stake got reduced to 22.26 percent and further down to 20.74 percent as of March 2003. As of September 2008, the promoters held only 8.61 percent stake -which was the latest figure available.

Read more here: Satyam promoters gradually reduce stake -Economic Times

The continuous decrease in the promoter’s share in Satyam Computers was a warning sign which most shareholders ignored and later resulted in losing their money.

When a decrease in the promoter’s share a bad sign?

As a thumb rule, a continuous decrease in the promoter’s share from their own company is not a healthy sign.

This is because the decreasing stake means a low confidence of the promoters (who are actually the owners) towards the future of their own company.

The promoters are the insiders, and they have the best knowledge of their company. They understand the product/services offered by their company, its demand in the market and the future growth potential. Further, they are also regularly updated on the finance of the company. They know how much revenue and profit their company is generating and how much financially strong/weak they are.

Therefore, if the promoters are optimistic towards their company’s future and have a clear vision/goal for its growth, they will not want to sell their shares or reduce the stake in the company which they themselves started.

In short, if the promoters are continuously decreasing their stake, then you might need to investigate further and take cautionary actions.

Also read: Shareholding Pattern- Things that you need to know

When the decrease in the promoter’s share actually  ‘NOT’ a bad sign?

If the promoters are openly mentioning the reason why they are reducing the stake or if the decrease in the promoter’s share is just one-time activity, then it might not actually be a bad sign.

Here, maybe the promoters are planning for a new venture, new acquisition, a new company or just to buy a new house. Everyone has the right to use their asset when they need it. If the promoters have some different plans, then they might sell their stakes to raise capital, and it’s not a warning sign.

For example- During May-June 2018, RK Damani- the promoter of Avenue Supermarket (Dmart Stores)- offload 62.40 lakh shares, or 1 percent equity.

rk damani avenue supermart

Was this a sign of trouble for the shareholders?

No!! RK Damani was selling his shares to meet the Minimum Public Shareholding (MPS) norms.

Everyone knew this reason, and hence the decrease in the promoter’s share couldn’t be taken a lousy sign here. (Nevertheless, the script still fell 5.23 percent after this announcement).

Similarly, if you follow the international market, you might have heard that in April’17, Jeff Bezos, the owner of Amazon company sold $1 Billion worth shares of Amazon. Should the shareholders panic and sell off their shares too in such a situation?

No! At that time, Jeff Bezos was selling the shares to fund his Blue Origin rocket company, which aims to launch paying passengers on 11-minute space rides starting next year. Overall, the company fundamentals remained the same. Just because the promoter holdings decreased, doesn’t mean any danger sign.

Conclusion

A decrease in the promoter’s share might not always a bad sign. Here, you need to investigate why the promoters are selling their shares. If the reason is genuine, then you might not need to worry.

However, if the stakes are continuously decreasing and you can’t find any reason- then you might need to look into the matter seriously.

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

mutual fund terms

23 Must-Know Mutual fund Terms for Investors.

23 Must-know mutual fund terms for investors:

Investing in mutual funds can be a good alternative for the people who are interested to invest in equities but do not have much time and knowledge to invest individually. As mutual funds as professionally managed, can sit back and relax. However, there are many frequently used mutual fund terms that investor should know so that they can at least understand ‘how’, ‘what’ and ‘where’ of mutual fund investing.

For example- here is the fund description for IDFC Focused Equity Fund-Regular Plan (G) —

mutual fund terms

Source: Moneycontrol

If you are a beginner, there may be a number of terms mentioned in the above table with which you might not be familiar. For example- Open end, Entry load, exit load etc.

In this post, we are going to discuss such key mutual fund terms that every investor should know to make an informed investment decision.

Also read: What is Mutual Fund? Definition, Types, Benefits & More.

23 Must-Know Mutual fund terms for investors-

Here are the 23 most frequently used mutual fund terms that every investor should know.

1. AMC: It stands for Asset Management company. They are financial institutions that manage multiple funds like HDFC mutual fund, SBI Mutual fund etc.

2. NAV: It stands for Net Asset Value. This is the unit price of a fund. When a fund comes out with an NFO (New fund offer), it announces a price (generally Rs 10). Later, depending on the return of the investments, this price could rise or fall.

It’s similar to the share price. For example- Shares represents the extent of ownership in a company. Similarly, NAV represents the extent of ownership in the mutual fund. 

3. AUM: Asset under management is the total value of money that investors have put into a particular mutual fund. Top mutual fund companies in India manage thousands of crores of rupees.

top AUM India

(Source: Moneycontrol)

4. Funds: These are individual funds with specific goals and investment philosophies. For example- HDFC Index equity fund, Sundaram selects mid-cap fund etc.

5. Portfolio: The portfolio shows all the investments made by a fund (including the amount in cash). For example, if a fund has invested in 40 companies and has kept 10% of the amount as Cash (for a better opportunity in future), then this 40 companies and cash consist of the portfolio of that fund.

6. Corpus: This is the total amount of money that you’ve invested in a fund. For example- Let’s assume that you bought 10 quantities of a mutual fund where each unit is worth Rs 100. Then, your total invested amount with the fund is Rs 1,000. This is referred to as the corpus.

7. Expense Ratio: It is the annual fee charged by the mutual fund scheme to manage money on your behalf. It covers the fund manager’s fee along with other expenses required to run the fund administration. A lower ratio means more profitability and a higher ratio means less profitability for an individual investor. Generally, an expense ratio for an active fund can be between 1.5-2.5%.

expense ratio

Source: Cleartax

8. LOAD: It is the fee that is charged when you buy or sell a unit of a fund. The load is a percentage of the NAV. Generally, a fund can charge an entry or exit load.

9. Entry load – This is the initial fee that you pay while entering a mutual fund. Here, you pay a percentage of the NAV. For example, if the entry load of the fund is 2% and you are investing Rs 10,000. Then it means that you pay Rs 200 as the entry load and Rs 9,800 will be invested in the fund.

10. Exit load – This is the charge for redeeming your unit i.e. this is that amount that you have to pay (as fees) when you sell your fund. Generally, the exit load is applied if you decide to sell your shares before a specific time period. Usually, it’s 0.5% when you withdraw before 365 days. For example, let’s say that the exit fee of a fund is 0.5% and the current NAV of your fund is Rs 10,000. Then, you’ll have to pay Rs 50 as the fee and you’ll get back Rs 9,950.

11. Redemption: Selling your fund back to the fund house (not to the general market) is called redemption. While redeeming, the value that you’ll receive is equal to NAV – exit fee. 

12. Lock-in Period: This is applicable for the Tax-saving funds. Usually, there is a 3 years locking for closed-ended tax-saving funds.

13. SIP: A Systematic Investment Plan refers to periodic investment in a mutual fund. For example, the investor can invest a fixed amount (say Rs 1,000 or 5,000) every month, every quarter or six months to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.

14. ELSS: It stands for Equity Linked Saving Schemes. ELSS is a diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act (the maximum tax exemption limit is Rs 1.5 Lakhs per annum, under section 80C). However, to avail of the tax benefit, your money must be locked up for at least three years.

15. Open End Funds: The majority of mutual funds in India are open-end funds. These funds are not listed on the stock exchanges are available for subscription through the fund. Hence, the investors have the flexibility to buy and sell these funds at any time at the current asset value price indicated by the mutual fund.

16. Closed-End Funds:- These funds are listed on the stock exchange. You cannot buy/sell units form the fund house- but only from investors. They have a fixed number of outstanding shares and operate for a fixed duration. The fund is open for subscription only during a specified period. These funds also terminate on a specified date. Hence, the investors can redeem their units only on a specified date. This is complex compared to the open end funds.

17. Equity Funds: These are the funds that invest in equities (shares of a company) which can be actively or passively managed. These funds allow investors to buy stock in bulk with more ease than they could purchase individual securities. Equity funds have different key goals like capital appreciation, regular income or tax-saving.

18. Diversified Equity mutual Fund: This is a kind of mutual fund that invests in equities (stocks) of various companies in various sectors. As the investments are diversified across different sectors, it is called a diversified equity mutual fund.

Also read: The Essential Guide to Index Fund Investing in India.

19. Debt Funds: These are funds that invest in debt instruments (fixed return investments like bonds, government securities etc).

20. Balanced Fund: A fund that invests in both equity (shares) and debt instruments (bonds, government securities etc) is known as a balanced fund.

21. NFO: A New Fund Offering (NFO) is the term given to a new mutual fund scheme.

22. CAGR: It stands for compounded annual growth rate. This is the percentage of return per year which is compounded (not simple).

23. CRISIL Rating: It stands for credit rating information services of India. CRISIL ranks the mutual funds in India based on its research. Obviously, a higher ranking is better. (Read more about CRISIL Mutual fund ranking methodology here)

That’s all folks. If I missed any key mutual fund terms that are frequently used, feel free to comment below. #HappyInvesing.

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 to do when the market goes up

What to do when the market goes up?

What to do when the market goes up?

Yesterday, Sensex ended at a record closing high. It went up 222.23 points or 0.61% at 36,718.60, while the Nifty was up 74.60 points or 0.68% at 11084.80. Most of the sectoral indices ended the day in the green. Although the market was all-time high yesterday, however- as a matter of fact, Indian stock market has been under a bull run for past couple of years.

sensex

But what to do when the market goes up? Should we enjoy or should we become conscious that the market may fall in the upcoming post? In this post, We are going to answer the same question. What should an average investor actually do when the stock market goes up?

First of all, celebrate.

Isn’t this something which everyone wishes for when the invest- Market going higher and higher.

If you have invested intelligently, then your portfolio would also have gone up along with the rise in the market. And hence it a reason to celebrate. All the hard work that you did in researching, picking stocks and investing is finally giving sugary fruits. In short, this moment something that you might be waiting for a long time to occur and it finally happened. Therefore, ENJOY.

Nevertheless, when the market goes up, there may be few behavioral issues associated with it that you can notice in your day-to-day lifestyle. It’s important to understand them as these behavior change might hurt your investment strategy. Here are a few of the observable behavioral issues when the market goes up.

Behavioral Issues when the market goes up:

1. You’ll feel richer which may lead to increased personal expenses.

I remember the days when I used to go out to dine with friends whenever my portfolio rises over Rs 500 in a single day. I know it was stupid. Nevertheless, I and my friends were insanely interested in the market movements. The whole discussion during the dinner was regarding the same topic- which stocks went up and why I bought that stock. At that time, I was a recent college graduate who was making money from stocks alongside his regular job. Moreover, I enjoyed the fact that I’m making a passive income.

Now when I look back, I understand why this strategy was really stupid? The rise in my portfolio doesn’t mean an extra profit until and unless I sold those stocks. That was just the unrealized gains (I didn’t sell any stock). And in most cases, the profits kept fluctuating from the next day.

Overall, whenever the market goes up- you might notice increased personal expenses in your day-to-day activity. However, you should remember that this profit as a non-realised gain and hence, you must re-think before increasing your personal expenses.

2. You might become over-confident

When your portfolio is high and everything is working great, over-confidence is an obvious behavioral issue.

During such times, you will get the feeling that you’re awesome. Your strategies are working and hence you have mastered the art of investing. However, this might not always be true. Sometimes, your stock might go high along with the market and not because of its fundamentals. 

I remember the time when my friend, Gaurav -picked Sanwaria agro at Rs 7.35 (September 2017). The stock moved from Rs 7.35 to Rs 28 within two months. Although he was not even three-months-old in the world of investing at that time, he started feeling that he was a seasoned stock market investor. And he became so overconfident that he bought 2x quantity of stocks than what he originally purchased at a price of Rs 25 per stock.  The stock moved down after touching Rs 28 mark and currently it is trading at Rs 13.35. Overall, although Gaurav purchased the stock at a very discount price, he didn’t make any significant profit or loss. Nevertheless, he learned an important lesson- ‘don’t become overconfident when your stock goes up in the bull phase.’

3. Your risk taking ability might increase:

Increased risk-taking ability is the byproduct of over-confidence.

People generally research a lot before investing in any stock when the market is not doing well. Although the stocks might be trading at a discount during that time, but they are afraid that the market might go even lower.

However, when the market goes up and everyone you know is making money- you might be inclined to take more risks. During bullish phase, people tend to invest more as they do not want to miss the opportunity.

4. You might lose focus on your investment discipline:

It’s really common for the investors to lose sight of the investment decisions when the market is high. Maybe you started investing with a strategy to build a diversified portfolio with equal investment in different sectors. However, as one of your stock is doing exceptionally well, you might be willing to sell all the other stocks and invest in your winning stock.

Or maybe, you might be planning to change your strategy from a diversified portfolio to investing intensely in the mid-caps as they are performing the best during that market. Overall, it’s difficult to follow a disciplined investing strategy market is high. Most people easily lose focus on their investment discipline when the market goes up.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: HOW TO PICK WINNING STOCKS? Enroll now and start your stock market journey today!

The Golden Rule to Follow When the Market Goes Up

Stick to your Strategy:

This is the golden rule to follow when the stock market goes up. As discussed above, when the market is high, you will notice many behavioral issues in your daily lifestyle. You will start feeling richer and might plan to buy your favorite automobile. Or, you might plan to invest more and more in the market to ripe extra profits.

But sticking to your original plan with which you started investing in the best approach here. If you are investing for your retirement fund, then let your investment continue to run. Moreover, invest regularly in the market with the amount that you initially planned. Don’t sell off your stocks just to keep that money in your bank account – if your targets has not been achieved. You might have made some good profits when the market goes up. But it has the potential to give even better returns. Overall, Ignore the short term market profits and focus on your long-term goal.

Also read: Should You Invest in Stocks When The Market is High?

BONUS: Rebalance your portfolio

Rebalancing your portfolio is also a good strategy to follow when the market goes up.

For example- let’s assume that you initially planned to invest 70% in equity and 30% in debt funds. However, when the market is high (and your stock portfolio is in profit), this allocation might change to 75% in equity and 25% in debt funds. Here, you should rebalance your portfolio to the original ratio of 70:30.

Quick Note: Rebalancing works similar to averaging your portfolio. For example, here when the market is high and you purchase debt funds to rebalance your portfolio- you might also be averaging your debt funds. You are purchasing debt funds when they might be down (contrary to the market which is high).

Bottomline:

When the market goes up, it’s definite reason to celebrate. However, during these times, you can also expect some general behavioural changes. You might feel a little richer when your portfolio is high. However, remember that these are non-realized profits and hence, you might not be as much rich as you think. You only have the money on paper and not credited to your account. Lastly, ignore the highs and stick to your investment strategy & your long-term goals.

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

stock market meme 20

33+ Best Stock Market Memes That Will Make Your Day.

33+ Best Stock Market Memes That Will Make Your Day:

Most people do not enjoy the stock market. The imagery that Dalal Street conveys to the general public, is purely monetary and a tad too serious. However, sometimes all you need is a break. In this post, we have complied with 33+ best stock market memes that will make your day. Check out these funny stock market memes and enjoy.

General Disclaimer: The below-given stock market memes are not the property of Trade Brains. They are collected from the internet. Please refer to the links mentioned in the images to find their real source. 

Best Stock Market Memes

1. Watching the stock markets…

2. Snow is falling…

3. Sounds Risky…

4. True Love…

5. They shorted my stocks…

6. Understanding the stock market…

7. What do bulls and bear eat…

8. Stock market crash vs divorce…

stock market meme 33

9. What is a bull market?…

10. How long should I hold?…

11. The most precise stock market indicator…

12. Damn, I miss those days…

13. Forex trading food chain…

14. The Candlelight dinner…

15. How to read charts?…

16. How most people view the stock market…

17. The stock market in Modi Government…

18. Investing vs trading…

19. How politicians view the stock market…

20. You mean to tell me…

21. Bull, bear, and snakes…

22. This is just a correction…

23. Am I trading better?…

24. Damn you, expectations…

25. Just follow the herd, you stupid Trevor…

26. Drawing the trends by experts…

27. Sun raha hai na tu

28. Following the herd lately…

29. Dear Trading Diary…

stock market meme 32

30. Is my old room still available, Mom?…

31. Finally, the scroll of truth…

32. Best stock trading software…

33. I’m afraid to ask too…

stock market memes 35

34. I was losing money…

stock market memes 34

That’s all, folks!!

Hope you enjoyed these stock market memes. Don’t forget to share these with your trader friends… #Happy Investing :p

 

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

latest financial news

The little known ways to read the latest financial news, effortlessly.

The little-known ways read with the latest financial news, effortlessly:

Stock market investing is a dynamic activity. Here, the things change fast and that why you need to keep yourself updated with the latest financial news.

There are hundreds of phenomenon happening daily in the stock market. From the stock related news like corporate announcements, quarterly results, board meetings etc -to the big scale news like fluctuation in crude oil price, Indian currency rate, local and global economy etc -you need to remain informed with all of these.

In this post, I’ll walk you through the best mediums to keep yourself updated with the latest financial news and happenings in India and the world.

General approaches:

When a newbie enters the stock market, he/she will energetically subscribe to a popular financial newspaper and start reading it daily. However, this process will hardly continue for a week or two. After that, although the newspaper subscription will continue- but they will just pile up in the corner of a room.

This happened to me too. At that time, I was in college and I subscribed to the Hindustan business newspaper. I thought that this will help me to remain updated with the latest financial news. Nevertheless, it turned out that I hardly read any newspaper in the morning as I’m not a morning person (usually I wake up after 9 AM). Further, after the classes, I just didn’t get any time to read the newspaper as I was much involved in extra-curricular activities (including sports). Many a time, I also tried to read the newspaper in the classroom.. and it didn’t end well.

Overall, there was a huge pile of unread newspaper in my hostel room by the end of the sixth month. Later, I decided that I won’t waste any money on the newspapers again as I knew I wouldn’t be able to give enough time to sit on a couch and read that newspaper.

Nevertheless, reading a newspaper is not the only option to remain updated with the latest financial news. I prefer reading stories/news on mobile apps and websites. They are cheap and easily fits into my schedule. I could read the news anytime (whenever I’m free or have some extra time). Further, apps are also a good source for instant alert/notification. Overall, reading news on mobile apps turned out to be my style.

Anyways, which medium you choose to keep yourself updated with the latest financial news totally depends on your preference.

newspapers

For example, my father likes to read the newspaper daily in the morning. And if any day, the newspaper doesn’t come (because of whatsoever reason), he feels like his day is incomplete. I tried convincing my father to use financial apps to read the news by installing a few good mobile apps on his mobile. But at the end of the day, he prefers reading a hardcopy newspaper. And I totally understand it.

In short, everyone makes their own choices. What matters more is that you remain updated with the latest news using whatever medium you prefer. 

Different mediums to read the latest financial news.

Here, I’m going to suggest a few best newspaper, websites, apps and other mediums to keep yourself updated with the latest financial news. I’ve tried most of them and found useful. Besides, you do not need to try everything listed below. Just find out which one you prefer (or which suits your lifestyle) and stick to it.

Newspapers:

Here are some good newspapers that you can subscriber for reading daily financial, business and economy news.

Quick Note: Although the hard copies of the below-mentioned newspapers are easily available everywhere, however, I’ve also included the links to the online ePaper for these news agencies. 

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

Websites:

Few good websites that you should bookmark on your laptop/desktop browser to read the latest financial news–

Quick Note: You can also subscribe to the Bloomberg quint Whatapp broadcast to receive the latest news on your mobile. They usually send 5-8 important daily news on WhatsApp and its fun to read. Just send a ‘START’ message on +4915792397922 to activate the broadcast. Read more here: News On The Move BloombergQuint Is Now On WhatsApp

Mobile Apps

Some good apps that I’ll recommend you to download to receive the latest financial news related to business and stocks are Moneycontrol, Economic Times, Edelweiss and Equity Pandit.

Also read 7 Best Stock Market Apps that Makes Stock Research 10x Easier.

Google Alerts

Google Alerts is a content change detection and notification service, offered by the search engine company Google. In simple words, if you set an alert for any company on google alerts, then Google will send you all the important news published on the web related to the company directly in your email.

You can set google alerts for the different companies and industries to receive daily news regarding them. (Quick Tip: I use google alerts to get notifications for the stocks that are in my portfolio or the ones that I’m tracking).

Read more here: How to Use Google Alerts to Monitor Your Portfolio?

Bottomline:

Keeping yourself updated with the latest happenings in the financial world is an essence to become a successful stock market investor. You might not be surprised to know that the biggest investor of all time, Warren Buffett, reads 4-5 newspaper daily in the morning.

Nonetheless, with the advancement of the internet and technology, there are a number of mediums available today to keep yourself updated with the latest financial news. Choose a medium that suits you the best and stick to it. #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

index fund investing in india

The Essential Guide to Index Fund Investing in India.

The Essential Guide to Index fund investing in India:

Hi. Welcome to the day 11 of my ’30 days, 30 posts’ challenge- where I’ll be writing one interesting post daily for the 30 consecutive days. In the last couple of days, I received multiple emails to cover the topic- Index fund investing in India. So, today’s post is based on the public demand.

Here are the sub-topics that we are going to discuss in this post.

  1. Introduction
  2. What is an index?
  3. What are index funds?
  4. Pros of Index funds
  5. Cons of Index funds
  6. Why are Index funds more popular in developed countries?
  7. Conclusion

It’s going to be a long post as I’ll cover everything from the perspective of a beginner. However, I guarantee that it will be worth reading. So, without wasting any more time, let’s get started–

Introduction

There are more than 5,000 publicly listed companies in Indian stock market. Therefore, selecting a few good stocks to invest can be a cumbersome work for any fund manager.

There are two popular approaches to managing a fund- Actively managing and passively managing.

In an active fund, the fund managers choose the stock to invest based on the goal of that fund. Here, the manager tries to beat the market by choosing better stocks. Nevertheless, the problem with active funds is that the return on these funds depends on the goal and efficiency of the manager. Moreover, even if you are able to find a good fund with a coherent manager, still there is some danger of what might happen in the case the manager quits and moves to some other company. 

On the other hand, the passive funds are process driven. Here, the fund invests in an index and the manager doesn’t have to choose the stocks to invest.  For a passive fund, even if the manager leaves, it won’t create much trouble. 

Anyways, before we start discussing index funds in details, let’s quickly brush up the basics.

What is an index?

Since there are thousands of company listed on a stock exchange, hence it’s really hard to track every single stock to evaluate the market performance at a time. Therefore, a smaller sample is taken which is the representative of the whole market. This small sample is called Index and it helps in the measurement of the value of a section of the stock market. The index is computed from the prices of selected stocks.

For example, Sensex also called BSE 30, is the market index consisting of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). And Nifty, also called NIFTY 50, is the market index which consists of 50 well-established and financially sound companies listed on National Stock Exchange of India (NSE).

Read more here— What is Sensex and Nifty?

Few other popular indexes in India are Senex, Nifty 50, Nifty next 50, BSE Smallcap, BSE midcap etc.

What are index funds?

Index funds are a passive strategy that attempts to generate similar returns as a market index. These funds try to replicate the performance of a specific index by entirely copying the stocks in the same composition as of the index.

For example, if an index fund is benchmarked to Nifty 50, it will buy all the 50 stocks in the Nifty index in the same proportion as nifty 50.  Here is another example- Reliance Index -Sensex -Direct (G) fund is benchmarked to Sensex. Hence, it copies all the 30 stocks of Sensex in the same proportion. Therefore, its return will be similar to Sensex.

Few of other popular Index funds in India—

(Source: The Best Index Funds for 2018 -GROWW)

Pros and Cons of Index fund investing in India

No investment strategy is perfect. Here are a few advantages and disadvantages of index fund investing in India —

Pros of the Index funds-

  • Low expense ratio– As these funds are passively maintained, the expense ratio of index funds are relatively lower compared to the active funds. This ratio can lie somewhere between 0.2-1.2%.
  • No dependency on the fund manager – In the index funds, the stocks are not picked by the fund managers. These funds are merely copying the index. That’s why even if the fund manager of an index fund quits, it won’t create any havoc (unlike actively managed funds).
  • Easy to understand and select the funds — For the active funds, you need to read and understand the reason why the fund manager believes any stock can perform well in future. And this can be a very tedious job.  On the other hand, the stock selection in the index fund is quite straightforward.

Cons of the Index fund-

  • No flexibility to the fund manager— In an index fund, the managers cannot pick stocks of their choices. So, even if he/she knew some amazing stocks- the fund cannot invest in it.
  • Index funds can’t beat the returns from the market: The best an index fund can do is to match the returns of the specified index. Nevertheless, if you subtract the expense ratio and other charges- the returns are even lower.
  • Have to stick with the poor stocks: An index fund can’t sell a stock which is a part of the index. For example, if a fund invests in the Nifty 50 stocks- even if some of the stocks (out of 50) are not performing well/doesn’t have good potential, still, the manager can’t sell that stock. An index fund has to keep as the stocks similar to the index in the same proportion.
  • An index fund holds all the risks associated with the asset class: If a particular index has some definite set of risks, then the associated index fund will also have the same risks.
  • Tracking Error in Index funds: Many times, the index fund does not perfectly track the composition of the fund. This can be because of a number of reasons like the difference in the time between accepting investment and buying stocks, rounding off the stock units, dividend adjusting etc.

In short, index fund investing in India has both pros and cons- as discussed above. Nonetheless, there’s one additional sub-topic regarding index fund investing in India, that you should also know.

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!

Why are Index funds more popular in developed countries?

There are various studies that suggest that investing in index funds outperforms actively managed funds over the long-term. But most of these studies have been made in developed countries like US, UK, etc. And hence, the conclusion might not be the same for the developing countries like India.

For the developed countries, the stock market is somewhat efficient and they have a broader index. In addition, the expense ratio for the Index funds in the US is also quite low (less than 0.2% for most of the funds). That’s why people prefer investing in the passive index funds in the developed countries.

However, India is a developing country. It has a lot of opportunities outside the index fund that an active fund manager can explore. Moreover, there are a number of active funds in India which has consistently beaten the market. And that’s why active funds are more popular than index fund investing in India.

Also read: Is the stock market efficient?

Conclusion:

Index fund investing in India is a good alternative for the people who like a straightforward way of investing in funds. These funds have no dependency on the fund manager, a pre-set defined stocks and a low expense ratio compared to the active funds. The best part- unlike active funds- Index funds are easy to select. 

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