Investment articles

When you decided to start investing, you end up with many options such as Gold, Real estate, bonds, Equity, Bank FDs, and many more. An equity investment attracts more to all types of investors whether an investor is risk averse, risk neutral or risk taker. The vision of every investor is to generate wealth while making an investment with or without having risk.

When you invest in equity you are not only buying a particular stock, you are buying a piece of business that generates value for you. Many people find difficulties while making equity investment decisions, but here are some basic checklists for equity investments that will help you to start your investment journey.

1. What is your goal and time horizon? – the first step to choosing investments is to determine your goal, time horizon, and most importantly your risk appetite. No doubt everyone’s goal is to make money but some investors focused on generating additional income during retirement, and some investors focus on the capital appreciation and building wealth. While making an investment you also need to determine the time horizon because it plays an important role. Your time horizon could be based on your financial goals.
2. Nature and perspective about business – “Never invest in a business you don’t understand,” the quote comes from Mr Warren buffet. One of the easy ways to burn capital is to invest in a business that you do not understand. Understand the type of business, current environment of the business, and outlook about the business along with the past financial track record of the company while investing.
3. Uniqueness in business – A unique business model differentiates the company from its industry peers. Uniqueness in the business model indicates the company’s ability to maintain its competitive advantage over its peers. This translates into adequate margins, consistent cash flow generation, and increasing the company’s value over time.
4. Quality of management – Do not only analyze the numbers but analyze the people behind the numbers. The quality of the management of the company plays an important role when making an investment decision. Father of growth investing, Mr Philip A Fisher says, investors should pick such companies for investments that have managements that show a strong sense of trusteeship and moral responsibility to their shareholders.
5. Financial ratios are critical – Balance sheet, Profit and loss statements, and cash flow statement are the three main documents released by the company. With the help of these, you can evaluate a variety of financial ratios, performance, historical growth, and financial strength. Understanding the financial ratios will lead you to move in the right direction. You can evaluate this ratio between different years and between its industry peers. Many basic ratios are critical for analysis such as Return on Equity (ROE), Return on Capital Employed (ROCE), Debt to Equity, inventory, and asset turnover ratio, profitability margins, and many more.
6. Be aware of value traps – Some companies look undervalued relative to their industry peers. There is always a risk that the company looks undervalued and might it suffering from financial distress and low future growth potential. Many new investors fall into this value trap. To avoid that trap always evaluate the company’s financial numbers, quality of management, competitive advantages, and nature of business.
7. Avoid rumours – Another easy way of losing capital is to chase rumours and speculative news. Do not hurry and buy stock on such news without checking new developments. It is all right to not buy the stock which looks attractive based on the rumours and speculations.

At the end of your research process, you might end up with a list of limited numbers of companies. It is fine. Your research process helped you to eliminate companies which not suitable for your financial goal, and your risk appetite.

Happy Investing!

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

“The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The Intelligent Investor is a realist who sells to optimists and buys from pessimists.”: Jason Zweig, The Intelligent Investor.

That’s exactly what happened in India for software services between pre-Y2K and 2001; Realty, power & infra stocks in 2008 and 2020, amidst the covid fear, the hospitality and leisure sectors.

It is proven time and again that such extreme corrections provide the best investing opportunities. Most stocks that get beaten down for no fault of theirs have value in them. However, falling from their peaks is neither a necessary nor a sufficient condition for having value. To recognize value, we have to rationally distinguish between transitionary and permanent events.

Usually, we underestimate the risk when the market is going up and miss out on opportunities when the market is going down. Optimism vs pessimism is characterized by fear of missing out in a bull run vs fear of crashing out in a bear phase.

Buying when the carnage is happening requires separating emotions from rational thinking.

Investors can use the following framework to identify the right stocks during times of pessimism:

• When no one is talking about a sector/company, when it is totally out of favour, it generally trades at a historically low valuation.
• Survivability test – can the company survive the current downturn? That will largely depend on the company’s business model, the amount of debt it has, and its cash-flow-generating ability.
• Are the insiders i.e., the founders or the management increasing their stake in times of pessimism? If yes, that’s a very positive sign. It shows their belief in the company.
• The cost-saving initiatives have the potential to permanently improve a company’s profitability.
• If a company is facing temporary demand disruption, operating at lower capacity utilization is not always a negative point. This means with the rise in demand the company can improve output without any significant requirement for capacity expansion.
• Even if the company stands true to all such parameters, if it is facing a corporate governance issue, it should be avoided. There are always better alternatives.

Conclusion: It is rewarding to be optimistic during pessimism however, one should be extremely disciplined and patient in order to reap the results. Also, sticking with the framework, setting up milestones and avoiding companies with governance issues proves very helpful.

With excerpts from: www.cfasocietyindia.org

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

How do humans learn anything? Through feedback loops. Imagine you are riding your bike and getting late for the office – you don’t see any traffic cop at the red light… and you jump it. There was an incentive and an opportunity. A few hours later, you get a challan message. There was a camera that caught you. The next time you won’t dare to jump the red light as you already got feedback from your previous misadventure. Similarly, if you, as a good Samaritan, helped a blind man cross the road, you will instantly feel good for the deed.

Sportspersons make excellent use of feedback they receive when they make a right move or a wrong move. A tennis player who keeps hitting the net while playing a backhand topspin, instantly realizes that she has to practice it more while training.

Unfortunately, in investing, it is risky to rely on feedback.

You buy a stock and the next day the market falls and takes the stock down with it. Does it instantly become a bad investment? A long-term approach is critical for most investments to succeed.

There are a dozen reasons for markets to go up and many times the same reasons for them to fall. But feedbacks are most useful when the link between our actions and results is clear. A stupendous 25% GDP growth takes the market down just because the street was expecting an even higher number. In investing, the instant results of any action can be highly misleading. Over short time horizons, meaningless noise dominates outcomes.

Learning from short feedback loops only works if the impact of negative feedback is minor. You know that drinking poison will kill you. You don’t have to verify it by consuming it and facing its consequences. Similarly, we already know the risks involved in taking concentrated stock positions, borrowing money to invest in the stock market, and putting money in an unregulated instrument like crypto. The negative consequences of these won’t count as lessons after facing catastrophic losses.

Investors learn from their own experiences and the experience of others. Our sample size is simply too small. And hence, it is far too easy to learn the wrong lessons.

Here is a short, non-exhaustive list of things to remember:

• Ignore near-term feedback as much as possible.
• Decide what type of feedback is useful.
• Learn the right things from the right people.
• Weigh evidence correctly.
• Focus on general principles rather than specific stories.

In investing, useful feedback is often received too late because meaningful results only emerge over time. Investing is an exercise in dealing with short-term noise, deep uncertainty and profound behavioural challenges. The best we can do is base our decisions on sound principles, always be willing to learn and understand that most short-term feedback can be ignored.

With excerpts from www.behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their research and analysis and should consult their investment advisors to determine the merit, risks, and suitability of the information provided.”

“Money saved is money earned.” As soon as we start earning, we think of saving and investing money to achieve our future goals like marriage, buying a house, or children’s education and retirement. To achieve the financial goals, we look into many options available in the market.

We all know about investments like FD, mutual funds, and stocks. Many of us aren’t aware of more investment options – hedge funds, futures and options, and alternative investment funds. In each of these categories, there exist many subcategories offering very detailed and complicated investment options. Some funds specialize in arbitrage investing, high-frequency trading, investment strategies that are top secrets, and so on.

The greed for getting maximum returns out of our investments makes us investigate and try all the options available. But the reality is that a huge chunk of these complicated investments simply fails to outperform simpler investments. Even the ones that do perform very well – choosing the right one itself is a very complicated task, which most normal investors cannot afford to do. Most individual investors work full-time at their job or business. Very complicated investments require constant time and attention –that simply isn’t available.

If it is complicated if it needs to be explained by someone sitting at a lunch table if it’s proprietary if it’s only available from certain companies and if it makes claims about your future financial health, don’t buy it.

Instead, go to the periphery of the market where all the least processed, least complicated, least expensive financial products can be found, fresh every day.

Like any industry, investing has its language. And one term people often use “investment portfolio,” which refers to all your invested assets.

Building an investment portfolio might seem intimidating, but there are steps you can take to make the process painless. One of the most important things to consider when creating a portfolio is your risk tolerance. Your risk tolerance is your ability to accept investment losses in exchange for the possibility of earning higher investment returns. Your risk tolerance is tied not only to how much time you have before your financial goal such as retirement but also to how you mentally handle watching the market rise and fall. If your goal is many years away, you have more time to ride out those highs and lows, which will let you take advantage of the market’s general upward progression.

Steps for building a portfolio

• Decide the amount to be invested
• Choose your investments based on your risk tolerance
• Determine the best asset allocation for you based on the risk-taking capacity
• Rebalance your investment portfolio as needed
• Keep reviewing and update

Happy Investing!!!

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered investment advice or research recommendation. The users should rely on their research and analysis and should consult their investment advisors to determine the merit, risks, and suitability of the information provided.”

Have you heard that Facebook has changed its name to Meta and that Mark Zukerberg is betting the future of his company on a vision that will have us spend more time in the virtual world?

Well really, the metaverse uses different sets of technologies such as virtual reality (VR) and augmented reality (AR) to allow people to have real-time interactions and immersive experiences across distances. It’s expected to be a space wherein our digital world and the physical world converge.  The provider companies will be looking forward to providing experiences to users such as virtual concerts, theme parks, casinos, sports arenas, shopping centers, etc. There are several games such as Decentral, Roblox, Minecraft, etc. that have their own metaverse worlds equipped with their own avatars, interactions, and currency. The gaming industry allows users to pay real currency for virtual currency which can buy you lands, farms, and businesses to progress faster in the game.

The ‘metaverse’ has essentially amplified this concept wherein you can build, trade, and make money using NFTs via cryptocurrency. Virtual goods can be turned into NFTs and stored on metaverse platforms as assets. Metaverse users can then trade these NFTs for cryptocurrency or choose to cash out.  Now, you would be wondering what are these NFTs. NFT is a nonfungible token associated with a digital or physical asset and stored on blockchain technologies such as cryptocurrencies such as bitcoin, or Ethereum. These can be sold or traded.

For example, ‘Decentraland’ is a 3D virtual world browser-based platform where users buy virtual plots of land as NFTs via the MANA cryptocurrency, which uses the Ethereum blockchain.

These platforms are targeted toward the tech-savvy younger audience (15-30-year-olds) wherein the audiences are expected to be present in a Meta world for businesses such as work meets or for fun activities such as concerts. The experience would be similar to consumers visiting physical stores to purchase goods. Metaverse could facilitate hybrid work meetings or training programs spanning multiple locations.  Several brands are beginning to experiment with the metaverse. Nike is looking to connect with younger generations through a gaming and virtual reality experience and has launched Nikeland, a virtual world made in partnership with Roblox. By early 2022, nearly seven million people had visited Nikeland.

What are the big tech companies such as Meta (earlier Facebook), Google, and Microsoft doing with metaverse?

Meta, in December 2021 announced that it plans to invest USD 10 bn into metaverse platforms and that money will be going towards connecting people via this new digital experience.

Microsoft announced in January 2022, that it would be acquiring Activision Blizzard, an enormous video game developer, and publisher for USD 68.7 bn. Google has invested about USD 39.5 mn in a private equity fund for all metaverse projects for utilizing augmented reality and making services like Maps and YouTube into the virtual landscape.

Tech Mahindra announced the launch of the first-of-its-kind ‘Meta Village’, a digital twin of Paragon in Maharashtra to gamify learning on the Roblox platform. Strengthening its commitment to the ‘Make in India’ initiative, Tech Mahindra initiated its launch of the Meta Village to drive innovation in the education sector at the grassroots level. The Meta Village will ensure that the students play on Roblox to learn the basics of computers and coding in Bharat Markup Language (BHAML), a platform built by Markers lab that enables anyone to code in their native language.

How will it affect companies?

Metaverse is an immersive experience that holds potential for innovation in branding, marketing, and commerce. Metaverse creates opportunities for companies to reach out to consumers in a more engaging manner. Brands would have to create their presence in the metaverse with 3D representations of their products, for example, a ‘try on virtual clothing’ option for a clothing brand.

What do these new developments mean for investors like us?

Investors can invest in businesses involved in immersive hardware, semiconductors, interactive platforms, connectivity, and other potential layers that comprise the metaverse universe. Patience is essential to realize meaningful returns on metaverse investments, which may take a decade or more to develop.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

In continuation with our previous post, following are a few situations of what we think we can do, but probably can’t:

• Ignoring an attractive bad investment story: Generally, a bad investment comes with an attractive story. At first, we ignore the story and we think that only other people will fall for such a story. But after some time, the story starts building. We see people invest in it, and we feel that it’s a good growth story. Eventually, we end up investing in it. As the basis of the story falls out, the investment loses its value, and we end up losing our invested capital. Most investors feel that they won’t fall for such stories, but they end up falling for them.
• To be a long-term investor: Long-term investing is very difficult to do, but it also rewards greatly. Doing very little seems like an easy task. But the temptation to act is so often overwhelming. Acting a lot, and doing something is often the opposite of doing very little when it comes to investing. Every day brings a new story, a new doubt, and a new opportunity. There’s always a new reason to be a short-term investor. Many feel that they can be long-term investors. But only a few people can do it.
• Benefit from extremes: Most of what we witness in financial markets is just noise, but extremes matter. When performance, sentiment, and valuations are at extremes (either positive or negative) the opportunity is for investors to take the other side; Yet, many investors are afraid of losing their capital. They feel that being part of the crowd will save them from taking wrong decisions. Such investors don’t benefit from the extremes of the market.
• Overcoming terrible odds: Investors frequently make decisions where the odds of success are incredibly poor. We think that we will make money by investing in a star fund. But we forget that we are looking at the historical performance. The same performance may or may not repeat. There are many more factors that might have resulted in the success. But we invest without considering these facts.
• Find the ‘one’ investment:Investors are aware of the benefits of diversification. But it feels a little boring and represents an admission of our limitations. We would prefer to find the ‘one’ investment that will transform our financial fortunes. Whether it be a stock, theme, fund, or ‘currency’. Such ambition may not end well. We feel that we may find that one investment and make a fortune. But diversification proves to be more beneficial.

The author concludes that being humble about the challenges of financial markets and aware of our circle of competence is very valuable and an investor should avoid becoming one’s own worst enemy.

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

The author Joe Wiggins says that poor investment decisions take place when our expectations of what we are capable of exceed the reality.

Following are a few situations of what we think we can do, but probably can’t:

• Timing the markets: many investors try to predict what will happen, and when will it happen in the stock market. The ‘when will it happen’ part is considered as timing the market. The stock market is considered as a complex, adaptive and a chaotic system. Forecasting ‘when will it happen’ is very difficult and usually can’t be done accurately. Yet, investors think that they can do it and continue to do it.
• Truly understanding complex funds: Many funds are complex in nature. Such funds promise high return with low, differentiated risks. Investors usually don’t understand the nature of such funds. Yet, they are attracted to the high return promises made by these funds and invest in them. They break an important rule of investing. Don’t invest in things you don’t understand.
• Predicting Inflation: Macroeconomic variables are affected by many factors. One such variable is inflation. Inflation is usually affected by many factors. It is hard for an investor to predict inflation. The investor doesn’t know which all factors are playing the role at a given time. Hence, the investor won’t be able to predict the inflation estimates accurately.
• Pick funds that consistently outperform: A myth in fund investing is that any manager or strategy can consistently beat the market. Even a skillful fund manager will underperform for prolonged periods. Many times, we fail to realise this. Due to this, we get trapped in a painful cycle of selling losing funds and buying yesterday’s winners.
• Withstand poor performance: Weak performances are almost impossible to avoid for any strategy, fund or asset class. These scenarios are easy to deal with in theory. But in practice, the experience is entirely different. An investor can have stress, anxiety and doubts during difficult periods. An investor may feel that a poor performance can be completely avoided throughout the life of the investment process. This leads to making poor decisions at just the wrong time.

Source: behaviouralinvestment.com

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Before we answer this question, let’s know how exactly does inflation affect investing:

How does inflation hurt?

In an inflationary environment, input costs for product-based businesses rise. Therefore, businesses have to increase the selling prices of their products. The end consumer ends up paying a high price for the same product which used to cost less before. Else, the business can keep the prices same and reduce the quantity of the product. Here, the consumer pays the same price, but for less quantity of the same product.

If the prices remain inflated for a prolonged period, it starts affecting the purchasing power of the consumer. It affects the demand for the company’s products. Sales volumes of the companies reduce. The company’s future growth is also negatively affected in such an environment. This has negative effect on its stock price, thereby reducing the returns for its investors.

Is there any way to invest in such an environment? There is! Let’s look at it:

• Service based companies may not be affected by high inflation. Eg- Software companies.
• Some companies can increase the selling price and still retain demand. Such companies have a good pricing power.
• Some companies sell luxury products at very high prices. The demand for their products remains constant even if they increase the price of their products. That’s because their customers are not affected by inflation as much as the common man.
• Some companies come under the category of consumer essentials. Their products are essential in the day-to-day life of their customers. The demand for such products doesn’t go away.

An investor can look for such companies that provide these products/services. They can invest in these companies even in a high inflation environment. An investor should keep it in mind that this environment doesn’t last for life time. But the stock prices may decline during such an environment. An investor should use this opportunity and invest at low prices in companies with sustainably growing businesses.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”