greetings kochi! s. ananthanarayanan capricorn [email protected]
TRANSCRIPT
GREETINGS KOCHI!S. ANANTHANARAYANANCAPRICORN [email protected]
S. ANANTHANARAYANA
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ANNUAL REPORTS & INVESTMENT STRATEGIESHow to invest & how to create and read annual reports
Companies and scrips named are not recommendations to invest. Do your own analysis before deciding to invest.
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MONEY MAKING IS NOT EASY Investing is not equal to printing currency notes.
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THE MARKET IS EXTREMELY DYNAMIC WITH A HUGE SET OF VARIABLES Demand & supply of floating stock Valuation Asymmetric information People behavior Individual bias Mass psychology Corporate performance and outlook Sector prospects Inflationary expectations Currency movements
Commodity volatility Country fundamentals Government interventions Regulator speak & signals Global influences Monsoons, etc
All of these add to market unpredictability
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STOCK PICKING IS ABOUT IMPERFECTIONSActually, we search for: Imperfection in valuation Imperfection in demand & supply Asymmetric information about the company Several other unknowns
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VOLATILITY IS AN INDICATOR OF EXAGGERATED IMPERFECTIONPrice reflects imperfect public opinion
Movement in stock price is an attempt to capture perfection
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SEARCH FOR PERFECTION IS THE BASIS FOR A TRADEPricing errors are what give us a trade Do not expect the market to be perfect
Market is always searching for perfection
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INSTANCES OF HUMAN & PRICE IMPERFECTIONSHarshad Mehta & Ketan Parekh times:
ACC went up from Rs.200 to Rs.9,000 in 3 months
Apollo Tyres, BPL, Castrol, Reliance, TISCO, Sterlite, Videocon Valuations were decades ahead.
Later, similar shockers seen in Himachal Futuristic, Global Tele, Zee Telefilms etc.
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TULIP MANIA IN EUROPEOne Tulip flower sold for :
Two loads of wheat4 loads of rye4 fat oxen8 fat swine12 fat sheep2 hog heads of wine4 tonnes of beer2 tonnes of butter1,000 pounds of cheeseA complete bed
A suit of clothes, and a silver drinking cup
All these were valued at ƒ2,500.
Yes, ƒ2500 for one beautiful Tulip flower
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GREATER FOOL THEORYPrice of an object is determined not by its intrinsic value but by irrational beliefs and expectations of market participants
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AND THERE IS ALWAYS A GREATER FOOL!Companies promoted with Objects Clause in the Memorandum of Association:
To grow wool on egg shells
To take over all the debt of the Government of United Kingdom; and guarantee interest payment of 5%
To explore America & Mississippi river, to find
gold and silver
To carry on an undertaking of great advantage but no-one to know what it is! To reclaim sunshine from vegetables
To build floating mansions to extend the landmass of Britain
All the IPOs were over-subscribed!!
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EXPERTS HAVE COME OUT WITH SEVERAL INVESTMENT MODELS Value Investing Capital Asset Pricing Models Computer Simulated Random Investment Models Discounted Cash Flow Methods
Top-down investing Bottom-up investing Fundamental analysis Technical analysis Momentum investing Contrarian investing Dividend investing
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INVESTOR BEHAVIOR NOT IN LINE WITH TEXTBOOK CONCEPT OF EFFICIENT RATIONAL INVESTORInvestment strategy should accommodate
How investors behave &
What investors want
Less than fully rational investors may cause market prices to
Deviate from their fundamental values
Make the markets less than efficient
Disrupt the market
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SPECULATORS ARE MASQUERADING AS INVESTORSTraditional finance will ask rational investors to keep away from lotteries
Human behaviour seduces the participants to enter speculation
There are far too many speculators than investors in the market. They believe they are investors, when in reality, they are speculators.
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RISK VERSUS RETURNS. WHAT WOULD YOU DO?If you could increase your chances of improving your returns by taking more risk, would you be willing to take:
a lot more risk with all of your money?
a lot more risk with some of your money?
a little more risk with all of your money?
a little more risk with some of your money?
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PSYCHOLOGY OF AN INVESTOR Investors take more risk than what they wish to take
Not fully conscious of their downsides
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CAN WE BE SMARTER INVESTORS? Can we learn from the past & extrapolate the future trends?
Can we figure out the infinite unknown based on the finite known?
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WHAT JOHN MAYNARD KEYNES SAIDKeynes said four factors were at work:
Stock investors have scanty knowledge of the companies;
Short term fluctuations in profits disproportionately influence stock prices;
Psychology of investors changes stock prices which may not have anything to do with future earnings;
Professional investors try to anticipate & move before the non-professional investors do.
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SOMETHING ELSE JOHN MAYNARD KEYNES SAIDKeynes examined probabilities of alternative behaviour:
It is not a case of choosing those [faces] which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.
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TRY THIS. RANK THEM IN THE ORDER YOU PREFER. Kavya Madhavan
Namita Pramod
Manju Warrier Remya Nambeesan
Amala Paul Bhavana
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NOW RANK THEM IN THE ORDER OTHERS WILL PREFER Kavya Madhavan Namita Pramod Manju Warrier Remya Nambeesan Amala Paul Bhavana
When you anticipate how others might behave, your order of preference changes to accommodate theirs.
Keynes believed that similar behaviour was at work within the stock market. This has people pricing shares not based on what they thought their fundamental value was, but based on what they think everyone else thinks their value was, or what everybody else would predict the average assessment of value was.
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THERE ARE NO ABSOLUTES HERE. TOMORROW ISN’T YESTERDAY.No statistician or algorithm expert has found a formula that consistently produces profit or protects capital
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BUT, THERE MUST BE SOME METHODS THAT ALWAYS WORK?The short answer is NO.
There are no certainties, no assurances and no methods that are proved beyond doubt to work.
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WE NEED ALL THE INFORMATION WE CAN GET BECAUSE WE Are not running the business Do not have domain knowledge or core competence Have no idea of the competitive pressures Need outlook of the business Seek trend in the business segments, shrinking/growing core markets Do not know the entry barriers or cost of putting up a unit
Do not know the real value of the business Do not know the man years of skill sets the company owns Do not have any control on what they do or when they will do Do not know the appropriate valuation of the business Have an outside or tangential knowledge of the business
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WHICH BRINGS US TO THE ANNUAL REPORTWikipedia says the annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people reliable information about the company's activities and financial performance.
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WHAT DOES THE ANNUAL REPORT USUALLY CONTAIN? General Corporate Information Chairperson’s statement Director's Report Management Discussion & Analysis Report on Corporate Governance Accounting policies Balance Sheet Statement of Profit & Loss Cash Flow Statement Notes to the financial statements Auditors’ report
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WHAT SHOULD THE ANNUAL REPORT CONTAIN AS PER LAW? Refer Section 134 of the Companies Act
Relevant rules such as Companies Accounting Rules etc.
Requirements of the Listing Agreement
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WHAT DO INVESTORS NEED?
Clear & concise facts
Statistical data for investors to evaluate
Company’s goals & plans to accomplish
Be truthful, straight forward & say it, as it is
Avoid withholding bad news
Avoid making extravagant promises
Avoid making predictions without facts to back them up
Avoid projecting negatives as positives
Investors, analysts & other stakeholders need credible information
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ARE YOU INVESTOR ORIENTED OR ARE YOU MANAGEMENT ORIENTED?The test of providing credibility is in answering two questions!
Are you a trustee of the minority shareholders or of the promoter?
Who does the company belong to?
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ONE GOOD DEED LEADS TO ANOTHER
Accountability breeds trusteeship
Companies that share information tend to drive themselves
Companies should invest in information
Equally, investors need to invest in information
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WHAT IS THE DOWNSIDE OF WITHHOLDING INFORMATION?1. Trust deficit
2. Low credit rating
3. Higher cost of funding
4. Higher attrition &
5. Lower valuation
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THE ANNUAL REPORT SHOULD BE RENAMED. WE SHOULD CALL IT THE ANNUAL ACCOUNTABILITY REPORT.
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10 STEPS TO IDENTIFYING WINNERS
1. Go beyond the numbers. Try & understand the business
2. Company is in a business that has customer demand;
3. Lower supply side risk4. Is in the top 3 in its
segment5. Has competitive strength6. Good corporate
governance reputation & no major controversies; Avoid companies with poor record of ethics or skeletons in the closet
7. The promoters/directors have domain knowledge & core competence
8. Ensure sustainability of business & no serious threat to survival
9. Is company working for the promoters & related parties?
10.Raise your benchmark. Put a premium on integrity.
All of these are Qualitative Data.
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10 MORE STEPS TO IDENTIFYING WINNERSIf the quality reviews pass
thetest, then move on to thesequantitative parameters:
1. Rising product volumes;
2. Improving market share; prefer companies that have pricing power;
3. Increasing operating margin (EBIDTA)
4. Reducing absolute interest costs or at least reducing interest per tonne of product; Is the MD or CEO the best
employee that the banks have?
5. PBT rising faster than topline
6. Rising EPS
7. Higher cash flow from operations
8. Reducing debt
9. Increasing bank balance
10.No qualification in audit report.
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KEEP IN MIND THAT
Revenue, expenses, assets & liabilities are the best indicators
Real are volume manufactured, cash & bank balance on hand
Cash received, cash & bank balance are real
Except if you are looking at Satyam Computers....... !!
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IN THE END, IT’S YOU WHO DECIDESMake it difficult for anyone to reach your monies, to park low performance company scrip or a company that is threatening to produce wool on egg shells or produce wind energy in foreign countries or produce roses in Africa to sell in Europe.
Your wealth is precious and you owe it to yourself that the funds are parked in assets that will perform for you, add value to your net worth and carry lower risk profile.
THANK YOU AND GOOD LUCK!S. ANANTHANARAYANANCAPRICORN [email protected]