2. Aim
Provide a basic overview of the investment market and
steps to decide on stock investments
Agenda
Investments
Steps in investment analysis
Commonly used stock picking tools
Fundamental analysis
Value investing
Growth investing
Dhairya Mitawalkar (DK)
3. Investment Basics
Components of investment decision:
Type of investment
Real or financial
Markets
OTC, Exchanges
Securities
Types and risk/return profiles
Factors affecting investments
Macro-economic, micro-economic, non-economic
Investment analysis
What, when, how much to buy and for how long
Dhairya Mitawalkar (DK)
5. Investment management process
5. Monitor and 1. Understanding
update portfolio risk/return profile
(as per changes) (expectations)
2. Economic,
4. Construct political, social
portfolio analysis
(diversify)
(trends)
3. Industry
and stock
selection
(impact)
Dhairya Mitawalkar (DK)
6. Investment analysis
Economic • Which countries to invest in?
Analysis • What securities to invest in?
• Which industries are impacted?
Industry Analysis • How are they impacted?
• Which companies affected?
Company Analysis • Future outlook?
Dhairya Mitawalkar (DK)
7. Economic Analysis
Usually involves the study of economic indicators,
monetary policy and fiscal policy
Economic Indicator
Any economic statistic: unemployment rate, GDP, or the inflation rate
Indicates how well the economy is doing and how well the economy is going
to do in the future
Types
Procyclic
Same direction as economy. E.g. GDP
Countercyclic
Opposite direction to economy. E.g. Unemployment rate
Acyclic
No relation.
Dhairya Mitawalkar (DK)
8. Economic indicators
Leading indicators
Provides idea of future direction of economy
Change before economy changes
E.g. Stock market returns
Lagging indicators
Does not change direction until sometime after economy does
Reinforces view of economy
E.g. Unemployment rate
Coincident
Moves with the economy
E.g. GDP
Dhairya Mitawalkar (DK)
9. Economic analysis – examples
Expansionary monetary policy (control of interest rates)
Economy grows
Interest rates Money easily
(unemployment/
lowered available
inflation?)
Expansionary fiscal policy (government spending and taxation)
Governments Jobs created
invest money in Unemployment Multiplier effect
projects reduced
Currency exchange rates
Interest rates: USD deposits Cheaper to
attractive (USD import from
US > Japan appreciates) Japan
Dhairya Mitawalkar (DK)
10. Industry Analysis
Important step before stock picking
Avoid comparing apples to oranges
E.g. P/E ratios differ for different industries
Economic climate effects
Includes analyzing factors affecting
particular industry
Porter’s five-forces model
Understand how much industry affected
due to given economic climate
Cyclical or counter-cyclical to economy
Understand where industry is in its life
cycle
http://www.osovo.com/diagram/part_t3.gif
Dhairya Mitawalkar (DK)
11. Industry life cycle
Market growth life cycle Product/Business life cycle
http://www.blurtit.com/var/question/q/q7/q72/q724/q7243/q724306_374408_product-life-cycle.png
Dhairya Mitawalkar (DK)
12. Company Analysis
2 analysis styles..
Fundamental Analysis
Economic Climate and Indicators
Industry maturity
Company Financial Statements
Management decisions
Investor Sentiment
Technical Analysis
Moving Averages, Volume Indicators, Quantitative methods
Complicated and Out of Scope!
Dhairya Mitawalkar (DK)
13. Stock picking strategies
Fundamental analysis
Find the intrinsic value of stock (actual worth v/s market price)
Stock should be worth its discounted cash flows
Assumptions: Cash flows, discount rate, growth rate, no. of
years
Understand that growth rate changes as company enters
different phase in its life cycle
Dhairya Mitawalkar (DK)
14. Fundamental analysis
Implementation is a bit tricky
Cash flows considered depend on the type of company
Dividend paying companies
Use dividend discount model
E.g. GE, Exxon Mobil, Citigroup, BoA
Free Cash Flow (FCF)
Cash generated after spending on maintenance and expansion
(Operating cash flow – capital expenditures)
EBITDA & Net Income
Vanilla techniques
Prone to manipulation through creative accounting
Dhairya Mitawalkar (DK)
15. Value investing – Warren Buffet way!
Basics
Stocks with strong fundamentals
earnings, dividends, book value, and cash flow
Undervalued companies with high potential of growth
Buying into businesses for long-term growth
Guidelines:
Stock price < (2/3) intrinsic price
Stock price < book value
Debt/Equity ratio < 1
(P/E)/y-o-y earnings growth less than 1 (cheap while considering growth)
Current assets = 2 * current liabilities
Dividend yield should be at least two-thirds of the long-term AAA bond yield.
Earnings growth over past 10yrs > 7% pa compounded
Dhairya Mitawalkar (DK)
16. Growth investing
Very different from value investing
Focus on future growth potential – present price ignored
Companies with intrinsic value > stock price
Future growth will exceed current valuations
Companies undergoing rapid expansion
Capital gains, no dividends.
Compare company’s past performance to industry average
Things to look for:
Historical earnings growth
Future earnings potential
Strong balance sheets
Potential for stock price doubling in 5 years
E.g. Microsoft, Google, Apple
Dhairya Mitawalkar (DK)
18. Resources (books)
The intelligent investor – Benjamin Graham
Beating the street – Peter Lynch
Fooled by Randomness – Nicholas Taleb
Liar’s Poker – Michael Lewis
Common stocks and uncommon profits – Philip Fisher
Dhairya Mitawalkar (DK)
