Your First Step in to Intelligent investing
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Transcript of Your First Step in to Intelligent investing
YOUR FIRST STEP INTO INTELLIGENT
INVESTING
- Sridhar V
This is not an investment recommendation, but only an illustration for knowledge purposes
All facts and data shared are accurate to the best of our knowledge. Readers are advised to double check if required before acting on investments.
The information here could be based on past data, which could have changed significantly.
Past performance is not necessarily an indicator of future performance
Any logos, company names, brand names, trademarks or symbols used here belong to the respective owners
The author or presenter may have personal investments in the stock or company discussed
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Disclaimer
AGENDA 3
Money in Life, Financial Goals
Savings & Investments
Where to create wealth?- The Asset Classes
Why Equities?
Styles of Investing
Value Investing Concept
Economic Moat – The Secret to Successful Investing
Value Investing Process
Summary
Money in Life 4
Myth
• Money is not everything in life
• Money can’t buy happiness
• More money = More trouble
Reality
• Its important, its an enabler
• Can’t buy happiness or love, but can keep life running smoothly
• Law of Attraction applies here
• Wise and productive use of money can do wonders
• Getting rich or wealthy (legitimately) is not bad
Money in Life – Financial/Life goals 5
Having life goals or financial goals is inevitable
• Retirement Planning
• Children’s education
• Pursue a hobby or start a small venture
• A vacation
• Wedding
Short Term Goals
Long Term Goals
Allocating Responsibilities/Accountabilities
Case: Time & Money 6
Vicky and Aamir studied together and started
working in the same year
Aamir started investing 5 years earlier than Vicky
See the table below showing details of their savings
Who does better and how?
Item Vicky Aamir
Annual Savings 100000 100000
Years 25 30
Interest Rate 12% 12%
Case: Time & Money 7
Aamir started early and was able to make 2.41
crores (against 1.33 crores for Vicky)
Vicky makes about Rs.1 crore less since he started 5
years late
Item Vicky Aamir
Annual Savings 100000 100000
Years 25 30
Interest Rate 12% 12%
Accumulation 1,33,33,387 2,41,33,268
Difference - 1,07,99,881
Budgeting & Cash Flows 8
Create a budget to know your monthly incomes,
expenses and net savings
Identify top expenses and leaks
Find ways to maximize your cash flows
Find additional income options
Curtail expenses (umpteen ways)
Minimize loans and credit card use
Famous Quote
“If you buy things you don't need, soon you will have to sell
things you need.”- Warren Buffett
Savings & Investments 9
Savings Save for a rainy day
Safety first, returns second
Meets Short-term goals or needs
Investments Create
assets or build wealth
Focus on returns &
safety
Plan for long-term
goals
Cross-Movement
(S-I or I-S)
When your short-term
funds are in excess of
needs
When you reach closer
to your goals
Where to create wealth? – The Asset
Classes 10
Equities
Real Estate
Gold Bank Fixed
Deposits
Bonds/Co. FDs
Fixed income
Inflation – The Silent Wealth Killer 11
CPI is 10% or more
FD and fixed income options generally provide
10% or less (before tax) barring few exceptions
Your returns are negative
Does this create wealth?
No but its still important for savings or preservation
of surplus cash
Equities – The Ultimate Wealth Creator 12
What are equities?
• Equity Share represents part-ownership in a company
Benefits shareholders by providing
• Dividends or share of profits &
• Capital Appreciation (of share price)
Why Equities? 13
They can provide about 15-20% returns p.a. and
can beat inflation
Returns are non-linear creating potential for wealth
creation
Flexibility to buy smaller or larger quantities
Easier to liquidate
Issues with Equities 14
Probably less understood
Temptation to trade
Overpriced
The company or its management is poor
Highly volatile
Others…
Things to do before you jump in to
Investing 15
Have a budget to maximize savings and create positive cash flows
Have an emergency fund/contingency fund of about 3-6 months of your salary
• Why is this required?
Research the product/instrument that you want to invest in
Things to do before you jump in to
Investing 16
Provide for life and health insurance to protect family in case of eventuality
• Choose term insurance plans only
Plan for ad-hoc expenses or responsibilities
Minimize credit card and other loans (except home loans)
• Ideally your debt payments (EMIs) should be less than 40% of your monthly income
Risk in Investing 17
Risk exists in all investments in varying degrees
“Risk comes from not knowing what you are doing” –
Warren Buffet
Risk is the permanent loss of capital
Investors should first aim to reduce the probability
of permanent loss of capital
Styles of Investing 18
Growth Investing
Value Investing
Index Investing
Others
• Choice of fast growing companies, which are doing well in the current market
• Choice of unfavourable stocks that are available at a price, which is lower than its true value
• Investing in a basket of stocks that form the index (basically creating a portfolio that replicated index)
Which investing style to follow? 19
You can pick up a mix of different approaches
But we recommend a strong focus on Value Investing
Principles
This works for growth stocks too
Successful investors who follow value philosophy
include Warren Buffett, Seth Klarman, Mohnish
Pabrai, Prem Watsa, etc.
In India: Rakesh Jhunjhunwala, Rahul Saraogi,
Amitabh Singhi, etc.
Value Investing Idea 20
Pick companies that are currently out of favour or ignored, but fundamentally sound
To buy companies at a significant discount to their true underlying value
• Eg. You buy a company worth Rs.100 crore for Rs.70 crore
In-depth Research & Analysis to evaluate fundamental strengths and weaknesses
Old School Value – Ben. Graham 21
Benjamin Graham’s Philosophy
Shortlist companies that are cheap on PE, PB basis
and with good dividend yield (>5%)
Stock Price <= Net Current Asset Value per share
Special Situations or Turnarounds
Buy Back or Arbitrage
Deep value techniques – Cigar butts?
Statutory Warning: Smoking and careless investing are injurious to health
and wealth
Buffett’s Transformation 22
Berkshire Hathaway – how did it start as?
Where is it today?
Textile business
Highly competitive
Cost & Margin pressures
Capital intensive
Statutory Warning: Smoking and careless investing are injurious to health
and wealth
Analysing Business 23
Bargaining
Power of
Suppliers
Bargaining
Power of
Customers
Threat of New
Entrants
Threat of
Substitutes
Competitive
Rivalry
Economic Moat – The secret to
successful investing 24
Moat = Competitive advantage and pricing power
Types
Cost Advantages
Price Advantages
Economic Moat – Price Advantages 25
Product Differentiation – eg. Apple (may not be durable), Wabco (air braking)
Intangible Assets
• Brands (eg. Coke, Titan, Colgate, Gillette, etc. )
• Regulatory Licenses (NMDC, Coal India, Solar Ind. - explosives)
• Patents & IP (Intel, Bosch)
Switching Costs (HDFC Bank, MS office)
Network Effects (NSE, Naukri, etc.)
Economic Moat – Cost Advantages 26
Economies of Scale
• Eg. Container Corp., Coal India, Tata Steel
• Large Distribution – Eg. ITC
• Large scale – Maruti Suzuki, Walmart
Cheaper Access to Resources
• Coal India, Sesa Sterlite, Hindalco
Process Based Advantages – efficiency, best practices
• Toyota (TQM), Ambuja Cement (efficiency)
Brands without a Moat 27
Mere presence of brand or
popular product is not
a Moat
Brands without a
moat
Eg. Flipkart, MakeMyTrip,
Camlin
Wind Energy – Suzlon
Had first mover
advantage
Legal or regulatory issues, high
debt
Kingfisher Airlines
Acquisition of Air Deccan
High costs & over-
leveraged (debt)
Violation of regulatory norms and procedures
False Moat – Avoid! 28
A short-term advantage
Recent performance
looks favorable
Popular products (but low margins,
returns)
Well-known personalities
in the top management
High growth expectations or Fancy (FB,
Sify, etc.)
Determining a Moat 29
Does the product/service have a recurring demand
Does the company have better profitability against its peers?
Consistent market share overall or within a niche
Not subject to price-regulation
Has the company earned high returns on capital?
Can it continue to earn high returns over long-term?
Changes: Technology, substitutes, etc, and their impact
Others – Refer Porter’s 5-Forces
Financial Indicators of Moat 30
Buffett’s Secret Recipe
• High and consistent Profit Margins
• Growing Free Cash Flows
• Minimal Capex to sustain long-term growth
• High RoE and RoCE
• Consistent Growth in Earnings and Dividends (baring few exceptions)
• Million $ Question: Does the Moat really translate in to superior financial performance?
Value Investing Process 31
Business Model
Understand the Business (A stock is a part-ownership in a business)
Financials & Intrinsic Value
Evaluate the company’s financials and future prospects to arrive at an Intrinsic Value
Margin of Safety
Arrive at a Purchase Price after providing for adequate Margin of Safety (Discount)
Summary – The Foundation 32
Money in Life
Case: Time & Money
Where to create wealth? – The Asset Classes
Inflation – The Silent Wealth Killer
Equities – The Ultimate Wealth Creator (Why
Equities and Issues)
Things to do before you jump in to Investing
Risk in Investing
Styles of Investing
Summary – The Structure 33
Value Investing Idea
Old School Value
Buffett's Transformation
Analysing Businesses
Economic Moat - Secret to Successful Investing
Types of Moats - Price and Cost Advantages
Determining a Moat & Financial Indicators
Value Investing Process
Looking forward to your continued participation
Contact:
+91 8050705299
Web
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Google Group: “Value Stock Picks”
Thank You 34