All about finance and investments

29 Jan
Finance

How to evaluate management of a company? How to find quality stocks?

Financials of a company are tools to measure company’s success. But for selecting good stocks, we also need to analyse qualitative aspects of a company along with its financials. Qualitative aspects of a company depend upon management of the company. In this blog we will find out how to evaluate management of a company.

One can evaluate a company’s management by considering below mentioned points, which could be found in the annual report of company:

1. Honesty – Is management communicating bad news as freely as good news?

2. Management should not be biased towards promoters. Is it lending loans to promoter companies that could have been distributed to shareholders ?

3. Capital allocations – How management is allocating capital? Is it wasting resources in loss making investments or projects. Check Return on capital employed ROCE). It should be above 15% in general cases.

4. Does management rectify its mistakes made earlier?  For example – XYZ ltd had acquired a loss making enterprise last year. Now is management considering to hold such enterprise or to dispose such enterprise to rectify its mistake made earlier?

5. Check whether promotor is drawing salary in excess of the limits under companies act 2013.

6. Whether salary of promoter is increasing year by year despite of declining company’s profits

7. Investors should check whether promoters are lending money to their related parties without any sound reason.

8. Check whether management is continuously acquiring loss making enterprise. Also the management should generally make investments in businesses which are related to core competencies of the company.

9. Check Promoter’s background including their educational qualification, years of experience, companies handled by them in past.       

10. Whether management has track record of fulfilling the promises made earlier. Read past years annual reports to identify what promises were made by management and did management fulfil those promises in timely manner. Delayed project work means huge interest cost.

This is how you could evaluate management of a company. This is also an answer to the question “How to find quality stocks?”

13 Nov
Finance

When to sell stocks?

Philip Fisher, an investor offers three reasons for selling stocks .

One should only sell stocks when :

1. If a mistake was made in original purchase – Some times people get attached with regards to holding stocks for long term in a way that they overlook the mistake they committed while purchasing stock .
If as a result when stock prices fall, they do not sell it. They keep it in their portfolio with a hope that price will correct itself in long run.

But when price do not correct , they end up making huge losses.

So whenever you realize that you committed mistake at the time of purchasing stock, sell it without waiting for corrections.

2. The stock no longer satisfy the criteria that were looked into while purchasing it – The facts you considered when you originally purchase share may have been deemed to be correct, but facts can change negatively over the passage of time. Say you bought a stock looking at the integrity of the management and strong business model, what if management of the company changed and new management is not showing integrity or the business model is changed drastically.

3.     A more attractive stock is identified – If you find better investment opportunity and you have shortage of cash, It is the best option to sell the stock for better opportunity. Make sure that the benefit of the new investment opportunity outweigh the implication of capital gain tax resulting from sell of previous stock.

Philip Fisher also noted that selling stocks should not turns out to be very often.
“If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.”
 – Philip Fisher

08 Nov
Finance

What to check before buying a stock?

Investing in stocks just based on someone’s advice is very risky. It is important to have your own checklist to identify stocks. Checklist attached below is not fully exhaustive but it is least one should check.

1. The company should have zero or very little debt . Consider the companies having Debt – Equity ratio less than a half .

 2. Last three year CAGR sales growth rate and CAGR profit growth rate is 10 % to 12%

3. Last three years average return on equity and return on capital employed both are greater than 18 % .

4. Make sure that promoters shareholding is not declining and is higher

5.  Promoters pledge is less than 5 %

6. PE ratio is less than industry average and less than last five years of average PE ratio.

After short listing , look more deeper into these stocks and select the best one .\

In later vlogs, checklist for qualitative analysis will be shared




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29 Sep
Finance

Should you take education loan?

Education is one of the key aspect of a student’s life.  But many students are unable to study in good college because of financial limitations in their family. One of the finest solutions to this problem is education loan.

But students have doubt in their mind about whether to take education loan or not. So let’s look at points to be considered before getting education loan:

1. Salary after job –  Students should ask themselves whether their future salary would be able to repay the loan in five to eight years or as per their convenience.

What is the point of taking loan where your salary is almost getting used in paying loan.

2. Good financial condition – If family have good financial condition, then it is better to not take loan and pay unnecessary interest. In other words never take loan if your family can afford to pay for education without loans.

 Loan should be taken only to meet gap not fulfilled by family finances.

3. Unnecessary courses – Students should not choose a course just because loan is offered for the course.  Loan is secondary to course or college.

Students should first determine the course they want to enroll in. Then decide whether to take loan or not. It should not be other way.

4. Take rational decision – Many students and parents take loan just because their student is getting a prestigious college. But they forget to check the placement potential of the college.

Prestigious college do not guarantee good placements. Parents need to rationally research whether average annual package of college is good.  Never take loan just because student is getting a prestigious college. Never have college bias.

5. Tax benefits – Section 80E of income tax act provides deduction of interest in respect of loan for higher education in India or abroad.

Assessee get tax deduction of interest for 8 consecutive years.  It is important factor to consider and understand what will be the interest and resulting tax benefit of obtaining respective loan.

6. Never forget to check if your state government has launched any scheme for subsidy in education loan.

10 Sep
Finance

Long term investment strategies – 1

4 tips for long term investing in stock market.

The is a lot of buzz around the word “stock market”. After covid-19, many people entered the market hearing the buzz. But most of them suffered huge losses. Part of reason for such loss is investing for short term.

In order to create wealth, one need to invest for long term. Good things take time.

So, let’s discuss some long term investment strategies.

Never chase daily price movement –  you are investing for long term. You need not to worry about daily share price fluctuations. If you are involved in daily price monitoring, you are wasting a lot of time. Stock market is just our passive income source.

Instead you should invest your time in your own professional work so that you can earn more money from there and invest that in stock market. So focus on earning more.

You have to put efforts only once. i.e. when picking stocks.

Don’t be emotional and greedy – You should understand that investment decisions are never made in greed.

Decisions should be made based on data and logic. I have investment in 12 stocks. I had once selected 2 stocks just on the basis of their past performance. Their financials were decent but their growth was extraordinary. I overlooked other factors and fallen for their extraordinary past growth. I invested heavily in these 2 stocks.  And the result was that, after 7 or 8 months, that stock crashed to half of its original price. And it negatively affected my overall portfolio. Had I analyzed those stocks in depth, I would have grown my portfolio at very good rate.

Now, I regret that 2 stocks ruined my entire portfolio despite the fact that I had invested in other 10 stocks very carefully.

So prefer data and logic over greed.

Don’t fall for penny stocks – People think that this is penny stock of Rs 2. If it becomes even Rs 20, it will be 10x return. But that’s not the case. It can even fall to Rs 0.5.

Firstly you have to understand how share prices works. Consider 2 companies A ltd and B ltd.

A ltd has issued 10000 shares of Rs 1 each, total value being Rs 10,000.

 B ltd has issued 10 shares of Rs 1000 each. Its total value is also Rs. 10,000.

Now these two companies have same value of Rs 10,000. This 10,000 will grow. In your eyes, A ltd’s stocks are penny stocks while B ltd’s aren’t. But the fact is that both A lts and Bltd stocks have same value.

So it is not like A ltd’s Rs 1 will become Rs 100 and B ltd’s Rs 1000 will only become Rs 2000. So don’t fall for penny stocks.

You should always invest as per data and logic. Not as per price.

Ignore stock recommendation from friends and influencers.

You should stick to your own investment checklist no matter what your friends recommend. Even if you want to invest in your friend’s recommended stock, you should invest only after going through your own checklist.

Best is to ignore friends and influencer’s recommendations.

Yes if they have anything knowledgeable to share about market, then why not to increase our knowledge.

SO, these were some points you have to keep in your mind if you are a long term investor.

Learn more about investing – Two golden rules of investing

21 Aug
Finance

Two golden rules of investing

We invest to earn money. That is why it is necessary to follow some basic rules before investing our hard earned money. These rules are vey basic but if followed, it can prevent us from big shocks/ losses,

Rule No. 1 Cap the downside –

It is very necessary to cap downside. It means limiting the amount you can loose.  One big loss can end everything you dreamt about.

In other words, take small risks. Take small risks that can give big returns.

Definitely there are investments that have high risks and high returns. But such investments are not actually investments but just gambling. So avoid high risks as far as possible.

Reasons you should avoid gambling:

Scenario (i) If you win a gamble, you will think about gambling more and more. And this would lead you towards bigger gambling. And once you loose a big gamble , loss will be so big that all your past profits will be wiped out. And obviously you will loose because you can not have 100% or even 50% success rate.

Scenario (ii) If you loose a gamble, you will think about recovering at least the amount initially invested ( just google sunk cost fallacy). And this will lead you to gamble again and again. And once you started making gains, you will follow the above thing again and ultimately end up loosing money. 

We must understand that sometimes gambling may make us rich but richness will be there for very short time. “Gambling brings temporary success and permanent failure”.

Rule No. 2 Asset diversification –

It means to put eggs in different baskets. Always diversify your asset so that even if you loose in one asset, you are gaining in other asset to nullify the loss.

Remember that asset class should be limited. Just invest in 5 to 10 different asset class. It is because you focus is limited. You can not focus on 20 different asset classes and so never invest in 20 different assets. “Focus on everything means focus on nothing”.

The above two rules seems obvious. But they are not easy to follow. They looks easy but your greed and fear makes these rules harder to follow. Therefore put your greed and fear in check before investing.

19 Jul
Finance

How Big Boss make money?

As big boss is trending now a days, most people have this question in mind about how big boss makes money?

We’ll not discuss revenue streams only but also the tactics big boss use to market it.

So let’s find out how big boss makes money:

1. Sponsorship – Sponsorship is one of the best ways to earn money for any show whether it’s big boss or KBC or The Kapil Sharma show.

In big boss OTT2. Vimal is the main sponsor of the show. There are other special sponsors like Vicco Vajradanti Sugar Free Paste, Paytm etc.

These brand deals gives crores of revenue to these shows.

Read Impact of foreign language on a country you should know?

 

2. Advertisement revenue – When you see shows like big boss, you have to see ads every few minutes. These ads are also one of the big funding machines for these shows.

Mostly these two streams of revenue are dominant in both TV shows and OTT shows.

3. Promotions – You might have seen various film stars promoting their films on big boss, specially on weekend ka war. Big Boss charges fees for the same and that makes it 3rd source of revenue.

Till now we have discussed how big boss earns money

Now let’s see some tactics used by the show to gain more TRP

1. Special guests – It invite special guests to the show for some tasks. Many people watch the show just because their favourite guest is on the show. Yes this is not a big marketing tactic.

2. Bringing celebrities to the show – Many celebrities are invited to the show. For example – Siddharth Shukla, the great Khali etc.  Now in OTT season youtubers are also invited. And we know that youtubers today have far more viewership than TV actors and many film actors.

3. Controversy – This is one of the main TRP builder thing for the show. There are many controversies that had been created by the show. The show even brings people who already had controversies in their past.

Big Boss want to get your attention. And because of that it tries to establish new controversies between your favourite creators so that you continue to watch the show and fight over social media. And your social media fights creates more attraction to the show than it could gather on its own.