Irrational Minds, Irrational Markets....

Few months back, I was worried because the way in which the SENSEX was soaring up did not relate to the growth story of the emerging Indian economy or the earnings potential of the individual companies... The equation seems to have reversed now. The interesting part…My sentiment is fear in both the situations ( both @ above 21000 levels and @ below 10000 levels) though the cause of fear and the reaction to it looks totally different..

Now, the worry is, the correction seems to be much worse than what it should have actually been considering the fundamentals. The correction in the GPP growth of India because of the US sub prime and Global recession is close to 2%. But then the market has fallen down from 21000 to less than 10000 levels which looks unreasonable. A P/E of 12-15 for top notch companies in sectors such as IT and telecom definitely looks like a very low valuation considering the EPS projections of these companies.

My take on this issue:

#1, I don't agree to the argument that this fall in SENSEX is because of the liquidity crunch. Every earning Indian seems to have a secured mindset with quite a bit of reserve funds which does not get into equity markets. Confidence of Indians in commodity and realty space as an asset class looks to be really good. Probably because we feel that we understand these asset classes as an investment opportunity much better than the equity space. The current downfall is more to do with the confidence and sentiments of people. Lack of awareness brings in fear that reduces our confidence and finally becomes panic….And the current levels indicate that it is a panic struck market..

#2, Even if FIIs has to pull out the money from Indian markets, I tend to believe that we have got the capability to absorb it locally and provide support at these levels to SENSEX.

So the fundamental problem with us is that we are either overly pessimistic or overly optimistic. We seem to lack rational thinking. We seem to get carried away just with what the media says. Our awareness and understanding of the economic system looks to be superficial that lacks common sense. We as investors should try and learn how this system works before we invest our money into it.

Should we be building an economy just based on the sentiments of the people?? We need level headed media persons, economist, politicians and decision makers to reduce the impact of the sentiment factor from the economic growth though a complete decoupling may not possible.

I believe that in situations such as this the media has to act in a responsible way with a lot of awareness and courage about the issue. It's high time that they realize the fact that they make up half of our economic consciousness. Media can have a great impact on our day to day decision making process and ultimately on our economy.

"While morality is all about how this world should work, Economics is all about how it actually works". Is Morality in economics a distant dream for this human race???

The "NEXT"ism

There is no fun in being a capitalist being in a capitalist era...Perhaps this is the best time to bring out the critic in me to write about capitalism....A free fall in the free economy ...Banks running under losses buying bankrupt banks. A classic example to study the impact of "Greed vs capability", “Consumption vs production” puts me back into the "What's next" thinking mode while it puts others in the Regulatory mode.

History gives us enough evidences to prove that every phase of human evolution has seen three kinds of thinkers...

1. Obsolete thinkers who try in vain to put us back into the old system
2. Cotemporary thinkers who are very happy with the existing system and seldom critique it.
3. Futuristic thinkers who make us realize the problems with the existing system and thereby help us to move forward..

The fact that a believer is happier than a skeptic is no more to the point than the fact that a drunken man is happier than a sober one – Bernard Shaw

So, in the economic front we have seen the
"ism" for "equality in poverty"
"ism" for "inequality in wealth"
Can we have the NEXT "ism" for "equality in wealth" ?????!!!!!!!

Looks impossible and against the LAWS of nature for a common mind. When there are inherent variations in the human capabilities how in this world, is it possible to have an equidistribution of wealth. Honestly, I don't have an answer to this. I don't think any other economist in this world can have an answer to this question

But then, let’s look deep into the teachings of nature. If the imbalance in a system goes beyond a threshold the only way by which it restores it back is by unusual, unpredictable, chaotic phenomenon which usually results in undesired consequences. I think each one of us can relate to some examples over here (Pressure difference to formation of a cyclone...)

The true contemporary capitalist in me goes of to SLEEP mode for a while and the futuristic NEXTist in me consciously wakes up to the call of humanity before the imbalance becomes too huge to create a Chaos.

So I start off with an oversimplified economic scenario.....

Let's think of a economy with just three of people in it .. 1. Ishwar 2. Chen 3. Adams

Let's assume Ishwar produces product X ( 2 units every month) priced at Rs. 10 with a profit margin of 50% and the buyers are Chen and Adams who procure 1 unit every month

On the other hand Chen produces product Y ( 2 units every month ) priced at Rs. 20 with a profit margin of 50% for which the buyers are Adams and Ishwar who procure 1 unit every month

Adams produces a product Z ( 2 units every month) priced at Rs. 30 with a profit margin 50% for which the buyers are Ishwar and Chen who procure 1 unit every month

Do you see the inherent logical problems in the scenario explained above. Some questions related to the above scenario which might help us expand the horizon of our economic thinking.

a) For the product produced by Adams do Chen and Ishwar have the real buying capability..??
b) Adam and Chen – do they have a security (savings) based mindset i.e., even if they have the buying capability would they want to maintain sufficient liquidity without consuming?
c) Should the bank "XYZ" give credit to Ishwar and Chen to consume what Adam has produced?
d) Should Adams improve consumption just by working on the GREED/NEED factor or CAPABILITY factor of "Adams" and "Chen"?
e) If Adams is not able to sell his Rs. 30 product then who will consume Chen and Ishwars product?
f) Are these products (X, Y, Z) an essential necessity or others without which Ishwar, Chen and Adam could live with?
g) Is there any interdependency in production (is product X a raw material for production of Y or Z etc…)?

The above questions do not mean that I undermine the awareness of great producers about the demand factor and their understanding of priorities for human survival and happiness.

The point that I want to convey over here is that in a capitalist set up we have got great people (say 10% of overall population) capable of increasing production, reducing cost, world class marketing etc., etc., Usually in their case the consumption in monetary terms should be far lesser than what they produce in monetary terms..

But then on the other side we have got people who are unable to produce (for various reasons such as incapability, lack of opportunities etc.,) as much as they would want to consume.

While these people work on their aspiration factor and Advertisements of capitalist work on their need/greed/status factor, EVERYONE/SOMEONE has to take the responsibility of working on their OPPORTUNITY and CAPABILITY factor. The deep rooted philosophical nerve in my mind says with some conviction that we are in for a CHAOS if we don’t listen to this fact...

The million dollar question..Do we need to call just CONSUMPTION as growth or CAPABILITY coupled with CONSUMPTION as growth ???

Oh.. NATURE why did you create us with inherent differences and expect to create a equilibrium in everything we do…??!!! That’s unfair ..

To(o) ponder:

For those of us, who need impetus to neurons and wanting to put our mental muscles to work?

1. Speed of Light, Time, Thinking, Evolution
2. Needs and Wants of people, Production, Consumption, Money (Inflation).
3. Quality of life, Tangible & Intangible (Love, Affection, Relation), Economy.
4. Nature, Universe, Consciousness, Illusion.
5. Cause and Effect, Comprehension, Prediction.
6. Nature, Contradiction, Logic, Humor
7. Guilt& Fear, God, Creation, Survival, Destruction
8. Free will, Society, Legal system
9. Intentions, Words, Act.
10. Senses, Emotions, Reasonings, Language
11. Day to Day transactions and Civilization
12. Incomprehensible, Hypothesis, Science
13. Birth, Body, Mind, Ego, Life, Death.
14. Absolute, “Survival of the fittest”
15. Time, Space, Matter, Existence,
16. Ignorance, Innocence, Education, Intelligence, Knowledge, Truth, Realization, Science, Discovery.
17. Hunger, Humiliation, Religion, Ideology, Terrorism.

Can we use all these attributes to bring out some holistic multi variable equation to define everything…if not everything in universe atleast in life?

Can we evolve a systemic ThinKing based on these variables..?

What more is required (require all your contribution from all you great Thinkers to add to the above list of variables and categorizing it) to evaluate what has happened, to understand what is happening, and to get a feel of what could happen by assimilating and synthesizing these facts..?

How do we draw an ER diagram out of this?

Will these help us to answer most of our “Why? What? Who? When? How? “ questions that we encounter in its root level?

Can we bring in some sort of self awareness by reflecting on these?

Can we put all this in perspective for the good of the Humanity and Ecology?

I shall continue to work on this in OOPs approach…

Belief in God

My belief in God looks to be more profound when I realize that there is more truth in the statement “Man created God” than “God created Man”

Known, Unknown

Recent days, the thoughts of Einstein have made a profound, immense impact on my thinking and my perspective towards life. Made me explore new territories in my mind…and created new patterns in my thought process … connected disconnected concepts… lit up those little gray cells which were dormant all these while…And as a result of all this strenuous mental exercises I feel much more matured (if we could define maturity as the state wherein we learn to live with confusion and realize that life is full of contradictions and have a reasoning for the same..)

Here I go interrelating some of his thoughts…

The most incomprehensible thing about the world is that it is comprehensible.
Look deep into nature, and then you will understand everything better.

1) Comprehensible/ Comprehensible – I believe each of us will have quite a few items listed here and this list will/should keep growing over a period of time.

2) Comprehensible/ Incomprehensible – If we could get something out here in this quadrant then that should really signify that we are a GENIUS in that particular concept/subject

3) Incomprehensible/ Comprehensible – Offers scope for further enhancing our knowledge.

4) Incomprehensible / Incomprehensible – GOD alone knows.

This 4th quadrant is very interesting. Every day there are lot of stuffs that get uncovered which deprives them of its eligibility to stay in that quadrant for ever.

How do people illuminate this 4th quadrant?

We all “understand” what we have “not understood” with what we have “already understood”. In my mind, It’s impossible to understand a concept as an absolute abstract notion.

In the early stages of evolution of human kind there was nothing other than NATURE. So, our thinking process should have started from the nature. (Because we all learn new concepts with what is been understood and the only source of understanding for us at that time was Nature)


Note: Definition of nature is anything that is not a manifestation of human thought.

If that is the case, “Strengths and Weakness of our thinking” should exist in nature. Our thinking seems to be only a reflection of human nature. And our creations have come out because of our thinking. So the greatness and imperfections in human creativity is only a manifestation of nature…

Is that the reason why we call our common emotions as Human NATURE? Is this the reason why Einstein Said,

“Look deep into nature, and then you will understand everything better?”

Cost Management in Project Management...

I can only pity at people who ask project Managers to remember these earned value formula through some "Tricks of the Trade". May be, "complicating simple stuffs" is the sustainable revenue model these days...:-)

The reason being it's such a common sense concept and aboslutely no effort is required to learn/understand this . So, here I go trying to simplify the so called complex earned value concept. After reading through this post you decide as to how complex it is...

Let's assume that we hire a carpenter to do 2 windows and 1 door. We ask him for a effort estimate and a schedule plan. And here's his plan:

Effort: 30 days for completing 2 windows and 1 door (with 8 hrs a day)

Schedule: 2 windows will be completed in the 1st 15 days and the door in the next 15 days

And after say 15 days you make a visit to the carpenter to check the progress. Your expectation at this point in time is that the 2 windows whould have been complete..

Planned work for 15 days (or BCWS) : 15 days * 8 hrs = 120 hrs

Burned (Actual) work for 15 days ( or ACWP): 15 days * 10 hrs = 150 hrs
(assuming 2 hrs OT everyday)

Earned work for 15 days ( or BCWP): 75% of 120 hrs = 90 hrs

As a customer you have budgeted to pay only 1200 Rs ( 10 Rs. per hour)
Now, how much will you be ready to pay for ( 90hrs *10 rs ph= 900 Rs , isn't it?)

Let's say what the carpenter has to say, He will keep complaining that he has overworked everyday..So, you are most likely to respond back to him saying "thats not my problem, you do not know how to complete your work on time" And other than that you will also tell him that all your plans are in a mess because the carepenter has delayed the making of the doors and windows...

Sounds like a usual scenarion in software projects. isn't it?

Ok, now with this plan, burn and earn values let's look at how to compute the variance, Index

Now the cost variance/performance index from a project perspective is:

CV = Earned - Burned = Rs 900 - Rs 1500 = - 600
CPI = Earned/ Burned = Rs. 900/Rs. 1500 = 0.6

Note: A negative variance is bad and a index less than 1 is bad.

SV = Earned - Planned = Rs. 1200 - Rs 1500 = -300
SPI = Earned /Planned = Rs. 1200/ Rs. 1500 = 0.8

Sounds simple now..ain't it?

Now the next logical question for which we would like to have an ansswer is " When do you think that this would be complete? ". Also, Let's look at some of the primary causes for this variance in the next installment of this series..

Thanks,
Kiru.

Albert Einstein on Science and Religion

worth reading through though it is a little long..

================================

Religion and Science:

Everything that the human race has done and thought is concerned with the satisfaction of felt needs and the assuagement of pain. One has to keep this constantly in mind if one wishes to understand spiritual movements and their development. Feeling and desire are the motive forces behind all human endeavour and human creation, in however exalted a guise the latter may present itself to us. Now what are the feelings and needs that have led men to religious thought and belief in the widest sense of the words? A little consideration will suffice to show us that the most varying emotions preside over the birth of religious thought and experience. With primitive man it is above all fear that evokes religious notions--fear of hunger, wild beasts, sickness, death. Since at this stage of existence understanding of causal connexions is usually poorly developed, the human mind creates for itself more or less analogous beings on whose wills and actions these fearful happenings depend. One's object now is to secure the favour of these beings by carrying out actions and offering sacrifices which, according to the tradition handed down from generation to generation, propitiate them or make them well disposed towards a mortal. I am speaking now of the religion of fear. This, though not created, is in an important degree stabilized by the formation of a special priestly caste which sets up as a mediator between the people and the beings they fear, and erects a hegemony on this basis. In many cases the leader or ruler whose position depends on other factors, or a privileged class, combines priestly functions with its secular authority in order to make the latter more secure; or the political rulers and the priestly caste make common cause in their own interests.

The social feelings are another source of the crystallization of religion. Fathers and mothers and the leaders of larger human communities are mortal and fallible. The desire for guidance, love, and support prompts men to form the social or moral conception of God. This is the God of Providence who protects, disposes, rewards, and punishes, the God who, according to the width of the believer's outlook, loves and cherishes the life of the tribe or of the human race, or even life as such, the comforter in sorrow and unsatisfied longing, who preserves the souls of the dead. This is the social or moral conception of God.

The Jewish scriptures admirably illustrate the development from the religion of fear to moral religion, which is continued in the New Testament. The religions of all civilized peoples, especially the peoples of the Orient, are primarily moral religions. The development from a religion of fear to moral religion is a great step in a nation's life. That primitive religions are based entirely on fear and the religions of civilized peoples purely on morality is a prejudice against which we must be on our guard. The truth is that they are all intermediate types, with this reservation, that on the higher levels of social life the religion of morality predominates.

Common to all these types is the anthropomorphic character of their conception of God. Only individuals of exceptional endowments and exceptionally high-minded communities, as a general rule, get in any real sense beyond this level. But there is a third state of religious experience which belongs to all of them, even though it is rarely found in a pure form, and which I will call cosmic religious feeling. It is very difficult to explain this feeling to anyone who is entirely without it, especially as there is no anthropomorphic conception of God corresponding to it.

The individual feels the nothingness of human desires and aims and the sublimity and marvellous order which reveal themselves both in nature and in the world of thought. He looks upon individual existence as a sort of prison and wants to experience the universe as a single significant whole. The beginnings of cosmic religious feeling already appear in earlier stages of development--e.g., in many of the Psalms of David and in some of the Prophets. Buddhism, as we have learnt from the wonderful writings of Schopenhauer especially, contains a much stronger element of it.

The religious geniuses of all ages have been distinguished by this kind of religious feeling, which knows no dogma and no God conceived in man's image; so that there can be no Church whose central teachings are based on it. Hence it is precisely among the heretics of every age that we find men who were filled with the highest kind of religious feeling and were in many cases regarded by their contemporaries as Atheists, sometimes also as saints. Looked at in this light, men like Democritus, Francis of Assisi, and Spinoza are closely akin to one another.

How can cosmic religious feeling be communicated from one person to another, if it can give rise to no definite notion of a God and no theology? In my view, it is the most important function of art and science to awaken this feeling and keep it alive in those who are capable of it.

We thus arrive at a conception of the relation of science to religion very different from the usual one. When one views the matter historically one is inclined to look upon science and religion as irreconcilable antagonists, and for a very obvious reason. The man who is thoroughly convinced of the universal operation of the law of causation cannot for a moment entertain the idea of a being who interferes in the course of events--that is, if he takes the hypothesis of causality really seriously. He has no use for the religion of fear and equally little for social or moral religion. A God who rewards and punishes is inconceivable to him for the simple reason that a man's actions are determined by necessity, external and internal, so that in God's eyes he cannot be responsible, any more than an inanimate object is responsible for the motions it goes through. Hence science has been charged with undermining morality, but the charge is unjust. A man's ethical behaviour should be based effectually on sympathy, education, and social ties; no religious basis is necessary. Man would indeed be in a poor way if he had to be restrained by fear and punishment and hope of reward after death.

It is therefore easy to see why the Churches have always fought science and persecuted its devotees. On the other hand, I maintain that cosmic religious feeling is the strongest and noblest incitement to scientific research. Only those who realize the immense efforts and, above all, the devotion which pioneer work in theoretical science demands, can grasp the strength of the emotion out of which alone such work, remote as it is from the immediate realities of life, can issue. What a deep conviction of the rationality of the universe and what a yearning to understand, were it but a feeble reflection of the mind revealed in this world, Kepler and Newton must have had to enable them to spend years of solitary labour in disentangling the principles of celestial mechanics! Those whose acquaintance with scientific research is derived chiefly from its practical results easily develop a completely false notion of the mentality of the men who, surrounded by a sceptical world, have shown the way to those like-minded with themselves, scattered through the earth and the centuries. Only one who has devoted his life to similar ends can have a vivid realization of what has inspired these men and given them the strength to remain true to their purpose in spite of countless failures. It is cosmic religious feeling that gives a man strength of this sort. A contemporary has said, not unjustly, that in this materialistic age of ours the serious scientific workers are the only profoundly religious people.

The Religiousness of Science:

You will hardly find one among the profounder sort of scientific minds without a peculiar religious feeling of his own. But it is different from the religion of the naive man. For the latter God is a being from whose care one hopes to benefit and whose punishment one fears; a sublimation of a feeling similar to that of a child for its father, a being to whom one stands to some extent in a personal relation, however deeply it may be tinged with awe.

But the scientist is possessed by the sense of universal causation. The future, to him, is every whit as necessary and determined as the past. There is nothing divine about morality, it is a purely human affair. His religious feeling takes the form of a rapturous amazement at the harmony of natural law, which reveals an intelligence of such superiority that, compared with it, all the systematic thinking and acting of human beings is an utterly insignificant reflection. This feeling is the guiding principle of his life and work, in so far as he succeeds in keeping himself from the shackles of selfish desire. It is beyond question closely akin to that which has possessed the religious geniuses of all ages.

Installment #7 - Do the due diligence

Hi Frenz,

I continue to write though the low response levels (or) feedback from you guys have brought down my motivation levels.

This is what I would call it as a framework for due diligence. Before you invest in a company spend a few hours collecting all this information. Here is a sample "Due diligence" that was done by me for "Infosys".

The good thing about doing this is that you get to learn a lot of macroeconomic perspectives. Also, the information that you collect about the sector could be reused for other companies in the same sector

Installment #6 - Ask the right questions

Hi Guyz,

The last 15 days has been eventful to say the least for all those who closely follow the stock markets...And happenings include, SENSEX has soared up from 18000 to 19000 in just 4 trading sessions. ET termed it as "Stupendous Madness". The draft policy on the P- Notes as expected had both criticisms and appreciations. With Damodaran saying that the opaqueness of this instrument is the cause of this sudden policy change whereas our FM Chidambaram said that it is not about the "P – notes" but about the moderation of Capitals flowing into Indian Share market. Yes, this does seem to make sense...

Statistics shows that around 30 billion dollars (1 billion dollar = 4000 crores) have been pumped into into India through the FII channel in the last 45 days. This was one of the major causes for the rupee value to appreciate. Looking at these numbers SEBI's move on P-notes does not come as a surprise to all of us.

The very next day after this move by SEBI there was this disastrous fall ( of around 1500 points from 19000 to 17500 which is a circuit breaker which I believe is happening for the 4 th time in the history of Indian Share market) and then a remarkable recovery with SENSEX closing at around 18800 levels..

So, should it be the "economy that should be driving the market" (or) the other way around "market driving the economy". Few days before the P- Notes move, the proceedings indicated that it is the later statement that was true which anyways is not a encouraging sign for a growing economy such as India...

Let me cut short on this story and get into my mainstream business…Here is a comprehensive set of questions that I could think of (so far) to become a shrewd buyer of stocks. Having said that this list of questions is not complete per se and this will continue to grow as I read further.

Before you invest in your hard earned money in a particular scrip try and find out the answers to all/most of these questions. In my opinion this is a bare minimum homework that all of us have to do before investing if we are serious about this business. We can't rely on an analyst to do all this for us…Do a reality check for yourself on the confidence levels, before you have understood all this and after you have answered all these questions?

For all those who would want to "STAY INVESTED" this list of questions could provide a framework for making a rational decision.

1. What is the sector to which the company belongs to?
2. Do you understand about the business intricacies of this sector?
3. What is the rate at which this sector is been growing in India for the last 5 years?
4. What is percentage contribution of this sector to Indian GDP?
5. How is the global demand for the product/service that they produce? (Or) in other words how is the global business outlook for this sector?
6. Is this sector dependant on domestic markets (or) global markets? Essentially is it an export oriented business?
7. Are the raw materials for producing the product/service imported?
8. Do you foresee a sudden rise in the price of these raw materials?
9. Are you aware of any government policies that might go against (or) in favor of this particular sector
10. If it is an export oriented business, how does the rupee value appreciation (or) dollar value depreciation affects this particular sector?
11. What is the growth rate of this company for the last 3-5 years?
12. Is this company among the top 5 player in this sector in India?
13. If there is a global competition in the business what is their global ranking?
14. Has the growth rate of the company surpassed the sector growth rate in the last 3-5 years?
15. Do you believe that this trend will continue for the next 3 years?
16. What is the overall "revenues" of this company?
17. What is their operating/net profit margin?
18. Have this company maintained a consistent margin (OPM, NPM) in the last 3-5 years?
19. What is the total number of outstanding shares (or) shares issued by the company to the public?
20. What is their EPS?
21. How is their EPS growth in the last 5 years?
22. What is your projected EPS based on their future earnings?
23. What is the sectoral P/E range?
24. What is the P/E at which it is currently trading?
25. Do you know how the news about the new order gets translated into the balance sheet and by when?
26. What is the P/E for the CMP based on the future earnings?
27. Do you know about the management of this company? What is you confidence level on their management?
28. What is the 52 week High/Low for this scrip?
29. Have you looked at the chart for this scrip (1 month, 3 months, 1 year, and 3 years)?
30. Do you understand the support and resistance for this particular scrip?
31. Do you know their debt to equity ratio?
32. Are you aware of any M&A that they might happen in near future?
33. Are you aware of any large orders that might get in the near future?
34. Is this stock an A, B - B1, B2 category stock?
35. Do you know of any other companies in this sector based on the above analysis where the numbers might be better than this?
36. How has been the investor sentiment (or) how is the market hype on this stock in the past?
37. Is this company listed in any other parts of the world other than BSE/NSE?
38. How are the brokers'/analysts' rating on this particular scrip?
39. Have you had a look at the 50 day/200 day moving averages for this scrip?
40. Have you had a look at their last three years P/L statement and Balance sheet?
41. Do you know the competitors for this company and their P/E?
42. Do you know the face value of the scrip?
43. Do you know about the dividend per share for the last 3 years?
44. Do you know the market capitalization of this stock?
45. Would you know of the other mutual funds that have invested in this company?
46. What is the average momentum of this stock (no of shares traded) in a day/week/month?
47. Is it a BLUE CHIP stock?
48. Do you know of any bonus shares that this company had announced already?
49. Do you know the split up of investors in this scrip like FII, retail, mutual fund etc.,
50. Is it the right time to buy this scrip (say market is down for issues such as p Notes). You might feel that there will never be such a kind of good buying opportunity again.
51. Have you observed any seasonal trends in the price fluctuation of this scrip? Like just before the day of the quarterly or annual results announcement the stocks price keeps soaring up.

GDP - Gross Domestic product
OPM - Operating Profit Margin
NPM - Net Profit Margin
EPS - Earnings Per share
P/E - Price to Earnings ratio
CMP – Current Market Price
BSE - Bombay Stock Exchange
NSE - National Stock Exchange
P/L - Profit and Loss
M&A - Mergers and acquisitions
FII - Foreign institutional Investors
YoY – Year on Year

Thanks,
Kiru.

Installment #5 - Rely on your reasoning than getting carried away with market sentiments

For all those who are still skeptical about my positive views on KPR mills (or in other words to all my friends who get carried away with the market sentiments and speculations rather than relying on our own sense of reasoning J - which is what differentiates humans from the rest of the “beings” in cosmos) and a buy strategy on KPR mills at Rs. 130

The reason why I say KPR mill is still not a bad bet at 130 levels based on my deep dive and the following findings...So, here is an analysts J pick based on the fundamentals… (still a novice who is on a fast paced learning ..)

Financials:


KPR Mill reported sales of Rs 481.62 crore and net profit of Rs 58.42 crore for FY07. The company’s operating profit stood at Rs 120.27 crore and the operating margin was 24.97%. The net profit margin stood at 12.13%. On post issue diluted equity, KPR posted an EPS of Rs 15.5 for the year.

Valuations


At the upper end of the issue price, the stock will discount its FY07 EPS of Rs 15.50 by 17.1x and 14.5x at the lower end.

So, @ the price of 225 the P/E works out to 14.5
@ the price of 130 the P/E works out to 8.3 – So, I believe that the share is trading @ a
comparatively cheaper price.

Look @ how it compares with its peers…( KPR is almost half the size of Gokaldas exports in terms of revenues and better than Gokaldas in terms of profit margins)









Take a look at the overweight stocks in textile listed in ICICI DIRECT.. If I do a comparison of this company with other companies in the same line of business (based on the revenue and the net profit) KPR will definitely be there in the TOP 5 slot…


























My take:

Currently this stock is trading at a discounted price. All that is required is a hype in the market about this company…Patience is the name of the game as far as KPR is concerned…This stock definitely deserves more light than what it has got so far…170- 180 levels should bring in a fair P/E for this stock…

PS: take a look at the below links to understand more about the textile sector and why P/E could be an effective metric to evaluate if a stock is trading on an investment or speculative basis.

http://www.equitymaster.com/research-it/sector-info/textiles/

http://beginnersinvest.about.com/cs/valueinvesting1/a/011101a.htm

http://www.equitymaster.com/detail.asp?date=9/2/2004&story=2

Installment #4 - Numbers Don't lie

Hello knowledge workers,

I am a firm believer of this philosophy “earning comes along with (l)earning” atleast in a knowledge economy ( offcourse there are few exceptions, what say you, Kannappan :-) The coincidental connotation (not sure if it was coincidental or intentional) of these words (learning and earning) had intrigued me right from my childhood.

Nevertheless, I feel that there is a strong relationship between earning and learning in an industry such as share market. So, let’s take the first step towards earning which is learning.

Numbers don’t lie though people who give out these numbers may lieJ. In my opinion numbers (or) metrics helps us in different levels based on the need of the hour.

Level 1 – Understand an “object of study” better.
Level 2 – Evaluate if it is good or bad
Level 3 – Compare (both 1 & 2 are in its absolute sense) whereas level 3 is in a “relative sense”
Level 4 – Predict (In this level we all tend to feel as if we were astrologers).

Note: Sometimes it is very difficult to understand the thin line of difference between 2& 3. So for all practical purposes we could consider level 2& 3 to be the same.

Let’s see how these 4 levels works while we make an investment decision in share market.

Here are the stats for some of the most renowned IT companies that I had considered for my investment options.







Here is the definition for each of these metrics…

Face Value à Par value (or) stated value of the share. This is not an important metric when you want to understand the intrinsic value (and) market value of the share. However this is an important number when you want to understand how dividends are given out every year.

Current Market price: The current price at which a share is traded.

Revenue: Overall sales of the company

PAT: Profit after tax in other words net profit

Net profit Margin: Revenue/PAT say for eg., for HCL it is 1101.82/3768.62 which is 29%

EPS: Net Income/Number of outstanding shares (for the definition of outstanding shares refer to the earlier installment)

P/E ratio: Current traded price/ EPS say for eg., for HCL it is 305.55/16.6 which is 18.41.

52 week high and low à should be self explanatory

In my opinion the key numbers that are to be used while making an investment decision are EPS (the higher the better it is) and P/E (the lower the better it is). The best metric that could give us an indication regarding the intrinsic value of the share (and also to understand whether a stock is trading at a much higher price than it is ought to be) is this P/E.

Let me not spoon feed you too much… let your thoughts take wings... Look at these numbers for any stock where you want to invest money. Streamline your thinking based on the four levels explained above. Make a choice. I am sure that the chances of repenting later will be greatly reduced if we all understand the implications of these numbers (not to mention that it is our responsibility to ensure that these numbers are correct).

Even to buy a t-shirt @ 150 rs. We ask fundamental questions such as,

• Is it worth buying at this price?


• Is there any other shop where I could buy this @ a cheaper price?


• Is there any shop where I could buy it @ a discounted price (say end of season sale)

Even to buy a product that is @ a price of 100 rs. We ask ourselves all these basic questions. Seldom do we ask the same questions while investing thousands of rs. in shares which is something that I had always failed to understand. Most often that not we tend to get carried away with the typical herd mentality...So, let’s get our basics right.

Have a nice weekend and many thanks for your patient reading,
Kiru.

Installment #3 - Market Capitalization

Dear prudent Investors,

For a change this thread starts of with a note whereas most of the threads end with a note…

Note: Though this thread is a little longer, understanding the concepts explained out here should not take much time…BTW, sorry for this long thread. In future I will try and keep it short. I am in the process of learning “how to write precise and concise threads/emails”. I am doubtful if I would ever get to learn this art in my lifetime…

Sensex has crossed the 16000 mark (infact it is at around 16800 while I write this email) and here’s my 3rd installment of this series…The market has taken around 50-60 trading sessions (if my memory is correct) to reach 15000 -16000 level. My belief is that it will take less than 30 sessions to move from 16000 – 17000 level which only goes to show the kind of impact that a policy decision (now in this case it is the FED rate cut in US on Sep 19th ) can have on the INDEX

Guyz... As far as my personal disclosures are concerned, overall it’s been a profitable day for me…

1. Puravankara bought @ 400(in IPO) and sold @ 445 – Overall profit of Rs. 3600 (off course you will have to deduct the brokerage of around 300 bugs)
2. ICICI bank bought @ 850 and sold @ 995 – Overall profit Rs. 2900
3. Tata motors bought @ 673 and sold @ 755 – Overall profit of Rs. 1640

These are (2 & 3) still unrealized profits. But then today these stocks are trading in these ranges and I am hopeful that it will get sold out at these prices. Now I would want to consolidate all these money into IT stocks (Satyam, Wipro and HCL) that are on its way towards an all time low (or) 52 week low (configuring an alert in ICICI DEMAT can be quite useful here.. I have already started using this facility for timing my buy decisions when the share prices are on its 52 week low for the chosen stocks)

Now in this installment let me introduce you to a few key terminologies that I have understood and digested so far. I think I could fairly relate to these terminologies and factor in these concepts and numbers in all my judgments to buy a share @ some X price.

Market capitalization – All of us may not have heard of this terminology “Market capitalization” including me (atleast till the time i.e., last month that I read the dummies book on Stock marketsJ).

I am pretty sure every one in CC would have heard of this term Small Cap, Mid Cap, Large Cap etc., So, what does the term “Cap” mean here...?? It simply means Capitalization.

Market Capitalization =

1. Value of the company (or) Market value of outstanding shares*
2. No of outstanding shares * Market value of the share

* Outstanding shares is the number of shares held by the investors

So, say for example if the current value of infosys share is Rs. 1800 and no of outstanding shares is 1000 then the market capitalization is 1000* Rs. 1800 = Rs. 1800000

Now that we know about the funda for classifying a stock as smallcap, largecap what is the most common misconception of a naive? “Higher the stock price the larger the company”

If you have understood market capitalization concept you should be able to understand how ridiculous this understanding is. Still, till last month I had this misconception. Now I am fairly clear on this concept.

Lessson#2

Always make “Apple to Apple comparisons” why trying to judge the performance of the companies relatively. To make apple to apple comparison the minimum requirement is that the companies that we compare:

• are involved in the same line of business ( I mean the same sector)
• Then understand whether it is a Midcap, Smallcap, Largecap etc., based on Market Capitalization to ensure that they are of the same size.

A couple of months back my understanding about this concept was flawed. Believe me, understanding this simple yet effective. Understanding this concept has made me a better/ (to be professional) investor. Now when I look back at some of my choices that I have made few of them could be attributed to the sheer misunderstanding of this concept.

Let’s talk about EPS (Earnings per share) and P/E ratio in the next installment, quite an interesting concept in equities.

Thanks,
Kiru.

Installment #2

Looks like my stock picks for last week weren’t all that bad... Though my venture into IPO has turned out to be a big disappointment (or) rather learning by burning the fingers (As Edison quotes “I have not failed. I have found 10,000 ways it won’t work”), with investments in KPR mills and Purvankara…Now I am ambivalent as to “exit out” or to “wait” (a million dollar question in this industry) because I have very little faith in the fundamentals of these companies…

Learning #1: Never invest in an IPO just b’coz it is an IPO without understanding the fundamentals of the company/industry. Belief in fundamentals adds in an ounce of patience in our emotion. Otherwise we tend to panic and sell of the stock at a lower price than the offer price. Understanding the fundamentals thoroughly before we invest in an IPO makes us to wait with patience and confidence, even if the listing price is lesser than the offer price…

So, guyz (investors) out there… watch out before you invest in an IPO. I have paid my price for not heeding to the words of the experts and for getting carried away with my emotions and sentiments... would you want to be a prudent investor? The choice is yours…

Dopes with Stats:







Puravankara – offer price – Rs. 400 and current price is around Rs. 365
KPR mills – offer price – Rs. 225 and current price is around Rs. 170

The eternal quest for knowledge lies in these – Why, Where, When, What, Whom, How….

As always, Comments and Criticisms are most welcome. Will come back with more thoughts/learnings as thoughts converge (or) when time permits…J

Thanks,
Kiru.

Looks like this the golden period to invest in shares..

Hi all,

Would you be interested in investing your money in shares? Looks like this is the best time to invest in shares with a medium term (6 months – 9 months) or long term perspective (anywhere between 12 months – 36 months) if not with a short term perspective...

Most of the IT (heavy weight sector) stocks like HCL, Satyam, Infy, Wipro (heavy weight companies) are on a 52 weeks low price… I feel that the market will bounce back from this bearish trend in another 6 months timeframe. In my opinion if we invest now we should get anywhere between 15-25% returns in the next 6 months time frame…? (i.e., If I invest Rs. 1000 now I should get anywhere between 1150 -1250 in 6 months time frame)

HCL – around 289*
Infy – around 1759*
Satyam – around 410*
Wipro – around 444*

* Based on yesterday’s closing..

I had a look into the fundamentals of the above listed companies like P/E (price per earnings) and EPS (earnings per share) and the net profitability for the last three years. The fundamentals definitely look positive for all the above 4 companies...

Apart from the above IT sector stocks that I have mentioned over here, few other stocks that look appealing to me are Tata Motors (automobile), ICICI bank (Banking), SBI (Banking)

This is the time when we need to buy out stocks in small chunks. So that even if it goes down further we could average out…For eg., if I intend to make an investment of Rs. 50000 in Infy shares I invest only 10000 immediately and wait to see if the market goes down further.. If it does I invest another 10000 and so on…This is called the averaging strategy….

What do you say/think?

Disclaimer: All stock market investments are subject to market risk….. Whatever predictions that are made are with the assumption that future will continue to behave in the same way as the past…. :-)

Expectations

Your expectations for this day, this year, this life will significantly impact your outcomes. Raise your expectations and raise your quality of life.......