INVESTING IN SHARES
By S.K.Sengupta
By S.K.Sengupta
INDIAN SCENE
Largest companies in India : SBI , Tata
Steel , ITC , Reliance Industries , Hindustan Lever , TELCO , ACC , ONGC ,
HINDALCO , Tata Motors , SAIL , L&T . Well-known Core companies : Hero Honda , Bharat Forge , Infosys
Technologies . Well-known diversified companies : Growth Areas
: Pharmaceuticals , Textiles , I T
services , Farm produce , Steel , Aluminium , Processed & semi-processed
food , Personal Care items , Home appliances . Some Growth companies : ABB Ltd. ,
Bajaj Auto , Siemen , TISCO , Gujarat Ambuja Cement , WIPRO , Indian Hotels ,
Indian Rayon , Infosys Technologies , L&T , TELCO , Reliance Industries . India is Internationally competitive in the following
fields : I T , Health Care , Silk , Cotton Textiles ,
Milk products , Two Wheelers , Tea , Leather products , Mushroom , Fruits ,
Floriculture , Pharmaceuticals , Poultry products , Vegetables , Auto
ancillaries , Gems and Jewellery . Petrochemicals , Fertilizers , Consumer Durables and
Electronic goods are threatened by global competition and receding
profit-margin . Power , Hotel & Cement are not open to
international competition and their domestic market in 
GENERAL ADVICE
A company should have at least 5000 shareholders ,
equity capital Rs. 10 crores , and turnover of Rs. 50 crores . Diversify your share investment in different companies
, different fields , and different geographical locations . However , do not
over-diversify . ( Invest in about 10 different companies . ) Core competence companies are fast growing . Large
diversified companies are slow and sluggish and not best investment . Core companies that are monopoly or near monopoly
and/or whose market is growing are safe investments . But invest in diversified
core companies . Growing companies are in growing sectors of the
economy . Identify growth areas of the economy . Next identify
companies in this area that have impressive past growth record . Turnaround stocks , Defensive stocks , Blue chips ,
Growth stocks , and Keep track of monsoon predictions , agricultural boom
, and economic trade cycles . Inflation , Transport cost , Power , and Steel affect
most of the companies . Also Interest , Customs , Excise , Foreign
Exchange rates , EXIM and Govt.
policies affect the companies . Inflation foretells taxes , controls , and credit
squeeze , which lead to recession and bearish pressures . The following economic factors have a negative impact
on Stock Market : Bad monsoon , Fall in Industrial growth , Inflation , Rising
Interest rates , Falling Forex Reserves , Deficient Balance of Trade , Rising
Budgetary Deficit , Falling employment level , Rising taxes , Govt. policies
not pro-business , Unstable Govt. , Unfavourable International developments . Interest rates
in U.S rise > Foreign Direct Investment flies back to Internationally competitive industries alone can do
well with growing globalization . Value and nature of exports of a company
indicate its global competitiveness . Keep an eye on neglected
or overlooked companies which have
good future . Also keep an eye on bluechip companies which are temporarily out
of favour . However , be very prudent and cautious before any bargain hunting . One may disinvest in a company , in a whole industry ,
or one may even disinvest from the entire Stock Market . THREE critera
of minimizing risk : * Liquidity ( so in case of need or emergency , you can quickly sell )
. * Diversification of Portfolio
.
*
Long-term Investment Strategy ( to balance out temporary swings . Stock markets are irrational in the
short-run , but rational over the long-term ) . Dividend is usually 1% to 2% p.a. of Market Value of
shares .
FINANCIAL ANALYSIS
Huge reserves – particularly twice the amount of
equity capital - ensures that it’s a
growth-company , and it may issue bonus
shares , and the price of its shares are likely to go up . Book Value per share = Share Holders’
Funds / Total No. of Equity Shares issued . Share Holders’ Funds = Net Worth of the company = Assets – Liabilities =
Equity Capital + Reserves . [ Market Value of share is usually much higher than Book Value . So , if Market
Value is very close to its Book Value , then the shares are undervalued . If Market Value is more than 3 times its Book Value , then the shares
are over-valued . Moreover , in case of new companies , Market Value is close to its Book
Value –
if it’s more , the shares are over-valued
. ] Earnings Per Share ( EPS )
= Profit After Tax / Total No. of Equity Shares issued . EPS – Dividend per share = Profits ploughed back per share . ( Real returns on investment is EPS .
) Price / Earnings Ratio ( P / E
) = Price of the share / EPS . ( P / E denotes approx. how many years it will take
to recover the price of the share . ) A company with high present earnings and dim future will have lower
share price and hence very low P / E
ratio . But it won’t be a good investment .
Blue Chip companies normally have a high P / E ratio because of high
price of its shares . ( Good future prospects of a company , where its P/E is not that high is
a good investment . ) Important Ratios : Yield
= Dividend per share / Market Price per share x 100 ( Normally 1% to 2% in
Return
on Net Worth = Net Profit / Net Worth x100 ( = EPS / Face Value of each share x 100 ) Debt-equity Ratio = Outside Liability / Net Worth x 100
P / E ratio 15
( to 20 ) ~ Purchase shares . They’re underrated if the company is large ,
well-known ,and growth-oriented . P / E > 25 ~ Avoid buying . There’s bullish
overrating of shares . P / E < 8 ~ Avoid buying . The company is bad . Average P / E
for last 3 to 5 years normally does not fluctuate . This average P /
E multiplied by EPS for this year gives
a rough idea about the legitimate average price of this share for this year . Fundamental ( Ratio ) Analysis is always on a strong
foundation . Trend ( Graph of Market Price
) Analysis is always on a weaker ground . 
SELLING
Four simple rules of Selling : 1. Don’t wait for the Highest Price .
2. Have a target and
sell when your target-price is reached . 3. Once you realize
you have made a mistake – Sell . 4. Sell a
share if you won’t buy it at its prevailing price . ( With proceeds , you may
buy the shares of newly emerging high-growth sector companies of the economy .
GOOD TIMING
When to buy and at what price ( not only which shares
to buy ) ? When to sell
and at what price ? What to buy is an easier decision than when to buy . When to buy is an easier decision than when to sell . In a growing economy the high and low of share prices
this year will be higher than that of last year . Yet last year’s high and low
give indications of undervaluation and overvaluation of shares now . Sell in boom , buy in recession , because stock markets always over-react . However ,
buy in recession only when the company is sound and only its shares are
undervalued . Buy dear and sell dearer is another golden rule . Average up . Buy some shares , buy more and more in stages as
long as price keeps on rising . Don’t average
down i.e. don’t buy more and more as price keeps on going down . Better
wait until you feel that the bottom of the downswing U is reached . Always buy on the upsing and never on the downswing
. ( See the Trend Analysis for this . ) After a steep rise , normally there is a fall which is
about 50% of the rise . So don’t buy when it rises . BUY when it falls 50%
. SELL a share when it
rises steeply . After a steep fall , there is normally a rise which is about
50% of the fall . So don’t sell when
the price falls steeply – rather that’s the time to buy , if the company is good and you are sure of its fundamentals . Be alert in foreseeing the promise in a company’s
venture , and buy its shares before the good news is public . Similarly , see
early and sell shares before a bad news becomes public . The moment a good expanding company goes into
commercial production , the prices of its shares shoot up . So buy its shares a
few months before production begins and sell after about 2 months of the
beginning of production . Buy shares of good companies on the day some good news
is announced . Soon its price will soar . Then sell it off .
INITIAL PUBLIC OFFERING
Invest only in new issues of existing large ,
growth-oriented companies . Apply for mega issues of well-known profit-earning
companies ( because of better
chances of getting a firm allotment ) . Invest in companies operating in high growth sectors
of the economy . Invest in companies with well-known reputed foreign
collaborator companies . Invest in companies that have something new to offer . Don’t invest in companies which are not ready to start
business operations ( the gestation
period may grow long ) .
COMPANY ASSESSMENT
GATHER THE FOLLOWING INFORMATION :
1. Turnover ( should be over Rs. 50 crores )
2. Equity Capital ( should be over Rs. 10 crores )
3. Shareholders ( should be more than 5000 ) 4.
Book Value ( vis-à-vis its Market Value )
5. EPS ( and Dividend )
6. P / E ratio ( also
Average P / E over last 3 or 5 years )
7. Actual Return ( = EPS / Market Price x 100 ) Yield ( = Dividend /
Market Price x 100 = 1% to 2% in CARRY OUT THE UNDERGOING ANALYSIS :
1. Economic Analysis and Future Prospects . 2. In new companies , Market Value should
be close to Book Value . In
old companies , Market Value should be much higher than Book Value – but if it
is 3 times or more , then it is overvalued . 3. EPS measures
real earning .
Actual Return measures the real return .
4. ‘EPS – Dividend’ measures company’s Reserve Building Activity . 5. Equity should be much higher
than Debt .
6. P / E ratio should ideally be between 15 and20 . It measures : How many years it will
take to recover the price of the share . 7. Return on
Capital employed which measures the overall profitability of the company . 8. Average P / E x EPS this year - -
indicates the average price of the share this year .
9.
An important equation as a broad thumb-rule :
72 /
Rate of Interest ( or Return ) = No. of years ( in which the money will double
itself ) .
Tips from Warren Buffet
Have a portfolio of about 10 Company shares only . If you ain’t willing to own a stock for 10 years ,
don’t think of owning it even for 10 minutes . Purchase stable companies which are least volatile ,
and which will last at least 10 years surely and won’t be eliminated by an innovation . Go on reinvesting all dividends . The power of
compounding will do the rest . Invest only when you get shares of great Companies at
a great price . Avoid detailed mathematical systems : they are not unfailingly reliable . Yearly high is 30-45% higher than yearly low normally
. So the knack is to buy good shares when they are at their yearly low and
selling when they are at their peak . Actual Return in Shares Market is 11% . Because of
C.I. , higher than 11% return is a good kill . Less than 11% is a bad show . In
fact invest only in Companies which give you at least 15% return . Make a list of 20 best Companies and watch them
patiently over time . The name of Companies in best 20 may keep on changing .
Make their ‘list-table’ with prices at which you are ready to buy . Then wait
till the price comes down to desired level or lower . Of course keep on
updating the assessment price . See page 50
of Warren Buffet book to arrive at desired level prices of shares . The rate of growth a Company had over last several
years is the best indicator of its likely future rate of growth . And that’s
the rate of return you will get on your investment . [ Average EPS of a Company
over last 10 years is likely to be its average EPS for the next 10 years .] Invest only in Companies which
give you at least 15% return . Per-share Book Value of a Company is the best
indicator of the true value of the Share and at what rate it is growing .
*****
