28 Nov 2017

Why we need a Portfolio?

  “Why I need a portfolio while I make enough money from trading?”
Shahul asked me. 
A regular day trader with consistent results, he knew what he was doing. So making profits or doubling investments wasn’t a concern. Scalping, the method in which traders make small profits using slight but sudden move in stock prices, was Shahul’s main technique. He focuses mainly on stocks that have reached their highest price in a year.
“What do you do with your profits”, I asked, knowing that his question came from a place of ignorance and that I cannot send my answer to same place.
“I spend! Shopping, vacations, you name it!” He was having fun, I could say. But being a Financial coach, I have to set him for goal based investing.
“Have you planned out anything for your retirement and children’s college education?” I asked with concern.
“I have Rs. 10 Lakhs in Fixed Deposits. I guess that’s enough.” Now, I can say that he was expressing more of a genuine doubt, as he looked at me for reassurance.
“You are joking, right?” I asked with a smile.
“No, that’s…. That’s my actual plan right there.”
I leaned forward. “Shahul, consider an average inflation of 6% affecting your plan. An MBA programme costing Rs. 10 Lakhs today is going to cost about Rs. 24 Lakhs in 15 years’ time. And only God knows what a Medical College tuition fee would be in that time frame. The same is true for retirement. You are forty now. Retire at sixty and you would need almost thrice as much for monthly spending.”
“Good lord, my monthly expenditure is somewhere near Rs. 25,000 now? Are you saying it could go over to Rs. 75,000 then?”
“Even if you consider average inflation, you will need near Rs. 80,000 a month.” I answered.
“Rs. 80,000 a month means anywhere north of Rs 1 Crore in fixed deposits or bonds! Oh…… So I get it! It’s to make this amount that we create a portfolio, yes?” Realization is always a pleasurable experience.
“Yes. You should set aside an amount to create a portfolio where you limit the risk. And this is very important. Let me say it again. You limit the risk, here! Now this is what we call you core portfolio. You make such a portfolio including top stocks, equity funds, balance schemes, etc.”
“Go on. I have heard about more kinds of portfolios.” Clearly, Shahul seems to have opened up his mind now.
“ Well, the core portfolio is designed to take care of long term goals. So, money left can be exposed to some level of risk, meaning a satellite portfolio of mid-level stocks and sector funds. Only after setting up two such funds should you expose remaining funds to higher levels of risk, that is, penny stocks, swing trades and day trading. This now, would be our aspirational portfolio. See how both of these came in our priorities? This, Shahul, is exactly my point. Stick into asset allocation Principles for goal planning and at the same time, avoid losses by segregating portfolio.” I wondered whether I had made my point clear.
“So, I only have an aspirational portfolio right now. Hmm…. I could have messed up, but hey, thanks to you. Got to change a few things, I guess.” Shahul smiled at me. After all, I had made my point, I thought.
“Hey, let’s get something to drink.” I tried to lighten the mood.
“Oh yeah sure! The best decisions have always been decisions over a cup of coffee!” He laughed, holding my hand firmly. Then I knew, the man had decided to make the change- a change that would make him an investor!

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Why you should read Annual Reports ?

            Do you call yourself an investor when you’ve never read an annual report? Annual reports are sent to shareholders at the end of every financial year and published on the company website.It summarizes the performance of the sector and the company.It is a ready reckoner  of products, market share, and financial situation of a company.Charlie Munger says," You must value the business in order to value the stock".Annual reports help us to obtain clarity and insight about the business and it's competitors.

          Each annual report can be dismantled into four pieces- the director’s report, the auditor’s report, financial results and account notes. The director’s report describes the current economy and the sector, spreading light on the firm’s activities, challenges faced, opportunities to be tapped and future plans. Checking the information for flaws and comparing with other firms in the sector is the job of the investor. Here, reading between the lines is the rule.The law requires the company to publish the auditor’s report. The company’s statements are critically examined, with the stockholders’ interests in mind. Chances are that a few of the director’s statements are despised, although not directly, in the auditor’s report. Such discrepancies and accounting methods can be noted from this part of the report.

         The financial statement at the end of the report has three parts- the balance sheet, the income statement and the cash flow statement. The assets, liabilities and net worth of the firm are listed in the balance sheet. A company is called a fairly good business when it’s net worth has increased consistently over the years.Seeing a track record of double digit growth rate in company's networth is a positive sign. The balance sheet gives a clear idea about the capital, reserves, loans, permanent assets, current assets, long term and short term borrowings, etc. Income statement is about the net revenues, net profit and total expenses. Consistent rise in net revenues and profit attract the attention of investors.Money transactions, both in and out of the firm’s books, are listed under the cash flow statement. The ‘Cash Flow from Operations’ gives the amount of money earned from the sale of goods and services. Money from selling or buying of assets are listed under ‘Cash Flow from Investing’, and that from sale of shares or bonds, under ‘Cash Flow from Financing’. A company with a positive net cash flow over the years proves as a worthy investment. Otherwise, the consistency of returns are doubted. 

      An intelligent investor should not ignore a report section called ‘Management Discussion and Analysis’ . This is where the sector and the company are looked at together, considering all the qualitative factors,business model and future growth potential. “When others read the Playboy magazine, I read annual reports”, is a famous quote by  the greatest investor of all times, Warren Buffett. This mindset differentiates market participants blindly betting, and intelligent investors.

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24 Nov 2017

Equity Market Outlook

                                                        (Image Courtesy: Financial Express.)
                   The market’s going up! The market’s going down! The market’s going sideways! People shout out their feelings of where the market’s about to go. But where it’s actually headed is not something anyone can predict. At the same time, if you participate in the market, you should have your own idea as to what’s going on- your unique perspective. The market currently reflects the presence of a bunch of optimistic participants. A strong-looking economy gave us hopes of an increase in GDP, but it failed to meet expectations in previous quarters.

           Structural reforms always shake up the system, which is exactly what happened during demonetization and the GST rollout. These baby steps aimed at a better future, saw our reluctance in accepting change. Years of outcry against black money, but demonetization wouldn’t be worth our patience. A tax reform had been due for decades now, but presented with the GST bill, change was too fast.Public reluctance to adopt this paradigm shift reflected in our growth rate and corporate earnings, although demonetization influenced the stock market positively. Real estate, gold and fixed deposits- the common investments for Indians- got replaced by mutual funds and other market vehicles gradually. One year back, Nifty was at 7900 and as of now, it’s at 10300 levels.While sectors like banking, automobile, consumer goods, financial services, media, cement and metals have seen huge rally, others like pharmaceuticals, IT, realty and public sector experienced mediocre gains.Temporary profit booking is evident in these sectors. Foreign exchange reserves have risen record levels of an estimated 400 billion dollars, making the rupee strongest in the past two years. Overall, inflation also seems to be under control.

           Our imports have crossed our exports by a huge margin which is a bad sign. While the former saw a 28% growth, the latter grew only by 8% this year. Corporate earnings have been up to the mark last quarter, especially companies under Nifty that gave good returns. But as a whole not much seems to have changed. Growth in corporate earnings, if not consistent, may lead to corrections. Data from the National Stock Exchange  shows a change in investment pattern from Foreign Institutional Investors(FIIs). The year saw INR 12,200 crore being invested in the secondary market and INR 35,000 crore in the primary market(IPO & QIP). Rise in prices of prominent stocks brought about this shift and it has pumped funds into recent IPOs of insurance companies.

            Last time there was a risk of correction in the market, the central govt. stepped in with a INR 2.1 lakh crore package for public sector banks. The move slightly pulled up stock prices of major public sector banks. The Bharat Mala programme also brought a positive vibe in the market. The PE levels of the Nifty index is 26.4 whereas the PB is 3.4. By valuation principles, these levels are quite high.The current sentiments convey a constantly moving market. Financial institutions presently invest hoping to catch up on profits to be made in the period 2018-20. The structural changes are expected to increase the profit potential of companies and mutual funds, FIIs, etc. believe so. Changes in GST levels are anticipated, but a consistent upward trend should not be blindly bet on. Total or partial profit booking in case of highly priced stocks can protect investors from sudden corrections.

         Sector rotation is a common sight in the Indian market. Sectors growing hugely at a point of time may pressure the markets sometimes. Also sometimes, concentration shifts to sectors with minimum participation previously. An example would be the rise in metal sector last year after about 2 years of gloom. As of now pharmaceuticals, IT, corporate lending, power, etc. seem to be attractive. Consistently growing firms in these sectors can prove to be appropriate for long term investors. Focusing on the management, instead of market indices, to make decisions can result in better moves. As market guru Chandarkanth Sampath said, selecting stocks with good growth and prices discounted by 30-40%, is the best thing to do in the present situation.

        Rise in price of commodities like crude oil, can limit the upward trend in the stock market, at least temporarily. International events have always affected the Indian market time and again. Also, a correction close to year end is commonplace. Even if a correction occurs in the American market, currently traded at pretty high levels, the Indian market might go through a reflection of the same. Unrest in the Middle East, the debt problem in Venezuela, etc. may affect the international economy. Election results in Gujarat is also an upcoming factor capable of indicating the market direction.

Disclaimer & Disclosure:
Sony Joseph,Author is a SEBI Registered Research Analyst and involves in active stock recommendations for his clients.This is a personal view about general market situation:not an advice.Stock market is subject to internal or external risks.Do your own analysis before any decision.

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