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Presentation on theme: "GREETINGS KOCHI! S. ANANTHANARAYANAN CAPRICORN"— Presentation transcript:


2 S. ANANTHANARAYANAN ANNUAL REPORTS & INVESTMENT STRATEGIES How to invest & how to create and read annual reports Companies and scrips named are not recommendations to invest. Do your own analysis before deciding to invest.

3 S. ANANTHANARAYANAN MONEY MAKING IS NOT EASY Investing is not equal to printing currency notes.

4 S. ANANTHANARAYANAN THE MARKET IS EXTREMELY DYNAMIC WITH A HUGE SET OF VARIABLES  Demand & supply of floating stock  Valuation  Asymmetric information  People behavior  Individual bias  Mass psychology  Corporate performance and outlook  Sector prospects  Inflationary expectations  Currency movements  Commodity volatility  Country fundamentals  Government interventions  Regulator speak & signals  Global influences  Monsoons, etc All of these add to market unpredictability

5 S. ANANTHANARAYANAN STOCK PICKING IS ABOUT IMPERFECTIONS Actually, we search for:  Imperfection in valuation  Imperfection in demand & supply  Asymmetric information about the company  Several other unknowns

6 S. ANANTHANARAYANAN VOLATILITY IS AN INDICATOR OF EXAGGERATED IMPERFECTION Price reflects imperfect public opinion Movement in stock price is an attempt to capture perfection

7 S. ANANTHANARAYANAN SEARCH FOR PERFECTION IS THE BASIS FOR A TRADE Pricing errors are what give us a trade Do not expect the market to be perfect Market is always searching for perfection

8 S. ANANTHANARAYANAN INSTANCES OF HUMAN & PRICE IMPERFECTIONS Harshad Mehta & Ketan Parekh times:  ACC went up from Rs.200 to Rs.9,000 in 3 months  Apollo Tyres, BPL, Castrol, Reliance, TISCO, Sterlite, Videocon Valuations were decades ahead. Later, similar shockers seen in Himachal Futuristic, Global Tele, Zee Telefilms etc.

9 S. ANANTHANARAYANAN TULIP MANIA IN EUROPE One Tulip flower sold for : Two loads of wheat 4 loads of rye 4 fat oxen 8 fat swine 12 fat sheep 2 hog heads of wine 4 tonnes of beer 2 tonnes of butter 1,000 pounds of cheese A complete bed A suit of clothes, and a silver drinking cup All these were valued at ƒ2,500. Yes, ƒ2500 for one beautiful Tulip flower

10 S. ANANTHANARAYANAN GREATER FOOL THEORY Price of an object is determined not by its intrinsic value but by irrational beliefs and expectations of market participants

11 S. ANANTHANARAYANAN AND THERE IS ALWAYS A GREATER FOOL! Companies promoted with Objects Clause in the Memorandum of Association:  To grow wool on egg shells  To take over all the debt of the Government of United Kingdom; and guarantee interest payment of 5%  To explore America & Mississippi river, to find gold and silver  To carry on an undertaking of great advantage but no- one to know what it is!  To reclaim sunshine from vegetables  To build floating mansions to extend the landmass of Britain All the IPOs were over- subscribed!!

12 S. ANANTHANARAYANAN EXPERTS HAVE COME OUT WITH SEVERAL INVESTMENT MODELS  Value Investing  Capital Asset Pricing Models  Computer Simulated Random Investment Models  Discounted Cash Flow Methods  Top-down investing  Bottom-up investing  Fundamental analysis  Technical analysis  Momentum investing  Contrarian investing  Dividend investing

13 S. ANANTHANARAYANAN INVESTOR BEHAVIOR NOT IN LINE WITH TEXTBOOK CONCEPT OF EFFICIENT RATIONAL INVESTOR Investment strategy should accommodate  How investors behave &  What investors want Less than fully rational investors may cause market prices to  Deviate from their fundamental values  Make the markets less than efficient  Disrupt the market

14 S. ANANTHANARAYANAN SPECULATORS ARE MASQUERADING AS INVESTORS Traditional finance will ask rational investors to keep away from lotteries Human behaviour seduces the participants to enter speculation There are far too many speculators than investors in the market. They believe they are investors, when in reality, they are speculators.

15 S. ANANTHANARAYANAN RISK VERSUS RETURNS. WHAT WOULD YOU DO? If you could increase your chances of improving your returns by taking more risk, would you be willing to take:  a lot more risk with all of your money?  a lot more risk with some of your money?  a little more risk with all of your money?  a little more risk with some of your money?

16 S. ANANTHANARAYANAN PSYCHOLOGY OF AN INVESTOR  Investors take more risk than what they wish to take  Not fully conscious of their downsides

17 S. ANANTHANARAYANAN CAN WE BE SMARTER INVESTORS?  Can we learn from the past & extrapolate the future trends?  Can we figure out the infinite unknown based on the finite known?

18 S. ANANTHANARAYANAN WHAT JOHN MAYNARD KEYNES SAID Keynes said four factors were at work:  Stock investors have scanty knowledge of the companies;  Short term fluctuations in profits disproportionately influence stock prices;  Psychology of investors changes stock prices which may not have anything to do with future earnings;  Professional investors try to anticipate & move before the non-professional investors do.

19 S. ANANTHANARAYANAN SOMETHING ELSE JOHN MAYNARD KEYNES SAID Keynes examined probabilities of alternative behaviour: It is not a case of choosing those [faces] which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.

20 S. ANANTHANARAYANAN TRY THIS. RANK THEM IN THE ORDER YOU PREFER.  Kavya Madhavan  Namita Pramod  Manju Warrier  Remya Nambeesan  Amala Paul  Bhavana

21 S. ANANTHANARAYANAN NOW RANK THEM IN THE ORDER OTHERS WILL PREFER  Kavya Madhavan  Namita Pramod  Manju Warrier  Remya Nambeesan  Amala Paul  Bhavana When you anticipate how others might behave, your order of preference changes to accommodate theirs. Keynes believed that similar behaviour was at work within the stock market. This has people pricing shares not based on what they thought their fundamental value was, but based on what they think everyone else thinks their value was, or what everybody else would predict the average assessment of value was.

22 S. ANANTHANARAYANAN THERE ARE NO ABSOLUTES HERE. TOMORROW ISN’T YESTERDAY. No statistician or algorithm expert has found a formula that consistently produces profit or protects capital

23 S. ANANTHANARAYANAN BUT, THERE MUST BE SOME METHODS THAT ALWAYS WORK? The short answer is NO. There are no certainties, no assurances and no methods that are proved beyond doubt to work.

24 S. ANANTHANARAYANAN WE NEED ALL THE INFORMATION WE CAN GET BECAUSE WE  Are not running the business  Do not have domain knowledge or core competence  Have no idea of the competitive pressures  Need outlook of the business  Seek trend in the business segments, shrinking/growing core markets  Do not know the entry barriers or cost of putting up a unit  Do not know the real value of the business  Do not know the man years of skill sets the company owns  Do not have any control on what they do or when they will do  Do not know the appropriate valuation of the business  Have an outside or tangential knowledge of the business

25 S. ANANTHANARAYANAN WHICH BRINGS US TO THE ANNUAL REPORT Wikipedia says the annual report is a comprehensive report on a company's activities throughout the preceding year. Annual reports are intended to give shareholders and other interested people reliable information about the company's activities and financial performance.

26 S. ANANTHANARAYANAN WHAT DOES THE ANNUAL REPORT USUALLY CONTAIN?  General Corporate Information  Chairperson’s statement  Director's Report  Management Discussion & Analysis  Report on Corporate Governance  Accounting policies  Balance Sheet  Statement of Profit & Loss  Cash Flow Statement  Notes to the financial statements  Auditors’ report

27 S. ANANTHANARAYANAN WHAT SHOULD THE ANNUAL REPORT CONTAIN AS PER LAW?  Refer Section 134 of the Companies Act  Relevant rules such as Companies Accounting Rules etc.  Requirements of the Listing Agreement

28 S. ANANTHANARAYANAN WHAT DO INVESTORS NEED?  Clear & concise facts  Statistical data for investors to evaluate  Company’s goals & plans to accomplish  Be truthful, straight forward & say it, as it is  Avoid withholding bad news  Avoid making extravagant promises  Avoid making predictions without facts to back them up  Avoid projecting negatives as positives Investors, analysts & other stakeholders need credible information

29 S. ANANTHANARAYANAN ARE YOU INVESTOR ORIENTED OR ARE YOU MANAGEMENT ORIENTED? The test of providing credibility is in answering two questions!  Are you a trustee of the minority shareholders or of the promoter?  Who does the company belong to?

30 S. ANANTHANARAYANAN ONE GOOD DEED LEADS TO ANOTHER Accountability breeds trusteeship Companies that share information tend to drive themselves Companies should invest in information Equally, investors need to invest in information

31 S. ANANTHANARAYANAN WHAT IS THE DOWNSIDE OF WITHHOLDING INFORMATION? 1. Trust deficit 2. Low credit rating 3. Higher cost of funding 4. Higher attrition & 5. Lower valuation


33 S. ANANTHANARAYANAN 10 STEPS TO IDENTIFYING WINNERS 1.Go beyond the numbers. Try & understand the business 2.Company is in a business that has customer demand; 3.Lower supply side risk 4.Is in the top 3 in its segment 5.Has competitive strength 6.Good corporate governance reputation & no major controversies; Avoid companies with poor record of ethics or skeletons in the closet 7.The promoters/directors have domain knowledge & core competence 8.Ensure sustainability of business & no serious threat to survival 9.Is company working for the promoters & related parties? 10.Raise your benchmark. Put a premium on integrity. All of these are Qualitative Data.

34 S. ANANTHANARAYANAN 10 MORE STEPS TO IDENTIFYING WINNERS If the quality reviews pass the test, then move on to these quantitative parameters: 1.Rising product volumes; 2.Improving market share; prefer companies that have pricing power; 3.Increasing operating margin (EBIDTA) 4.Reducing absolute interest costs or at least reducing interest per tonne of product; Is the MD or CEO the best employee that the banks have? 5.PBT rising faster than topline 6.Rising EPS 7.Higher cash flow from operations 8.Reducing debt 9.Increasing bank balance 10.No qualification in audit report.

35 S. ANANTHANARAYANAN KEEP IN MIND THAT  Revenue, expenses, assets & liabilities are the best indicators  Real are volume manufactured, cash & bank balance on hand  Cash received, cash & bank balance are real  Except if you are looking at Satyam Computers !!

36 S. ANANTHANARAYANAN IN THE END, IT’S YOU WHO DECIDES Make it difficult for anyone to reach your monies, to park low performance company scrip or a company that is threatening to produce wool on egg shells or produce wind energy in foreign countries or produce roses in Africa to sell in Europe. Your wealth is precious and you owe it to yourself that the funds are parked in assets that will perform for you, add value to your net worth and carry lower risk profile.



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