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Dada,
Are these the same articles you were ferering to -
The Economic Times
Title : INVEST IN STOCKS OR MUTUAL FUNDS?
Author : Dhirendra Kumar
Location :
Article Date : 03/27/2017
This is a question that all investors have to answer. All logic points one way, but some people's instincts point the
other, says Dhirendra Kumar.
Over the last few weeks, we've arrived at the realisation that equity is inevi table. For any kind of long-term in vestment (and we
will also define long-term soon), the risk-reward ratio is heavily in favour of equity investments. All arguments for the primacy of
`risk-free' fixed income investments fall apart when one realises that what looks like freedom from risk is actually freedom to
become poor. This conclusion is unavoidable when you look at real, inflation-adjusted, post-tax returns.
Having accepted the inevitability of equity, one is immediately confronted with the question of how to go about this reportedly
difficult activity. For people who have never invested in stocks, it's hard to know where to make a start.However, there are two
distinct ways of investing in equity. One is to choose stocks and buy and sell them yourself. And two, invest through equity funds.
The final goal is nominally identical--to benefit from the superior returns that equity investing offers. However, the two activities
are completely different. Unless you are an expert, or are willing to spend considerable effort in becoming one, it doesn't make
sense to invest yourself--funds are the right choice.
Mind you, I'm not saying that an individual can't do this. There are many people who manage to invest themselves with
considerable success. However, the odds are against any one individual being able to do so, in the sense that for every 100 who
try, perhaps 5 or 10 will be successful. An even bigger problem is that even those few would have probably learned to be
successful after many failures. That's something that turns out be a deal breaker for most who set out to become expert equity
investors.
Investing through equity-backed mutual funds sidesteps all these problems neatly. The heart of equity investing is having a correct
mental model of how successful stock investing is done, and then having the capacity in terms of information, analysis and
execution to execute that. I'm not suggesting that an individual acting alone can't do that. What the individual would almost always
lack is the capacity, in terms of money and effort, to do this.
But there are many more advantages to investing in equity through mutual funds. A major one is an disciplined diversification.
Fund managers operate within an institutional framework which enforces certain ground rules of investing. These could have a set
of rules defining the investments such as there must be at least 15 or 20 stocks with no less than X% of the total portfolio. The
stocks must be spread over at least 5 sectors with no sector being less than Y%. At least Z% must be held only in large
companies because they tend to be more stable in bad times. And so on and so forth.
Taken together, such rules define a framework that ensures that the portfolio stays diversified and safe from shocks that may
strike individual stocks, sectors or types of stocks.Individuals who manage their own stock investing would rarely have the
knowledge or discipline to do all this.
Another advantage is that of being able to invest with small amounts. If you try to build a diversified portfolio with stocks by
buying them directly, you'll need a large sum of money--at least a few lakhs to begin with. In mutual funds, you can start off by
owning the same with a few thou sand rupees. It's all much more convenient too.
Then there's one advantage that results in higher--in the long term, much higher--returns in equity mutual funds. All equity
portfolios need some buying or selling as individual stocks become more or less desirable. If you are trading stocks yourself then
these transactions may mean a tax liability.However, in an equity mutual fund, this trading is done by the fund manager inside the
fund. You don't have a tax liability because you haven't transacted yourself. There's a further multiplier to the tax saved because
the money stays available as an investment and thus gains more. For long term investments that compound over years, this can
make a huge difference. That's a long and persuasive list, and if you are not convinced, you can still go ahead and invest in stocks
directly. Perhaps you will be among the small minority who succeed.
The Economic Times
Title : Learning the ropes of equity analysis
Author :Uma Shashikant
Location :
Article Date : 03/27/2017
While the fundamentals are simple, equity analysis and investing require intense processing of
available information. There is no room for triviality, says Uma Shashikant.
A group of young students wanted to know if equity analysis was too tough a subject to pur sue. They told me
about the stock market games they played in college. While they found it fascinating, they knew that it was not a
dependable way to make money. They then participated in equity analysis competitions and found that cases
being discussed at the forum were very complex. The approaches seemed too many, the data too immense to
deal with, and the accepted truisms about multi-baggers seemed to have a significant hindsight bias. Is there a
simple approach to equity analysis for a beginner? And how should someone who is not a student of finance
begin to learn equity analysis?
Equity analysis does encompass a vast range of factors and requires processing of information with intensity. But
the fundamental concepts are still simple and straightforward. Does the business hold an earning quality that will
sustain over a long time?
That is the central question. Every relevant factor of analysis should be able to answer that question. It could be
about the market opportunity for a new business; or the strategic acumen of its promoters; or an innovative
approach to products that captures large markets over short periods of time. All these activities should finally
converge into an earnings stream that is clearly discernable, growing and of the quality that an investor can trust.
Consider a business that begins with equity capital contributed by its promoters. To be able to manage a return
to investors, the business builds assets to sell a product or service. It plans to put the capital to use and make a
profit trying to do so. We can thus begin with the sales that the business achieves and whether such sales result in
a profit. The post-tax margin is what is left for the equity investors. The first number to look at is the post-tax
margin or PATsales.
Then, one asks how this sales number would grow. If it is a trading business, for example, it would use the capital
to buy stocks of goods, and as the stocks sell, the business would make profits. The capital of the business is
turned over from stocks to cash and back to a fresh lot of stocks that it would buy and sell. In manufacturing
business, there would be fixed assets bought with the capital, deployed to produce goods, and then sold for a
profit. Some capital is thus always locked in the assets of a business. However, more the sales generated from
the assets, better the return to the investor.
Let us assume that a business began with a capital of `100. It deploys this capital in fixed assets, stocks and
materials, and in costs in curred to make goods. At the end of the year, it managed to achieve sales of `150, of
which costs amount to `125, leaving a post-tax profit of `25. The return to the investors is 25%, which comes
from the ability of the business to make something more valuable than the money first invested and sell it for a
profit.Assume that the business achieves annual sales of `300 with the same capital, because it was able to
produce and sell twice over in the year. The return to the investors doubles.
A business that can utilise capital so that more sales are achieved for the same investment in assets, returns more
to its shareholders. The turnover of assets to sales, mul tiplies the return to the investor. Salesassets is a number
that tells the investor whether the asset productivity of the business is such that it would enhance the benefits from
being a profitable enterprise.
The third element is leverage. If a business deploys capital such that it earns 25% on it, the promoters would see
that it makes sense to borrow funds at say 10% to fund the assets. Assume that they fund 50% of the business
with equity and 50% with borrowings.What happens when they do this? The profit comes down from `25 to `20
after paying interest. But, `20 is the return on equity of `50, which is a 40% return, and is better than the earlier
25%. Funding assets with borrowings has resulted in better returns to the equity investor, the benefit we call as
leverage. Assetsnetworth is the number we want to look at, to see how much of the assets are funded by equity.
The return on equity is a simple function of these three variables: PATsales (profit margin), salesassets (asset
turnover) and assetsnetworth (leverage). It is easy to see that multiplying these three numbers will result in
PATnetworth which is the return on equity. This analysis made famous by DuPont many years ago, is a simple but
robust framework to understand the quality of earnings of businesses and think about how the future earnings will
pan out. It also helps understand the business model of enterprises around us.Telecom businesses worry about ARPU, value-added services, and revenues from data usage. They have made
the investment in assets and in bandwidth, with the hope of making more money from subscribers. If they find
that sales are not expanding, or even if they did, margins are dropping from competition in the industry, their
ability to borrow falls. They consolidate with the intent to reduce costs and investments, and enhance sales.
Real estate businesses enjoy a high margin as they can add value to the land parcels they buy and develop. They
do not worry too much about leverage, as they have enough margins. But their undoing would be a falling asset
turnover. If they are unable to sell what they have built, or can do so only at a lower and lower sales price, they
will find that the borrowings become too heavy to sustain.
When one sees e-commerce businesses making a large volume of sales but losing money consistently, it is easy
to see that they will need more and more equity capital to sustain the assets they have. Businesses with low
margin and low leverage need a very high asset turnover to sustain. Hence the everyday sales tactic to push
goods off the godowns.
Equity analysis and investing is both intense and interesting, and one should desist from trivialising the process.
The return on equity (RoE) framework is a good starting point for investors to understand the fundamental
factors that drive the earning quality of a business.
Are these the same articles you were ferering to -
The Economic Times
Title : INVEST IN STOCKS OR MUTUAL FUNDS?
Author : Dhirendra Kumar
Location :
Article Date : 03/27/2017
This is a question that all investors have to answer. All logic points one way, but some people's instincts point the
other, says Dhirendra Kumar.
Over the last few weeks, we've arrived at the realisation that equity is inevi table. For any kind of long-term in vestment (and we
will also define long-term soon), the risk-reward ratio is heavily in favour of equity investments. All arguments for the primacy of
`risk-free' fixed income investments fall apart when one realises that what looks like freedom from risk is actually freedom to
become poor. This conclusion is unavoidable when you look at real, inflation-adjusted, post-tax returns.
Having accepted the inevitability of equity, one is immediately confronted with the question of how to go about this reportedly
difficult activity. For people who have never invested in stocks, it's hard to know where to make a start.However, there are two
distinct ways of investing in equity. One is to choose stocks and buy and sell them yourself. And two, invest through equity funds.
The final goal is nominally identical--to benefit from the superior returns that equity investing offers. However, the two activities
are completely different. Unless you are an expert, or are willing to spend considerable effort in becoming one, it doesn't make
sense to invest yourself--funds are the right choice.
Mind you, I'm not saying that an individual can't do this. There are many people who manage to invest themselves with
considerable success. However, the odds are against any one individual being able to do so, in the sense that for every 100 who
try, perhaps 5 or 10 will be successful. An even bigger problem is that even those few would have probably learned to be
successful after many failures. That's something that turns out be a deal breaker for most who set out to become expert equity
investors.
Investing through equity-backed mutual funds sidesteps all these problems neatly. The heart of equity investing is having a correct
mental model of how successful stock investing is done, and then having the capacity in terms of information, analysis and
execution to execute that. I'm not suggesting that an individual acting alone can't do that. What the individual would almost always
lack is the capacity, in terms of money and effort, to do this.
But there are many more advantages to investing in equity through mutual funds. A major one is an disciplined diversification.
Fund managers operate within an institutional framework which enforces certain ground rules of investing. These could have a set
of rules defining the investments such as there must be at least 15 or 20 stocks with no less than X% of the total portfolio. The
stocks must be spread over at least 5 sectors with no sector being less than Y%. At least Z% must be held only in large
companies because they tend to be more stable in bad times. And so on and so forth.
Taken together, such rules define a framework that ensures that the portfolio stays diversified and safe from shocks that may
strike individual stocks, sectors or types of stocks.Individuals who manage their own stock investing would rarely have the
knowledge or discipline to do all this.
Another advantage is that of being able to invest with small amounts. If you try to build a diversified portfolio with stocks by
buying them directly, you'll need a large sum of money--at least a few lakhs to begin with. In mutual funds, you can start off by
owning the same with a few thou sand rupees. It's all much more convenient too.
Then there's one advantage that results in higher--in the long term, much higher--returns in equity mutual funds. All equity
portfolios need some buying or selling as individual stocks become more or less desirable. If you are trading stocks yourself then
these transactions may mean a tax liability.However, in an equity mutual fund, this trading is done by the fund manager inside the
fund. You don't have a tax liability because you haven't transacted yourself. There's a further multiplier to the tax saved because
the money stays available as an investment and thus gains more. For long term investments that compound over years, this can
make a huge difference. That's a long and persuasive list, and if you are not convinced, you can still go ahead and invest in stocks
directly. Perhaps you will be among the small minority who succeed.
The Economic Times
Title : Learning the ropes of equity analysis
Author :Uma Shashikant
Location :
Article Date : 03/27/2017
While the fundamentals are simple, equity analysis and investing require intense processing of
available information. There is no room for triviality, says Uma Shashikant.
A group of young students wanted to know if equity analysis was too tough a subject to pur sue. They told me
about the stock market games they played in college. While they found it fascinating, they knew that it was not a
dependable way to make money. They then participated in equity analysis competitions and found that cases
being discussed at the forum were very complex. The approaches seemed too many, the data too immense to
deal with, and the accepted truisms about multi-baggers seemed to have a significant hindsight bias. Is there a
simple approach to equity analysis for a beginner? And how should someone who is not a student of finance
begin to learn equity analysis?
Equity analysis does encompass a vast range of factors and requires processing of information with intensity. But
the fundamental concepts are still simple and straightforward. Does the business hold an earning quality that will
sustain over a long time?
That is the central question. Every relevant factor of analysis should be able to answer that question. It could be
about the market opportunity for a new business; or the strategic acumen of its promoters; or an innovative
approach to products that captures large markets over short periods of time. All these activities should finally
converge into an earnings stream that is clearly discernable, growing and of the quality that an investor can trust.
Consider a business that begins with equity capital contributed by its promoters. To be able to manage a return
to investors, the business builds assets to sell a product or service. It plans to put the capital to use and make a
profit trying to do so. We can thus begin with the sales that the business achieves and whether such sales result in
a profit. The post-tax margin is what is left for the equity investors. The first number to look at is the post-tax
margin or PATsales.
Then, one asks how this sales number would grow. If it is a trading business, for example, it would use the capital
to buy stocks of goods, and as the stocks sell, the business would make profits. The capital of the business is
turned over from stocks to cash and back to a fresh lot of stocks that it would buy and sell. In manufacturing
business, there would be fixed assets bought with the capital, deployed to produce goods, and then sold for a
profit. Some capital is thus always locked in the assets of a business. However, more the sales generated from
the assets, better the return to the investor.
Let us assume that a business began with a capital of `100. It deploys this capital in fixed assets, stocks and
materials, and in costs in curred to make goods. At the end of the year, it managed to achieve sales of `150, of
which costs amount to `125, leaving a post-tax profit of `25. The return to the investors is 25%, which comes
from the ability of the business to make something more valuable than the money first invested and sell it for a
profit.Assume that the business achieves annual sales of `300 with the same capital, because it was able to
produce and sell twice over in the year. The return to the investors doubles.
A business that can utilise capital so that more sales are achieved for the same investment in assets, returns more
to its shareholders. The turnover of assets to sales, mul tiplies the return to the investor. Salesassets is a number
that tells the investor whether the asset productivity of the business is such that it would enhance the benefits from
being a profitable enterprise.
The third element is leverage. If a business deploys capital such that it earns 25% on it, the promoters would see
that it makes sense to borrow funds at say 10% to fund the assets. Assume that they fund 50% of the business
with equity and 50% with borrowings.What happens when they do this? The profit comes down from `25 to `20
after paying interest. But, `20 is the return on equity of `50, which is a 40% return, and is better than the earlier
25%. Funding assets with borrowings has resulted in better returns to the equity investor, the benefit we call as
leverage. Assetsnetworth is the number we want to look at, to see how much of the assets are funded by equity.
The return on equity is a simple function of these three variables: PATsales (profit margin), salesassets (asset
turnover) and assetsnetworth (leverage). It is easy to see that multiplying these three numbers will result in
PATnetworth which is the return on equity. This analysis made famous by DuPont many years ago, is a simple but
robust framework to understand the quality of earnings of businesses and think about how the future earnings will
pan out. It also helps understand the business model of enterprises around us.Telecom businesses worry about ARPU, value-added services, and revenues from data usage. They have made
the investment in assets and in bandwidth, with the hope of making more money from subscribers. If they find
that sales are not expanding, or even if they did, margins are dropping from competition in the industry, their
ability to borrow falls. They consolidate with the intent to reduce costs and investments, and enhance sales.
Real estate businesses enjoy a high margin as they can add value to the land parcels they buy and develop. They
do not worry too much about leverage, as they have enough margins. But their undoing would be a falling asset
turnover. If they are unable to sell what they have built, or can do so only at a lower and lower sales price, they
will find that the borrowings become too heavy to sustain.
When one sees e-commerce businesses making a large volume of sales but losing money consistently, it is easy
to see that they will need more and more equity capital to sustain the assets they have. Businesses with low
margin and low leverage need a very high asset turnover to sustain. Hence the everyday sales tactic to push
goods off the godowns.
Equity analysis and investing is both intense and interesting, and one should desist from trivialising the process.
The return on equity (RoE) framework is a good starting point for investors to understand the fundamental
factors that drive the earning quality of a business.
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It's just the ease of things at one place. Not opening diff acct with diff mutual funds. If someone is interested, https://www.mfuindia.com/ is also an option.
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