Sector diversification is not for retail investor

Retail investors get misguided by reading fund manager interviews or journalists write ups in newspaper. We were stunned when one of our subscribers asked us, are you overweight or underweight IT? Direct equity investors are often wrongly advised by investment management community to diversify into 8-10 sectors just because Index consists of so many sectors. We should first start by answering why Index was formed. Index was formed for Pension fund/insurance companies to gauge how a particular fund manager performs in comparison to broader market. The Index consists of mostly large sectors/companies of the economy depending on how developed the country is. We often get to hear only fund managers in media, who often hold more than 40-50 companies across most of the sectors. A fund manager faces a huge career risk if he misses a rally in a particular sector because cumulative index keeps performing in short term. We have no compulsion to have a particular exposure for […]

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Category:Learn

Investors’ common mistake during bullish market

You as an investor, may be considering trailing earnings or ROEs as base case for arriving at any valuation. The problem in this assumption is that high ROEs and margins are not sustainable as every company or industry reverses to the mean. Consider Airline and Refining industry currently. Many of you may be buying the stock looking at cheap P/E they trade at. What you may not be realizing is that margins and working capital cycle is at its peak. The P/E may seem subdued due to higher earnings base. Its prudent to consider cross cyclical P/E and ROEs while valuing a company. As Howard Marks says, “I think it’s essential to remember that just about everything is cyclical.” Similarly, if you see that companies which had one time contract order, low raw material costs, faster inventory turns due to short term tailwind may be trading at low P/E or EV/EBIT. Don’t […]

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Category:Learn
Nifty@MRP Suggest Markets Are Fairly Valued, What Should Investors Do?

Nifty@MRP Suggest Markets Are Fairly Valued, What Should Investors Do?

What is Nifty@MRP? As investors, we constantly track the Nifty movements. To make investing more profitable and not a game of mere chance, we need a solution, a solution which could help us identify whether the market is grossly depressed or irrationally exuberant. This is exactly what Nifty @ MRP is for! What is the latest value of Nifty@MRP? For Jun’16, considering the free float market capitalization at the MRP of individual stocks and the share price data as of 31 August 2016, the Nifty@MRP is at 8649. On 31h Aug, NSE Nifty index closed at 8783, which is ~2% or 137 points above the Nifty@MRP. It indicates that the index is slightly overvalued. On similar lines, the Sensex@MRP value is at 28741. On 31 August, 2016, the Sensex closed at 28452, which is about 1% or 288 points below Sensex@MRP. Future Outlook The nifty has gained almost 15% since […]

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Category:Nifty@MRP

Avoid Noise in long term investing!

Yesterday I had an interesting chat with one of our customers. We discussed various news and events. He suggested that we should include these into our research process. While its very valid point that we should keep track of news and developments, but getting influenced by this is very foolhardy. Few days back, another customer was of opinion that Tata Motors has very poor product line and service of Passenger vehicle segment. Why would you recommend us to buy the company? But Passenger Vehicles forms less than 5% of the company’s sales, why should I worry. Unless large capital is employed, I wouldn’t worry about that segment. Another query was, one of the battery companies uses promoter’s land for its plant, isn’t it bad corporate governance? But the business model doesn’t get affected and valuation doesn’t change. And yet another one was, cash was found in premises of one of the leading conglomerates […]

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Category:Learn

Caution is the word for the year 2016

We have seen high volatility in equity markets in first four months of CY2016. Chinese macro-economic data, US/EU/JPY monetary policies are in focus by money managers to make tactical changes in asset allocation. Since the government bonds in developed economics are trading at near zero or even negative interest rates, the institutions are going lower in risk curve to earn slightly better returns. This is evident from the response Argentina’s Sovereign bonds received despite very bad credit history. Asset allocation has increased towards emerging markets ETF (primary mode of investment for FIIs). Source: Top EM ETFs AUM. We have seen phenomenal rally in Indian Equities in March and April. This is nothing to do with Indian Economy or Feb. Budget. We saw large FPI inflows in last two months, while Indian domestic institutions like Insurance and MFs were net sellers in the same period. We do not predict market levels but focus […]

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Category:Learn