YOUR FIRST STEP INTO INTELLIGENT

INVESTING

- Sridhar V

This is not an investment recommendation, but only an illustration for knowledge purposes

All facts and data shared are accurate to the best of our knowledge. Readers are advised to double check if required before acting on investments.

The information here could be based on past data, which could have changed significantly.

Past performance is not necessarily an indicator of future performance

Any logos, company names, brand names, trademarks or symbols used here belong to the respective owners

The author or presenter may have personal investments in the stock or company discussed

2

Disclaimer

AGENDA 3

Money in Life, Financial Goals

Savings & Investments

Where to create wealth?- The Asset Classes

Why Equities?

Styles of Investing

Value Investing Concept

Economic Moat – The Secret to Successful Investing

Value Investing Process

Summary

Money in Life 4

Myth

• Money is not everything in life

• Money can’t buy happiness

• More money = More trouble

Reality

• Its important, its an enabler

• Can’t buy happiness or love, but can keep life running smoothly

• Law of Attraction applies here

• Wise and productive use of money can do wonders

• Getting rich or wealthy (legitimately) is not bad

Money in Life – Financial/Life goals 5

Having life goals or financial goals is inevitable

• Retirement Planning

• Children’s education

• Pursue a hobby or start a small venture

• A vacation

• Wedding

Short Term Goals

Long Term Goals

Allocating Responsibilities/Accountabilities

Case: Time & Money 6

Vicky and Aamir studied together and started

working in the same year

Aamir started investing 5 years earlier than Vicky

See the table below showing details of their savings

Who does better and how?

Item Vicky Aamir

Annual Savings 100000 100000

Years 25 30

Interest Rate 12% 12%

Case: Time & Money 7

Aamir started early and was able to make 2.41

crores (against 1.33 crores for Vicky)

Vicky makes about Rs.1 crore less since he started 5

years late

Item Vicky Aamir

Annual Savings 100000 100000

Years 25 30

Interest Rate 12% 12%

Accumulation 1,33,33,387 2,41,33,268

Difference - 1,07,99,881

Budgeting & Cash Flows 8

Create a budget to know your monthly incomes,

expenses and net savings

Identify top expenses and leaks

Find ways to maximize your cash flows

Find additional income options

Curtail expenses (umpteen ways)

Minimize loans and credit card use

Famous Quote

“If you buy things you don't need, soon you will have to sell

things you need.”- Warren Buffett

Savings & Investments 9

Savings Save for a rainy day

Safety first, returns second

Meets Short-term goals or needs

Investments Create

assets or build wealth

Focus on returns &

safety

Plan for long-term

goals

Cross-Movement

(S-I or I-S)

When your short-term

funds are in excess of

needs

When you reach closer

to your goals

Where to create wealth? – The Asset

Classes 10

Equities

Real Estate

Gold Bank Fixed

Deposits

Bonds/Co. FDs

Fixed income

Inflation – The Silent Wealth Killer 11

CPI is 10% or more

FD and fixed income options generally provide

10% or less (before tax) barring few exceptions

Your returns are negative

Does this create wealth?

No but its still important for savings or preservation

of surplus cash

Equities – The Ultimate Wealth Creator 12

What are equities?

• Equity Share represents part-ownership in a company

Benefits shareholders by providing

• Dividends or share of profits &

• Capital Appreciation (of share price)

Why Equities? 13

They can provide about 15-20% returns p.a. and

can beat inflation

Returns are non-linear creating potential for wealth

creation

Flexibility to buy smaller or larger quantities

Easier to liquidate

Issues with Equities 14

Probably less understood

Temptation to trade

Overpriced

The company or its management is poor

Highly volatile

Others…

Things to do before you jump in to

Investing 15

Have a budget to maximize savings and create positive cash flows

Have an emergency fund/contingency fund of about 3-6 months of your salary

• Why is this required?

Research the product/instrument that you want to invest in

Things to do before you jump in to

Investing 16

Provide for life and health insurance to protect family in case of eventuality

• Choose term insurance plans only

Plan for ad-hoc expenses or responsibilities

Minimize credit card and other loans (except home loans)

• Ideally your debt payments (EMIs) should be less than 40% of your monthly income

Risk in Investing 17

Risk exists in all investments in varying degrees

“Risk comes from not knowing what you are doing” –

Warren Buffet

Risk is the permanent loss of capital

Investors should first aim to reduce the probability

of permanent loss of capital

Styles of Investing 18

Growth Investing

Value Investing

Index Investing

Others

• Choice of fast growing companies, which are doing well in the current market

• Choice of unfavourable stocks that are available at a price, which is lower than its true value

• Investing in a basket of stocks that form the index (basically creating a portfolio that replicated index)

Which investing style to follow? 19

You can pick up a mix of different approaches

But we recommend a strong focus on Value Investing

Principles

This works for growth stocks too

Successful investors who follow value philosophy

include Warren Buffett, Seth Klarman, Mohnish

Pabrai, Prem Watsa, etc.

In India: Rakesh Jhunjhunwala, Rahul Saraogi,

Amitabh Singhi, etc.

Value Investing Idea 20

Pick companies that are currently out of favour or ignored, but fundamentally sound

To buy companies at a significant discount to their true underlying value

• Eg. You buy a company worth Rs.100 crore for Rs.70 crore

In-depth Research & Analysis to evaluate fundamental strengths and weaknesses

Old School Value – Ben. Graham 21

Benjamin Graham’s Philosophy

Shortlist companies that are cheap on PE, PB basis

and with good dividend yield (>5%)

Stock Price <= Net Current Asset Value per share

Special Situations or Turnarounds

Buy Back or Arbitrage

Deep value techniques – Cigar butts?

Statutory Warning: Smoking and careless investing are injurious to health

and wealth

Buffett’s Transformation 22

Berkshire Hathaway – how did it start as?

Where is it today?

Textile business

Highly competitive

Cost & Margin pressures

Capital intensive

Statutory Warning: Smoking and careless investing are injurious to health

and wealth

Analysing Business 23

Bargaining

Power of

Suppliers

Bargaining

Power of

Customers

Threat of New

Entrants

Threat of

Substitutes

Competitive

Rivalry

Economic Moat – The secret to

successful investing 24

Moat = Competitive advantage and pricing power

Types

Cost Advantages

Price Advantages

Economic Moat – Price Advantages 25

Product Differentiation – eg. Apple (may not be durable), Wabco (air braking)

Intangible Assets

• Brands (eg. Coke, Titan, Colgate, Gillette, etc. )

• Regulatory Licenses (NMDC, Coal India, Solar Ind. - explosives)

• Patents & IP (Intel, Bosch)

Switching Costs (HDFC Bank, MS office)

Network Effects (NSE, Naukri, etc.)

Economic Moat – Cost Advantages 26

Economies of Scale

• Eg. Container Corp., Coal India, Tata Steel

• Large Distribution – Eg. ITC

• Large scale – Maruti Suzuki, Walmart

Cheaper Access to Resources

• Coal India, Sesa Sterlite, Hindalco

Process Based Advantages – efficiency, best practices

• Toyota (TQM), Ambuja Cement (efficiency)

Brands without a Moat 27

Mere presence of brand or

popular product is not

a Moat

Brands without a

moat

Eg. Flipkart, MakeMyTrip,

Camlin

Wind Energy – Suzlon

Had first mover

advantage

Legal or regulatory issues, high

debt

Kingfisher Airlines

Acquisition of Air Deccan

High costs & over-

leveraged (debt)

Violation of regulatory norms and procedures

False Moat – Avoid! 28

A short-term advantage

Recent performance

looks favorable

Popular products (but low margins,

returns)

Well-known personalities

in the top management

High growth expectations or Fancy (FB,

Sify, etc.)

Determining a Moat 29

Does the product/service have a recurring demand

Does the company have better profitability against its peers?

Consistent market share overall or within a niche

Not subject to price-regulation

Has the company earned high returns on capital?

Can it continue to earn high returns over long-term?

Changes: Technology, substitutes, etc, and their impact

Others – Refer Porter’s 5-Forces

Financial Indicators of Moat 30

Buffett’s Secret Recipe

• High and consistent Profit Margins

• Growing Free Cash Flows

• Minimal Capex to sustain long-term growth

• High RoE and RoCE

• Consistent Growth in Earnings and Dividends (baring few exceptions)

• Million $ Question: Does the Moat really translate in to superior financial performance?

Value Investing Process 31

Business Model

Understand the Business (A stock is a part-ownership in a business)

Financials & Intrinsic Value

Evaluate the company’s financials and future prospects to arrive at an Intrinsic Value

Margin of Safety

Arrive at a Purchase Price after providing for adequate Margin of Safety (Discount)

Summary – The Foundation 32

Money in Life

Case: Time & Money

Where to create wealth? – The Asset Classes

Inflation – The Silent Wealth Killer

Equities – The Ultimate Wealth Creator (Why

Equities and Issues)

Things to do before you jump in to Investing

Risk in Investing

Styles of Investing

Summary – The Structure 33

Value Investing Idea

Old School Value

Buffett's Transformation

Analysing Businesses

Economic Moat - Secret to Successful Investing

Types of Moats - Price and Cost Advantages

Determining a Moat & Financial Indicators

Value Investing Process

Looking forward to your continued participation

Contact:

sridharcw@gmail.com

+91 8050705299

Web

Slideshare: http://www.slideshare.net/sridharcw

Google Group: “Value Stock Picks”

Thank You 34