Valuation Parameters You Should Know - First time investors guide

Courtesy - Economic Times

Knowing them will enable you to buy stocks at the right price.

PE RATIO: SHARE PRICE/EARNINGS PER SHARE

The price-to-earnings ratio is the most commonly used valuation parameter. A lower PE indicates either an attractively valued stock or one whose prospects are poor. You may compare the current PE of a stock with its own historical valuations (say, 5-year average), the industry average. the industry average, and the PE of a broad market index, such as the Sensex or S&P 500.
PE ratio can be of two types: forward and TTM (trailing 12 months). Forward PE is based on the earnings estimates provided by analysts. The advantage of using it is that stocks respond to the prospects of a stock. The risk is that earnings estimates often go wrong. TTM PE is based on past four quarters' earnings, so it can't be wrong. However, it is backward looking.

PB RATIO: PRICE/BOOK VALUE

The price to book value compares the price of a stock with its book value (value of shares originally issued, plus retained earnings). The book value is a proxy for the liquidation value of the company. It is a good measure for judging the valuations of asset-heavy companies. It is also well suited for banking and other financial services companies. It is not a good measure for asset-light, service firms.


EV/EBITDA: ENTERPRISE VALUE/EBITDA

This valuation ratio compares the enterprise value of a stock with its EBITDA (earnings before interest, tax, depreciation and amortisation), a measure of a stock's operating profits. The EPS gets affected by 'other income', which is income not derived from the company's operations, but from, say, sale of an asset. This can artificially inflate the EPS and bring down the PE. This doesn't happen with EBITDA. The latter is, hence, a better reflection of a company's earnings capability. EV or enterprise value measures a company's value. It is the sum of the market value of the firm and its longterm debt, minus its cash.


PEG RATIO: PE RATIO/EPS GROWTH RATE

Here you compare a company's PE ratio with its 3- or 5-year EPS growth rate. Sometimes, a company's PE may appear high compared to its own historical valuation or the industry average. This usually happens with high-growth companies. If you wait for its PE ratio to fall, it may never happen. The PEG ratio, by comparing the PE with the EPS growth rate, offers a justification for investing in such a stock. The PEG ratio should be be below 1. If it is less than 0.5, it is very attractive.


Before You Invest
No quick gains
At the very outset, investors must accept that the equity markets are not a route to quick riches. "Greed and speed are the worst enemies of sound investing," says investment analyst R Balakrishnan, a former mutual fund CEO. All direct investments in equities should be made with a time horizon of at least 3-5 years. If you ignore this tenet and adopt a high-churn strategy, you will soon come to grief. "You may get lucky on your first punt and make some quick money. Then, inevitably, you will buy something that will keep sinking," says Balakrishnan.

If the markets tank and the uneducated investor is left holding stocks of suspect quality, his corpus value erodes rapidly and does not recover for a long time, if ever. Many investors get so badly singed by their first such brush with the equity markets that they decide to stay away from stocks forever.


Educate yourself

Before you start investing directly in equities, make the effort to educate yourself. "If you won't invest time in educating yourself, then direct stock investing is not for you," says Balakrishnan. Learn the ropes of investing from an unbiased source with no conflict of interest. Says Dhawan: "Many brokerage houses today run short-term learning programmes on equity investing. Brokerages earn more when you transact more. Hence, they have a vested interest in teaching you investment strategies that involve a high churn," he says.


In our view, the approach with which you stand the best chance of making money is one based on fundamental analysis and buy-and-hold. Also, by reading investment classics, you may have the best chance of developing an approach that is time-tested.

Minimalist Portfolio Ideas for Young Earners

Courtesy - Freefincal

Investing for long-term goals is governed by the following tenets.

1) Beat inflation either by investing more and/or with adequate exposure to volatile but productive assets. Preferably ‘and’, not ‘or’.
2) Understand the importance of containing volatility and that trying to maximise returns by being more aggressive is like trying to run a marathon like Usain Bolt.
3) Knowing how to contain volatility.
a) never ignoring debt. Not more than 50-60% equity exposure is needed for any long-term goal.
b) having the maturity to diversify the folio among productive asset classes and within each asset class
c) having the maturity to periodically shift gains from a performing asset class to a meek if not under performing asset class. Also known as rebalancing.

I am convinced that investors, especially the young earners, must keep things as simple as possible and avoid portfolio clutter like the plague.

For most people, the best way to diversify a portfolio within an asset class is by not trying!  If they don’t know what they are doing, this is what happens:

Here are a few long-term (15 Y plus) portfolio ideas that are minimalist in nature. All of them are likely to produce a real-return to the disciplined and un-wavering investor.

Be warned that, none of them will work

• if you expect anything more than 12% CAGR (I prefer 10%) from the equity or equity-oriented component.
• if you jump up and down each time other funds do better than yours.
• if you think having more mid and small-cap funds will fetch you more returns because your goal is far away.

Minimalist Portfolio 1

• Single Large Cap mutual fund (60%) + PPF (40% only!)

Core and satellite principle be damned.  Solid large caps will be relatively less volatile. Size of the fund does not matter as large caps are liquid stocks.

Minimalist Portfolio 2

Single Equity-oriented balanced mutual fund

My favourite for the following reasons

1) Tax-free debt component.
2) Automatic rebalancing
3) Fund return = portfolio return. Goal tracking is the easiest.
4) Most liquid portfolio of them all.
5) The equity component could be diversified too

Minimalist Portfolio 3(a)

• Single Large and Mid-cap fund (60%) +PPF (40% only!)

For those worried souls who long for mid-caps. Some have a touch of small-caps too!

Fund size could be an issue. Larger the fund, the more large cap it becomes in nature.

Minimalist Portfolio 3(b)

• Single Large Cap mutual fund (60%) + PPF (40% only!)

or

• Single Large and Mid-cap fund (60%) +PPF (40% only!)

The fund in this case has exposure to international stocks.

Robust diversification. Solid long-term returns but with the short-term impression of being a laggard (diversification requires maturity)

~~~~~~~~~

Down the line, a debt mutual fund can be added to the above portfolio to aid rebalancing.  Initially, one-way rebalancing, that is shifting excess equity allocation (say 5% or more) to PPF is more than enough.

If you are starting to invest for all your long-term goals at the same time, a unified minimalist folio will do the trick. If there is a gap of a few years between the investment for each goals, you can construct separate minimalist portfolios for ease of tracking and rebalancing. A unified folio could also work, but tracking the corpus of each goal can be a pain.

Individual minimalist folios allow independent risk management. A 25 year goal is not the same as a 15 year goal. I would prefer to rebalance more often for a 15 year goal.

That is it. Don’t chase after that hot mid/small/micro cap fund.

Keep it simple.

Avoid portfolio clutter like the plague Consider a minimalist portfolio:

8 simple steps to create wealth

Wealth creation is a much bigger and broader goal than say 'children's education funding' or 'retirement planning' -- those are sub goals, of course. So every big goal is met by taking a lot of small steps. Here are some of those steps. Not saying these are enough, but this is a good beginning.

1. Look for a good fund manager: The importance of a good fund manager is rarely brought out by the financial press. There is just too much emphasis on costs. HDFC ULIP (when I bought it) had the lowest asset management company (AMC) charges -- of just 0.8 per cent -- however the benefit of low charges was lost by poor fund management skills.

I pay a much higher brokerage than you do (and there are at least three brokerage houses willing to do it free for me). Frankly, as an investor, I could not and need not care about the brokerage rates at all. The quality of advice that I get makes it worth while.

2. Having understood point number 1, make sure that among the good fund managers (I mean the AMC, not the individual) make sure that the costs are reasonable. Too much should not be lost in the premium of good fund management!

3. Start today: This has been said so many times, that it does not need any explanation. Just pick up the phone and call, or go online and invest. NOW.

4. Automate your investing: SIP -- again enough has been said. Do not get distracted by value SIP and variable SIP... and all such concepts. You do not need to tweak it. Pick a fund, pick a date, pick an amount -- and DO it, not today, NOW. This article can wait; your investment cannot.

5. Find areas in your expenditure that can be cut so that you can increase the SIP amount -- even if you can improve by Rs 300 per month, do it. Every drop counts.

6. HDFC and ICICI Mutual Fund allows you to do a rising SIP -- so you could charge with Rs 5000 a month and sign up to increase it by Rs 500 every year. Just see how comfortable it would be to increase. If you are confident, increase by Rs 1000 a year -- your comfort level is necessary.

7. Start doing all this with a friend and open an online account that will help you track your portfolio. Just start tracking your expenses and your wealth accumulation. NOW.

8. See if you have some surplus from time to time. If the answer is yes, your SIP amount needs to be bumped up.

Know the Art of Wealth Creation

What is wealth?

Wealth is a state of mind. It is not strictly any number.

It is actually a feeling of “enough” - without fear or worry.

If your focus is on money as a measure of your wealth, a feeling of enough money is an indication for being wealthy. The truth is that money is a part of your wealth.

If one only had money they would starve. Aristotle (384 – 322 B.C.) contended that the components of wealth were coined money, property, livestock, implements, and slaves.

Rich Dad Poor Dad famous Robert Kiyosaki sees a difference between the rich and wealthy. According to him, “Rich might have lots of expenses that keep them up at night. Or they might have a high paying job but have to get up to work every day and have fear of getting fired or laid off” He further says that the wealthy don’t have these worries (like rich).

“The remedy for weakness is not brooding over weakness, but thinking of strength,” said Swami Vivekananda. Likewise if you want to become wealthy, your focus should be on “wealth” and not on “lack of it”

How?

If your heart is filled with abundance and joy, you got the key for real wealth. If you can imagine something, material wealth included, you can manifest it. Simply your dream becomes true. You can have everything in your life that you can possibly imagine.

The base for wealth building is peace of mind. While dreaming about wealthy future, don’t forget to live in this moment. Learn to enjoy the whole journey.

Are they doable?

Yes. You can do it. No longer, money is a dream. You will see it in abundance. All you need to do is just 3 easy steps.

STEP 1 is a step towards peace of mind. Protect yourself and your family from all known and unknown adverse financial circumstances, within your means. Being aware of it and taking steps actually give you immense peace of mind. What are they?

• Money to cover basic needs
• Your own roof (home) over the head
• Risk protection mechanism in place to deal with unknown life events

STEP 2 is passive income. Stop working for money. Let the money work for you! It has worked that way for several imaginative people. That’s why Albert Einstein said, “Imagination is more important than knowledge”

Where can I find my passive income? If this is your question, here’s the answer.

You can find passive income in

Real Estate

Business

Investments &

Internet

How?

I can show you, when we get connected. But don’t forget to ask me about this.

STEP 3 is perpetual income. It means a continuous flow of income without any interruption.

Will it happen?

Yes; it will. First you have to achieve success in step 1 & 2. Then you have to understand, how you achieved it. Finally systematize your success and repeat. systematizing step 1 and 2 is actually step 3.