Sunday, December 12, 2010

6 things every startup founder should know

Working as part of a startup is always challenging. Working in a startup as a founder or co- founder is even more challenging. Here we are trying to come up with a list which every startup founder should know.

  • Always plan to keep you expenses to minimum
    • Try to be profitable as fast as possible.(in 6 months or 1 year). Every person in your payroll adds up to the expense list. So plan yourself before taking a new hire. Dont waste your time trying to take stock of your inventory daily. If you are more productable utilizing that time for real development for your startup...do that and outsource the other.
  • Be prepared to be Jack of all trades
    • As working in a startup you should be ready for anything come on your way. You have to be a founder, a manager, a developer, a store keeper, an accountant etc. Because you dont have the luxuary of hiring professionals for each kind of work.
  • Ready to work for long hours.
    • The deadlines and requirements from your clients will be tough to meet as your are starting up. Established firms can stick to their stand or have the luxuary of saying a polite No to unreasonable things. So as a statup founder you have to be redy to work for 12 to 16 hours daily to get it going with out any stop.
  • Make use of social media yourself
    • Social media is the new buzz word in marketing. Start to get engaged in social media, because we know a lots of people are interacting a lot in the social media sites like facebook,twitter,linked in etc very similar to the way they interact in real world. So your presense there is very important. Dont ask your system admin or clerk to do this, because you represent the company so you have to do this your self. This will help building a brand image for your startup very fast.
  • Be ready to change fast
    • You cant make a perfect product the time you are starting up. So always sell the best you have at that time. Be ready to change according to the feedback yo are getting. This change should be fast. If the pricing is wrong change it fast. If the product positioning is wrong change it asap.
  • Dont forget to have fun
    • The key to be successfull is to enjoy doing the work you do. So make sure you are enjoying the work you are doing as a startup founder. It will be like a rollercoaster ride but be sure you enjoy it. If you are not, as yourself why?  If you are not enjoying it you will not be ale to stick to it until you see the light at the end. So be sure you are enjoying the ride.

Monday, November 8, 2010

Stock picking strategy - Dogs of Nifty

I had talked about some stock picking strategies in our previous blogs. In that I had mentioned a stock picking strategy called the Dogs of Dow. Dogs of Nifty applies the same stock picking strategy on the fifty stocks of the NSE Nifty index. The idea is to identify ten stocks that have the highest dividend yield among the fifty nifty stocks, build a portfolio by investing equal amounts in each of them. Hold the stocks for one year and one day and rebalance the portfolio. While rebalancing the portfolio, you will have to sell of the stocks that are not in the list of ten high dividend yielding stocks of the time and also make sure that all the stocks have equal weightage in terms of capital invested. But before we jump in to identify the stocks, let look at this strategy in brief and also its pro and cons.

History
Dogs of Dow is a stock picking bought into lime light by Michael Higgins through his book "Beating the Dow". The basis of this strategy is that index stocks are fundamentally strong and capable of withstanding any market upheaval.  High dividend yields indicate that the stock is relatively cheaply priced but management is confident about the companies performance as the dividends haven't gone down. 


Pros
  • Simplicity: No fancy calculations or number crunching needed for picking the stocks
  • Performance: Beaten the DJIA by about 3% for the period from 1953 to 2003. DJIA had annual return of 11% whereas dogs had 14.3%
  • Fundamentally Strong Stocks: By using the Dow as the basis, the stocks in the portfolio is guaranteed to have strong fundamentals
  • Long term strategy 
Cons
  • Does not perform well during bull runs.
  • Lot of assumptions, many which may not hold true as time changes.
The Nifty Dogs
Following is the list of 10 stock that make up the dog of nifty.






Next task is to construct a portfolio by investing equal amounts in each of the ten securities. Practically, one will not be able to invest exactly equal amounts in each of the securities as buying fractional units of a stock is not possible. So one will have to round of to whole number unit values, which I believe should be OK.
An investment portfolio constructed on 1st of Nov 2010 by investing Rs 10,000 on each of the securities is as given below.



Now we have a Dogs of Nifty portfolio, we will leave this as is for one and one day. We should revisit this portfolio on Nov 2nd 2011 to rebalance the portfolio. Any profit booking or loss harvesting will have to wait till that date.
I have created this portfolio using finahub.com and has published a model so that all finahub.com users can track this model to see how it performs over time. As of now models are visible to logged in user alone.

Disclaimer
Please note that the above portfolio was created for studying the Dogs of Dow investment strategy and how it can be applied to the Indian investment scenario using NSE NIFTY as the base index. This should not be used as is for making actual investment. Please do the required research and due diligence before making any investment. 


  

Tuesday, October 26, 2010

Why your business should be Social Network Ready?


These days social networking is the buzz word among the Netizen's. Now social networking has grown to an extend where, people spent most of their online time in social networks rather than on any other sites. Here are 5 important points on why business owners should consider social networking in a serious way.
Be th​ere where the people are
             If Facebook were a country, it will be worlds 3rd largest​ one. World is there waiting there for you to reach in each network. So if your business needs people contacts (most will), you should be using social networking. 
Lower Cost Leads
             Traditional marketing like news paper advt, TV advt, exhibitions etc burns lots of money. We all have become so used to them that we now know, how to effectively filter them out. The only way to break this barrier is to get up close and personal. Social networking the way do it. There is no need for expensive tools or advt campaigns, business owners themselves can start using it.
Your First step to go Global
               The global playing field is now even. People from various country's, cultures, religion etc are coming together in one place. By  using social networking as business tool your voice will be heard world wide. ​
Find Talent from Trench
               Hiring the best and suitable talent is one of the toughest part of running a business.  Through social network, one can easily track the best people suitable for the you and attract them to your business. The important thing is, they will be already 'social network' ready from day one.
Your First level of PR
               Business can use social network as the very first level of public relations. People talk about their needs, the issues they face, the brands they love etc on networking sites. You can easily track discussions involving your company or brand and can join in them. This helps to build a strong relationship with people and helps to grow your brand or company.


These are the main points came across our mind. We know there will be many left unmentioned here. Please share with us in the comments section, the points which you feel is important.


Regards,


Jerith Shajan.

Thursday, October 21, 2010

How to pick those winning stocks - Overview (II)




Overview - Part 2
Continuing from our previous post where we look at the overview of fundamental analysis and quantitative analysis, we take a brief look at the rest of the stock picking strategies. 

Value Investing
Value Investing is about finding fundamentally strong companies that are currently undervalued by the market. A value investor is not interested in all stocks that has a low price, otherwise they will end up buying all the penny stocks. Value investors can use fundamental or quantitative analysis techniques to identify stocks with high intrinsic values. The relative merit of stocks with high intrinsic value can be identified by low P/E values or low price to book values ratio.
Value investing is a long term investment strategy, a value buy during a bull run might be profitable only when the market starts to correct. So value investor will have to do through analysis before investing and have the discipline not to take emotional investment decisions.

Contrarian Investing
Contrarian or contra investing is a investment strategy that believes in bucking the trend. The contrarian investor takes the opposite view of the prevalent  market trend. In a bull market the contra investor will be looking for opportunity to sell stocks, rather than buying new holding. Likewise the contra investor, looks for buying opportunity in a bear market. The basis of contrarian investing is that crowd behavior among investors will lead to over valuation or under valuation of stocks.
Contrarian investing is similar to value investing, in that both tries to identify stocks that are valued under its intrinsic value. The main difference between contra investing and value investing is that contra investing take the market sentiment into account while identifying stocks whereas in value investing the market sentiment is ignored.

Growth Investing
Identifying stocks that have potential for growth and investing in them is known as growth investing. Growth investors usually buy stocks that are priced more than their current intrinsic value in the hope that the growth of the intrinsic value will exceed the high cost. In other words growth investors believe that high price of a stock reflect the positive market sentiment for the stock.
Grow investors invest in relatively new companies and new technologies which have high growth potential rather than established companies. Grow investing is not for everyone as it is a high risk, high return investment strategy.

GARP Investing
GARP stands for Growth AReasonable Price and is an investment strategy that tries to capture the merits of both growth investing and value investing. In GARP, a potential buy is a value stock which is undervalued now and one that has great potential for growth. Unlike growth investors, GARP investing view very high P/E values in negative light. Too high P/E value is seen as paying too much for very high risk. 

Income Investing
Income investing involves finding and investing in stocks that payout dividend regularly. The idea is to ensure regular cash flow for a long period of time. The stocks that selected for this style of investment is know as income stocks. A typical income stock will have a high dividend yield in the range of 5-6%.  Dividend yield is obtained by dividing the yearly dividend per share by the price of the stock.

CAN SLIM
This is an investment strategy that lays down strict guide lines about picking stocks. CAN SLIM is a strategy devised after studying the performance of more that 500 top performing shares The name is a mnemonic derived from the strategy guide lines. Following are the guide lines for picking a stock.
C - Current quarterly earnings per share must be at lest 18-20 % up compared to the previous year's same quarter.
A Annual earnings growth for the share should be in the 25-50% range  for each of past 5 years
N - Newness associated with the company,  it can be a new product, new management team, new market, new price
S - Supply and demand for stocks, stocks with relatively smaller number of outstanding shares show better results
L Leader in the market is always preferred over laggards
I  - Institutional ownership of stock is essential but should be limited to few above average institutional investors  
M - Market direction, or the momentum of the current market needs to be understood before picking a stock

Dogs of the Dow
This is one of the simplest stock picking strategy and was developed based on the 30 stock of the Dow Jones Industrial Average (DJIA). In the Indian context, the base index can be the BSE Sensex stocks or the NSE Nifty stocks. The strategy is to pick the 10 stocks of the DJIA that has the highest dividend yield and construct a portfolio with equal weightage for each of the ten stocks. The investor should rebalance the portfolio on regular intervels to make sure that weigtage and selection criteria is always met. It is seen that this sort of investment strategy has out performed the index by about 3%.


We have covered the gist of some of the popular stock picking strategies. This meant to kindle your interest in stock picking strategies. One would have to understand the details each of the discussed strategy before it can be used as an investment tool. Therefore we will dig deeper into each of these strategies in detail in our subsequent blogs.







Tuesday, October 19, 2010

How to pick those winning stocks - Overview (I)

Wouldn't it be wonderful if you could master the techniques for picking those multi-bagger stocks. Many investors believe that there is some elusive stock picking strategy that would allow them to identify the sure winners. The truth is that there is no such sure-fire method for picking stocks. What we have are some strategies to improve our chances of making a profit. Some of the well known stock picking strategies are:
  • Fundamental Analysis
  • Quantitative Analysis
  • Value Investing 
  • Contrarian Investing
  • Growth Investing
  • GARP Investing
  • Income Investing
  • CAN SLIM
  • Dogs of the Dow
We are starting a series of blogs that explains these stock picking strategies. This will go in parallel with the series on technical analysis. To start with, lets take a look at an overview of these investment strategies before we jump in to dig deeper. We have split the overview into two parts, this is the part 1 on the overview.

Overview
Fundamental Analysis
Fundamental analysis is used to identify the intrinsic value of a company's shares. A stock that is priced below its intrinsic value can be bought as there is good chance that the price will rise to the at least the intrinsic value. A stock that is priced above the intrinsic price is costly  and should be avoided. The intrinsic value of a stock is the sum of all future profits of the company discounted to the present. The discounting to the present is done to adjust for the fact that the value of Rs 100 that you receive 5 yr from now will be less that the value of Rs 100 that you receive now. The issue here is that it is very difficult to reliably  predict the future profits of a company. One can use the companies financial results to see the historic cash flows and profits and then try to predict the future cash flows and profits. Financial results of a company can give some measures, like EPS, P/E ratio, Growth rate, Price earning to growth (PEG), Return on invested capital (ROIC), Price to Sales (P/E) ratio, Market cap, Enterprise value(EV), EBITDA etc, that can be used to value a stock. Also there many theoretical models, such as Gordon growth model, that can be used to value a stock.

Qualitative Analysis
Qualitative analysis tries to ascertain the quality of a company by judging the strength of the management team of the company. In order to understand the quality of a company, one should ask 5 Ws: 
  1. Who: Who are occupying the leadership posts such as CEO, CFO, CIO and COO.
  2. Where: Where did these people come from, i.e. educational and employment background.
  3. When: When did this team start leading the company
  4. What: What is the companies management philosophy
  5. Why: Why have they become managers
Next in line is understanding the business model of the company, i.e. what are their products or services and how do they make money? This understanding is critical in judging whether the company is viable or not and also its growth potential. We also need to understand the competition for the company in the market.

Fundamental analysis and qualitative analysis are the corner stones of stock analysis. Almost all other stock picking strategies use various aspects of either or both of these strategies. We will look into the other stock picking strategies in the next part of this series. 
cont. in part 2

Monday, October 11, 2010

Technical Analysis Basics Part 2 (Concept of Trend)



Trend is nothing but direction of movement. Logically the share price can either be rising or falling or moving narrowly (flat) 

It's also an aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.

Trend analysis tries to predict a trend like a bull market run and ride that trend until data suggests a trend reversal (e.g. bull to bear market). Trend analysis is helpful because moving with trends, and not against them, will lead to profit for an investor.


Thus there are three direction in which price can move. When price move upward the trend is "rising". When the price move downwards the trend  is "falling" And when the price are moving in a narrow range the trend can be called as "Choppy or Flat"

Price line do not rise or fall straight. It is generally interrupted by a counter move. This counter move is known as a reaction. If the scrip is rising, the counter move would be against the rise. If the scrip is falling, the counter move would be against the fall. Because of these counter moves, the scrip can be said to be moving in a zig-zag fashion, which gives rise to tops and bottoms.

Rising Trend
In a rising trend one would find the zig zag price movement carrying the scrip upwards. In this, the scrip will exhibit the formation of higher bottoms and higher tops.


Falling Trend

During a falling trend, the zig zag movement would carry the price downwards so the scrip would form of lower tops and lower bottoms.



Flat trend or Choppy Trend

During sideways or flat trend, the  zig-zag movement would carry the prices sideways and the scrip would neither form clear cut higher bottoms and higher tops nor form of clear cut lower tops and lower bottoms.

Always the trader or the investor has three options - to buy, sell or stay away from market. If the trend is rising, he would do well to buy. If the trend is falling, he should be selling, and if the trend is flat, it is best to move away from the market. This is because in a flat trend, the scrip would neither be rising nor falling, and hence the trader/investor would lose out on the interest or the opportunity cost of funds apart from being frustrated of course.


Reversal of Trend's

These trends will not last for ever. If the scrip is rising (rising trend), it is possible that it may start to move narrowly or fall after some time. Again, if the scrip is moving narrowly, it may start to rise or fall sooner or later. A falling scrip cannot go on  falling. At some point,  it will start moving flat or  upwards. Thus, it can be seen that the trend at any given point of time is vulnerable to change. This change in the direction of trend is referred to as trend reversal.

The position of the bottoms and tops that determines the trend at any given point of time. Hence, if a rising scrip want to start falling, it must start forming lower tops and lower bottoms. So to identify when a rising trend will reverse to a fall trend, we has to observe the tops and bottoms and the moment the script forming lower top and lower bottom, one can say the trend has reversed directions and has become bearish or is falling.






 
In short, trend Analysis helps you capitalize on directions in which the stock price is moving based on pure supply and demand. The main advantage here is that, you dont worry about the fundamentals behind the stock. Because we assume all fundamentals ,sentiment, and economy factors are reflected on the price of the stock always and the Trend will show the directions in which Stock will be heading in the immediate future. And is a perfect tool for short term traders.

Tuesday, October 5, 2010

Technical Analysis Basics Part 1


All of us have heard about technical analysis, but very few among average investors try to do it themselves. We leave it to the "experts" to play with the numbers or charts and give us those magical figures called resistance, support etc. Actually technical analysis can be mastered with some effort and dedication. We plan to have a series of blogs that explains the basic funda behind technical analysis which can be easily understood. This is the first blog in that series. In this blog we are trying to explain what technical analysis is and the basic graphs associated with it. 


What is Technical Analysis? 
Technical Analysis can be defined as a process of identifying trend reversal at an early stage and to ride the trend until the weight of evidence suggests that the trend has reversed directions. To study the trend or direction of price movement, the technical analyst studies the historic price and volume data with the help of charts.



Assumption for analyzing prices
  1. The market discounts everything.
  2.        The price at which the security is quoted represents the hopes,fears,inside information,muscle power of the participants.
  3. The market moves in trend
  4.         The market always moves in trends, and the trend when established has a tendency to continue further in time and the reverse at some point of time.
  5. History keep repeating itself
  6.          This assumption arises from the fact that human psychology does not change. In a bull market the human psychology drives the prices up  and the opposite in every bear market. In a different way it can be stated as mistakes made by traders on market will repeated again and again.



Basic types of price charts
There are three type of price chats generally used by technical analysis- the closing price chart, the bar chart, and the Japanese candlestick chart.

.



Closing Price chart
Price Chart
A style of chart that is created by connecting a series of data points together with a line. This is the most basic type of chart used in finance and it is generally created by connecting a series of past prices together with a line.

As you can see from the chart, a line chart can give the reader a fairly good idea of where the price of an asset has traveled over a given time frame. Since the closing prices are often seen as the most important ones to keep track of, it is not difficult to see why line charts have become so popular.



Bar Chart
A basic type of chart, on which, as illustrated above, the top of the vertical line indicates the highest price a security traded at during the day, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar, and the opening price is shown on the left side of the bar. A single bar like the one above represents one day of trading.





Japanese candlestick charts


A price chart that displays the high, low, open, and close for a security each day over a specified period of time.The candle will be White in color , if the closing price  is higher than opening prices. And the color will be black if the closing price is lower than the opening prices.It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval.








We will explain how to use these charts to find out Trend and Trend reversal in a later post. Do post your comments on this.




Jerith Shajan.


Monday, September 27, 2010

Is it time to fool the retail investors again?

The Indian stock market looks all set for another bull run. Take a close look and you will realise that the run up is already in motion. In the beginning of this year, March 2009 to be exact, NSE Nifty was around 2600 mark, now it stands at above 6000 points. That is a gain of about 131% over a period of 18 months. What is remarkable is that all this has happened at a time of global gloom. All most all major markets were looking south but the Indian market defied all that bad news and moved from strength to strength. The run up (till now) is fueled by money from domestic and foreign institutional investors. The retail investor is no where to be seen, they are sitting in the sidelines and licking bruises of 2008. This is evident from the fact that the run up is an index only event and is not seen among the mid caps or small caps.

If (yeah!,it is BIG if) things go well globally, the Indian market would be literally showered with good news from all quarters. The market sentiment would hit the sky and that is going to boost  the indices to  new all time highs. As usual, the retail investor will get to know about it very late. They will the see soaring indices and   the extremely high valuation of shares. The stock market experts on TV and other media would compete among one another to predict the next  high. The media would be filled with reports on the thousands of crores that were added to the market caps, Mukesh Ambani becoming the richest person in the world, India rising, rags to riches stores etc etc etc.  All this will make it too good to resist for the retail investor and like the moth to a flame, they will enter the market. By this time most of the shares would be over priced and only a greater fool would save the retail investor and they will have to find that among themselves.

We have seen this happen every time there is a major bull run in the market. The big player in the market makes all the big bucks at the expense of the retail investor.  This gives the market a bad name and the majority of the population stays away from the market. At present, less 2% of household savings go to the equity market. What can we do to turn the tables here? The usual answers are to educate the general public about financial market, urge them to do more home work before investing, think long term etc etc. All this looks good on paper, doesn't work on the ground. Why, because the retail investors are not Rakesh Jhunjhunwalas or Waren Buffets under the hood. They don't want to think about the P/Es and quarterly profits before investing their hard earned monies. What they need are smart investment products that are tailored to the needs of the Indian retail investor. These should not be an invented in the US and sold in India kind of product. The product should have to go beyond what the mutual fund has to offer. I know it is easier said than done, needs some very smart thinking but whoever does that has huge bottom pyramid market to cater to.

So until then we have a huge gullible mass of people out there and  as the saying goes fool and their money are soon parted.

Tuesday, September 21, 2010

5 reason's why this is not the time to invest in Gold


5 reason's why this is not the time to invest in Gold

With the recent rally gold is now at all time high with prices RS 19169 per 10g. Is this price justifiable? This is a question asked by people ranging from investors to country heads. Here we are listing the top 5 reasons which we think , why you should not invest in gold now.

     1.    Gold ETF's may bring trouble
                   We all know's country's accumulate gold. But surprisingly 7th largest gold holder in the world is not a country but an Exchange Traded Fund (ETF) named SPDR Gold Shares (GLD). So if some huge investors in these funds decide to dump their shares or liquidate it, who will buy these tons of gold? This surplus supply can cause the gold prices to crash.

     2.    Economy is showing recovery signals
                 Gold price rise is not because people buy more jewelry. It's because people fear hyper inflation and value loss of paper money. Because of this experts says buying gold is a 'fear trade'. Few days back NBER said US recession ended in june 2009. So as economy recover and people become less 'fear' , there is a good chance that gold prices will ease.
                 
     3.    Gold still not good as a long term investment option
                 Even though the recent run up of the gold will make us think , to consider gold as a perfect thing for long term investment. But the truth is different. Golds last high was in 1980, where it was around 850 RS per gram, which has now reached 1915 RS. This is not a good growth if you adjust it for inflation during this time. 

     4.     If the bulls are back - Gold will be in trouble.
                   Historically the price movement's of gold is very well linked to the equity market. When the markets are on an upward momentum people and enterprises will move their Gold investments to equity to fetch better return. And when the market is under the Bear grip / down turn people will take back the money from equity market and put it in gold. So even though Indian markets are on a rise now, the global markets are yet to move out of the down turn. So once the global indices is moving up , the investments n gold may get moved to equity, which will lead to a heavy correction.

     5.    The very recent spike is just momentum driven
                   Gold has spiked a lot in the recent months. And no one can point out any fundamental reason for it. Neither it's because of  the changes in economy , nor the market, nor the natural demand. And it's suspicious enough to doubt some one having a hand behind this. 


Tuesday, September 14, 2010

Are we irrational investors by design?


Are we rational beings devoid of emotions when we make our investment decisions? Modern investment theories like CAPM (Capital Asset Pricing Model) or EMH (Efficient-market hypothesis) make this assumption that we humans are rational beings who try to maximize our selfish interest. Human emotions are seen as external factors that do not play any role in investment decision making. This assumption gives rise to the idea of a species called homo economicus or "the economic man" which is found only in economic books. To me, homo economics sounds more like a Vulcan (i.e. the alien race of the Star Treck character Spock) than human.


We humans are emotional, complex and often irrational beings who are affected by emotions and actions of others around us. These human traits have served us well in our evolutionary journey to reach the top of the evolutionary pyramid. Financial investment are relatively new activities in our evolutionary journey and the skills that evolved over millions of years of evolution may not work as well here. For example we are more adept in thinking in relative terms than in absolute terms. Thinking in relative terms, like am I stronger than the other person or am I more attractive than the competition, worked well than thinking of an absolute number that represent your strength or beauty. When it comes to investment, we need to think in absolute terms than in relative terms. This is more significant in cases where the outcome of the decision is risky. Following experiment makes this more evident.

Assume that you are in a situation where you are given Rs 1000 to keep and then presented with two options. If you choose option one you would be given Rs 500 more to take home and option two is that a coin is flipped and if it is heads you gain Rs 1000 more and if it is tails you loose nothing. Which option would you choose?

Now let us consider another situation, where you are given Rs 2000 to keep and then presented with two options. If you choose option one Rs 500 will be taken away from you and option two is that a coin is flipped and if it is heads you loose nothing and if it is tails you loose Rs 1000. Which option would you choose?

What is seen is that majority of people choose option one if the first experiment and option two(which is more risky) in the second experiment. In absolute terms, both the experiments lead to the same out come a 50/50 bet for Rs 1500 but we had two entirely different choices. This human behavior is know as loss aversion and it tends to make us take more riskier choice in decision where losses are involved.

The most interesting thing is that in an experiment Capuchin monkeys have shown the same loss aversion behavior as human being. This points to the fact the irrational financial decisions are results deep rooted genetic deficiencies in human beings. It is more like the incapability to fly like bird or swim like fish. This has not prevented us from conquering the skys or swimming in deep oceans. We invented tools to overcome our deficiencies, just like that we will have to develop financial tools that will help us over come our genetic deficiencies and make better financial decisions.

Jerith Shajan