Investing Basics - Feel free to ask the most basic questions

Thanks @dineshssairam :slight_smile: it means the more CASA ratio tells us that there is huge retail presence for a bank and the funds are available for cheap right ?

Yes, that’s the likely conclusion. However, a better way is to just look at the evolution of NIM.

@dineshssairam

Why are you calling this as double-edged sword?

If the company has a consistent growth (Net Profit/EBDT) but the current price is low compared to the average P/E (may be due to market sentiments) then is this not a good technique of valuation?

But surely, it will not be useful for new companies as they dont have the history.

Can you also help to understand, when to sell the stocks? I know the answer of this single line question is not that easy but can you suggest some books or share your experience which is easy to understand?

Thanks.

That’s the fallacy. Historic growth is not representative of future growth. And P/E is just rule-of-thumb as I keep reiterating. Using these two to value a company doesn’t sit well with me. But you would probably be happy to know that even Charlie Munger uses this method (But he does have a lot of insights into the business world than a typical investor).

But Warren Buffet still uses a DCF (Although he doesn’t need a spreadsheet to do that… he does it in his head). Even when Munger uses the simpler method, he invests his money with Li Lu, who again uses a DCF/DDM kind of method.

In conclusion, I would say, you can use the Multiples method if you have a lot of business insights. It gets dangerous when you use it because you think it’s simple or if you want to manipulate the numbers to fit your narrative (After all, manipulating 1-2 inputs is easier than justifying a whole set).

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My interpretation is that If there is not much change in NPA and net profit and it’s growth, then P/E is more appropriate like in case of HDFC bank. Else, P/B is used like in case of J&K bank.

RoE= PB/PE. Did u mean this relation or anything else?

@sambandham82 Thanks.

I just want to understand, In case of financial firms can one make an entry by only looking at P/B if the firm have consistent/increasing RoE and low NPA and low P/B compared to historical avg and/or its peers?

Is this the good approach to make an entry or @dineshssairam you are only suggesting to use DCF and ignore these?

I think any of these methods are fine, as long as you can justify every step of the way. I mentioned that Charlie Munger uses a Multiples Valuation method. But look at how he does it. Here’s an excerpt from his 1996 speech titled “Practical Thought on Practical Thought”:

We can guess reasonably that by 2034, there will be about eight billion beverage consumers in the world. … Each consumer is composed mostly of water and must ingest about sixty-four ounces of water per day. This is eight, eight-ounce servings. Thus, if our new beverage and other imitative beverages in our market, can flavor and otherwise improve only 25% of ingested water worldwide, and we can occupy half of the new world market, we can sell 2.92 trillion eight ounce servings in 2034. And if we can then net four cents per serving, we will earn $117 billion. This will be enough, if our business is still growing at a good rate, to make it easily worth $2 trillion.

He’s essentially doing a Multiples Valuation of Coco-Cola. But observe how we tries to justify the numbers.

I personally think a DCF is the least inefficient Valuation model. But if someone is valuing a company like Mr. Munger, I’ll be impressed.

However, many times, I see people using random multiples pulled out of thin air, aimed at calculating a value they already have in mind or justifying a purchase. That kind of reasoning doesn’t sit well with me.

Thanks. I got your point.

The only problem in calculating the future value through DCF is it requires some experience which is difficult for a beginner.

Hii folks…i just finished the book common stocks and uncommon profits…many of my perceptions about value investing got replaced with new concepts…i have created a checklist which summarizes the contents of the books…The aim of this list is to form a checklist for identifying the companies with long term growth prospects –

  • The long term Sales Curve
    • This will include finding the opportunity size in the market.
    • It is important to identify the consumer behaviour and needs by reading various reports.
  • The importance of research
    • The research activities may seem as risky endeavours. However it is the research efficiency which will bring new product lines in the market which will sustain the growth.
    • We need to identify the product pipeline of the company.
    • The current poor profit margins due to deep investment in research and sales promotion are the investment by the company for the future growth of the company
    • The aim of research needs be a product for which a market is readily available, already established marketing system is able to handle it and it should generate healthy profit margins.
  • Marketing and distribution strength
    • Marketing capabilities of the company by means of advertisement, brand recognition, partnerships need to be identified
    • Strength of the distribution channels for better customer reach
  • Training activities being sponsored by the company
    • Companies with long term view form the institutes catering to their specific needs.
    • Training is required not only for the research activities but also in sales and marketing.
    • These centres of excellence may open another line of products for the company.
  • Cost cutting methods being incorporated by the management
    • The modern technology should be used for cost cutting
    • The profit per employee should increase gradually
  • Human resource development
    • What is the view and emphasis of the management on human resource development
    • The turnover ratio of labour
    • The reviews by the employees of the working environment in the company
    • The gradual increase in the wages
    • The training of human resources being promoted by the company or not.
    • Productivity index of the company should improve gradually
  • The level of team work in the top management
    • While the family business are safer till the time original founder is active in the business, for consideration of the same to invest for longer duration needs a management depth.
    • No monopoly will survive the situation.
    • Does the directive style of command exist.
  • Patents
    • Type of patents
    • What kind of moat these patents provide to the company
    • Constant leadership in innovation is the key moat
  • Is the company friendly to minority share holders
    • What is its view on equity dilution
    • This point requires further scrutiny on favourable environment to minority shareholders
    • Does the management speaks freely of the expected and current difficulties
    • Payrolls of the relatives to the management needs to be checked
    • The issue of common stocks should be scrutinised regularly
  • High valuations
    • High valuations to a stock are recognition of the intrinsic qualities of the company which will derive the stable earnings expected from it…if the company is able to maintain those intrinsic qualities it will keep commanding the higher valuation as in future also they may maintain the same expectations of the growth.
    • However, in between there may come periods of slow growth and that time these stocks will tumble sharply due to failure in meeting the high expectations…such opportunities can be termed as buying times…
    • What is more important is to scrutinise such intermittent failures by interacting with the management and find their plans for future growth…find their future outlook
  • Is the company lowest cost producer in the industry
    • This factor is important in determining the ability of the company to survive the difficult times when the costs increase to a painful level…indigo is the lowest cost operator among the airline…spicejet is 18% costlier than indigo…
  • Marketing strength of the company
    • Is it able to understand the changing behaviour of the consumers in advance.
    • Is it able to sense the new needs of the consumers and highlight these requirements to convince these consumers to buy such products. Is it able to stay ahead of the curve.
    • Is there any training facility established by the company for imparting adequate marketing skills to its salesperson.
    • Is it able to balance the cost on marketing with the desired profit margins…new customers should not be gained on the cost of profit margins.
  • Budgeting and accounting within the company
    • They should be able to pin point the excessive cost generation
    • They should be able to keep a track of inventory and receivables…both on a higher scale should be avoided
  • Salary structure of the top management
    • The difference between the salaries of the no.1 person and no.2 and no.3 reveals the domination of no.1 person
    • Such a company will lack cohesion in the team and may not be able to survive as larger organisation.
  • What is the current appraisal of the industry by the financial community
    • This will decide the valuation part for that company
    • Appraisal of the market as a whole
    • Appraisal of the sector as a whole
    • Appraisal of the company in specific
    • What is the current belief system of the community about the stock
    • Is company capable enough to maintain the strong reputation among the community.
  • What are the long range plans of the management…is the management able to make long range plans
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@dineshssairam can you please give any source to understand banking balance sheet. will refer and learn some basics
Bit hesitated to ask bit by bit

Investopedia itself does a wonderful job:

I don’t think there’s a specific book that explains a bank’s financials alone. But you could try getting any textbook on the topic Assets, Liabilities and Treasury Management.

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For understanding valuation of Banks,please check out this video.I found it very useful

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ICRA on 21Sep has updated the ratings of YESBANK from Positive to Stable after the RBI’s decision.

Is it good to rely on the ICRA/CRISIL reports before buying the stock to analyse the quality of the company?

I think they have downgraded to stable as positive means the rating is on track to be moved to a higher rating (AAA in this case). If it is stable, then it has to become positive before moving to a higher rating.

Thanks for the reply. Just to understand -

YESBANK is still a good script to buy if we consider the ratings irrespective of RBI’s decision and the market behaviour?

We cannot base our investment decisions merely on rating agencies. ILFS was AAA before it defaulted last week and moved to junk rating after default. You can check the yes bank thread in Valuepickr for meaningful discussions on the stock and make your own decision.

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Thanks.

Then how to these reports/ratings useful to us? What to look into these reports?

It’s good to extract any information from the Crisil reports as they attend more investor meetings than retail investor like us.
By collecting all the required information,we should create a conviction on the stock ,rather than purely depending on the rating of Crisil reports

Found this video very interesting

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I am currently screening Shriram Pistons & Rings Ltd. The key thing that came to my notice is about its shareholding pattern. You can see the same below.

Insiders - 88.74%
Institutional - 10.36%
Free Float - 0.9%

Now, Life Insurance Corporation and National Insurance Corporation are the only two institutional investors(assuming that they are in for a long haul).

With such low float, how should one consider analyzing the company any further?

Please share your viewpoints.