Tuesday, February 24, 2009


We all know Allen Stanford has been investigated for fraudulent activities. But poor West Indian cricketers, Chanderpaul and Sarwan did not have any idea about this man and reinvested the entire 1 million dollars they received as prize money for the Stanford 20/20. Now their return on investment is as high as minus 1 million dollars. Against this backdrop, our own Sachin and Sehwag went to a coffee shop before leaving to New Zealand and both were discussing about investments. Let’s see what they were talking about.

Sehwag: Bhaiya, it’s great that you have come at the right time. I was discussing about investing the money we earn, sometime back with my agent and he was not that knowledgeable.

Sachin: You should consult me. Let me first order coffee for us.

Sehwag: OK. Tell me…Where do you invest?

Sachin: Mmmm…..I in fact invest in windmill projects particularly in Rajasthan and I get significant Tax Savings.

Sehwag: Gash…You don’t leave out any avenue of earning.

Who will? But now I am thinking to buy INFOSYS.

Sehwag: Bhaiya, Have you already earned that much to buy INFOSYS?

Sachin: Bhuddhu, I am not buying the entire company but INFOSYS Shares.

Sehwag: If that’s the case why don’t you buy SATYAM which is available for paltry price and you can earn lot of money when everything gets settled.

Sachin: Ha Ha…..Now I know why you play the way you do. No speculation my boy. I am an investor not a speculator.

Sehwag: OK. What did you find special in INFOSYS when there are many good companies.

Sachin: It’s a well respected company and best among the software companies. But I have asked one of my friends who is writing a stock market blog (he he) to come up with an analysis of INFOSYS and he just sent an email with all the details. What you see here is the peer level analysis table which he sent. It contains balance sheet details and ratios. This table is based on 2008 Third quarter data.

(Please Visit the Following Link to access the table)


Sehwag: I have no idea about all these. Explain me.

Sachin: I don’t need to explain anything here. It’s very clear from the table that other companies pale in comparison with INFOSYS. It has higher reserves, higher bank balance, higher gross block and higher net block.

Sehwag: Wait wait wait….What is gross block and Net block?

Sachin: Gross Block is the cost of fixed assets and Net Block is cost of fixed assets minus depreciation.

Sehwag: OK. Go ahead!

Sachin: As I said, it is in very good position with respect to assets and balances. But one thing that’s more important than that is zero debt which is great. Even the current liability is lesser than other companies. It has higher current ratio (Current Assets divided by Current Liabilities), higher operating margin, higher net profit margin, higher book value and higher EPS. So, INFOSYS is the leader among all the three in most of these parameters and I think my investment would make reasonable returns.

Sehwag: I am wary of stock markets. What if we fail?

Sachin: That’s funny. Do you go to the cricket match thinking that you would not score runs? No, right? You go to play good cricket and sometimes you score 100, sometimes you score 50 and sometimes you don’t score anything. That’s how life goes and you might not be successful all the time. But over long term, stocks will give you good returns just like the good average you and I have in Test Matches.

Sehwag: Great! I am now convinced and I think I am going to invest whatever I earn in this New Zealand tour in INFOSYS.

Sachin: Do not think I am recommending you to buy INFOSYS. I have provided you the facts and you can consider it after doing your own research. That way, you will also learn the art of investing and also be confident about your investments.

Sehwag: Thank you very much Bhaiya. Let’s go to the Hotel. We have the flight this evening.

Both left the place after providing good conversation for the readers to think about.

Note: I wrote this post based on the request of one Vamsi who worked in INFOSYS earlier. Hope he liked the analysis. As Sachin said in the conversation, INFOSYS beats the peers in almost all the parameters and that’s the reason it commands higher valuation than other companies. If you believe in Technology sector and you want to make decent returns over a period of time, then INFOSYS is the best bet.

Kumaran Seenivasan


Thursday, February 19, 2009

Stock Market Basics: Story of Mr.X

November 10, 2001, our Hero of this story Mr. X was in his prison cell wondering why the police arrested him for a petty crime. Suddenly there was lot of commotion outside his cell and he just peeped out to see what was happening. He saw a guy surrounded by lot of police men with good enough media attention.

Warden came and opened his cell only to stand beside. Mr. X was thinking why they release him 2 days in advance. But that momentous joy vanished as the police sent the guy who was standing outside with his hands cuffed in to Mr. X prison cell. What a surprise? It was our own Harshad Mehta. Mr. X had no idea about stock markets but knew people make lot of money in stocks. After spending few hours without talking to him, he decided to ask some basic questions regarding the stock markets.

Mr. X: Sir, you look very good and why do people call you “Bull”?

Mehta: “Bull” is my nickname. I got this name because I am a guy who is very optimistic about shares and always think that the prices will go high.

Mr.X: What if you think prices will go down? Did they put you in prison for that or what?

Mehta: No. If I think that prices will go down, then my nickname would be “Bear”.

Mr. X: Why you are playing with me? OK. What did you do to come here?

Mehta: Nothing. I just diverted money from Banks to buy shares for people to make everyone rich and police say that I am doing a fraud.

Mr.X: They are always like that. Sir, what is this Share? Why companies issue share? Why people buy it?

Puzzled Mehta thinks that Police could have killed him instead of putting him along with Mr.X. But he decides to go ahead answering.

Mehta: Share is part ownership of a company and companies issue it to raise money for the business expansion since they don’t have enough money. People buy it because they want to create wealth for future and also to negate the inflation. You can’t buy the same quantity of things next year for the same amount of money. That’s why people buy shares and if the company does well, then you gain in two ways. In one way, company pays you portion of their net profit as Dividend. In another way, people’s confidence on the company goes up and you can sell your shares at a higher price.

Mr. X: Sir, what if the company does not do well?

Mehta: Then you will have to come here again to eat.

Mr.X: You look like a very rich man. Like you I too want to buy shares and become rich. Where I have to go and buy that?

Mehta: You can buy it in two places where all the companies in India sell their shares. One is Bombay Stock Exchange (BSE) and another is National Stock Exchange (NSE). But before that you have to contact a good broker like me to buy it.

Mr.X: Good Broker!!! Sir, I want to earn money like you but I do not want to end up like you. Tell me what I need to do buy shares?

Mehta: You need to open a Trading Account with a broker where you can buy shares both in primary market and secondary market. Primary market is the place where Initial Public Offering (IPO) is made and you can probably buy shares little cheap at Issue Price which is the initial price when the company offers shares. Secondary Market is a place where companies who already have shares sell it.

Mr.X: How much money I need it?

Mehta: You can start with even Rs. 5000. If you want to buy more than Rs.5000 you can always borrow money from the broker up to Rs.50000 – Rs.60000 as Margin. If you sell it for profit, you return the money to the broker and take the rest as profit. If you sell it for loss then you have to pay Broker the difference.

Mr.X: I don’t want to buy and sell daily.

Mehta: Oh. If you do not want to do Day trading, then you have to take the delivery of shares. Delivery means, you can buy it and sell it whenever you want. One more thing, you also need a Demat account which is like a bank account where you can keep all your shares safely and like in a bank, you can transfer your shares between one account to another account.
Mr.X: Ok Sir. But what is the surety that I will not end up with a loss?

Mehta: There is no surety in anything. Are you sure you will live till 60 years old? So, there is no such thing and all I can say is if you work hard diligently and buy the stocks for a long time consistently, then you will make money. Stocks have returned 17% annualized return in the past and you can take heart from that.

Mr.X: I need to know the tricks in selecting the stocks.

Mehta: It seems you want to be a good investor and I will let you know whatever I know. You need to assess you risk and then look for growth stocks or value stocks. If you want to make good money in quick time then look for growth stocks. Growth stock refers to the share of a company which has very good potential to grow in the near future with excellent revenues and grows faster than the peers. Else, if you don’t have any problem to hold the share for a long term, you can look at value stocks which means, market has not recognized the true value of the shares of certain companies and are currently undervalued. When the market understands the true potential, at that time value stocks give you excellent return. But you have to be patient for that.

Mr.X: Do I need to buy many companies?

Mehta: It is always good to have at least 15 companies as nobody knows what will happen in the market. Had you bought the shares of ACC, you could have become either a crorepati or beggar because of me (He was involved in that scam). So, to avoid this kind of situations, you need to buy 10-15 good companies and invest regularly to be successful.

Mr.X: What else I need to know?

Mehta: How much you earn?

Mr. X: Why are you asking me? If I earn well, why would I end up in Jail?

Mehta: I am not asking you. You need to ask that question to the companies before you buy shares. Like you, if the companies don’t earn any thing they will go bankrupt and end up in jail. So, you need to know how much net profit company is making, how much debt they have, whether they have been making money consistently or not, what is their product, how other companies in the same sector are doing etc.

Mr. X: Who do I contact for all these details?

Mehta: Gash…..You look like a real bull. You do not need to go anywhere. You can visit the company website to download the reports and see balance sheet, cash flow statement and profit/loss statement. You need to look at the share price, Earnings per Share (EPS), PE Ratio, Debt Equity Ratio, Return on Capital Employed (ROCE), Return on Total Assets, Return on Shareholders equity etc. Then you have to compare all these things with other companies in the same sector. You also need to look at general market trend, political situation and so many other things and finally you should not hear whatever I say when I come out of the prison(Analyst Recommendation).

Mr. X: You have told me so many things which I never heard of. Please explain one by one. What is the significance of EPS and PE?

Mehta: Earnings Per Share indicates how much a company has earned as a net profit per share. It is arrived by dividing the total net profit by total shares. Higher the EPS, better the stock value. But to understand how much people are confident in the company, we calculate PE Ratio which simply means, how much people are willing to pay for every one rupee of net profit the company has earned.

For example, If EPS of a company is Rs. 100 and the Share price is Rs. 1000, then you can understand that people are ready to pay Rs. 10 for every rupee of net profit. In another way, Rs.1000/Rs.100 = 10 and this 10 is the PE Ratio. You can use this to compare two companies. When everything else equal, if a company has PE of 20 and another company has PE of 12, then you have to look for the reasons why the company has the EPS of 12. If you do not find any bad reasons, then you should go ahead and buy it.
GMR Infrastructure is a emerging company and it's PE is 230 which means people think this company will do wonders in the future and are ready to pay 230 rupees for every rupee of earning. In these situations, you have to be very careful and unless otherwise you are sure about the success, don't buy it. Instead you can search for stocks with reasonable valuations like in the case of GE Shipping or GSFC. To be on the safer side, always buy beaten down large caps rather than small caps if you are the one who broods over the short term loses.

Mr.X: What EPS and PE Levels I should look at?

Mehta: Higher the EPS, better the stock. So, compare all the companies in the same sector and pick the one which has higher EPS with reasonable price. In general, if the PE is less than 15, then you can consider that. But there are times where you can get very good companies for for less than10 PE and you have to grab those opportunities. Also see if the company has given dividends consistently in the past or not along with its bonus and stock split history. Apart from that you need to look at their debt level and growth over a period of time.
Mr.X: How do I know if they have more debt?

Mehta: You can find the details in the balance sheet. You can also find Debt-Equity Ratio which simply says how much company has borrowed and how much promoters have invested. If it is more than 1, that means, debt is more than the equity capital and you have to be careful. If it is less than one and the company is doing well, then you can be sure of its potential.

Mr.X: What is RoCE and Return on Shareholder Equity?

Mehta: RoCE is Return on Capital Employed which measures the percentage of money the company has earned against the capital he has employed. Suppose, the company has invested Rs. 10000 for the business and the net profit is Rs.2000, then RoCE is 20%.

Likewise, you also calculate the Return on Equity by dividing the Net profit by net worth. In general, if these numbers are higher for one company when compared to other companies in the same sector, then that particular company with higher numbers is doing well financially.

Mr.X: What else I need to look for?

Mehta: You also can look at cash flow statement to understand how much money the company is able to generate from revenues and loans and how much the company have invested for future growth. If the numbers make sense to you then you can buy that company. If a company is not generating any revenues but the cash flow only comes from financing activities, then you have to stay away from it. It is better to talk to your wife for a month to know what she does to manage the family. You apply the same mindset in the stock market and I see no reason why you can’t be successful.

Mr.X: You are telling very useful ideas but why you could not follow it?

Mehta: Good question. It is not enough to do whatever I said. There are few more simple things which are difficult in practice and that’s why I am here.

Mr.X: Like what?

Mehta: You need to know when to buy and when to sell. I knew it and I did all that. But I did not know how much money I needed to satisfy myself. I became greedy and tried to earn more and more that resulted in this fashion. So, decide yourself how much money you need in next 5 years or so and then enter the market. When you reach your goal, please sell it and do not look at what others are doing or regret when the index is going higher. It is better to come out with a decent profit rather than losing your capital when the crash is imminent. Stock Market behaves like a balloon. You can inflate it only to an extent. If you inflate it more, then it will burst and you have to make small balloons out of it to satisfy yourself for sometime before buying new one.

Mr.X: Thank you very much. I have learnt more than what I have learnt throughout my life by talking to you.

Mehta: I did the same thing outside the prison educating my friends about stock markets and I ended up here.

Mr.X: Oh….You guys screwed up the Stock Market as a group…..Very Nice. If god willing, I should be able to do the same thing except ending up in Jail. Thank You!

Mehta: You are Welcome!

Our Hero Mr.X was amused by Mehta’s Welcome, came out of the prison to make money in stock market like you and me. Was he successful? No one knows.

Note: This is an imaginary story and is not true. I just tried this idea to see if the readers like it.

Kumaran Seenivasan


Tuesday, February 17, 2009


Stock Market performance is quantified by calculating an index using the benchmark scrip’s and we all know that SENSEX is associated with Bombay Stock Exchange and NIFTY is associated with National Stock Exchange, but what many do not know is how those indices are calculated along with EPS and PE values.


SENSEX has been calculated since 1986 and initially it was calculated based on the Total Market Capitalization methodology and the methodology was changed in 2003 to Free Float Market Capitalization. Hence, these days, the SENSEX is based on the Free Floating Market cap of 30 SENSEX Stocks traded on the BSE relative to the base value which is 100(1978-79) and it is calculated for every 15 seconds.

Free Float Market Capitalization is defined as the value of all the shares available for public trading excluding the promoter equity, holdings through FDI Route, Holdings by private corporate, and holdings by Employee Welfare Funds. .

Why Free Flow Market Cap?

1. It depicts the market more rationally
2. It removes undue influence of government or promoter share holding, there by giving the equal opportunity for companies to be in the SENSEX
3. Almost all the Indices world over are calculated by this methodology
4. It gives Fund managers more authentic information for benchmark comparisons.

How the SENSEX 30 Stocks are selected?

1. Listing History
2. Trading Frequency
3. Rank based on the Market Cap (Should be Among top 100)
4. Market Capitalization weight
5. Industry / sector they belong
6. Historical Record

How SENSEX is calculated?

The formula for calculating the SENSEX = (Sum of free flow market cap of 30 benchmark stocks)*Index Factor

Index Factor = 100/Market Cap Value in 1978-79.

Where, 100 is the Index value during 1978-79.


Assume SENSEX has only 2 stocks namely SBI and RELIANCE. Total shares in SBI are 500 out of which 200 are held by Government and only 300 are available for public trading. RELIANCE has 1000 shares out of which 500 are held by promoters and 500 are available for trading. Assume price of SBI Stock is Rs.100 and Reliance is Rs.200. Then "free-Floating Market Cap" of these 2 companies =

(300*100+500*200) = 30000+100000 = Rs. 130000

Assume Market Cap during the year 1978-79 was Rs.25000

Then SENSEX = 130000*100/25000 = 520.

The methodology in the example is exactly followed to calculate the SENSEX, only difference being the inclusion of 30 stocks.


The National Stock Exchange (NSE) is associated with NIFTY and it is also calculated by the same methodology but with two key differences.

1. Base year is 1995 and base value is 1000.
2. NIFTY is calculated based on 50 stocks.

Everything else remains the same in NIFTY Index calculation as well.


We all know Earnings per Share (EPS) is calculated for all the companies to show how much a company generates the net profit for every outstanding share. Likewise EPS is calculated for SENSEX as well so that we can have a better understanding about the market.

Let’s see how it is calculated. All you need for this calculation is EPS of all the 30 SENSEX stocks along with their Free Float Adjustment Factor.

Example: Take HDFC Bank for the example. Present EPS for HDFC Bank is Rs. 44 and Free Float Adjustment Factor is 0.85. Free Float Adjustment factor of 0.85 just means 85% of the total outstanding shares are held by Non-Promoters and are available in the market for trade.

Multiply the EPS with Adjustment Factor which is 44*.85 = 37.4. This 37.4 is the contribution of HDFC Bank towards SENSEX EPS. Likewise we need to calculate for all 30 stocks and add it together to get the final value of SENSEX EPS which should be somewhere around 900 these days. We can calculate NIFTY EPS in the same manner.


PE Ratio is calculated for companies which show what the investors are ready to pay for every rupee of earnings. If we calculate the same thing by taking into account all the 30 SENSEX stocks, then we will end up with SENSEX PE.

How to calculate?

Consider the same HDFC Bank. Multiply the Market Price of HDFC Bank with number of shares outstanding which should be equal to Market Capitalization.

Market Capitalization = Share Price * Total Shares

Then calculate the Net Profit by multiplying the EPS with Total Shares.

Do this for all the 30 SENSEX stocks.

SENSEX PE = Sum of Market Capitalization of 30 SENSEX Stocks divided by Sum of Net Profit of all the 30 SENSEX Stocks.

At present the SENSEX PE is around 12 and it provides useful information about SENSEX. Analysts predict the level of SENSEX using this number only. Suppose, SENSEX PE is 12 and SENSEX EPS is 900, then the Index = 10800. For example, if you believe, earnings of the companies would grow at 10 percent this year, then apply the same growth rate to both SENSEX PE and SENSEX EPS to predict the SENSEX next year which would be 13*1000 = 13000.

Conclusion: SENSEX PE and SENSEX EPS give some useful information about which way the market might move. But it is not necessary that the information you get should hold true always. As we know, Stock Market is a place, where no one can be right all the time.

Kumaran Seenivasan


Monday, February 16, 2009

Troubled Company Acquisition and SATYAM Scenario

Stock Market has been grappling with this SATYAM Fiasco for a long time than any seen before and media news is the one to go by, then news for the past few days have been both positive and negative. Let me list out few.
Positive Signals

1.SEBI has amended the takeover rules where a suitor can’t make an open offer if an acquirer has announced an open offer already.Also, they have relaxed norms for the companies where new board has taken over.
2.World Bank has said that SATYAM ban might get reviewed if the company proves that they have taken a corrective action and it is good news for speculation. But I wonder why they did not ask WIPRO to take corrective action?
3.Restatement of account before March 2009.

Negative Signals

1. Few Clients including Merrill Lynch are shifting projects to other IT Majors
2. If they decide to restate the account for many years, then it will take more time.

I am not going to dwell much on media news and instead I will focus in this article about troubled company acquisition process, its benefit and pit falls so that it might be useful if there comes a similar situation in future.

Troubled Company Acquisition process

Buying a struggling company is a complex process and the complexity depends on the reasons behind the problem. For example, assume a company called ABC Oils and the company is doing everything right and the management is honest, but somehow they do not generate good revenue either due to bad economies of scale or inefficient targeting. The acquisition process here would be fairly simple. Why? Because, in this example, strategic acquirers should have been hearing this news for few months and they might have spent enough time in analyzing what the acquisition would do for them, its benefits and problems. The buyer would be in a better position to confidently buy it as he knows that additional capital investment and use of parent marketing capability would make the struggling company viable. But the process becomes complex when things go in the opposite direction.

Incase of SATYAM, there was no problem as such and it was created by its own Chairman due to his greediness and lack of business ethics. Of course, he would have started the SATYAM with good ethics and he should have been a nice person for sometime. I have a feeling, he committed the mistake once with help of his coterie and he became confident to do more such acts as there was no adequate company law to identify such things. Since, he knew our inefficient legal process and the tolerance level Indian people have got, he just wanted to build an infrastructure empire by diverting some “Free” cash and finally when he was cornered, he simply put himself in prison so that he can spend his retirement life with adequate security. Here the problem is its suddenness. Of course the fraud has been going on for many years but no one knew it and there was no buyer prepared to this kind of situation. Also, no one knows the real complexity of Satyam problem unless investigating agencies find out. Raju won’t come out with clear facts as it will hamper his legal process and it is up to the auditors to unearth what has been going on.

Hence, potential suitors do not have enough time to analyze SATYAM’s strategic fit to them and also they do not have clear view on the financial position. That’s why it has become more complex even though SATYAM’s business structure remains strong. In my view, I do not think it will happen any soon unless it comes for sale at a real cheap price. Would you or your family buy a business which does not have any credible account standards? No, right? It is as simple as that. Unless suitors become confident that it would be a value addition, they won’t buy it in the current scenario as they have seen many takeovers in the past year going futile. Majority of the companies have seen value erosion in the past year after the new acquisition and Tata Motors has lost 80% of its value after the Jaguar-Land rover deal. Let me go through what potential suitors look for and what they bring to the deal.

What potential buyers look for?

Any individual let alone potential buyers will look for some benefit in return to their interest and investment and the case in SATYAM is no different here.

1.Strategic fit
2.Attractive product extension
3.Reach i.e New clients, channels, marketing avenues
4.Sudden scenario where a company is available for cheap price for “Good” reasons
5.Buyer gets into a situation where they do not have any other situation but to protect investment by buying it. Ex. L&T

What they need to know before buying?

Companies simply do not go and buy for the sake of making an empire. They should understand the complexities involved in it and here are few things they should know.

1. Comparative advantage and cost efficiency
2. New capital investment needed to reorganize the struggling company
3. Margins and technical capability
4. Legal troubles the company associated with
5. Debt, the problematic company has
6. Conflicts of interest in pay structure between parent company and new company
7. Day to day operations and clients
8. Shareholders in the company
9. Sufficient time to analyze the financial statements

What a buyer would bring to the struggling company?

1. Freshness
2. Win-Win business situation or synergy (In fact The name “SYNGENTA” came from Synergy in Genetics” after the merger of Geneca Agrochemicals and Novartis Agribusiness)
3. New Capital Investment
4. Effective Management

Buyer, benefits and problem

After evaluating all the details, a buyer would come to the conclusion to buy it but has some additional things to be considered as well. Not many buyers have cash in hand to buy new companies. Hence, how they are going to finance it? Is it going to be a leveraged buyout or all cash transaction or stock transaction or combination of all these things? So, it depends on the buyer’s particular situation. In fact he would go ahead and buy if he at least knows there would not be any potential value erosion to his parent company in the long term due to the acquisition. Then they have to get the approval of shareholders and it should benefit them. As I said benefits might include new clients, technically efficient employees, cost efficiency, higher margins, new or additional marketing channels, infrastructure etc. But they might also bring undisclosed problems like Merrill Lynch problem with Bank of America or general market view on that deal. If the market does not view the deal as a prospective one, then it will be catastrophic disaster to buyer particularly.

SATYAM Scenario

After all we have discussed a bit regarding troubled company acquisition and we should be able to piece together who has in them to buy SATYAM in the normal scenario. But SATYAM case is unique where even SEBI is granted permission to enquire RAJU after two weeks. It might be a good exercise for you as well if you analyze on your own to identify the buyer based on all the things pointed out earlier. In my view, L&T should be the one desperately looking for some benefits out of this deal whether they buy it or not. They are in a position to protect Rs. 575 crore investment and it depends on the deal. As a potential buyer, SATYAM strategically fits in to its InfoTech business. But they would want to make sure that the acquisition does not turn out to be a disaster for them. If they buy SATYAM, it might well take away the focus from its core engineering business for many reasons. In my view, they would have a significant role to play in this deal whether they buy or not. Hope things do not change dramatically.

Market Buzz on Acquisition:

SUN Pharmaceuticals has been sitting on cash and the news is it is looking to acquire new companies that fits to their business expansion.


Sunday, February 15, 2009

Cash Flow Statement: Educomp Valuation Example

I have written about cash flow statement and its importance in the previous article. But I would like to illustrate why sometimes it is more important with a recent example. We all have been talking about the high valuation Educomp solutions command and some people do not even look at the scrip. But investors invest in this stock and it commands good premium in this bear market. Let’s see if they are mad or they have some basis to do so.

Current Market Price: Rs. 2097

Before going to the numbers, we will see why it commands such a high valuation in general.

1.It has no peers in the strict sense with respect to content and execution
2.Operating Margin in excess of 50 %
3.India is a huge country and potential for expansion of their business is excellent.

But market is not that crazy to put its weight behind Educomp on the basis of these things. Let’s calculate some numbers to see if there is something else.

Stock Value: Educomp Solutions

People term it as “Intrinsic Value” and I am no Warren Buffet to use those terms. That’s the reason I use the simple term “Stock Value”. Because stock market is a place where nobody can be right always and even the market sometimes. I use certain conservative assumption to calculate stock value which I explain to you as well.

I am going to calculate value of this stock based on the following two ways and list the results.

1.Based on Discounted Earnings per share

EPS = 40
EPS CAGR for last 3 years = 41 %


EPS Growth Rate for Next 10 Years = 20% 25% 30%
Discount Rate = 5 % (Conservative Bank Yield)
EPS Growth rate is constant for next 10 years

Since, last 3 year CAGR for EPS is 41 %, I opted for one conservative estimate (20 %) and two other values to see what effect it can bring.

Note: CAGR refers to Compounded Annual Growth Rate. Also please note that this assumption is a CAGR value for next 10 years and might not make sense sometimes in the short term.

Stock Value Based on Discounted EPS

If EPS Growth Rate Assumption is 20% then Stock Value = Rs. 897

If EPS Growth Rate Assumption is 25% then Stock Value = Rs. 1180

If EPS Growth Rate Assumption is 30% then Stock Value = Rs. 1552

2.Based on Discounted Net operating Cash Flow

Current Operating Cash Flow = Rs. 680 Million
Operating Cash Flow CAGR = 83 %
Number of Shares = 17.2 Million


Operating Cash Flow Growth Rate for next 10 years = 30% 35% 40%
Discount Rate = 5% (Conservative Bank Yield)
Operating Cash Flow CAGR is Constant for Next 10 years.

I have calculated the last 3 year CAGR for Net operating cash flow and it stands at 83%. Hence, I assumed a higher growth rate of 30% 35% and 40% for operating cash flow for next 10 years.

Stock Value Based on Discounted Net Operating Cash Flow

If Operating Cash Flow Growth Rate is 30% then Stock Value = Rs.1534

If Operating Cash Flow Growth Rate is 35% then Stock Value = Rs.2018

If Operating Cash Flow Growth Rate is 40% then Stock Value = Rs.2650

If you compare the stock value between these two methods, there is huge difference and in fact the value based on Discounted Net Operating Cash Flow is almost double the value of EPS Based estimate. Why is that? Of course, if I assume same 20% growth for operating cash flow, then the value is Rs. 890 which is similar to EPS Based estimate. But does it make sense to assume 20% growth rate when the company has generated net operating cash flow at CAGR 83% for the last 3 years? I do not think so. Hence, I assumed little higher than what I assumed for EPS growth. What this analysis indicate is that market assumes that Educomp Solutions Net Operating Cash flow would grow at 35% (CAGR)for next 10 years (If my assumption makes sense) and they think that stock value now is atleast Rs.2000 which is what it commands right now. You might ask why did the stock was trading at Rs. 1350 range just few days back? Well, stock price accounts and discounts for many things and I will certainly try to write an article about it in the coming days.

Stock Value based on cash flow gives better idea about the company rather than looking at just EPS. May be that’s the reason, market has put huge premium on this stock. But there is also one more thing. I have in fact calculated the value based on Net Operating Cash Flow which excludes money the company raised through financing which stands at Rs. 3306 Millions as of 2008. A company without strong growth potential and fundamentals would not have raised this much money and may be investors considered that too. But my another question is, would you have found this by just looking at PE Ratio or PC Ratio? Let’s see.

PE = 40 Stock Price = 2097 PE Ratio = 2097/40 = 52

PC Ratio = Stock Price Divided by Operating Cash Flow per share

Operating cash flow per share for Educomp = 680 / 17 = 40

PC Ratio = 2097/40 = 52

Wow……Two values are identical and I do not think people would have valued based on this. Hence, I strongly feel that at least few investors if not all have looked at cash flow of Educomp along with few more things I list out here.

Current Ratio is above 5 even though debt equity ratio is greater than 1.
Total Revenue CAGR of 126% for last 3 years.
Net profitability to net sales stands at 26% and I think not many companies have this kind of profit.

Conclusion: I strongly feel investors have done their home work before investing in this scrip. This was my attempt to find out why this stock attracts huge valuation in this tough time and we have found reasonably convincing answer if not completely convincing. Hence, looking at cash flow statement provides more clarity than just looking at PE or general trend. Also, analyzing the stock in totality including PE, PC Ratios, General Trend, Company growth along with cash flow statement and balance sheet gives you much more clear picture which can reduce the risk to an extent. I might not be correct, hence I request readers to share their thoughts in the blog. Thanks.

Caution: This example has been taken only to see if cash flow statement gives any additional information to value stocks and it is based on certain assumptions. Hence,please do not take this as a recommendation.


Saturday, February 14, 2009

Stock Analysis : Cash Flow Statement

Financial statements comprise three things namely Balance Sheet, Income Statement or Profit/Loss Statement and Cash Flow Statement. Experienced and successful investors say that they rely heavily on financial statements when deciding where to invest. Out of all the three statements, Cash Flow Statement is the very important but widely neglected one by beginners / retail investors. In this article, we will see the difference between these statements while explaining in detail about Cash Flow Statement.

Components and Differences

It is a myth that these statements contain some crazy financial stuff that only Auditors can understand, but in principle these statements are copycat to what we do in our family to manage the family budget (The difference is we do not prepare and do not complicate). Then you might ask what the Auditors do? They are of course essential as the companies get involved in too many transactions and also the company has to follow the laws to comply regulations. Now let’s see what they contain and the differences among the three.

All the three statements are inter-related but they are prepared separately to give clear picture to understand the financial health of the company in three different angles. Balance sheet is the statement that shows the overall financial position of the company at any particular point of time from inception. It has two components namely Assets and Liabilities (Just like what are all the assets our family has and what are the loans and other things that we need to repay). Profit/Loss statement includes Earnings and Expenses so that we can be clear about the Net Income. Cash Flow statements give you the detailed picture of both Cash inflow and Cash outflow of a company under three sections namely operations, investing and financing. All the three statements are equally important but Cash Flow Statement is even more important during the crisis times like what we have now.
The simple diagram below shows the relationship among three and components of these statements. You see a brown color stock investor box which shows that proceeds from the stock sales will be shown under financing section of cash flow but the total money raised through stocks will be shown under equity section of balance sheet. Similarly the bond investor’s box explains that proceeds from bond sales go to financing section of cash flow statement and interest paid to the bond holders go to the income statement while the bond debt goes to the liabilities section of the balance sheet. You can think of similar relationships from the diagram between these three statements.

The three green arrows indicate the three sections of Cash Flow Statement which are operations, investing and financing. The yellow part is the components in the income statement.

Why Cash Flow Statement is more important?

Assume a hypothetical situation where you have two neighbors Akash and Nilesh and you are a man with common sense. Akash works in L&T as an Assistant and earns Rs. 300 / day and he is able to meet daily family expenses and other costs but he does not have any major assets and debt. Nilesh earns Rs. 500 / day and he has a house but has taken a loan from HDFC and he is struggling to meet even family expenses. They both come and ask you Rs. 5000 and promise you that they would return it in a month. Who would you believe and give loan? Common sense investors would give it to Akash. In this particular situation, you would not be reading any financial statements to make a decision as you know these individuals and their financial situation. Nilesh might have stronger balance sheet than Akash but Akash has better cash flow and gets your confidence.

It’s the same case in corporate as well where experienced investors give more importance to the cash segment as it is very important for the day to day operations of the company. So, people think it is better to invest in a company which can survive in short term rather than a famous corporate giant who is all set to fail. In my view, you do not need to study complicated books to understand the basic principles which remain the same both at household level and firm level. That’s why legendary investors like Peter Lynch and Warren Buffet say that a guy with common sense will show better returns than many of the Analysts.

Cash Flow Statement

As I have pointed out earlier, Cash Flow Statement includes operational activities, financing activities and investing activities.

The above table is a cash flow statement from Satyam for the year 1999 and is shown as an example. The basic idea remains very simple. We deduct all cash outflows from cash inflows and show the net cash available for the company operations in a Cash Flow Statement. But I will explain one by one with respect to this example. Figures in parenthesis indicate cash outflows and figures without parenthesis show cash inflows.

1. Operating Activities

Section A in the table contains operating income and it starts with net income before interest, tax and after extraordinary items. The operating income usually comes from selling products and services. Since, the net income has been calculated already by excluding extraordinary items like depreciation, and loss on sale of fixed assets; they have added it back to remove the effect. Extraordinary items may include Amortization and many other things (All non-cash items), but in this example they have included only two. Then they have added whatever cash inflow they had and deducted all the cash outflows they had to finally arrive at Net Cash Flow from operating activities which was Rs. 9,782 Lakhs in 1999(Hope it was not a fictitious statement) . In short, operating activity is a Money raising activity.

2. Investing Activities

Investing activities (Section B) include activities that are carried out by the company for future growth either upgrading facilities or buying equipments or fixed assets. I am not going to explain what is in the table again. But the idea under this section is again to calculate the amount invested for the company and income if any and then arrive at net investment amount which stood at Rs. 16,574 Lakhs.

3. Financing Activities.

All the items related to the core finance come under this category in Section C including loans companies get from banks, raising money through stocks sale, IPO, dividends etc. Here too the idea is to calculate the net amount raised by deducting outflows from inflows. In the example Satyam had raised Rs. 9,302 Lakhs in 1999 through financing activities. This is again a Money Raising activity.

Finally to arrive at Net Cash / Cash Equivalents, you add Section A and Section C. In this example it was Rs. 19,084 Lakhs (Rs. 9782 + Rs. 9302). Then deduct the amount invested for that year from Rs. 19,084 Lakhs which is Rs. 19,084 – Rs. 16,574 = Rs. 2,510 Lakhs. This is the amount you are seeing in the example as well. Since they had Rs. 1,317 Lakhs from the previous year, you are seeing that amount added to this Rs. 2,510 Lakhs to get the final Cash / Cash equivalent of Rs. 3,827 Lakhs.

Cash Flow Statement and it’s relevance to the Stock Investment

We have discussed sufficiently about the basics of cash flow statements. But how it is relevant to our stock investment stand point? In fact I would say Cash Flow is the first important thing in the business without which no one could have started the business. Earnings are important and people value companies based on that. But not many think how a company managed to earn that money? A company with better cash flow in general would generate good earnings and that’s why experienced people go to the root of the problem. In some cases it might not be true (Initial Days, Capital Intensive Business). Company with a better cash position can outsmart peers and can take advantage of special situations.

For example Reliance Capital was late in to the Brokerage business, but they are threatening to rule the brokerage world just by virtue of having more cash flow. I do not think any other brokerage firms would have attained the same growth.

Another example is our fallen baby Satyam (Illegal outflow and Cash inflow shrunk). A company can be worth Rs. 50,000 crores but if it does not have Rs. 500 crores for day to day operations, then it will become bankrupt and is of no worth.

Subhiksha is a success story and within 10 years, the company fetched Rs. 1,500 crore value, but what happened now is a story well known to everyone. Company is in bankruptcy situation. So, cash flow is an important thing that you have to look in to while valuing a company or stock. Of course you have to study the balance sheet as well. Cash flow statement combined with balance sheet might give you a better idea about value when you compare a company and its peers. There are few ratios which you can look at if you do not study the entire statement.


1. Price to Cash Flow Ratio
This ratio is similar to our PE Ratio but many think that PC Ratio is more reliable than PE Ratio. PE Ratio can be easily manipulated as it includes non cash items, depreciation etc. while same cannot be said about PC ratio. I do not know which side Raju has manipulated, but in general it is very hard to manipulate the PC Ratio.

Price to Cash Flow Ratio = stock price per share divided by Operating Cash Flow per Share

where, Operating Cash Flow per share = Net operating Cash Flow / Number of Shares

Example: Assume Yes Bank has Rs. 900 crore cash flow and it has 300 crore shares. Then operating cash flow per share would be Rs. 3 and it’s Price to Cash Flow Ratio would be 20 (60/3) based on the current stock price. Like PE Ratio, the interpretation remains the same. Lower the PC Ratio, better the stock value and it is a nice tool to have when you compare companies in the same sector or peers. In spite of the importance, PE Ratio rules the world.

2. Price to Free Cash Flow
It is a similar ratio with stringent guidelines.

Price to Free Cash Flow Ratio = Company Market Capitalization divided by Free Cash Flow

where, Free Cash Flow = Net Income + (Depreciation and Amortization) – (Changes in working Capital + Capital Expenditure)

Higher the P/FCF value, more expensive the company is.

These are the two important ratios which broking firms calculate but you can calculate your own ratios based on what importance you attach to different things.

For example you can calculate Cash Flow to Debt ratio or Cash Flow to Long Term Debt Ratio along the similar lines. But the basic idea remains the same across all the ratios which is better the cash position, better the value.

Conclusion: Cash Flow Statement is as important as balance sheet and PL Statement and serious investors should give at least a glance while making larger investment decisions. This does not mean, companies with better PE and PC ratio will always give you great returns but it is one among various measures you can use to evaluate a company so that you can eliminate the risk to a certain extent. I will try to explain balance sheet ratios and PL statement in another article. Thanks.

Kumaran Seenivasan


Stock Market and Macroeconomic Policies

This article is intended for people who do not know how the Macroeconomic policy works through Reserve Bank of India (RBI) but has some interest to learn it. Many people invest in stocks and some of them might be even successful but only few people understand why the stock market behaves erratically to the announcements made by the Government and the RBI. You might have heared Bank Rate, Repo Rate, Cash Reserve Ratio (CRR), Tax Cuts, Government Spending, inflation and many more words these days and whenever some major announcement comes from RBI regarding these, SENSEX and NIFTY either goes up or comes down. Why? These are all Macroeconomic tools at the Disposal of Government of India to keep the Economy in Balance. I will try to explain important Macroeconomic tools to the best of my knowledge.

Macroeconomic tools involve two main things namely Monetary Policy and Fiscal Policy. The new “Buzzword” Stimulus Package derives inputs from both these policies to have “Multiplier Effect” on the economy and my aim is to show how this works and how the economy improves and it’s bearing on Stock Markets. Let me start with Monetary Policy first.

Monetary Policy

It is an “Economic Lever” by which the Government and RBI keeps the money supply under control to leave the Economy in balance.

I will explain this with a simple example. Assume inflation (Rise in Prices of goods) level of 5. At this inflation level, you are buying 1 Kg of tomato for Rs.15. Let’s assume the inflation goes to 8 which simply mean that “Currency” available in the open market is more than the demand and you will be buying the same 1 Kg tomato by giving more money (Rs.20) because you have more currency (Please do not assume that price goes up only because of this. In this case Tomato price might have gone up due to the increased cost for the Farmer because of lack of economic activity). Many things are interwoven here and I am explaining only important things. Now lets assume inflation comes down to 2 which means “Currency” available in the market is less than the demand and people have less money to buy the same 1 Kg tomato.

At present we are facing less supply of money in the market and that’s the reason for current recession. Since the money supply is less, companies are not able to borrow money for their operations. They do so at higher interest rate which lowers the company earnings which in turn reduces the stock price. So, both over supply of currency or under supply of currency in the market is not good for the economy and thus Stock Market. Here comes the tool of Monetary Policy to keep the money supply and inflation at the optimum level. There are various options for the RBI under Monetary Policy and some are as follows.

1) Cash Reserve Ratio(CRR)
It’s a percentage of money that a commercial bank must keep with RBI as a reserve. At present the CRR is 5% which means if Axis bank gets Rs. 100 as a deposit; it must keep Rs.5 as a reserve with the RBI and will have Rs. 95 for loaning. How does CRR affect money supply and stock market? Here is how. Suppose RBI hikes the CRR to 10 %. Then Axis bank must keep Rs. 10 as a reserve with RBI and it will have only Rs. 90 to give loans instead of Rs.95, which reduces the available currency in the market. The stock market will react based on the prevailing market sentiment to this change but mostly downside. Suppose the CRR comes down to 3% means Axis bank will now have Rs. 97 to give loans which in turn increases the currency supply in the market and stock markets move up to this kind of news (Because companies can get credit at cheaper rates without hindrance which reduces the cost of capital and the company Earnings Per Share (EPS) improve).

2) Bank Rate or Discount Rate
It’s a rate at which the RBI lends money to the commercial banks. The principle I explained under CRR applies here too. If the RBI hikes the rate, then banks will not seek more money as the rate is high, hence less money supply in the market. If the rate is low, then banks will try to get more loans from RBI to take advantage of the low interest rates, hence more money supply.

Stock markets move up or down based on the increase or decrease in the rate. The graph (In US Dollars) explains pretty much the same idea and it even includes description.

3) Open Market Operations and Repo Rate
If the RBI feels that available currency in the market is less, then it purchases government securities or bonds in the open market to temporarily create more money supply and vice versa. Repo rate is a rate at which it transacts the securities and bonds with commercial bank to create or destroy money supply as explained earlier.

4) Interest Rates
RBI announces the interest rates at which commercial banks lend themselves for overnight loans or short term loans. If the rate is high, then money supply will become less and stock market might go down. If the rate is less, then money supply will be more and stock market will react positively.

In the graph, the shaded bars indicate the recession period and the blue line indicates the currency in circulation. Whenever there was no increase in supply of money proportionate to the economic growth, there was a recession as you see in the graph. Between 2000 and 2008, you see a steep increase in money supply which is disproportionate to the economic growth. Because banks gave credit too freely (We saw higher inflation in 2008 because of this) to people and the stage came where people started defaulting. Once they started defaulting, others got scary and they all sold stocks to be on cash. Hence, credit crisis arose and we have the recession now.
Depending on the situation, RBI uses either one or all of these tools to control the money supply in the market. Now you know what Monetary Policy is and its uses. What is this “Stimulus” Package and Fiscal Policy and how it is related with economy and stock market?

Fiscal Policy and Stimulus Package

We all show eagerness to the budget announcements. Why? Because government defines the path for the economy and aggregate demand to travel, through budget and the whole idea of spending is based on Keynesian economics. So, the fiscal policy is a tool by which government influences it’s spending and tax related issues. This concept is as simple as our family spending. There are three situations as follows.

Optimum Budget.
Under optimum budget Government spending = Government income (Taxes). Suppose government collects Rs. 1000 crore as a Tax means, just like our family, the government can spend only Rs. 1000 crores. If the government is able to provide all the facilities to its citizens within this amount, then that’s where, economy is in optimum.

Surplus Budget.
Government spending <= Government Taxes. This is a dream situation where the government collects Rs. 1000 crores in Taxes but it requires only lets say 750 crores to provide all the facilities for its citizens.
Deficit Budget.
Government spending >= Government Taxes. This is our familiar situation where the government collects Rs. 1000 Crores in Taxes but requires Rs. 1500 Crores to provide all the facilities for its citizens. Where does the government go for the additional Rs.500 Crores? Well, that’s when government sells securities and bonds to mobilize money by promising a fixed interest income to you and definitely not to make you or me rich if you felt that way. Government also gets loan from IMF, Asian Bank and other agencies. How the hell government will repay that Rs. 500 Crores? Just like we start a business by getting loan from SBI thinking our business will generate enough income to repay the loan, the government also thinks, the additional spending will stimulate the economy by “Multiplier Effect”. The idea of “Stimulus” Package originates under this principle. Since, the government thinks that additional spending will improve the economy by “Multiplier Effect”, the stock markets react positively thinking company earnings will go up and thus stock prices.

What is this “Multiplier Effect”?

I will explain two scenarios here. 1) Government spending and Tax cuts. 2) Lending or Deposit multiplier. This is the situation we are facing these days. Let’s take the government spending and tax cuts first. Government spends the “Stimulus” money in infrastructure or other projects. These projects employ additional people (Employment). These employees earn income (Earning) and they buy goods (Spending) with that money. The seller earns income and he spends it to expand his business. To expand his business, he buys more goods and employs more people. This process goes on and on which “Multiply” the effect of initial amount that government spent, hence the name “Multiplier Effect”. Government cuts Tax. Why? Because tax cut increases the disposable income of a household and since they have more money, they will spend it to buy goods and it will follow the same process which I explained above. Stock markets react positively to “Stimulus” package since market thinks economy will get a boost through this so called “Multiplier Effect”. But why stimulus package is not working overnight? Because people fear the current situation and they try to keep cash like you and me, rather than spending. Since they do not spend, the situation of “Multiplier Effect” does not arise leaving the economy in trouble and stock market either moves down or moves sideways. Then why government is spending? The government thinks that the stimulus package will create more employment which leads to more income and people slowly will come out of their groove to spend it. When that happens, you and I will rejoice with a hope to invest some of the money in stocks and stock market begins to move up. Hope now you understand why the entire “BUZZ” about Stimulus package.

Deposit multiplier is directly linked with CRR. Suppose Axis bank gets Rs. 100 as a deposit. Then it must keep Rs.10 as a reserve since the CRR is 10%. Axis bank lends remaining Rs. 90 and people borrow it and spend. That money is deposited in another bank and that Bank keeps Rs.9 as reserve in RBI and loans the rest of Rs. 81. This goes on and on till the loan amount reaches Rs. 1000 (Rs. 100 /0.1). Money multiplying money situation, right? Hope you now have a better idea about Macroeconomic tools and its association with stock market.

This article is not for people who know Macroeconomics well to whom it might not be useful but for retail investors who have the interest to learn how the Macroeconomic environment is linked with Stock market. You might have questions or need explanations. If so, please leave a comment.

Kumaran Seenivasan.


Income, Investment and Being Content

Stock market investors come from varied income strata and this piece of writing is to create a sense of balance when they opt for investments. I honestly do not have any data to back up my claims but in general I have a feeling, majority of the retail investors come to the stock market thinking that stock investment is as good as starting a business and it's a sure way to make money just because someone they know made windfall profit. But new investors have to be careful in their judgment as only few retail investors beat the market. You might argue that you could be one of those few. Of course you can if you have the requisite skills and I define it as vague as the stock market in the following few lines.

In my view, most people can make money in the bull market (If you happen to be the one who lost money in bull market, then do not ever come back to the stock market).

But the one who makes money in the bear market (If investment started at beginning of bear market) or the one who booked the profit exactly at 20000-21000 sensex levels or the one who at least minimized the loses (If investment started in the bull market but still holding into the bear market) is the one who can claim that they have the requisite skills to be in the stock business. If you think you do not fall in any of these three categories, please read further.

What is special in those few people who beat the market?

The few "market beaters" whom we are talking about, do it as a passion in addition to just investment. Their mind constantly tickles around stocks and news and they relate almost everything with stock market. They are fortunate to receive perfect information in an "imperfect market"(It has become these days). They put their brain on work rather than heart. They are the ones who would have happily remained in Titanic till it sank rather than fighting to get a place in the women's boat. They know how to find the anomalies in the company statements in addition to filtering out right information. They must surely have alternate sources of income which makes them not to fear about the loss and be greedy for more.

How the market works?

Of course we all know that stocks make money based on earnings, potential profits, macro economic outlook, company management and what not...But you still need a buyer and seller and that’s where my point originates. Your loss is someone's gain and vice versa. This is precisely the reason why stock market functions always and it will be there even if the sensex hits 1000. Because people are not content. One guy makes money and he returns to make more to lose some. The one who gained from him follows the same pattern and I am sure not many people ran away from stock market after investing once including me. Then comes the question of who should invest in the market and what income strata they should belong!

Income Strata and Investment options

Here I am not talking about people who have the above said skills and start investing with 25000 rupees even with Rs. 5000 /month job. I am talking about the people who does not belong to any of the categories I mentioned as requisite skills and invests mostly based on analyst and broker recommendations or peer pressure or own misplaced confidence. If you are someone like that (Many of them are), you have to be very careful about stock investments.

If your family income is less than Rs.5 Lakhs per year and your only ambition is to save for marriage or education, there are many other avenues including gold which provides capital safety which is the need of the hour rather than investing in stocks and mutual funds which are like Indian monsoon, which is never on time and either over flooded or inadequate. Invest in stocks only if you are not fortunate to invest in any other avenues like buying a piece of land or gold etc...For this income group, the opportunity cost is huge to get involved in stock investment. Never invest in a stock that has 10 year average PE ratio more than 20.

(Over flooded comment is to say that rich get richer)

If your family income is more than Rs.5 lakhs per year but less than Rs.15 Lakhs, then you can probably try but please prepare yourself at least 1 season to identify good magazines, articles, blogs, various information sources and read it regularly. This way, at least you can check if the analyst's recommendation has any valid point or not incase if you can’t decide on your own and rely on him to make the decision. But if you can buy a piece of land or build a house, do so first before coming to stock investments. But still if you want to try your hand in stock investments, then allot a specific amount for each month and do not invest more than that for at least 2 years. I know stock markets require timely investments and occasionally you might be tempted to breach your monthly amount but I suspect the potential of retail investors to time the market. Hence, be an apprentice till you become confident about your skills. Most likely than not, you might pick up few skills in 2 years time and you can take it from there. Invest in stocks that have paid dividends without fail.

If your family income is more than Rs.15 lakh, then you probably do not need any explanation here. That does not mean you are a great investor, but I just think that you have the ability to bounce back financially even if you lose all in one year. But you have to be careful about mental aspect. If you are the one who broods over the loss all the time, then you please buy a good lock to protect your money.

Why you should not rely only on analyst?

In the market, I am not saying all the analysts are bad. But I am just saying that even the good one can't be always right. Some might have high stakes on their recommendation. Good recommendation or bad recommendation, still they make money. You might raise a question that if an analyst is bad, how he can stand in the industry? The answer is not many people remember that even for a month and also the open instinct that he might be right this time. For example, Anand Rathi securities was involved in insider trading and scams etc...and even it was barred for 2 years from the BSE. But they are back in the business and people do business with them. I am sure there will be people to do business with Katen Parekh and Ramalinga Raju if they start a Broking company. So, read the analyst recommendations but you verify his claims with your own research.

Being Content

Do not try to emulate Warren Buffet or Rakesh. Here is why. Many people think that Warren Buffet has generated 21.9 % return since 1965 through stocks. That’s not true. He made that possible through "investments" rather than only stocks. His company Berkshire Hathaway has more than 50 fully owned private subsidiaries and few of them are well known insurance companies including Geico. If you want to know what I am talking about, please go to this link.


So, many of his businesses make huge profits and that’s the reason even when Bank of America is trading at $6 (He has 0.7% of his portfolio), he is sitting on $30 billion cash and reports 21.9 % return since 1965. He is just not making it only through stocks. But no one can question his financial wisdom and skills. There is simply no one to match. Hence, you have to be content with your situation. Do not be greedy to take all the money in the market. There is enough for everyone over time. You have to focus on what you do rather then what others do. Sometimes you have to focus on actions rather than results and sometimes you have to concentrate on actions as well as results. Failure happens and if you are the one who lost money, here is the way to come out of it. Look back not just look ahead. If you look back, you might get to know that the stock market has corrected many a times before and it has comeback even more strongly. If you just look ahead, then you will not buy when you need to buy and sometimes you will invest more to get back what you have lost and in the process, you will be left with nothing. So, being content with your life and profits will reduce your worries and you will be happy one day that you have not indulged in extravagant things.

Lastly, I conclude by saying one important thing. You might lose money in stock market but that’s not the end. Never suspect you abilities on other avenues. You have to stand up and prove the world that you have it in you to be successful in life rather than taking any wrong decisions. If you are successful in stock investments, then expand your skills on other businesses as well, so that you can hedge yourself against any unwanted market situations. Please remember long term success involves short term failures as well. For example, Rakesh might be worth 5000 crores in 2020 but still he has lost half of his portfolio in this market crash.

Kumaran Seenivasan.


Being Content

We all try to move up in our life and career and in the process some of us fail to enjoy the present by not giving enough attention and time. People consider all options on earth to advance and infact many of us sacrifice a lot in moving to greener pastures like US,UK,Canada,Gulf etc... Couples live and work in different locations to make themselves affordable and in the end they can't even afford a normal life. Personally I have been talking with many regarding business ideas. I am trying to get a new job eventhough I have one. Ofcourse, people have many reasons to make money and amass wealth and one of them is to get recognized and respected. It works in the reverse as well. I was talking to one our friends Michael(IPS) and he says that he is not even getting time to eat lunch. Here, he has the required recognition and respect but still ends up with something to qualm about. Either content or discontent is not only about money but it has many facets to it. It can be a relationship with someone or with relative, it can be about our society, it can be about kids......It could be anything.

So,the question is, are we content enough? the answer probably is "NO". But why? Why the answer should not be "YES"? I tried to collect different perceptions and I give here the details of what I read from few articles.

The first one that I liked the most is the one written by Guy Browning in Guardian. I give here the excerpts of his article.

"Contentment is nature's Prozac. It keeps you going through the bad times and the good without making too much fuss of either. Happiness is a fine marmalade but contentment is a citrus grove. Children are naturally content because they don't know any different. It's the knowledge of difference that breeds discontent and it's when you finally realise that difference makes no difference that you can reclaim contentment.

It may sound dull, but being content is a profoundly radical position. It means you have no outstanding needs that other people, events or corporations can satisfy. Contentment is the real peace of mind insurance policies claim to sell. Its definition varies between people but generally includes someone to love, somewhere to live and something to eat. And, almost always, one item of sentimental value.

The path to contentment is well signposted but generally points in the opposite direction to where we want to travel. Instead we rush off getting everything we want and then realise we don't need any of it. A quicker way to contentment is to realise you don't need any of the things you think you want before spending 40 years trying to acquire them.

Being happy with your lot seems to be the essence of contentment. If you are one of life's good-looking millionaires, you just have to accept your fate and not continually struggle against it. Being unhappy with your lot is perfectly understandable when the one you've been given is absolute rubbish. Sadly there is no cosmic car boot sale where you can get rid of the lot you're not happy with. All you can do is look at other people's car boots and be happy with the junk you've got in your own".

His views that appear in bold are the ones that I liked the most. But "discontent" is the one that made many success stories and "content" is the one that saved many a lives. I saw an interview of famous tamil lyricist Vaali and he said that he was struggling to come up in his initial days as he was pitting against Kannadasan at that time and he decided to commit sucide.
But he changed his mind after hearing the song "Unakkum Keezhe Ullavar Kodi, Ninaithu Paarthu Nimmadi Naadu" written by Kannadasan. So, the perception of both "Content" and "Discontent" has its followers.

I read another internet article (The Secret Of Being Content) by one Larry Brody, and I got even more curious. You can read his entire article at the following link.


My understanding after reading the article is "Contented man is Discontent".

Once Winston Churchill said,

"Success is the ability to go from one failure to another with no loss of enthusiasm" and I am sure only few people can identify themselves with this quote.

The article by Donald Latumahina lists 8 points to be content with your life (Reasons for being Discontented).

I quote "Sometimes we may feel stressed or even depressed in life. Things can go wrong and not go as expected. While there may be other causes for such situations, I believe one important cause is unrealistic expectations.

Either they come from ourselves or from other people, unrealistic expectations cause us to ride mental roller-coaster. When we succeed, we will feel very happy or even ecstatic. But when we fail, we will feel very disappointed. Our mental condition goes up and down like a roller-coaster.

We need to avoid that, of course. Here are some tips on how to do it so that you can minimize stress and be content with our life:

1. Focus on actions rather than results

Focusing on results is a sure way to experience the ups and downs of emotional roller coaster. Even worse, there is not much you can do about it since you can’t control the results. So you should focus on something you can control instead, and one thing you can certainly control is your actions.

Instead of worrying about results, spend your time thinking about what to do and how to do it. The role of results is to give you feedback to refine your actions, but no more than that. Look at the results, get feedback to refine your actions, and then focus on the actions.

2. Have fun; don’t take things too seriously

We often take things too seriously to the point of being obsessed with them. Don’t do this. Instead, make everything you do fun. Having fun will certainly makes you less stressed while at the same time make the journey much more pleasant. One way to do so is by seeing things as games; something which are fun to do despite some winnings and loses. Another way to do it is by looking for hidden pleasures in whatever you do.

3. Don’t compare yourself with others

A study shows that we care more about how much money we have relative to everyone else than we do about how much money we have. It shows our tendency to compare ourselves with others.

But, similar to #1, you should look at others only to get feedback on how to do things better. Beyond that, comparing yourself with others will only do two things:

Make you down, if you are worse than them.
Boost your ego, if you are better than them. But this will only make the next failure more painful.
So learn something from others, set your goals, and refine your actions. Beyond that, don’t compare yourself with others.

4. Focus on being what you love rather than being loved

One reason why we feel stressed is we are worrying too much about what other people say about us. We are busy trying to meet other people’s expectations that we may end up living someone else’s life. Don’t focus on being loved; life is too short to be spent living someone else’s life. Instead, focus on being what you love. Cultivate your passions and do what really matters to you.

5. Cultivate abundance mentality

Scarcity mentality says that there is only limited amount of resources available so that other people’s gain is your loss. Having this mentality will make you stressed, especially when your peers become more successful than you. So, cultivate abundance mentality instead. Abundance mentality says that there is enough resources for everyone; someone else’s gain is not your loss. There is enough for everyone to prosper.

6. Make failure your friend

Failure is normal part of successful life. In fact, it is a friend of successful people. I love this quote by Thomas J. Watson:

Would you like me to give you a formula for success? It’s quite simple, really. Double your rate of failure.

The more failure you make, the more likely it is that you will be successful. Make failure your friend, and it will be much easier for you to go through each one. Seeing things as games (see #2) is one way to make yourself comfortable with failure.

7. Look back and not just look ahead

Seeing how far we are from our goals may make us stressed, especially if our mind is occupied with it. So you need to also look back and see how far you have walked. What achievements have you got? What are your success stories? Remembering these will make you feel grateful for your current position in life.

8. Cultivate your enthusiasm

Enthusiasm makes you excited about life. It makes you excited about where you are now no matter how difficult the situation might seem. It energizes you to always do your best.

In fact, the ability to maintain enthusiasm despite failures and difficulties is an essential trait of successful people".


GRE/TOEFL and Foreign Education - My Career Experience

I infact completed my Bachelor's degree (Agriculture, 1999) in Tamilnadu and my first Master's in Haryana (Agricultural Economics, 2002). I do not know why I chose to study Agriculture but I always had the inclination to study that, probably because of my childhood and government job opportunities that existed at that time. But when I completed my studies, those opportunities had become distant past and was left in the lurch. Not that I did not try anything while in Master's program (Studied because I was given a fellowship that covered everything and even I could save money).I tried to prepare for civil services exams but I had the disadvantage of chronic skin problems and my own self doubts about failure even though I always had the indefatigable spirit and confidence. But the risk you do not take is someone's opportunity and mine did not really germinate. Suddenly, I came to know about what then considered as an exam for elites by many, GRE/TOEFL, Foreign Education and an American dream to make quick bucks. I just overjoyed to hear about it as I wanted to rest my ever working poor parents. But then, when your mind is cluttered, you research on things that you should not do in the first place. Here I started enquiring about money needed to realize the American dream and the time I came to know that it required at least 6 lakhs money (Read some stupid booklets distributed in India by the "So called" coaching institutes), I lost my steam once again and did not really have any idea about the existence of assistantships (Complete financial aid to complete a degree in US) then. Yes....I have comeback to where I started again. I started applying to all open positions I saw on news papers which included marine trainee, project officer trainee, management trainee and whatever positions that ended with the word "trainee".

After all I am a guy who worked in Agrochemical field sales force to save some money so that I could go to Delhi for the preparation of my Master's entrance examination and here I am not trying to say that agrochemical marketing job is menial but am just emphasizing the positive correlation of many Indian student's financial situation with the decision they make. Faced with adversity, I wrote entrance examination to study Agri Business Management in one of the premier institutions in the country and I cleared the exam but failed to win the imagination of the interviewing people. Wondered and wandered for few months here and there before heading to Hyderabad based on one of my friends suggestion to work on a one month contract to earn 11,000 rupees.

In spite of all these, I cherished the educational path I took, without which I might not have stories to tell you. The course offered me to learn many subjects, visit many places in the state and country (Through State and All India Tour Programs) and try my hands on many things before settling down on one. My present life really started in Hyderabad. I started making new friends and as a huge break, I got a Research Associate position in a National Academy that prides itself in training Agricultural research scientists. With steady flowing income, paths had cleared to write GRE/TOEFL exams. This itself is significant and far cry from my school days where I was not so comfortable with the English language as I studied in Tamil Medium till college days.

These are the two exams, one need to write and secure good scores to get admission in US universities with financial aid (Assistantships).Graduate Record Exam (GRE) involves three sections namely quantitative, verbal and analytical. Quantitative sections contain advanced intermediate level maths to test your math skills while the verbal section tests your English vocabulary and word power. The analytical section contains essay writing. Test of English as a Foreign Language (TOEFL) assesses your skills in listening, reading and writing English.

I wrote these exams in 2003 and secured reasonable score in GRE and Good score in TOEFL. Applied to two universities for 2004 spring term (January) and got admission and financial aid in both the universities. But again I was subjected to further hardening as my father was diagnosed with liver cancer and I chose to stay in India only to see his end in 2004 January. I took it in my stride and applied again for 2004 fall term (August), this time to three universities and to my surprise I got admission and financial aid in all three universities including my alma mater "University of Arizona" which is considered as one of the top schools for the Agricultural Economics program in US. The success made me believe in two things;1)You work hard for something and you do not meet with success means, there is something better in store for you.2) You do not work hard and opt for riskless career option then the opportunity cost is huge.

US Education and its Impact:
I landed in Tucson International Airport in Arizona on July, 2004 for the fall semester and in few weeks I started realizing why USA is a pioneer in every sphere on earth. The quality of the education was just outstanding at least in the university where I was in if not in all the universities. They do not test your handwriting skills here and they do not of course come with materials that your grandfather studied. You are given complete freedom to select your courses and select thesis topics. Most of the time you are on your own though you can take advice from your professors. You come from India where you studied with the sole aim of securing marks and suddenly you are in a place where you see US President's economic advisors, Nobel laureates and outstanding researchers. It's not just American professors. You encounter lot of Indian professors with mind blowing teaching and research skills and suddenly you wonder what makes them to be the world beaters here in US but not in India. The answer is best explained by the system and infrastructure they have and more importantly, the commitment everyone shows and the reward that follows. You are allowed to think and innovate starting from your childhood and you are prepared to face the world right out of your school. My only qualm is that the students here lack general knowledge about the world they live in and they just think there is America and then Europe. This is probably something to do with their haughtiness and big brother attitude.

People who are keen learners get their outlook and personality transformed. In US, It just depends on you to pick up things and dream where you want to be and how you like to be without compromising your roots and fundamentals. Nobody asks you to drink unless you choose to and nobody asks you to eat in forks and spoons unless you choose to spill it in neighbor’s mouth. There are lot of things to be learnt from people here but unfortunately young people in India just captured the "Western Culture" with their opportunity presents-let's take it mindset.

Personally I have learnt many things, made many international friends and have seen the true spirit of cosmopolitan culture. I have completed my Master's in 2006 and attracted and attended many interviews and nobody here expects you to come with your mark sheet and say you stood first, second or somewhere. It's just horses for courses here and if you are able to perform the job, then they hire otherwise not. Fortunately I happen to get good jobs with handsome salary, an amount I never dreamt four years back. I have uttered too much to digest, but here is the points for our "So what" question.

1) We should never think about failures and suspect our abilities. Unless we try, we will never know what we are capable of. But at the same time, our success depends on how best we understand our limitations.
2) We should not try to measure the depth of the sea before learning how to swim. In my case I started thinking about money needed to arrive in US even before I started preparing for GRE/TOEFL let alone writing it (In 2002).
3) We need to avoid confining ourselves and be open to other options and ideas. For example, take entrepreneurship as a career and we have the chance to make people realize their dreams and we can identify ourselves.
4) Overall success depends on trying few things, making mistakes, learning from it and finally identifying the path where we do not have the chance to make those mistakes.

I have come this far and I continue to ask myself tough questions in the pursuit of something big and potentially life changing business plans and who knows what is in store for me.....

Yours truly,



This is a blog about stock market investments, investment strategies, and related topics. Any statement made in this blog is merely an expression of concerned authors opinion, and in no case should it be interpreted as an investment advice to buy stocks, sell stocks, or for that matter advice for any other issues be it money related or not. By using this blog you agree to (i) not take any investment decision, or any other important decisions based on any information, opinion, suggestion or experience mentioned or presented in this blog (ii) verify any information mentioned here, independently from your own reliable sources (for e.g. a registered investment advisor) and thereby check for possible inaccuracies. This blog is to create investment wisdom among general population and the authors are not responsible for
any decisions that you make based on the information provided here.
Creative Commons License
Stock Analysis Online by Kumaran Seenivasan is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 2.5 India License.
Based on a work at www.stockanalysisonline.com.

  © Blogger templates The Professional Template by Ourblogtemplates.com 2008

Back to TOP