Don't lose money
How to get high returns with low risk? Phil Town offers an answer in `Rule #1' (www.crosswordbookstores.com), a book that guides you to `returns of 15 per cent or more in the stock market, with almost no risk.'
There are only two rules of investing, Warren Buffett would say. "Rule #1: Don't lose money... and Rule #2: Don't forget Rule #1."
The first rule can work for the majority, assures Town. It is easy to learn, and you don't even have to be that smart, either, he says.
How not to lose money? Invest with certainty, says Town. "Certainty comes from this: buying a wonderful business at an attractive price." Wonderful implies three Ms, viz. the business should have meaning, moat, and good management.
The business must have meaning for you, and reflect your values; "you understand it enough to want to own the whole thing if you could." Moat refers to the criteria of financial strength and predictability.
Business that is wonderful isn't enough; the price has to be attractive, meaning `a very big margin of safety,' the fourth M.
Thus, the `four straightforward steps' of Rule #1 investing, according to Town, are: find a wonderful business, know what it is worth as a business, buy it at 50 per cent off, and repeat until very rich.
Rule #1 is just about being a good shopper, cheers the author. "There are opportunities to buy wonderful companies at attractive prices - they really do exist - if you're willing to do your homework and say good-bye to mutual funds."
Meaning is important, because you buy a business, not a stock, the author reasons.
To infuse discipline into investing, he lays down the 10-10 rule: "I won't own this business for ten minutes unless I'm willing to own it for ten years."
The rule doesn't, however, preclude you from buying and selling the business over and over; rather, it makes you think as a long-term investor.
Identify your list of `wonderful' companies using three circles: passion (`what do you love to do, professionally and as recreation'), talent (`what things are you really good at'), and money (`what do you do to make money or what do you spend money on').
See how the words that show up in the circles point to a product, an industry, or a certain business.
"Anything that's in two or all the three circles is something you probably understand much better than most of the rest of us. It's probably something that has meaning to you, which automatically makes it an industry worth researching."
Elsewhere in the book, you'd read about `the three tools' to help you "have the courage to grab the stick from Mr Market, which is a good thing because we don't want Mr Market to beat us... "
Too imperative to ignore.
http://www.blonnet.com/iw/2007/06/17/stories/2007061701331200.htm
Monday, July 16, 2007
Saturday, July 7, 2007
How to read an Annual Report
Shanthi Venkataraman
The thought of poring over annual reports to glean information about a company or its growth prospects may seem terribly dull to most new investors. At a time when there is an overflow of information across media channels and scores of analysts churn out stock calls on a daily basis, you may be excused for taking the short cut and just looking up financial snapshots on the Internet.
Nevertheless, the annual report remains the most authentic source of information about a company and contains important facts about its financial condition, growth strategy and current challenges that are not readily available upon an Internet search. A well-written report can give you a rare glimpse into the management’s outlook for the industry or its views on new trends in the market. So for those who do not know (or remember) what an annual report looks like, here is a quick guide to reading this document.
The manner of presentation differs from one annual report to the other; some are mini opuses that promise to be a one-stop guide to the industry and company, others barely make the cut when it comes to providing crucial information. Most reports, though, will have the following important components:
The director’s report, which will detail the company’s operational performance in the year gone by.
Management Discussion and Analysis, where the management provides an outlook on the industry, competitive scenario, new challenges and risk factors and outlines its future strategy.
Detailed financial statements of the company and its subsidiaries, as well as consolidated financials, along with the auditor’s report.
The basics, for starters
You may also find pictures of happy employees participating in corporate events. Heart warming, but we suggest that you skim through all that gloss and start with the director’s report. This will give you an overview of the company’s performance across various segments and an idea of the factors that drove performance.
If you are unfamiliar with the industry the company operates in, then the Management Discussion and Analysis (MDA) is the best place to begin. Clueless about the pig iron industry? Read the Tata Metaliks report for data on the globa l pig iron and foundry market and pig iron price trends. The report also includes an interview with Tata Metaliks’ management, which discusses some of the key events that took place during the previous year and its perception about the competitive scenario.
Companies put forth their views on a variety of topics that concern their industry, be it Government regulation, consumer or user industry trends or changes in the global picture in the MDA. They then articulate their own plans to capitalise on unfolding opportunities.
Between the director’s report and MDA, you will get a fairly good idea of the businesses the company operates in, its key focus areas, the challenges ahead and the measures it has in place to improve financial performance in the year ahead.
For number-crunchers
For those who believe that it is numbers that do all the talking, the financial statements in the annual report provide you with details that you are unlikely to find on the BSE or NSE Web sites. For instance, you can figure out the extent to which a company is able to fund its expansion plans on the strength of its current operations by looking at its cash flow statements.
The schedules to accounts provide break-ups of income, expenditure and other items. For instance, you may want to know what components constitute “other income”, particularly if it has been a significant contributor to profits that year. The item-wise split-up of the components classified under other income will help you decipher how much of the non-operational income is recurring in nature. You are also provided with segmental information — both geographic and business.
Similarly, schedules elaborate on balance sheet items such as long-term and short-term loans. For retailing companies, for instance, inventory management is crucial and you may have to compare the inventory positions over a three-year period to understand how efficiently the retailer manages its stores. Or for cash-rich companies, the quality of their investment book may well play a role in valuations.
The annual report also discloses the financial information of the company’s subsidiaries, besides providing financials on a consolidated basis.
As new, high-growth ventures are typically routed through subsidiaries, companies are beginning to command valuations based on their consolidated numbers.
Be sure to look at the notes to accounts to understand the accounting treatment of various revenue and expenditure items. Those who are unfamiliar with accounting practices can make-do with looking for changes in accounting policies . This might tip you off on the impact of one-time earnings or expenses.
Also look for the auditor’s qualifications to accounts for any assumptions that have been made while preparing or auditing accounts.
Nooks and corners
The annual report also contains little nuggets of information that could provide you with additional insight into the company.
Management background: For instance, you can find brief profiles about the directors on the board of the company. The presence of directors with strong industry standing lends credibility to the management of the company.
The shareholding pattern of the company will reveal the extent of promoter holding and the extent of institutional interest in the company.
Production and utilisation figures: For manufacturing concerns, the production figures assume significance. The production as a proportion of installed capacity (utilisation) could give you an idea of the efficiency at which the compan y is operating and the headroom for further volume growth. This information is particularly pertinent if the company is planning further expansion.
IPO proceeds utilisation: For newly listed companies, the progress on the expansion plans that had been outlined in the offer document and the utilisation of the IPO proceeds are also disclosed in the annual report.
Notices to resolutions: Some special resolutions passed at the annual board meeting also merit attention. For instance, resolutions passed to increase borrowing limits are cues to the company’s desire to leverage its balance shee t.
Explanations are also available on why the resolution has been mooted. For example, Colgate Palmolive India’s latest annual report explains the reasons for its declaration of a special dividend and a capital reduction.
This list is far from exhaustive. Going through all this might mean a lot of time and work. But it does make your information more authentic than the tip from your broker friend or the analyst on TV.
http://www.thehindubusinessline.com/iw/2007/07/08/stories/2007070850701300.htm
Shanthi Venkataraman
The thought of poring over annual reports to glean information about a company or its growth prospects may seem terribly dull to most new investors. At a time when there is an overflow of information across media channels and scores of analysts churn out stock calls on a daily basis, you may be excused for taking the short cut and just looking up financial snapshots on the Internet.
Nevertheless, the annual report remains the most authentic source of information about a company and contains important facts about its financial condition, growth strategy and current challenges that are not readily available upon an Internet search. A well-written report can give you a rare glimpse into the management’s outlook for the industry or its views on new trends in the market. So for those who do not know (or remember) what an annual report looks like, here is a quick guide to reading this document.
The manner of presentation differs from one annual report to the other; some are mini opuses that promise to be a one-stop guide to the industry and company, others barely make the cut when it comes to providing crucial information. Most reports, though, will have the following important components:
The director’s report, which will detail the company’s operational performance in the year gone by.
Management Discussion and Analysis, where the management provides an outlook on the industry, competitive scenario, new challenges and risk factors and outlines its future strategy.
Detailed financial statements of the company and its subsidiaries, as well as consolidated financials, along with the auditor’s report.
The basics, for starters
You may also find pictures of happy employees participating in corporate events. Heart warming, but we suggest that you skim through all that gloss and start with the director’s report. This will give you an overview of the company’s performance across various segments and an idea of the factors that drove performance.
If you are unfamiliar with the industry the company operates in, then the Management Discussion and Analysis (MDA) is the best place to begin. Clueless about the pig iron industry? Read the Tata Metaliks report for data on the globa l pig iron and foundry market and pig iron price trends. The report also includes an interview with Tata Metaliks’ management, which discusses some of the key events that took place during the previous year and its perception about the competitive scenario.
Companies put forth their views on a variety of topics that concern their industry, be it Government regulation, consumer or user industry trends or changes in the global picture in the MDA. They then articulate their own plans to capitalise on unfolding opportunities.
Between the director’s report and MDA, you will get a fairly good idea of the businesses the company operates in, its key focus areas, the challenges ahead and the measures it has in place to improve financial performance in the year ahead.
For number-crunchers
For those who believe that it is numbers that do all the talking, the financial statements in the annual report provide you with details that you are unlikely to find on the BSE or NSE Web sites. For instance, you can figure out the extent to which a company is able to fund its expansion plans on the strength of its current operations by looking at its cash flow statements.
The schedules to accounts provide break-ups of income, expenditure and other items. For instance, you may want to know what components constitute “other income”, particularly if it has been a significant contributor to profits that year. The item-wise split-up of the components classified under other income will help you decipher how much of the non-operational income is recurring in nature. You are also provided with segmental information — both geographic and business.
Similarly, schedules elaborate on balance sheet items such as long-term and short-term loans. For retailing companies, for instance, inventory management is crucial and you may have to compare the inventory positions over a three-year period to understand how efficiently the retailer manages its stores. Or for cash-rich companies, the quality of their investment book may well play a role in valuations.
The annual report also discloses the financial information of the company’s subsidiaries, besides providing financials on a consolidated basis.
As new, high-growth ventures are typically routed through subsidiaries, companies are beginning to command valuations based on their consolidated numbers.
Be sure to look at the notes to accounts to understand the accounting treatment of various revenue and expenditure items. Those who are unfamiliar with accounting practices can make-do with looking for changes in accounting policies . This might tip you off on the impact of one-time earnings or expenses.
Also look for the auditor’s qualifications to accounts for any assumptions that have been made while preparing or auditing accounts.
Nooks and corners
The annual report also contains little nuggets of information that could provide you with additional insight into the company.
Management background: For instance, you can find brief profiles about the directors on the board of the company. The presence of directors with strong industry standing lends credibility to the management of the company.
The shareholding pattern of the company will reveal the extent of promoter holding and the extent of institutional interest in the company.
Production and utilisation figures: For manufacturing concerns, the production figures assume significance. The production as a proportion of installed capacity (utilisation) could give you an idea of the efficiency at which the compan y is operating and the headroom for further volume growth. This information is particularly pertinent if the company is planning further expansion.
IPO proceeds utilisation: For newly listed companies, the progress on the expansion plans that had been outlined in the offer document and the utilisation of the IPO proceeds are also disclosed in the annual report.
Notices to resolutions: Some special resolutions passed at the annual board meeting also merit attention. For instance, resolutions passed to increase borrowing limits are cues to the company’s desire to leverage its balance shee t.
Explanations are also available on why the resolution has been mooted. For example, Colgate Palmolive India’s latest annual report explains the reasons for its declaration of a special dividend and a capital reduction.
This list is far from exhaustive. Going through all this might mean a lot of time and work. But it does make your information more authentic than the tip from your broker friend or the analyst on TV.
http://www.thehindubusinessline.com/iw/2007/07/08/stories/2007070850701300.htm
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