Tag: basic

“Technical Analysis, which refers to the study of the action of the market itself as opposed to Fundamental Analysis, which studies the goods in which the market deals. We, as technicians, focus our attention on price because that’s the only thing that’s going to pays us, nothing else.”

“Fundamental guys study the cause of market movements; we choose to focus on the effect. All known facts, estimates, surmises, and the hopes and fears of all interested parties are integrated in this effect (price). The Fundamentalist always has to know why, but why doesn’t pay us.”

Must read: Why Charts? | The Reformed Broker.

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While discussing the buy & hold fundamental investing strategy, I had indicated that the a constant, fixed investment into a broad-based ETF would perhaps be the best way for new investors to build a diversified portfolio. The NIFTYBEES is perhaps the oldest ETF listed in the NSE: it has been tracking the Nifty 50 index since 2002.

How does a do-it-yourself SIP work? Well, its pretty simple actually. You just set aside a fixed amount every month (say, Rs. 10,000) and buy the same stock or ETF every time. To give you an example, say you started buying the NIFTYBEES on the first day of every month, since the time it was listed in 2002, it would look something like this:

As you can see, the lower the price, the more units you will actually buy and hence the name Dollar Cost Averaging: you are averaging your buying price of the unit over a period of time.

Now say you did this irrespective of whether the market was down or up, how much would you have gained till date? My calculations show that an SIP on the NIFTYBEES would have netted an IRR of 18%. That’s not bad at all! For the those who want to have a look at the actual cashflow and returns, they can hop over to the spreadsheet on Google Docs.

Happy Investing!

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The purpose of any business is, at the end of the day, to make money. It could be through providing a service, selling a product, acting as an intermediary or investing in other companies. All of these activities should lead to free cash-flow being generated. At some point, companies have to decide what to do with the excess cash.

What should Infosys do with Rs. 2,42,14,00,00,000 ($5.38 Billion) in cash?

Acquisitions

Infosys could try and grow bigger by acquiring smaller companies. However, IT services is a cashflow business; a bigger company will end up stock-piling more cash. For example OFSS (Oracle Financial Services) has more than $1B in cash.

Alternatively, it could buy or fund IT product companies. However, that would mean that Infosys knows more about running or funding IT product companies than the stock holder. Also, what if stock holders don’t want to invest in product companies at all?

Stock buy-backs

Infosys could also buy back its stock. Companies that pay their employees in stock options typically need to buy back their stock to avoid dilution. Infosys’ cash hoard can buy back nearly 25% of its public float and investors benefit from the capital appreciation (higher stock price) that the move would entail. The capital appreciation would result in a tax event for the investor as well.

However, what would Infosys do with all the stock it now owns? It could use it as currency to acquire other companies (pay in equity rather than cash). Or it could start paying out stock options to its employees, etc.

Dividends

Infosys could choose a third, more simpler alternative: distribute the cash as dividends. Dividends are perhaps the most straight-forward, investor friendly way to return cash to the stock holder. It allow the investor maximum flexibility in deciding what to do with the cash. And since dividends are actual checks that need to get sent out, it means that the accounting profits are actually real profits. In September, Infosys paid out Rs. 40 per share, that is close to $339 million to its public shareholders.

I personally prefer dividends to other forms of returning cash to the stock holder. Its simple, it doesn’t expect the management to work miracles trying to diversify and its cash in the pocket.

Image by Ronald HN Tan via Flickr

One of the fundamental strategies we had discussed before was value investing. While looking for value plays, it is important to understand the stage at which the rest of the market is with regard to the specific stock. While you may recognize value in a stock (value opportunity) and decide to invest in it, it might take a while for the market to recognize value and bid up its stock price (value in action). Sometimes, you may just be too early and get trapped in a long position while the rest of the market continues to hammer the stock price down, a la, value trap.

For example, let us take a look at Infosys. Given its strong cash position, professional management and brand, a typical value investor could be easily drawn to the stock. However, investing at any point since the beginning of this year would’ve trapped the investor in a dog stock, with every single pop turning out to be an opportunity for the market to sell.

To take another example, this time of Cisco.

There is no doubt that there is a good value opportunity. It has a ton of overseas profits, it is paying out dividends and buying back its stock, it is a market leader in most of its product categories and has an M&A track-record like you hear about. However, the market has yet to recognize it and just like Infosys, buying the stock at any point since the beginning of the year would’ve been a trap.

As the John Maynard Keynes once said, the markets can be irrational longer than you can remain solvent. Value investors will do good to heed that advise.