Reliance MF an­nounces FFO of CPSE ETF

Money Times - - Importance Of Fundamental Analysis - By Laxmikant Bhole

Reliance Nip­pon Life As­set Man­age­ment Ltd an­nounced the third fur­ther fund of­fer (FFO 3) of its Cen­tral Pub­lic Sec­tor En­ter­prises (CPSE) ex­change-traded fund (ETF) to raise Rs.8000 crore as a part of the gov­ern­ment’s over­all di­vest­ment pro­gramme. An up­front dis­count of 4.5% is of­fered to all in­vestors. The of­fer will open for an­chor in­vestors on 27 Novem­ber 2018 and for other in­vestors dur­ing 28-30 Novem­ber 2018. CPSE ETF’s new fund of­fer (NFO), FFO and FFO 2 raised Rs.3000 crore, Rs.6000 crore and Rs.2500 crore re­spec­tively.

“Risk comes from not know­ing what you are do­ing” – War­ren Buf­fet, In­vest­ment guru

In 1993, when a stu­dent at Columbia Univer­sity Busi­ness School in New York asked Buf­fet how he eval­u­ated in­vest­ments and risks, Buf­fett gave the ex­am­ple of the Wash­ing­ton Post Com­pany as a safe in­vest­ment in 1973. He pointed out that the com­pany’s mar­ket value at that time was un­der­es­ti­mated as it was sub­stan­tially lower than the value of the prop­er­ties it owned. Since it was run by hon­est and able peo­ple who had a sig­nif­i­cant part of their net worth in the busi­ness, it wouldn’t have both­ered him to put his en­tire net worth in it. But the ‘The Wash­ing­ton Post’ and other news­pa­pers and me­dia or­ga­ni­za­tions turned risky be­cause of the in­ter­net in­duced me­dia tur­moil. Ama­zon boss, Jeff Be­zos, pur­chased the pa­per in 2013.

A grow­ing trend in to­day's in­con­sis­tent fi­nan­cial times is self-re­search and plan­ning. Tak­ing con­trol and plan­ning your own fi­nan­cial fu­ture has be­come in­creas­ingly im­por­tant be­cause it has been proved that re­search and fun­da­men­tal anal­y­sis alone cre­ates wealth for in­vestors.

What is fun­da­men­tal anal­y­sis? Many in­vestors as­sume that fun­da­men­tal anal­y­sis is an­a­lyz­ing the fi­nan­cial po­si­tion of a com­pany and check its val­u­a­tions. While this is par­tially true, fun­da­men­tal anal­y­sis goes far be­yond this. It analy­ses a com­pany’s quan­ti­ta­tive and qual­i­ta­tive fac­tors that help iden­tify its cur­rent busi­ness stature and fu­ture busi­ness po­ten­tial. And un­der­stand­ing the busi­ness im­per­a­tives of a com­pany is as im­por­tant as its fi­nan­cials. But peer com­par­i­son is equally im­por­tant. Thus, there are a few points that in­vestors should think about be­fore in­vest­ing - What is its mar­ket po­si­tion to­day and what is it go­ing to be to­mor­row? Is the com­pany in a strong po­si­tion to beat its com­peti­tors in fu­ture? Who are its com­peti­tors? What are the fu­ture prospects of its prod­ucts? What are the macro and mi­cro pa­ram­e­ters that af­fect its busi­ness? What is its pro­moter and man­age­ment back­ground? How much debt does it carry and can it ser­vice the debt eas­ily? How are the cash flows? Is there growth in earn­ings? How sig­nif­i­cant is the pro­moter hold­ing? Is it ris­ing or de­clin­ing, etc.

Once you get the an­swers to these ques­tions, it is eas­ier to de­ter­mine whether the com­pany is un­der­val­ued, fairly val­ued or over­val­ued in the mar­ket. Stock re­search is im­por­tant be­cause the fi­nan­cial his­tory of com­pa­nies gives in­vestors a bet­ter sense of the fu­ture. Of course no one can as­sure the trend of a stock but eval­u­at­ing the past per­for­mance of a com­pany can help de­ter­mine the trend and the best way to ob­tain such in­for­ma­tion is from the An­nual Re­ports.

Why is fun­da­men­tal anal­y­sis es­sen­tial? This is be­cause stock prices are de­ter­mined by sen­ti­ments in the short run due to var­i­ous rea­sons such as news, fu­ture out­look, stock mar­ket con­di­tions, mi­cro and macro-eco­nomic and po­lit­i­cal fac­tors, etc.

As a re­sult, stock prices of­ten de­vi­ate from their true value due to such ex­ter­nal fac­tors. How­ever, fun­da­men­tals al­ways pre­vail in the long term and stock prices even­tu­ally re­flect the true fun­da­men­tal value. Thus, fun­da­men­tal anal­y­sis of a com­pany is re­ally im­por­tant in or­der to fetch good re­turns in the long term. What is the dif­fer­ence be­tween a great busi­ness and a great in­vest­ment? The an­swer is - price. If you pay a very high price even for the best stock in the world, you will not get a good re­turn on your in­vest­ment. Hence, a great in­vest­ment bet need not have a high price. The price that you pay for a stock mat­ters. It is the most im­por­tant fac­tor for good re­turns. Thus, an­a­lyz­ing the fun­da­men­tals of a com­pany thor­oughly is very im­por­tant be­fore in­vest­ing. When you put your hard-earned money into a stock, you need to re­search it thor­oughly and con­sider var­i­ous fac­tors like the com­pany’s in­vest­ments, debt sta­tus, cash flows, clien­tele and whether the stock trades at a rea­son­able mar­ket val­u­a­tion.

Many traders of­ten ig­nore fun­da­men­tal anal­y­sis and rely on tech­ni­cal anal­y­sis or just mar­ket in­tu­ition. They feel that fun­da­men­tal anal­y­sis is pri­mar­ily for the long-term and does not help in short-term trad­ing. But a trader wish­ing to trade next year, is a long-term in­vestor and there is lit­tle dis­par­ity in their hori­zon. The real prob­lem peo­ple have with fun­da­men­tal anal­y­sis is that it in­volves sub­jec­tive judg­ments and does not give clear ‘buy’ or ‘sell’ sig­nal gen­er­ally re­ceived through tech­ni­cal anal­y­sis. Tech­ni­cal anal­y­sis is heav­ily based on mar­ket sen­ti­ments in the near term, which is risky as they change quickly. There­fore, one needs to track the sen­ti­ment in the stock reg­u­larly, which re­quires high de­gree of time com­mit­ment and calls for higher risk. But in fun­da­men­tal anal­y­sis, there is vir­tu­ally no ‘sell’ sig­nal re­quired if the stock is fun­da­men­tally good. In­vest­ment guru War­ren Buf­fet be­lieves that the hold­ing pe­riod should be for­ever and that makes a long-term in­vestor who be­lieves in fun­da­men­tal anal­y­sis, free of short-term sen­ti­ment volatil­ity giv­ing peace of mind in in­vest­ments.

Sum­mary: In to­day’s times, in­vestors do not be­lieve in stock re­search but solely rely on the ‘tips’ that they re­ceive ei­ther from friends, fam­ily or other sources. This is cer­tainly in­ju­ri­ous to fi­nan­cial health. Stock anal­y­sis is cru­cial for spot­ting the right stocks that can cre­ate wealth than any other form of sav­ing or any other as­set class. One must un­der­stand that in the short-term, stock price move­ments are in­flu­enced by mar­ket sen­ti­ments but in the long run, the mar­ket price of a stock tends to move to­wards its in­trin­sic value, which is the true value of a com­pany cal­cu­lated by fun­da­men­tal anal­y­sis. Hence, an­a­lyz­ing the fun­da­men­tals of a com­pany is very im­por­tant for reap­ing good re­turns.


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