Logical Investor & Trader: What should you know before Investing !!

What should you know before Investing !!

I am compiling whatever i know into this post so that one does not need to go through various other articles in order to learn the “How to’s” about this topic.

Let’s dive in.

Investment :

When we talk about Investing then either we are looking at Investing in the economy of a particular country which we can do by Investing in Index ETF’s which track the broad movement of the major indices.

When doing so one has to look at the Macro-economic factors like Government spending, Taxes, Wages, Import & Export, Investment, Trade deficit/ surplus, Fiscal deficit/ surplus, Currency, Fiscal policy, Monetary policy, Inflation rate, Interest rate, Money supply, Money printing, Liquidity, GDP, Political system, Sovereign rating, Demography, Employment, Per capita income, Purchasing power parity, Personal disposable income, National savings, Oil prices, Foreign direct investment and Foreign institutional investment.

Warren Buffet's indicator for economy valutation :

Market capitalization/ GDP.

Or we are looking forward to Invest in a particular company.

For us to invest in a company, first we have to look at the Industries or Sectors that are likely to benefit from the development of the economy going forward.

We have to analyze the various Industries in terms of the percentage contribution of those Industries in the Economy and take a look at how vital those Industries are to the Economy.

While doing Industry analysis, below are the factors that need to be looked at :

Future prospects of the Industry.
Competitive dynamics of the Industry.
The stage at which the Industry is in terms of its life-cycle.

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Demand & Supply statistics of the Industry.
PEST analysis (Political, Economic, Social & Technological factors).
SWOT analysis (Strengths, Weaknesses, Opportunities & Threats).
Porter’s 5 force model.

After we pick the Industries that we are interested in, we look at the companies that are likely to benefit more than their peers.

We do this by performing "Company analysis" which is based on "Fundamental analysis".

Simply put, when we perform “Fundamental analysis“ our focus is on determining the “Intrinsic value” of a company.

My favorite investor “Warren Buffet” uses “Discounted cash-flow model” in order to do so.

Also known as “DCF” the idea here is to “BUY” the companies whose price is trading below the “Intrinsic value”.

We determine this value by first looking at our holding period.

Suppose we want to invest in a company for 10 years.

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We have to look at the fact that “How much Net cash-flow” will that company be able to generate over the period of next 10 years.

If today we are paying 100 rupees for a company then ideally it should be able to generate a “Net cash-flow” of 500 rupees over the period of next 10 years for our investment to be viable according to the expected return in equity segment.

That is why ‘Warren Buffet’ says “Our favorite holding period is forever”.

Now there are some other factors which need to be kept in mind when doing Fundamental analysis which reflect current state of the company.

Those factors include :

Competitive advantage of a company.
Market share of a company in terms of “Sales” and “Points of presence”.
Share capital, Reserves & Surplus, Assets and Liabilities.
Sales, Other income, Total expenditure, EBIT, Interest, Taxes, Net profit.
Dividend per share, Dividend yield, Earning per share, Earning yield, Book value per share, Operating profit margin, Net profit margin, Return on equity, Return on capital employed, Return on assets, Current ratio, Quick ratio, Working capital, Debt to equity, Interest coverage, Asset turnover, Inventory turnover. Price to earning, Price to sales, Price to book value, EV/ EBITDA, PEG ratio.

There are few "Fundamental screeners" available for Free which can ease the scanning task.

There are few basic “Rules of Investing” as well.

Which are :