Rediscovering the Ben - lecture One

The principal of continuity: -        

1. It means if you judge a security market over a long period of years, is the fact it does not go off on tangents permanently, but it remains in continuous orbit.
2. There is general tendency of analyst that new levels of values had been established for stock price which were quite a different from those we had previously been accustomed to.but the thing is they doesn't seem to be true, past levels and patterns of behavior cannot be discarded.

Conclusion: -

After market goes up a great deal it not only comes down a great, but it comes down to the level to which we had previously accustomed.

Principal of selectively: -

1. the idea is that you exercise the selectivity in your purchase and in that way, you can still derive benefit from security price changes.
2. it means buy the company stock which has a good earning prospect , where you will benefit market wise, whereas if you buy the other you won't.However, the Concept of selectivity is misleading: -Example: -

1. solution to selectivity: -We should use the technique which gives Yield Indication, that Security is Undervalued or at least more attractive than others.

Metrics that can be used to evaluate security then general prospects: -

• Market Cap - Higher is the Better
• Free float - higher is the Better
• Assets Revaluation - Arbitrary profit (ignore)
• price to book value: - lower than 1 is good but use the judgement relative to market.
• Average Earning
• PE multiple - Higher is better.
• Return on Capital
• Return on sale (post tax)
• Operating margins
• EBITDA/ Sales.
• Price per share/ Working capital per share
• Current ratio
• Future capex for growth Other important thing is Nature of business auto mobile, textile or cyclical company or non-cyclical company and all.

Some of other point for quality analysis: -

• Customer Base
• Revenue model
• cash conversion cycle
• Latest news impact
• CSR

Favorite of mine: - Balance sheet method: -

Opening Balance of shareholder fund: - ****

Add: - Dividend payment/ stock return

Throughout the life of company: ***

closing shareholder fund = ***

Now compute net increment: - Closing - opening Balance sheet / No of shares.

Here is your price per share which you can pay, since most of time Balance sheet capture the Fair value of business therefore it will give you the right value but not the price since price and value both are different.

Happy learning

Aashutosh Yogi

Follow for more.