Well if I write this after 102…it has to be 103 I presume? Yes, it is taking it forward from 102 so I am calling it 103

When comparing the performance of any two companies, remember that comparisons have to be between companies that are comparable. If you want to compare a metal container company with a glass container company are you comparing similar companies?

Are Cartier and Titan in the same business?

Or are Tanishq and Kalyan Jewellers in the same business?

For example, looking at a technology company like TCS, whose P/E is way above Tata Steel does not tell you much, does it?

Is Tata Motors comparable to Maruti or Ashok Leyland or Ford or Toyota?

Or is Icici bank (a holding company of Icici Prudential amc, Icici Lombard, and soon to be listed Icici direct) comparable to a pure banker Hdfc bank?

OMG did you say?

While a lower P/E is generally termed attractive for the Value investor (you are buying MORE profits for a Rupee of investment outlay are you not?) Tata Steel is in the basic materials space, RIL is a confused conglomerate, and TCS is a clear darling of the tech sector. The PE (or so the market says) are not really comparable. However, given the lower growth rate of the tech sector soon the PE of the tech sector might start catching up with the slow growing Fmcg or even the metal sector! Remember that the PE is a fascinating animal and we all keep learning and evolving. Also when you try to use PE in isolation, you ought to be crazy or very nearly crazy.

So how should you, the budding investment analyst, approach these theories?

Use ratios and comparisons only among comparable companies in comparable industries or sectors. No, you do not need to spend 20k to learn how to start investing, but it is time to invest in some good solid education aka self learning.

For example, while  fundamentals of a start up like Hdfc Life might make it look bloated the fact that ‘growth’ gets a premium over value in the markets will ensure that it will look like a pig for a long time before it is slaughtered for a party. It is a good company in a good sector (we are underinsured are we not?), and the decision makers in the BFSI space will keep handing it a great premium  FAR LONGER THAN you can short the share!

 

Fundamentals, of say Coromandel International and Hdfc bank are just not comparable as they are NOT IN comparable fields, so the re intrinsic value of each stock is no clearer for your comparative effort.

Funnily the better you get the more you realize that Biocon, Lupin, Sun Pharma, Cadila, Cipla, Dr. Reddy’s Lab are not REALLY COMPARABLE!!! See their income profile and business model and you will realize why. Some companies are in research, some in development, some in maintenance, some in world domination – comparing PE makes no sense. Hey I am going ahead of my brief, sorry.

You are starting off!

One of the ideas behind FA is that you are buying a share to get the financial benefits of owning a successful, growing, well run and prosperous company, to create wealth for yourself and your progeny over decades and generations. You are not a trader – or you would be looking at TA (technical analysis). Fundamental analysts try to find companies whose intrinsic value is greater than or will be greater than its market value.

There are various approaches to this broad approach of Value investing. Some of the gurus in this line of thinking are Graham, Buffett, Lynch, Phil and Ken Fisher (father and son), Vallabh Bhansali, Naren, and some who have a similar style but refused to be bracketed like Prashant Jain.

Can you learn FA and hope to become a Value Investor?

Sure you can without even a degree like CA or CFA (it helps though!)

You need to observe or set the standards against which you can measure the shares that you are analysing. There are no set rules, no need to do some course on investing (not sure if something good is available on coursera.org). Even after claiming to wear a hat of VI for almost 40 years, I make such fundamental mistakes, that in retrospect bite my tongue.

However, first go and get yourself a nice bound 200 page note book and download the Annual reports oomf Asian Paints,
Berger Paints, Coromandel International, Cholamandalam Investment, Hdfc ltd, Hdfc bank, Supreme Industries,  to start with. Start comparing these shares to the shares that you hold. Compare EVERYTHING.

Pick up some absolute shit shares (sorry I do not dare list them, but out of 5000 shares 4800 fall in this category).

Board of Directors (are the broad based, is it family dominated?)

Do the auditors look and feel independent (check out the quantum of audit fees)

Location of HO and factories, community (some business communities are terrible) some locations spew frauds (not naming it but you know it!)

Track these shares for three months.

Create a fundamental checklist.

decide on which ratios, cash flow quirks, PnL items, B/s items to track on a regular basis. Learn to read the notes on accounts. Have a file for each company. I have no clue where is Ashwin Mehta – yes Big Bull’s brother – he had an amazing dossier on PSU in 1990. Can you imagine that? He was the brain, Harshad the brawn.

Build your benchmarks. In about a year’s time you will have the experience of analyzing everything. I mean – independence of board, consistency of messages, sticking to the knitting, capital allocation, walking the talk, and YOU WOULD have created your own benchmarks.

Too painful? stick to a real cheap big basket ETF.

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