All assets in the world are discounted by using the risk free interest rate. So it would be useful for investors to understand the dynamics of interest rates, growth rates, earnings yield, inflation and asset value.
Long story short: read the following link. I'll try to find a more lucid english wordy version for the mathematically challenged people later.
http://www.digitaleconomist.com/yld_4020.htmlIf you want to make money using investments this is the systematic way to do it. P.E/P.E.G/ROCE are shortcuts just like rsi, macd etc are shortcuts and
Price (OHLC)/volumes/OpenInterest/channels are the real deal.
Anyway I started to invest by studying fundamental values of stocks. I wanted to know what I was buying, why I was buying it, what it was worth? (translate npv of investment one year into the future) Why? Because I had taken a loan from my dad and promised to pay him the risk free interest rate after one year. This is how I started playing the market. I had a clear objective in mind when I started investing : BEAT Interest rates! Otherwise the difference would be coming out of my pocket!
I actually did a simple version of d.c.f by using estimates of profits from publicly available balance sheets and the buzz surrounding my stocks and their respective sectors. Last year I went mostly with tech , sugar, pharma and steel. In the May 2005 panick I picked up some banks as well.
I didn't do what typical investors do when buying shares. Thats because I was more of an arbitrageur than a true investor. My only goal was to have some money in my pocket at the end of one year (which by the way was accomplished fairly well since most of my investments last year did work out rather well). Can't say the same for this year. This year I've been moving around confused between Fundamentals and technicals :). My best pick last year was the technical+fundamental turnaround Dhampur sugar 45-170. Best picks this year were technical colgate 254-350, sterlite 1000-1300, abb 2070-2500. But then again this year ain't quite over yet :).
This year I like PHARMA and metals notice the caps in pharma :). Tech is ever green, its still in cycle degree wave III should be strong for atleast 5 more years. All dips to long term lower channels are to be bought in Tech. Just go talk to the management of these companies. They are growing all over the place.
http://www.physiciansnews.com/finance/1105.htmlhttp://www.bankrate.com/brm/news/fed/translation-jan06.asphttp://www.calculator.org/CalcHelp/finance.htmThis is to help you do the calculations. :)
By now people will be literally screaming for shortcuts. So I will give you one. Its called C.A.N.S.L.I.M.
Here's the original link where I picked this up from:
http://content.icicidirect.com/ULFiles/UploadFile_20039231273.asp?icicicode=type%20symbolPersonally I think the idea is good.
I didn't necessarily use the 'mantra canslim' but I was going through these same steps when I first entered the market. Somewhere along the way I got dissatisfied when I saw my great funda pick Rolta got stuck between 80-90 even as the market was going up 20-30%. I think thats when I started getting seriously into technicals.
Right now Rolta is well above 200 and in hindsight it did outperform the market as was expected from a fundamental standpoint. Without making any big excuses I got out way too early :). I need to work on a little bit more discipline.
So what is this Canslim? If you want my understanding of it read on; otherwise scroll up and click the icicidirect link!! I would reccomend doing both.
CANSLIM:
C=Current Earnings/Growth
A=Annual Earnings/Growth
N=New (New highs/New management/New deals/new products. but I just use the word news. Whats the buzz surrounding the stock good buzz? good vibes? or bad buzz)
(Usually looking at the weekly chart of a good stock will make you think , damn why didn't I buy this last week! Daily can have more noise and might look confusing, intraday is often a downright mess!)
S=Supply (supply of the the stock outstanding shares)
L=Leader (ranking among peers.)
I=Institutional (are the funds buying or selling??)
M= Market (TRADE IN THE DIRECTION OF THE MARKET quite important.
Can be as simple as using a weekly bar chart. Higher highs+Higher lows+Higher closes on the bars=uptrend. Lower lows+Lower highs+Lower closes on the weekly bar chart=downtrend and well flat is flat.)
If you're really lazy you can check my yahoo group link on the left and download an afl which will keep you on the right side of the trend for the most part.
The info required for applying CANSLIM can be obtained using the following resources
Asiancerc has earnings, news and institutional holdings; almost all the stuff you will need.
http://www.contentlinks.asiancerc.com/kotakstreet/Corporate.asphttp://www.contentlinks.asiancerc.com/kotaknew/fundamental/Corporate.aspYou can either use your own stock database/my afl scripts to run scans or
you can check for new 52 week highs/lows at:
http://markets.moneycontrol.com/stocks/marketstats/bsehigh/index.phphttp://markets.moneycontrol.com/stocks/marketstats/bselow/index.phpYou can find stocks which supply/demand imbalances as well (this isn't exactly what the S in canslim means I'm just extrapolating a bit):
http://markets.moneycontrol.com/stocks/marketstats/onlybuyers.phphttp://markets.moneycontrol.com/stocks/marketstats/onlysellers.phpIn addition check out the following links to help you figure out bulkdeals; in particular mf bulkdeals.
http://www.nseindia.com/content/equities/eq_bulkdeals.htmhttp://mutualfunds.moneycontrol.com/mf/blockdeals/index.phpsel_month=200602http://markets.moneycontrol.com/stocks/marketstats/blockdeals/nse/index.phpIt is possible to actually check what the funds have been doing historically on a per stock basis at Moneycontrol. Only caveat is that this info is 1 month old . This particular link is for infosys just search for something else as required.
http://markets.moneycontrol.com/mf/user_scheme/mfholddetail_sec.php?sc_did=IT(Remember for every buyer there is a seller. Who was the smarter party? :) . CANSLIM assumes that institutions are the smarter party. I don't know if they are necessarily smarter but they do employ more analysts and they do have the power to move the market so in most cases you don't want to be on their wrong side. Minor contrarian point here: if some big guy is ditching a stock then a stock may give a dramatic bounce after the selling pressure is lifted. )
So whats left? well you just need to figure out which way the market is going. For that check out all the resources mentioned on the left hand side of this blog. Including my technical analysis frameworks.
Research has shown a positive case for closing your eyes+blind funda/value investing. Just as my research has shown a positive case for certain mechanical signals in a bull market for short term traders :).
There are lots and lots of ideas out there in this world. The problem in most cases is that people seek to divide the world into two halves quite often. My problem is that I'm always looking for problems to solve :). Let me give you an anology. A man and a woman are 'opposites' when they come together you get a human child (if all goes well :D)
The same kind of synergy is present when opposite ideas meet. You just need to let them settle in your mind !
Hence final summary: Open your mind to the other side :). We're technicians , we buy breakouts and old lows, fib supports, channel supports and what not. But also consider buying into good fundamentals (or better still buy a good funda stock when it gives the breakout!!) .
Take some of the money you make from technical trading and invest it in funda stocks
You might be able to get in a few weeks/months/years earlier than the big big parabolic move breakout. When in 10 years the stock has appreciated 10000% you can thank me for having given you this idea!
Note: Pictures get screwed up by blogger so you can check out the original pic here:
