Value Research PDF

July 2018
Subscription copy of [ratulghoshr@gmail.com]. Redistribution prohibited.

July 2018
p. 34
How to
politics-proof
your portfolio
before the
next general
election
p. 37
10 Twitter
accounts to
increase your
financial
wisdom
Promising
foreign p. 61
Unique
newcomers
stocks
of 2017
and how to
analyse them
Value Research
July 2018
Volume XII, Number 1
37 COVER STORY
EDITORIAL POLICY
10 Twitter accounts
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61 COVER STORY 70 COVER STORY
variety of stakeholders. We firmly

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Total pages 94, including cover
6 Wealth Insight July 2018

18

Columns
9 10 MARKET COMPASS
EDIT
Index watch Big moves
by DHIRENDRA
KUMAR
What won’t CIO VIEWS
change
The pace of
30 34
change is After the How to politics-
overwhelming
for equity investors. carnage proof your portfolio
Here’s a way out.
58 INTERVIEW Neelesh Surana

86 CIO - Equity, Mirae Asset Global Investments (India)
by
OFFBEAT
SANJEEV
“Value should
PANDIYA
be hunted in
Ego of the
groups growth-
Just like an
individual’s ego tries
to preserve the
oriented
individual, the
collective ego has the
businesses”
group’s preservation
as its goal
82 STOCK ADVISOR
STRAIGHT
89 A
by
TALK
ANAND
journey
An uncertain
TANDON
well
scenario
Oil investors are in a
begun
dilemma whether oil
demand has peaked
out or not
92 WORDS WORTH NOW
DISCLAIMER
The contents of Wealth Insight published by Value Research India Private Limited (the ‘Magazine’) are not intended to serve as professional advice or guidance and the Magazine takes no responsibility or liability, express or implied, whatsoever for any investment
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to the jurisdiction of Delhi courts only. ALL RIGHTS RESERVED
July 2018 Wealth Insight 7

EDIT
What won’t change

The pace of change is overwhelming for equity investors.
Here’s a way out.
DHIRENDRA KUMAR
Whenever anyone looks back at a investments that are available at attractive valuations
longish period of equity investing, it’s almost a today and I myself have investments in all of them.
tradition to say that there were a lot of ups and downs. They’re from a wide variety of sectors and are of
But on this 12th anniversary of Wealth Insight, I’ll different sizes. The smallest are small caps and the
resist saying so. The reason is that such a statement is largest are some of the most-valuable companies in
pointless – it’s what statisticians call a ‘vacuous India. And yet, can I claim that our research team,
observation’. Something that is true, and yet pointless. having chosen these companies, can just ignore them
There are always ups and downs in the equity for five or ten years? No, not at all. At that kind of time
market. In fact, it would be news if there was an horizon, even companies whose businesses look most
extended period of time when there were no major ups stable and set can be hit by some tsunami of change.
and downs. Equity investors who choose and buy their Being an investor nowadays means constant attention
own stocks have a much greater first-hand feel of the and imaginative research.
gyrations of the market because at least some of their Many years ago Amazon’s founder and CEO Jeff
stocks would have moved wildly. Bezos wrote, “I very frequently get the question: ‘What’s
However, for the last few years, it has been clear to going to change in the next 10 years?’ And that is a very
any thinking investor that something bigger than this interesting question; it’s a very common one. I almost
normal volatility is afoot. The wind of change that is never get the question: ‘What’s not going to change in
driven by technology has now become a storm of the next 10 years?’ And I submit to you that that second
transformation. In just a few years, not just companies, question is actually the more important of the two –
but entire industries are looking completely different because you can build a business strategy around the
from what they used to be. Entirely new kinds of things that are stable in time. …It’s impossible to
businesses have been created. Google and Facebook imagine a future 10 years from now where a customer
are the biggest examples but there are many others. comes up and says, “Jeff, I love Amazon; I just wish the
Nothing like Uber or Ola ever existed earlier. I mean prices were a little higher.” “I love Amazon; I just wish
taxis are not a new phenomenon, but the scale at you’d deliver a little more slowly.” Impossible.
which such companies can organise and aggregate Bezos has put his finger right on not only the most
information transforms the simple act of calling a taxi important thing in running a business, but also in
into a completely new kind of activity. being an equity investor. When we look at a company,
When I look at any list of investment-worthy the most important thing is not necessarily what is
companies, I’m hard-pressed to imagine which of changing fastest. Instead, it is likely to be what is not
them is guaranteed not to be impacted by some changing and what will likely never change. Jeff
technological change. For example, there are currently Bezos, who has built a company that’s the ultimate
23 stocks on the recommended ‘buy’ list of our symbol of change and disruption, is focused not on
premium Value Research Stock Advisor service (www. what will change but on what is not.
valueresearchstocks.com). All these are great As investors, we should be, too.

MARKET
C MPASS INDEX WATCH
The 10-year trail

An index tracks the movement of a set of related stocks. Hence, investors
track indices to judge how the market or a particular sector has performed
over time. Here are the major indices in the Indian market, along with how
they have fared over the last 10 years.
Nifty 50 Worth of `1 lakh
2,36,071
12,000
10,818
9,500
`
7,000
136.1% 9.0%
4,582
4,500
2,000 10-year return 10-year return

Jun 2008 Jun 2018 (absolute) (annualised)
BSE Sensex Worth of `1 lakh
2,30,978
38,000
35,622
30,000
`
22,000
15,422
14,500
131.0%
10-year return
8.7%
10-year return
6,000
2,45,684
7,000
5,802
5,500
`
4,000
2,500 2,362
145.7%
10-year return
9.4%
10-year return
1,000
2,52,451
11,500
9,344
9,000
`
6,500
4,000 3,701
152.5%
10-year return
9.7%
10-year return
1,500

MARKET
C MPASS
Nifty Midcap 100 Worth of `1 lakh
3,02,762
22,500
18,813
17,500
`
12,500
7,500 6,214
202.8%
10-year return
11.7%
10-year return
2,500
Nifty Smallcap 100 Worth of `1 lakh
2,00,234
11,000
7,629
8,500
`
6,000
100.2% 7.2%
3,810
3,500

Nifty Next 50 Worth of `1 lakh
3,84,222
34,500
29,216
26,500
`
18,500
10,500 7,604
284.2%
10-year return
14.4%
10-year return
2,500
Nifty Auto Worth of `1 lakh
6,42,513
13,000
10,000
11,173 `
7,000
4,000
1,739 542.5%
10-year return
20.5%
10-year return
1,000
Nifty Bank Worth of `1 lakh
4,26,049
31,000
26,417
24,000
`
17,000
10,000 6,201
326.0%
10-year return
15.6%
10-year return
3,000

MARKET
C MPASS
Nifty Energy Worth of `1 lakh
1,63,709
16,000
13,500
`
11,000 13,939
8,515
8,500
63.7%
7-year return
7.3%
7-year return
6,000
Nifty FMCG Worth of `1 lakh
4,96,124
32,000
25,000
28,775
`
18,000
11,000
5,800 396.1%
10-year return
17.4%
10-year return
4,000
Nifty Infra Worth of `1 lakh
1,06,493
4,300
3,208
3,600
3,013 `
2,900
2,200
6.5%
7-year return
0.9%
7-year return
1,500
Nifty IT Worth of `1 lakh
3,26,652
17,000
14,122
13,000
`
9,000
5,000 4,323
226.7%
10-year return
13.0%
10-year return
1,000
Nifty Media Worth of `1 lakh
1,80,902
4,100
3,200
`
2,300 3,179
1,757
1,400
81.0%
10-year return
6.0%
10-year return
500

MARKET
C MPASS
Nifty Metal Worth of `1 lakh
91,988
5,000
3,850 3,542
4,000
`
3,000
2,000
-8.0%
10-year return
-0.8%
10-year return
1,000
Nifty Pharma Worth of `1 lakh
2,66,185
17,000
13,000
9,316 `
9,000
5,000 3,500
166.2%
10-year return
10.3%
10-year return
1,000
Nifty PSE Worth of `1 lakh
1,29,002
5,000
3,695
4,200
`
3,400 2,864
2,600
29.0%
10-year return
3.0%
10-year return
1,800
Nifty PSU Bank Worth of `1 lakh
1,52,091
5,800
4,600
`
3,400
52.1% 4.3%
1,994
2,200
3,033
Nifty Realty Worth of `1 lakh
1,01,858
400
325 283
`
250
288
175
1.9%
7-year return
0.3%
7-year return
100

MARKET
C MPASS TOP 10 LARGE-CAP WEALTH CREATORS
Our large-cap universe has 73 large companies, making the top 70 per cent of the
total market capitalisation. The list mentions the stocks that have fluctuated most
wildly in the last 10 years.
Maruti Suzuki India Automobiles - Passenger Cars HDFC Bank Bank - Private
11.85 8.41
Worth of 8953 Worth of 2031
`1 lakh `1 lakh
Lakh Lakh
Absolute
return 1085% Absolute
return741%
return 28% return 23.7%
Annualised Annualised
242
756
Tata Consultancy Services IT - Software Kotak Mahindra Bank Bank - Private

Worth of
`1 lakh
7.99 Lakh 1842
Worth of
`1 lakh
7.90 Lakh
1341
Absolute
return690%
return 23.1% return 23%
Annualised 230 Annualised 170
Hindustan Unilever Household & Personal Products HCL Technologies IT - Software
6.86 6.48
947
Worth of Worth of
`1 lakh `1 lakh
Lakh 1621
Lakh
Absolute
return548% 146
return 21.2% return 20.6%

Annualised 236 Annualised
Mahindra & Mahindra Automobiles - Passenger Cars Nestle India Consumer Food
6.38 5.68
9737
Worth of 909 Worth of
`1 lakh `1 lakh
Lakh Lakh
Absolute
return468%
143
return 20.4% return 19%
1713
Hindustan Zinc Metal - Non Ferrous Hero MotoCorp Automobile Two & Three Wheelers
5.17 4.78
`1 lakh `1 lakh
Lakh Lakh
Absolute
return 417.2% Absolute
return378%
59

773
Data between June 15, 2008, and June 15, 2018. Data adjusted for splits, bonus and rights. The graphs depict 10Y price charts.

MARKET
C MPASS TOP 10 LARGE-CAP WEALTH DESTROYERS
Our large-cap universe has 73 large companies, making the top 70 per cent of the
total market capitalisation. The list mentions the stocks that have fluctuated most
GMR Infrastructure Engineering - Construction Hindustan Copper Metal - Non Ferrous

Worth of
`1 lakh
28,646 55.5
Worth of
`1 lakh
25,269 283.0
Absolute
return -71.4% Absolute
return-74.7%
return -11.8% return -12.9%
Annualised Annualised 71.5
15.9
Reliance Power Power Generation/Distribution Jaiprakash Associates Cement & Construction Materials
Worth of
`1 lakh
18,115 191.0
Worth of
`1 lakh
11,554 125.1
Absolute
return-88.4%
34.6
14.5
MMTC Trading Housing Development & Infra Construction - Real Estate

Worth of
`1 lakh
4,971 755.4
Worth of
`1 lakh
4,857 471.5
Absolute
return-95.1%
37.6
22.9
Aban Offshore Oil Exploration 3784.8 Suzlon Energy Electric Equipment
3,386 3,258
Worth of Worth of 244.7
`1 lakh `1 lakh
Absolute
return-96.7%
128.2
return -28.7% return -29%
8.0
Reliance Communications Telecommunication - Service Provider Unitech Construction - Real Estate
2,914 2,284
207.1
Worth of 530.2 Worth of
`1 lakh `1 lakh
Absolute
return-97.7%
Annualised 15.5 Annualised
4.7

MARKET
C MPASS TOP 10 MID-CAP WEALTH CREATORS
Our mid-cap universe has 218 mid-sized companies, making the next 20 per cent of
the total market capitalisation. The list mentions the stocks that have fluctuated most
IndusInd Bank Bank - Private 1966 Shree Cement Cement & Construction Materials
Worth of
`1 lakh
26.21 Lakh
Worth of
`1 lakh
23.2 Lakh
2521% 2220%
Absolute Absolute 16170
return return

75 697
Britannia Industries Consumer Food Motherson Sumi Systems Auto Ancillary
20.51 19.34
Worth of Worth of 308
6128
`1 lakh `1 lakh
Lakh Lakh
Absolute
return1835%
Annualised Annualised 16
299
Godrej Consumer Products Household & Personal Products Titan Company Diamond & Jewellery
16.97 16.43
904
`1 lakh `1 lakh
Lakh Lakh
Absolute
return1543%
69 55
Pidilite Industries Chemicals Havells India Electric Equipment
14.76 12.90
1085 555
Worth of Worth of
`1 lakh `1 lakh
Lakh Lakh
Absolute
return1190%
43
74
P&G Hygiene & Health Care Household & Personal Products Bajaj Auto Automobile Two & Three Wheelers
12.32 11.35
`1 lakh `1 lakh
Lakh Lakh
Absolute
return1035%

MARKET
C MPASS TOP 10 MID-CAP WEALTH DESTROYERS
Our mid-cap universe has 218 mid-sized companies, making the next 20 per cent of
the total market capitalisation. The list mentions the stocks that have fluctuated most
Consolidated Construction Engineering - Construction Videocon Industries Consumer Durables - Electronics

Worth of
`1 lakh
2,870 118.8 Worth of
`1 lakh
2,645 299.1
Absolute
return-97.4%
3.4 7.9
Monnet Ispat & Energy Steel & Iron Products Lanco Infratech Engineering - Construction
Worth of
`1 lakh
2,455 549.9
Worth of
`1 lakh
2,173 39.1
Absolute
return-97.8%
13.5 0.9
Provogue (India) Textile Gitanjali Gems Diamond & Jewellery
1,870 1,839
227.8
Worth of Worth of
`1 lakh `1 lakh
285.0
Absolute
return-98.2%
4.3 5.2
Moser Baer India Consumer Durables - Electronics ABG Shipyard Ship Building
Worth of
`1 lakh
1,632 159.4
Worth of
`1 lakh
1,550 407.2
Absolute
return-98.5%
2.6
IVRCL Engineering - Construction Educomp Solutions IT - Education

Worth of
`1 lakh
715 191.6 Worth of
`1 lakh
533 735.1
Absolute
return-99.5%
Annualised 1.4 Annualised 3.9

MARKET
C MPASS TOP 10 SMALL-CAP WEALTH CREATORS
Our small-cap universe (minimum market capitalisation `100 crore) has 922 small-
cap companies, making the last 10 per cent of the total market capitalisation. The list
mentions the stocks that have fluctuated most wildly in the last 10 years.
Bajaj Finance Finance - NBFC 2283 Eicher Motors Automobile Two & Three Wheelers
1.46 1.07
Worth of Worth of 29506
`1 lakh `1 lakh
Crore Crore
Absolute
return10643%
16
275
Ajanta Pharma Pharmaceuticals & Drugs Astral Poly Technik Plastic Products
Worth of
`1 lakh
87.29 Lakh
Worth of
`1 lakh
63.41 Lakh
1016
Absolute
return6241%
1105
Page Industries Textile Natco Pharma Pharmaceuticals & Drugs
58.14 56.89
`1 lakh `1 lakh
Lakh Lakh
Absolute
return5589% 830

457 15
Atul Chemicals V-Guard Industries Electric Equipment
49.11 48.75
213
`1 lakh `1 lakh
Lakh Lakh
Absolute
return4775%
55 4
TTK Prestige Consumer Durables - Domestic Appliances Gruh Finance Finance - Housing
46.24 43.38
323
Worth of Worth of
`1 lakh `1 lakh
Lakh Lakh
Absolute
return 4524% 5849
Absolute
return4238%

MARKET
C MPASS TOP 10 SMALL-CAP WEALTH DESTROYERS
Our small-cap universe (minimum market capitalisation `100 crore) has 922 small-
cap companies, making the last 10 per cent of the total market capitalisation. The list
mentions the stocks that have fluctuated most wildly in the last 10 years.
Bilpower Steel & Iron Products Hanung Toys & Textiles Textile
Worth of
`1 lakh
986 96.4
Worth of
`1 lakh
904 230.1
Absolute
return-99.1%
1.0
2.1
Bharati Defence & Infrastructure Ship Building PSL Steel & Iron Products 358.5
889 887
Worth of Worth of
`1 lakh 428.5 `1 lakh
Absolute
return-99.1%
3.8
3.2
Zylog Systems IT - Software Quintegra Solutions IT - Software

Worth of
`1 lakh
875 141.7
Worth of
`1 lakh
731 78.0
Absolute
return-99.3%
1.2
0.6
Ramsarup Industries Engineering - Construction XL Energy Electronics - Components
625 533
Worth of 145.7 Worth of 253.1
`1 lakh `1 lakh
Absolute
return-99.5%
1.4
0.9
ICSA (India) IT - Software 393.4 SEL Manufacturing Company Textile

Worth of
`1 lakh
483 Worth of
`1 lakh
339 578.9
Absolute
return-99.7%
1.9

CIO VIEWS
After the carnage

Here is how the CIOs and heads of equity of various fund houses have dealt
with the recent sell-off in mid and small caps
Price performance doesn’t warrant portfolio changes
Changes to our portfolio positions are guided by our investment framework,
which emphasises the investment thesis underlying each company. It is thus the
underlying investment premise of a company more than the price performance
that dictates portfolio changes. Having said that, the recent correction in the
mid- and small-cap space does bring in more companies to our investment-
evaluation zone as compared to, say, six months ago.
Taher Badshah,ÖCIO - Equity, Invesco Mutual Fund
Focus on companies with strong The recent correction is

earnings visibility only natural
We follow a proprietary
We were prepared to witness philosophy that uses a
heightened volatility in the profitability vs. valuation
market this year. We have been framework. In a sharp fall, like
the one we have seen, while
focusing on companies that having made some marginal
should have minimal negative changes, our strategy remains
surprises on the earnings intact. We prefer companies
that show high potential for
trajectory. While the premium sustaining ROE
valuations of mid-/small-cap through the cycle
segment over the large-cap basket has and are
reasonably
narrowed, the downside in mid/small caps valued. Our true-
could continue to be higher even from here. to-label approach
Harsha Upadhyaya,ÖHead - Equity, Kotak Mahindra Mutual Fund also ensures that
the exposure to
small and mid
Defensives will outperform in 2018 caps is limited to
We believe 2018 is a year of ‘U-turn’ when macros will funds that allow such
uch
deteriorate while micros (growth, earnings)
gs) exposure. In other words, we
will improve. Unlike 2017, when value and believe markets are cyclical
cyclicals outperformed, we believe in 2018 and we treat this correction as
and up to general elections, quality and a normal outcome of the same.
defensive growth companies will Markets remain volatile and
outperform. We have increased our their volatility itself makes
exposure to IT and consumer-staples them amenable for seeking
sectors while we have reduced exposure opportunities when such
to cyclicals and mid and small caps in our bouts occur.
flagship large-cap and multi-cap funds. Tushar Pradhan,ÖCIO, HSBC Global
Anand Shah,ÖHead - Investments and Deputy CEO, BNP Paribas Mutual Fund Asset Management India

Choose fundamentally strong stocks Go for balanced-advantage funds
Spiralling crude-oil prices, For the last one year, we have been of the view
rupee depreciation, rising that the mid- and small-cap space is expensively
interest rates have resulted priced, while large caps are
in market volatility. relatively better placed.
Recent changes in mutual Regarding the changing
fund categorisation market dynamics, we
norms may also have led believe the markets are
to some shake-up in mid- likely to remain volatile
and small-cap stocks. Our over the next one year
philosophy has always been n owing to various local and
to choose companies with global reasons. The optimal
strong fundamentals. Focusing on quality way to navigate such times
companies with earnings visibility and sound would be to invest in the balanced-
anced
corporate governance has been our mantra. advantage category of scheme.
Saravana Kumar,ÖCIO, LIC Mutual Fund Sankaran Naren,ÖED & CIO, ICICI Pru Mutual Fund
Increase the exposure to large caps

There is a fair amount of price correction in mid- and small-cap stocks in the past
two quarters following their sharp up-move in the markets in the past couple of
years. We have rebalanced our hybrid-fund portfolios to increase the exposure to
large-cap stocks. For our multi-cap portfolios or our funds in the large- and mid-cap
category, we are holding onto our positions where we have confidence in the
earnings estimates and the relative valuations are reasonable.
Rajat Jain, CIO, Principal Mutual Fund
Stick to your investment philosophy The glass is half full

We look at companies from a two- We might reduce our bets in
three year view, with primary focus businesses where higher
on quality companies with high prevailing uncertainty widens the
growth prospects. Within range of possible
fast-growing o
outcomes; but we also
industries, we target rremain ready to buy
companies that are b
businesses that we
leaders or can be lliked in the past but
probable leaders d
did not purchase due
and have strong tto valuations. While
management teams. tthe sentiment has
ased
Stocks are selected based c
clearly worsened in thee
on their ability to grow earnings on a last few weeks, we should not
sustainable basis while maintaining overlook improving earnings
a highly liquid and risk-managed trajectory, which will make
portfolio. We have continued this valuations attractive in any sharp
philosophy since our inception. correction.
Jinesh Gopani,ÖHead - Equity, Axis Mutual Fund Harshad Patwardhan, CIO - Equity, Edelweiss Mutual Fund

CIO VIEWS
Focus on value-generating businesses lncrease stake in high-

Through a rigorous bottom-up research approach, we try to
anchor medium-to-long-term value of a firm to its earnings and
conviction bets
We continue to focus on buying
return on capital and try not to get swayed by
and holding to our high-
market sentiments. In other words, we
conviction companies where
strongly believe that markets tend to
we find the business is durable,
behave like voting machines in the short
run by capable management
term and weighing machines in the long
and has long-term track
term. This anchoring helps us to avoid
record of generatingng
‘fluff ’ and ‘momentum’ and keep
sustainable ROCEss
focusing on businesses that generate
and positive cash
value, i.e., companies that generate
flows. While
consistent excess return over their cost of
market has
capital. Yes, some of our mid- and small-cap
ap
turned volatile,
holdings have also corrected, albeit much more moderately than
we actually
the wider section of the stocks and we try to use such
consider it to be
opportunities to add on to our higher-conviction ideas.
healthy in nature as
Anand Radhakrishnan,ÖCIO - Equity, Franklin Templeton Investments India a lot of low quality
y
mid/small caps had also shot
up quite a bit in the last one
Don’t go overboard on small caps year. This correction is
providing us an opportunity to
Our focus on small caps has increase the concentration in
been to identify companies our high-conviction bets.
with visible triggers for Vinit Sambre,ÖHead Equities,
strong earnings growth in DSP BlackRock Mutual Fund
FY19 and FY20. These could

be driven by commencement
of new projects, stabilising Improve portfolio
and expansion of sales in new quality
businesses, and strong economic tailwinds. Valuations are getting
Hence, our small caps are expected to deliver incrementally attractive; in
many stocks the valuation
strong growth in FY19. On a portfolio level, premiums have
we will maintain small caps at the current dissipated. We
levels and not look to increase the proportion continue to
remain positive
of small caps within our portfolios. on mid- and
Anoop Bhaskar, Head - Equity, IDFC Mutual Fund small-cap stocks.
However, the
defensiveness of
Reduce exposure to mid/small caps the portfolio is
Given the steep outperformance of small/mid mid achieved by
caps till 2017-end, to a certain extent, we had
d improving the quality
lity of
reduced exposure to this segment based on the portfolio – quality in terms
the fund mandate. Today, we have a more of better management, cleaner
neutralish view on the segment and are and healthy balance sheets and
positive on select stocks. strong competitive advantages.
Manish Gunwani, CIO - Equity, S.Krishnakumar,ÖCIO - Equity,
Reliance Mutual &UND Sundaram Mutual Fund

CIO VIEWS
How to politics-proof
With Lok Sabha elections scheduled for the next year, here is some advice
from mutual fund CIOs and equity heads to deal with the ensuing volatility
Focus on earnings
We feel that in the long run, We believe that over the
markets reward earnings medium to long term,
growth and earnings growth stocks broadly track
alone. History tells us that even earnings. We have seen in
the best political outcomes have the past that the impact
led to mediocre market gains of political events, which
due to a lack of economic were initially taken either
growth, and loosely cobbled positively or negatively by
coalitions have been beneficial the market, is not very
to markets on the back of long lasting. Secondly, it
economic booms. We do feel that is difficult for one to say
while markets react to news in as to how the markets will
the short term, in the long run, interpret an event and
earnings matter. We continue to how they will move. We
focus on companies that have the potential to are, hence, focused on stocks where we believe
provide sustainable profitability and are earnings growth is likely, which trade at
available at comparatively cheaper valuations, in reasonable relative valuations and where
line with our global framework. management is showing good execution.
Tushar Pradhan,ÖCIO, HSBC Global Asset Management India Rajat Jain, CIO, Principal Mutual Fund
We believe politics tends to have a short-term impact on markets while in

the long-term, it is earnings which will have a lasting impact on stock prices
in particular and markets in general. As a fund house, we have always
believed in identifying companies with superior and sustainable earnings
growth. Thus, to reduce risk in the portfolio against global and domestic
volatility, we are continuously looking to add secular growth stories with
superior ‘moat’, i.e., sustainable competitive advantage and high ROE. We
have further enhanced our holding in private retail banks, IT services
companies and consumer companies – both staples and discretionary.
Anand Shah, Head - Investments and Deputy CEO, BNP Paribas Mutual Fund
Invest in stocks that deliver growth irrespective of political outcome

In the run-up to the 2019 elections, we expect the market to remain
volatile. Without betting on any event, we would continue to focus on
fundamentally sound businesses. During this period, increased volatility
could lead to investment opportunities due to mispricing. We would be
keen to cash in on any such eventuality. Furthermore, we would stay
away or remain underweight on sectors such as sugar, PSU banks etc.,
which are either politically sensitive or heavily dependent on reforms.
Harsha Upadhyaya,ÖHead - Equity, Kotak Mahindra Mutual Fund

your portfolio
We generally tend to follow a
rather stable approach to
stock picking and portfolio
construction and do not try
to tweak it based on
externalities like elections,
trade wars, etc. Simply put,
the best way to politics-
proof one’s portfolio is to
pick companies whose
managements tend to do
well irrespective of the
nature of political party
governing the country.
Anand Radhakrishnan,Ö
CIO - Equity, Franklin Templeton Investments India
We have witnessed uncertainty in
market every time during election
period. It is exaggerated on either side. Elections, pre and post that
However, it has always been for short month of reckoning tends to
term and gets normalised over a see volatility rising
period of time. As a fund house, we particularly in the current
don’t take short-term tactical calls as a scheme of things. Paring down
part of our core portfolios. We choose exposures to sectors that are
to invest in stocks that have the ability policy/regulation dependent
to deliver growth irrespective of for sustenance of growth is a
political outcomes and can sail tactic one can use.
through such interim volatilities. S.Krishnakumar, CIO - Equity,
Jinesh Gopani, Head - Equity, Axis Mutual Fund Sundaram Mutual Fund
Don’t worry about the correction

We do acknowledge the higher To us, it is just
level of anxiety leading to higher another event
volatility and we will factor that which could have
in the sizing of our bets. Our some short-term
research focus remains on bearing on the
identifying businesses that will market. However,
likely deliver strong earnings over the long
growth in the future. Any sharp term, it is the
correction along the way might health and growth
be an opportunity to buy of corporate India
businesses at attractive which would drive price
valuations as earnings growth appreciation and we would like to
trajectory seems to be improving. focus more on this aspect.
Harshad Patwardhan, CIO - Equity, Vinit Sambre,
Edelweiss Mutual Fund Head Equities, DSP BlackRock Mutual Fund

CIO VIEWS
Themes to invest in
1. Domestic consumption and
infrastructure
At a portfolio level, all
elections are preceded by a
looser fiscal policy followed by
the government efforts to boost
consumption and capital
investment. Hence, we have
maintained a favourable stance
on domestic consumption and
infrastructure across most of
our portfolios.
Anoop Bhaskar, Head - Equity, IDFC
2. Upstream oil, power,

telecom, software,
While we are cognisant of politics pharma and rural
as a risk factor, our stock selection It is better to invest
is based on our proprietary progressively than
investment framework that places looking at one
considerable emphasis on a specific event. We
company’s own competitive believe that the best
advantages. This acts as an way would be to be
effective filter in eliminating in a position to brace
companies whose business model any volatile situation
is substantially predicated on the by looking to allocate
nature of the prevailing in pockets which we
government or its policies. believe will do well
Taher Badshah, CIO - Equity, in the near term. We
Invesco Mutual Fund are positive on
upstream oil, power,
telecom, software,
While politics is
pharma and rural
an important
consumption theme.
element of the
stock market, we Sankaran Naren,Ö
believe that ED & CIO, ICICI
there are Prudential Mutual Fund
multiple factors
at play, including
3. FMCG, auto and financial services
global and
Our focus has been on choosing
domestic
fundamentally strong companies.
growth, interest
Companies with quality corporate
rates,
governance and strong growth
commodity
visibility will perform well
prices, etc. Hence, over the medium
irrespective of the election results.
and long term, we do not believe
FMCG, auto, financial services linked
orienting the portfolio just for one
to the rural sector will do well and
event is advisable.
will provide alpha in the next 12
Manish Gunwani, CIO - EquityÖ months.
Reliance Mutual Fund
Saravana Kumar,ÖCIO, LIC Mutual Fund

COVER STORY
10
Twitter
accounts that will make you
money
wise

COVER STORY
The virtual classroom
Sanjay Bakshi
@Sanjay__Bakshi
Tweets Following
4,738 776
Likes Followers
4,608 89.6K
...Businesses which are doing things that will create significant incremental earnings 11 quarters
Why should you from now will be overlooked by many investors because they can’t afford to look that far out.
Follow
For example, businesses that are investing for the future but which also suffer from low initial
Prof. Bakshi? margins in those new initiatives (because capacity gets utilized only over time) will often be
overlooked because earnings growth is back-ended.
Professor Sanjay
Bakshi is one of the
And so if they execute well, they will see little earnings growth for next - say - 11 quarters
most well-known
and may even see a decline (thanks to incremental depreciation and poor margins
finance professors because of low utilization) will see a step function in earnings growth in quarter 12.
in the country
today. He has been
And stock markets in general don’t increase the market value of these businesses as they
teaching a popular would with a zero coupon bond (price going up a little bit every day) but re-rate them when
course behavioural the earnings growth is clearly visible (or just before that).
finance and
business valuation
Even though I don’t short sell, I am learning so much about corporate BS from this excellent
at the Management book. Dead Companies Walking: How A Hedge Fund Manager Finds Opportunity in
Development Institute Unexpected Places. Recommended.
(MDI) since 2001,
where he has been It’s really a collection of cases on human folly by business managers and investors. Many of
voted by the students them can & should be generalised for future use
as the best professor
for 10 years now.
Great vicarious learning for just $12 - if one can hang on to the important lessons in those
Professor Bakshi calls case studies.
his Twitter account
his virtual classroom,
...This is a great illustration of what Charlie Munger calls “pain-avoiding psychological denial.”
where he often posts
investing lessons. For
He spoke about “a friend of our family had a super-athlete, super-student son who flew off
any student of value
a carrier in the north Atlantic and never came back, and his mother, who was a very sane
investing, following woman, just never believed that he was dead… That’s psychological denial.”
Sanjay Bakshi is a
must to make yourself
“The reality is too painful to bear, so you just distort it until it’s bearable”
smarter.
...We should compare what the management of a business says about the prospects of a

COVER STORY
business over time and compare that with what really happened.
If we do this methodically, we should be able to identify managements which display

extreme over-optimism bordering on psychological denial.
One paradox of capitalism is that it needs over-optimistic people - risk takers who under-
estimate risk, and over-estimate prospects.
If the world was full of Mr. Spock like rational beings, then no one will start a new business
because statistically speaking almost all startup ventures are destined to fail.
One thing that I have learnt over the years is something that I got from Danny Kahneman
and it’s true. Mild over-optimism is good. Over-optimistic people are good to hang out with
because they are cheerful, because they look at the bright side of life.
Indeed, their enthusiasm itself creates opportunities. It opens doors while a pessimist will
just just turn away as he approaches a door that’s closed.
So, it’s good to track mildly over-optimistic people - in science, in business and in many
other fields. But it’s not good to be over-optimistic while practicing value investing. In value
investing, to be successful, you have to be a lot more like Mr. Spock.
That means that you have to have to skill to distinguish between those managements which
are just mildly optimistic, or are indulging in pain-removing, psychological denial.
Bought @michaelbatnick’s book on mistakes (Big Mistakes: The Best Investors and Their
Worst Investments). Look forward to reading and learning from it. Some other books in this
“series”
1. All I Want To Know Is Where I’m Going To Die So I’ll Never Go There
2. Brilliant Blunders: From Darwin to Einstein - Colossal Mistakes by Great Scientists That
Changed Our Understanding of Life and the Universe
3. Why I Failed: Lessons from Leaders
4. Einstein’s Mistakes: The Human Failings of Genius
5. The Ten Commandments for Business Failure
The smart one’s think differently. Take, for example, Charlie Munger:
“I think it’s in the nature of things for some businesses to die. Its also in the nature of things
that in some cases, you shouldn’t fight it...”
Or Warren Buffett: “My conclusion from my own experiences and from much observation
of other businesses is that a good managerial record (measured by economic returns) is
far more a function of what business boat you get into than it is of how effectively you row.
Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is
likely to be more productive than energy devoted to patching leaks.
Munger again: Part of what you must learn is to handle mistakes and new facts that change
the odds. Life, in part, is like a poker game, wherein you have to learn to quit sometime
when holding a much-loved hand.

COVER STORY
Rethink and recreate
Naval Ravikant
@naval
Tweets Following
17.2K 589
Likes Followers
74.6K 451K
Seek wealth, not money or status. Wealth is having assets that earn while you sleep.
Money is how we transfer time and wealth. Status is your place in the social hierarchy.
Understand that ethical wealth creation is possible. If you secretly despise wealth, it will elude you.
Why should you
Follow Ignore people playing status games. They gain status by attacking people playing wealth
creation games.
Naval?
You’re not going to get rich renting out your time. You must own equity - a piece of a
Naval Ravikant is a lot business - to gain your financial freedom.
of things – an angel
investor, a stock market You will get rich by giving society what it wants but does not yet know how to get. At scale.
investor, a CEO and
a philosopher. Naval Pick an industry where you can play long term games with long term people.
challenges you to
rethink a lot of things The Internet has massively broadened the possible space of careers. Most people
that matter. The thread haven’t figured this out yet.
reproduced here made
Play iterated games. All the returns in life, whether in wealth, relationships, or
waves on the internet.
knowledge, come from compound interest.
After ruminating on
the thread, if you are Pick business partners with high intelligence, energy, and, above all, integrity.
thirsting for more,
head on to the Farnam Don’t partner with cynics and pessimists. Their beliefs are self-fulfilling.
Street blog, where
Naval’s fabulous Learn to sell. Learn to build. If you can do both, you will be unstoppable.
podcast is hosted. It is
one long podcast with Arm yourself with specific knowledge, accountability, and leverage.
a transcript that runs
into 45 pages. Here’s Specific knowledge is knowledge that you cannot be trained for. If society can train you,
the link: https://www. it can train someone else, and replace you.
fs.blog/naval-ravikant/
Specific knowledge is found by pursuing your genuine curiosity and passion rather than
whatever is hot right now.
Building specific knowledge will feel like play to you but will look like work to others.
When specific knowledge is taught, it’s through apprenticeships, not schools.

COVER STORY
Specific knowledge is often highly technical or creative. It cannot be outsourced or automated.
Embrace accountability, and take business risks under your own name. Society will
reward you with responsibility, equity, and leverage.
The most accountable people have singular, public, and risky brands: Oprah, Trump, Kanye, Elon.
“Give me a lever long enough, and a place to stand, and I will move the earth.” - Archimedes
Fortunes require leverage. Business leverage comes from capital, people, and products
with no marginal cost of replication (code and media).
Capital means money. To raise money, apply your specific knowledge, with
accountability, and show resulting good judgement.
Labor means people working for you. It’s the oldest and most fought-over form of
leverage. Labor leverage will impress your parents, but don’t waste your life chasing it.
Capital and labor are permissioned leverage. Everyone is chasing capital, but someone
has to give it to you. Everyone is trying to lead, but someone has to follow you.
Code and media are permissionless leverage. They’re the leverage behind the newly
rich. You can create software and media that works for you while you sleep.
An army of robots is freely available - it’s just packed in data centers for heat and space
efficiency. Use it.
If you can’t code, write books and blogs, record videos and podcasts.
Leverage is a force multiplier for your judgement.
Judgement requires experience, but can be built faster by learning foundational skills.
There is no skill called “business.” Avoid business magazines and business classes.
Study microeconomics, game theory, psychology, persuasion, ethics, mathematics, and

computers.
Reading is faster than listening. Doing is faster than watching.
You should be too busy to “do coffee,” while still keeping an uncluttered calendar.
Set and enforce an aspirational personal hourly rate. If fixing a problem will save less than your
hourly rate, ignore it. If outsourcing a task will cost less than your hourly rate, outsource it.
Work as hard as you can. Even though who you work with and what you work on are
more important than how hard you work.
Become the best in the world at what you do. Keep redefining what you do until this is true.
There are no get rich quick schemes. That’s just someone else getting rich off you.
Apply specific knowledge, with leverage, and eventually you will get what you deserve.
When you’re finally wealthy, you’ll realize that it wasn’t what you were seeking in the first
place. But that’s for another day.

COVER STORY
It’s all about rules

Jim
O’Shaughnessy
@jposhaughnessy
Tweets Following
11.2K 2,458
Likes Followers
1/I have been a professional investor for over 30 years. What follows is some things I think I
4036 26K know and some things I know I don’t know. Let’s start with some things I know I don’t know.
2/I don’t know how the market will perform this year. I don’t know how the market will perform
next year. I don’t know if stocks will be higher or lower in five years. Indeed, even though the
probabilities favor a positive outcome, I don’t know if stocks will be higher in 10 yrs.
3/I DO know that, according to Forbes, “since 1945…there have been 77 market drops
between 5% and 10%...and 27 corrections between 10% and 20%.” I know that market
corrections are a feature, not a bug, required to get good long-term performance.
4/I do know that during these corrections, there will be a host of “experts” on business TV, blogs,
magazines, podcasts and radio warning investors that THIS is the big one. That stocks are
heading dramatically lower, and that they should get out now, while they still can.
5/I know that given the way we are constructed, many investors will react emotionally and heed
these warnings and sell their holdings, saying they will “wait until the smoke clears” before they
return to the market.
6/I know that over time, most of these investors will not return to the market until well after the
bottom, usually when stocks have already dramatically increased in value.
7/I think I know that, at least for U.S. investors, no matter how much stocks drop, they will
always come back and make new highs. That’s been the story in America since the late 1700s.
8/I think I know that this cycle will repeat itself, with variations, for the rest of my life, and probably
for my children’s and grandchildren’s lives as well.
9/Massive amounts of data have documented that while the world is very chaotic, the way
humans respond to things is fairly predictable.
10/I don’t know if some incredible jump in evolution or intervention based upon new discoveries
will change human nature but would gladly make a long-term bet that such a thing will not
happen. (www.longbets.org)
11/I don’t know what exciting new industries and companies will capture investors’ attention
over the next 20 years, but I think I know that investors will get very excited by them and price
them to perfection.

COVER STORY
12/I do know that perfection is a very high hurdle that most of these innovative companies will be
Why should you unable to achieve.
Follow 13/I think I know that they will suffer the same fate as the most exciting and innovative
companies of the past and that most will crash and burn.
Jim?
James Patrick 14/I infer this because “about 3,000 automobile companies have existed in the United States”
O’Shaughnessy [See https://bit.ly/2K09xH6] and that of the remaining 3, one was bailed out, one was bought
out and only one is still chugging along on its own.
is the chief
investment officer of
15/I know that, as a professional investor, if my goal is to do better than the market, my
O’Shaughnessy Asset
investment portfolio must look very different than the market. I know that, in the short-term, the
Management, LLC. He
odds are against me but I think I know that in the long-term, they are in my favor.
is an accomplished
writer with such titles
16/I do know that by staking my claim on portfolios that are very different than the market, I have,
as How to Retire Rich: and will continue to have, far higher career risk than other professionals, especially those with a
Time-Tested Strategies low tracking error target.
to Beat the Market
and Retire in Style 17/I know that I cannot tell you which individual stocks I’m buying today will be responsible for
and What Works on my portfolio’s overall performance. I also know that trying to guess which ones will be the best
Wall Street: A Guide performers almost always results in guessing the wrong way.
to the Best-Performing
Investment Strategies 18/I know that as a systematic, rules-based quantitative investor, I can negate my entire track
of All Time. record by just once emotionally overriding my investment models, as many sadly did during the
Jim, as he is known, financial crisis.
is a prolific Twitterati,
regularly discussing 19/I think I know that no matter how many times you “prove” that we are saddled with a host of
behavioral biases that make successful long-term investing an odds-against bet, many people
investment strategies,
will say they understand but continue to exhibit the biases.
what works, what
doesn’t; and he also
20/I think I know the reason for the persistence of these “cognitive mirages” is that up to 45%
shares nuggets of of our investment choices are determined by genetics and cannot be educated against. [See
investing wisdom he https://bit.ly/2n8Mda8]
comes across.
Follow Jim to 21/I think I know that if I didn’t adhere to an entirely quantitative investment methodology, I would
take advantage of be as likely—maybe MORE likely—to give into all these behavioral biases.
his experience of 30
years in the markets. 22/I know I don’t know exactly how much of my success is due to luck and how much is due to
In this recent thread skill. I do know that luck definitely played, and will continue to play, a fairly substantial role.
of tweets, Jim shares
what he has learnt 23/I don’t know how the majority of investors who are indexing their portfolios will react to a
over his long career in bear market. I think I know that they will react badly and sell out of their indexed portfolio near a
investing. market bottom.
24/I think I know that the majority of active stock market investors—both professional and
aficionado—will secretly believe that while these human foibles that make investing hard apply to
others, they don’t apply to them.
25/I know they apply to me and to everyone who works for me.
26/Finally, while I think I know that everything I’ve just said is correct, the fact is I can’t know that
with certainty and that if history has taught us anything, it’s that the majority of things we currently
believe are wrong.

COVER STORY
Get Street smart
Rohit Chauhan
@rohitchauhan
Tweets Following
2,076 2
Likes Followers
631 23K
Each bull market has its share of new gurus. This time around we have had large gurus, mid
Why should you gurus, small gurus, nano gurus and everyone in between. The bull market in guru worship never
sees a correction.
Follow
25x is a good threshold for financial independence, where x is annual expenses. Focus on
Rohit? fulfillment and not money beyond that. If you still chase money, then it’s not the money you are
Rohit is another after
famous value blogger.
He is the founder I can use the same post every other year. The message remains the same even though the year
of RC Capital and changes
writes a popular blog
on investing, ‘Value To summarize
Investor India’, where
you can find more X Think long term and focus on the portfolio with a 2-3 year time horizon. This means you
than 500 posts from should not be investing any money which is needed in less than 3-5 years.
more than 12 years
of writing – covering X Ensure that the position size for each stock and the overall diversification lets you sleep
everything from soundly at night
investment ideas,
thoughts, learning, X Focus on intrinsic value and performance of each company
investment processes,
book reviews,
X Do not try to time the market (now or any other time)
company and industry
analyses, etc.
X Avoid listening to forecasters, pundits and other doom and gloom guys. It will weaken your
resolve.
X If you manage to hold your nerves and plan to invest, stagger it over time. I am planning to do
the same.
Look at the results and not the stock price of your portfolio companies to check if you are doing
well. If the company is performing, stock price will follow, always, even if one cannot pinpoint the
precise time.

COVER STORY
There is a time to sow and a time to reap. A farmer does not feel smart only during
the harvest season. They work round the year although the ‘gains’ are made during a
short window.
2018: there are years when you make money, no matter what you do 2019 YTD: there are years
when you don’t make money, no matter what you do The key is to realize the role of luck and
stick to your process. The returns will take care of themselves.
If you cannot compete on speed against the traders and machines, make the opposite - lack
of speed, aka patience a strength. Patience is an under appreciated and a valuable edge for
individual investors. Take the long term view and do better with lower stress.
When you start as an investor, you feel dumb and ignorant. After a few years, you feel confident,
sure and smart. After spending another decade of learning, you feel uncertain and ignorant again
when you realize how much you don’t know.
It’s not a problem to solve, it’s how the world works. You cannot know everything, just enough to
make above average decisions over time
A sudden crash and quick recovery is just a disguised opportunity to make money. The real
painful market is the slow grinding bear market where you die every day with a thousand cuts
and your hope of a recovery slowly drains away. 2000-2003 is an instructive period for that.
The key to achieving financial independence is managing the X and investing from early in life.
Most people in financial media focus too much on returns as that is sexy, rather than on starting
early in life which is easier and under our control.
Listen to people who point out negatives on a stock you own. If they are right, you have dodged
a bullet. If they are wrong, the numbers will speak for themselves. You will win both ways. The
tough part is to have an open mind and re-test your thesis. It’s a trained response.
Losses from lack of patience have been 10X losses from poor stock selection. Still a struggle
after all these years https://bit.ly/2lsc3Y7
I mentally switch off the moment someone claims a 100% success rate in investing. Person is a
liar or delusional or both.
Successful investing is collecting a lot of dots (data) and connecting them in unique ways before
it’s obvious (insight)
The most surprising part of a drop in the stock market is that people are surprised by it.
A value investor manages to look foolish most of the time in the short term. Buying during bear
markets and selling during bull phases.
Investing based on price targets is a stupid mental model. Makes equities the equivalent of
bonds with a fixed upside but with higher risk.
Started investing in ‘95, thought will get easier by ‘05. In ‘05, thought it will get easy by ‘15.
2015, finally realized it never gets easy
Boasting about a single stock pick is like gloating over a sixer. Tendulkar is idolized for his long
term average and not a single shot

COVER STORY
Winning and losing
Shane Parrish
@farnamstreet
Tweets Following
21.4K 114
Likes Followers 1/ I want to explore something concerning relationships and time.
18.8K 97.7K 2/ There are four permutations of relationships between parties (be they people, organizations,
etc.) Lose-Lose, Lose-Win, Win-lose, and Win-Win.
3/ Let’s explore these a bit further.

Why should you
4/ Both parties lose. This is almost never entered into by people unless emotions are dominating.
Follow Think of the couple going through a divorce, with each party trying to hurt the other without
gaining anything. Or think of two people arguing in a meeting when it becomes personal
Shane?
Shane runs a popular 5/ One party suffers so the other person can have more. Sounds weird, but we often do
blog Farnam Street this for close friends or family. It’s also common in business with people who always feel
that specialises in like a victim or helpless.
Charlie Munger’s
6/ One party wins while the other loses. Consider this taking advantage of another
mental models in
person. This is fragile. And removes any benefits of time. It’s also stupid because most
fields as varied as of the gains in a relationship come over time.
science to humanities.
It also covers learning, 7/ We both win. This is intelligent. I want to do business with you. I trust you. I look out for you.
decision making and
how to lead a better 8/ It’s clear we want to avoid the losing side. However, entering into new relationships
life. Shane also runs isn’t likely an everyday thing. There is something that happens everyday for most of us
a series of podcasts that I didn’t see before now.
titled ‘The Knowledge
Project Podcast with 9/ A look at how most people spend their most valuable assets (time/energy/money/happiness)
reveals that a lot of it goes toward people who have little to gain from engaging us.
Shane Parrish’ with
such luminaries like
10/ Ex. The office colleague that tries to embarrass us in a meeting. This consumes us
Michael Mauboussin, for days and weeks after.
Sanjay Bakshi, Dan
Ariely and Ray Dalio. 11/ Ex. People that come in and out of our lives whenever we’re happy and leave after
Shane’s blog and they’ve watered the seed of unhappiness.
podcast is a must-not-
miss for every value 12/ Ex. People that want our advice over and over, never follow it, and offer no value in return.
investor.
13/ The point is it’s easy to see when we’re on the losing side of a formal agreement;
it’s much harder to see it when it’s not so black and white. Yet it’s these daily things that
rob us of our energy and time.

COVER STORY
The art of reading
Patrick
O’Shaughnessy
@patrick_oshag
Tweets Following
8,390 432
Likes Followers
I’m often asked how I read so much and how I choose books. So, I’ll try my first tweet
12.1K 45.4K storm...
1/ I love @naval’s idea to ask yourself: what that you do looks like hard work from the
outside, but doesn’t feel like work to you?
2/ For me, one answer is reading. In most down time, I read. Probably 3 hours a day, in 2-3
chunks. Sometimes much more.
3/ (I’m sure there is something similar that each of you do that would blow the rest of us
away. Start amplifying that thing in your life)
4/ Reading is meditative and calming. It is a way of being in the moment & connecting.
5/ Reading changes the past. This is important. The past isn’t fixed. A new book often
makes you realize something essential about an old book.
6/ This is why knowledge compounds. Old stuff that was a 4/10 in value can become a
10/10, unlocked by another book in the future.
7/ Metaphors We Live By unlocked Julian Jaynes. The Act of Creation (Koestler) unlocked
Zero to One. Krishnamurti unlocked everything…
8/ But it took five other books to prepare me for Krishnamurti.
9/ This is why picking “best” books is hard and maybe misguided. Usually it’s some
combination of books that has a non-linear impact.
10/ Accordingly, while many books I suggest seem unrelated to one another, they are all
related.
11/ When you start out reading, you are collecting distant dots in a constellation with no
apparent connection

COVER STORY
12/ As you keep going, say past 100 books, you start to realize all the good ones, even
those on wildly different topics, are connected.
Why should you
13/ Just as Campbell discovered a common cycle in the world’s myths through history, I’ve
Follow
found several common threads in the great books.
Patrick?
14/ Growth. Evolution. Human behavior. Emotion. Circles. Ego (destruction). Authenticity.
Patrick O’Shaughnessy
Iconoclasm.
is the CEO of the $6.2
billion O’Shaughnessy
15/ These major threads are then just aspects of the single topic: what it means, and what it
Asset Management.
is like to be human.
He is also the son of
Jim O’Shaughnessy,
16/ In most books, even good ones, I find about 20% of the text useful. Because the past
who is the chairman
isn’t fixed, I still view this as time well spent.
and chief investment
officer. But Patrick’s
17/ In a small subset of books, the author doesn’t give you ore, he/she gives you gold.
elevation is not
Impro. The True Believer. The Tiger. Bird by Bird.
a father-to-son
giveaway. Patrick
has made a name 18/ I used to spend a lot of time searching for books. In the library, on Goodreads, Amazon,
and lists. Now I exploit a network effect.
for himself. He is
a reader, author of
Millennial Money: 19/ I’m known for recommending books, so now everyone recommends books back to me!
Most of what I read comes from the 8k people in book club
How Young Investors
Can Build a Fortune,
runs a popular 20/ As the club (investorfieldguide.com/bookclub/) has grown, I spend less and less time
finding books.
investing podcast,
‘The Investor’s Field
Guide’ and has an 21/ Campbell: “If what you are following is your own true adventure, if it is something
active book club. All appropriate to your deep spiritual need or readiness
this at the age of 32!
22/ “…then magical guides will appear to help you.” That has been true for me with reading.
Patrick is another
prolific writer but his
23/ Ten years in, I now have an incomplete but dense set of interconnected dots. It is my
recent thread on how
most valuable asset.
he reads tons of books
shines the spotlight
24/ Beyond being an asset--“a stock” or sorts--it is also a “flow.” I hear runners talk about
on this genius. For
flow state. I feel the same reading some books.
all investors that
know and want to
read to increase your 25/ Reading gets more and more enjoyable the more you do it.
knowledge base, you
will find Patrick’s 26/ 82 books may sound like work, but I don’t even feel it. That kind of joy is an EDGE.
tips invaluable. Also Yours may not be reading, but you have one somewhere
head over to the
‘The Investor’s Field 27/ so get going!
Guide’ for loads of
interesting podcasts 28/ Extra stuff from here on, taking notes, stopping and skipping, gifting books, etc.
and great book
recommendations 29/ NOTES: I highlight and write notes in kindle, and then export each book’s notes/
on life, investing highlights into Evernote.
and everything in
between. 30/ I prefer physical books, but because I have to type up 100+ notes, I can’t justify reading
that way unless kindle isn’t available

COVER STORY
31/ I probably highlight 50-100 things in each book, and take a more detailed note on 10-
20. Most notes are about building out constellation
32/ Notes are essential. Without them, I’d forget almost everything. Sometimes I’ll just root
around in my Evernote book section for hours.
33/ I may start buying hard copies of the best books, so I can see them more often.
34/ STOPPING & SKIPPING: I stop a good chunk of books between 5-100 pages in. Never
keep going if a book sucks. Most books are bad.
35/ I skip a lot in non-fiction. If a paragraph’s opening sentence seems repetitive, I move to
the next. The “body” is usually way too long.
36/ Campbell had a great rule of thumb: the fewer citations, the better the book. This isn’t
always true, but it’s true an awful lot.
37/ I am increasingly tired of books which follow the “academic study + cute anecdote”
formula
38/ Books that use “proprietary data” are best. That data could be experience,
conversations, actual data that isn’t publicly accessible.
39/ This is good advice for writers too. I’ve tried very hard to stop citing others.
40/ GIFTING. I’ve just started sending people books through Amazon. I think reading needs
to be your own journey, so I do it sparingly.
41/ I also read one book at a time. If I find myself reading a second, that means I should quit
the first. So I do.
42/ Ok, done! Let me know if you have other questions. Happy to explore it more.

COVER STORY
Wisdom by the dozen
Tren Griffin
@trengriffin
Tweets Following
45.4K 291
Likes Followers
876 31.3K
Buffett’s mistakes include: Berkshire Hathaway itself in 1962 (then a failing textile
company), Dexter Shoe, Waumbec Textile Company, Tesco, Energy Future Holdings
debt, ConocoPhillips. Like everyone, errors of omission were greater. Not buying Google
Why should you shares is just one example.
Follow
“Success in a probabilistic field requires weighing probabilities and outcomes—that is,
Tren Griffin? an expected value mindset.” The most skilled performers in any probabilistic field (eg.,
investing, sports and business) focus on having a sound process over outcome.
Tren Griffin is an [See Michael Mauboussin Resource Page at https://bit.ly/2taGhDh]
author and blogger
of a famous blog Adopting an expected value mindset is useful in far more than just investing. The
https://25iq.com/ that magnitude of your correctness is more important than your frequency. Disappointing
features business outcomes that result from a sound process will inevitably happen occasionally. Think
and life lessons on probabilistically and profit.
prominent investors
and other successful One might think that Warren Buffett buying 140 million shares of Apple would dispel the
individuals. His most notion that value investing as an analytical style is about buying “cheap stocks.” Quality
famous posts are titled is a key part of value and may not be reflected in current price creating a bargain/margin
“A dozen things I of safety.
learned from …” And
then this includes Buffett and Munger have bought a stock based on a P/E ratio exactly never. John Burr
persons and investing Williams defined value based on P/E exactly never. A P/E ratio is as relevant to value
concepts from whom investing as an analytical style as a pickle.
Tren has learned.
Here are a couple Here’s a stock tip: when Munger and Buffett analyze a stock (which is a partial interest
in a real business not a piece of paper like a baseball card) they discount the *cash
of tweets by Tren
flows* not the P/E ratio.
that provide food for
[See ‘A Dozen Things I’ve Learned from Charlie Munger About Benjamin Graham’s Value
thought. He also offers Investing System’ at https://bit.ly/2ytGNBo]
regular suggestions
on how to go about
“When you have a business with negative capital needs in very
investing. high growth markets that is the holy grail in investing. Historically
I wanted to buy things cheap. I discounted the value of quality.
My take at this point is I want both.” Mohnish Pabrai
[See ‘Mohnish Pabrai: “Intensive Stock Research Can Be
Injurious to Financial Health” | Talks at Google’ at
https://bit.ly/2u166U7]

COVER STORY
Where
wisdom
Jana resides
Vembunarayanan
@jvembuna
Tweets Following
2,972 32
Likes Followers
124 11.8K
Why should you If you want to learn something, read about it. If you want to understand something,
Follow write about it.If you want to master something, teach it.
Jana? Carl Sagan’s Baloney detection kit a must read: https://goo.gl/I2pdQC. Original source
Jana Vembunarayanan https://goo.gl/Py75v
runs a popular investing
blog, ‘Seeking Wisdom’. Just finished “Behave” by the brilliant Robert Sapolsky. The best book I have ever read
Mastering the best of on human behavior. Sapolsky is an amazing teacher.
what other people have
already figured out, he ‘10,000 hours with Claude Shannon’ https://goo.gl/JEU4D1. Beautifully written. Read it
talks about mental mod- along with ‘Creative Thinking’ https://goo.gl/vswrxA .
els, learning, psychology,
books and many more ‘Before I Go to Sleep’ - https://goo.gl/U3oBap. 100 super videos that I have been
related topics. Jana has collecting over the last few years. https://goo.gl/Qrer1R .
also authored A Gen-
tle and Practical Introduc- There are a few books that makes one feel like: why did I not read this book 20 years
tion to Value Investing, back. ‘Thinking in Systems’ is such a book. Highly recommend it.
which is available on his
blog. Jana’s blog is anoth- Fantastic book on Self Talk: What To Say When You Talk To Yourself
er must-visit-regularly
site for anyone interested Rarely I own physical, kindle, and audible for the same book. An Astronaut’s Guide to
in learning. Here are Life on Earth deserves all three.
some of his posts on
Twitter. Think in Images - https://goo.gl/h1ngCo
Helping you invest wisely

Since 1992
Value Research July 2018 Wealth Insight 55
@ValueResearch Tweets 14.3K Followers 27.9K
COVER STORY
The value hub

Why should you Follow Austin?
Austin Value Capital figures in our list for the content that it puts
Austin Value out so often nowadays. Want a compendium of Berkshire Hathaway
annual-meeting transcripts from 1994 to 2018? It’s here. How about a
Capital compendium of everything about Graham, Munger and Schloss? Here.
@AustinValue Or Michael Burry and even Keynes? Again, here. Make Austin Value
Capital your go-to place for everything written by value managers. It
will take you years to finish what is already up.
Tweets Following
Compilation of Berkshire Transcripts from 1994-2018: http://bit.ly/2KlwYHj
89 105
Compilation of everything Buffett has written (at least that I have found): http://bit.
Likes Followers ly/2K64B3I
10 2,755
The world of books

Why should you Follow Invest Books?
We end our series on Twitter accounts that will make you smart with
Invest Books. Focused exclusively on value-investing books, follow
this account for the latest deals on books. Find deals on The Intelligent
Investor and books on Buffett. Get the latest on behavioural finance
Invest Books and the links to books recommended by value investors. Find the new
@investbooks launches that you should not miss. Value guru Howard Marks is about to
launch his book on market cycles. Find the updates here. Follow Invest
Books to get the latest on all value-investing books. Happy reading.
Tweets Following
Don’t miss this book....
4,060 735 The Geometry of Wealth: How to Shape a Life of Money and Meaning by @brianportnoy
Likes Followers
Value Investing and Behavioural Finance by Parag Parikh #Hardcover Rs 461/- off 34%
2,026 7,157
Buffett: The Making of an American Capitalist by Roger Lowenstein #Paperback Rs
559/- off 30%
Helping you invest wisely

Since 1992
Value Research
@ValueResearch Tweets 14.3K Followers 27.9K
INTERVIEW NEELESH SURANA
CIO - Equity, Mirae Asset Global Investments (India)
“Value should be
hunted in growth-
oriented businesses”
It was nothing less than a trial by fire. Investments (India), Surana has helped his
Neelesh Surana has been with Mirae since fund house carve out a niche among the
2008, a year that brings back the memories of constellation of asset-management
financial Armageddon as the US housing- companies dominating India. His fund house
mortgage crisis exploded. The assumptions today is highly respected by investors.
of any business, conceptualised in 2007, were In an interview with Kumar Shankar Roy,
challenged strongly by the slowdown that Surana says that when time horizon increases,
followed. Domestic equity flows were ‘price’ and ‘value’ converge. He talks about his
negative for six years straight. But when the admiration and respect for Bharat Shah and
going gets tough, the tough gets going. As he reveals why he is a stickler for
CIO – Equity at Mirae Asset Global diversification across sectors and stocks.

INTERVIEW
“Short-term market volatility cannot be handled as it’s driven by

various factors apart from the fundamentals. It’s important to note
that volatility is about the ‘stock price’ of a business, whereas the
‘estimated value’ does not obviously change frequently.”
You joined Mirae in 2008 at the consciously practise that in the growth pillars now are better than
height of the global financial crisis. interim three–five years and why? what they were two decades back.
How has your thought process evolved Generally, one would buy only if In this context, there are always
since then? the assessment of the intrinsic good opportunities available.
In investment, you are constantly value is significantly higher than
learning. However, the core invest- market prices and thereafter wait How has the concept of value
ment approach of buying for the same to be matched. As impacted your investing style?
decent-quality businesses up to a regards to the time frame, it could The learning is that value should
reasonable valuation and holding be perpetual if the value increases be hunted in growth-oriented busi-
them patiently over an extended linearly with time. However, many nesses. Value in non-growth busi-
period remains the same, irrespec- times the markets misprice businesses is a trap. Growth should be
tive of the ever-changing macros nesses on both sides. In cases when a subset of value.
since 2008. the market price is significantly
more than the value, investors need Investing is not a zero-error
Is volatility a function of the quality of to reassess and sell, if required. profession. How do you avoid value
business? When external factors are traps?
at play, how do you get a handle on Is there a benchmark for the minimum Value in low-growth businesses
volatility? return on capital you expect? should be avoided. As regards to
Generally, volatility is inversely We look at a minimum pre-tax errors, they could arise both from
proportional to the quality of busi- ROCE of 15 per cent. external variables or research
ness. Short-term market volatility assumptions. Herein a diversified
cannot be handled as it’s driven by In bull markets, there is a lot of hope. portfolio helps mitigate risks.
various factors apart from the fun- How do you go about removing the
damentals. It’s important to note optimism embodied in the stock price? For a market like India, where GDP is
that volatility is about the ‘stock The discipline in buoyant markets growing and so corporate earnings
price’ of a business, whereas the gets tested as the margin of safety rise, do you assume that equity
‘estimated value’ does not obvious- generally reduces. markets are always cheap?
ly change frequently. We all work We cannot generalise. The advan-
on the assumption that as time Prior to Mirae, you were with ASK. tage in a growing economy is that
horizon increases (say over five– What has been Bharat Shah’s the choice of businesses increases.
seven years), price and value con- influence on your investment style and For example, there were only 30
verge, thereby reducing volatility. thinking? companies between $0.5–3 billion
My thinking evolved significantly 15 years ago, and now the choice is
How do you go about looking for under Mr Bharat Shah at ASK. I more than 15 times. Also, given the
companies with moats? How do you admire him for his ability to iden- sectoral dispersion, there could
measure moats? tify growth-oriented businesses. In always be businesses available
Businesses with moats would mean addition, his words of wisdom which are reasonably priced.
some barriers to entry vis-à-vis the show the correct path to investing.
competition. If such is the case, log- When you identify a particular stock,
ically, the ROCE (return on capital Do publicly listed firms, in recent do you think about it in terms of your
employed) should be high. years, provide as much value as overall portfolio? How do you
stocks did two decades back when construct portfolio?
Intrinsic value is the price we think a you joined the profession? Isn’t a From a portfolio-construct perspec-
business will have in three–five years. large part of value already skimmed tive, the approach is to have diver-
Many say the best investors are those off by PEs, VCs, etc. investors? sification across sectors and stocks
who can buy and then forget. Do you India is a growing economy, and for an optimal risk-adjusted return.

INTERVIEW
“In pockets where valuation is not in sync While we are size and sector agnos-
tic, there is no drastic variation vis-
with the fundamentals of growth, it’s à-vis the benchmark on a sectoral
better to skip the company, as buying high basis. The idea is to have higher
stock-wise active share.
is also one of the risks.”
In some sectors, valuations have been
historically higher, for example,
consumption. So, is value a relative
term than an absolute truth?
We always look at absolute value.
In pockets where valuation is not in
sync with the fundamentals of
growth, it’s better to skip the com-
pany, as buying high is also one of
the risks.
At the end of the day, successful fund

managers regularly beat benchmarks.
Is that why you rarely deviate from the
benchmark? What priority would you
accord to benchmark beating, relative
ranking, and absolute return?
Mutual funds’ priority is to (a) beat
the benchmark in the long term, (b)
have a decent relative ranking, and
(c) generate satisfactory absolute
return. While for investors absolute
returns are most important, the key
assumption is that if a fund is able
to meet the first two objectives in a
growing economy, absolute returns
ought to be higher.
If a given sector is hot and people are

making money in it, the tendency of
justifying higher valuations is very
strong. How do you avoid getting
influenced by what everybody else is
doing?
Discipline is important in times of
such exuberance.
Does the macroeconomic or political

outlook have a bearing on your
portfolio?
While we try to understand the
macros and political outlook, they
have relatively less importance.
More important is a bottom-up
approach in valuing individual
businesses, and stress testing the
results with an outlier assumption
of variation in macros. WI

COVER STORY
Unique
newcomers
of 2017
Their business models and how to analyse them
I
n the past one year, many companies have Hence, for the average stock investor, it is rath-
raised funds from the markets through initial er challenging to analyse these companies. In
public offerings. Many of these belong to this cover story, we tell you about the business
such sectors that had no direct presence in the models of these companies, along with their rele-
listed universe. For instance, consider GIC Re, a vant metrics. This information will build analyt-
reinsurer. Or take ICICI Lombard, a general ical foundation for you so that you can dig deeper
insurer. Or IEX, a power-trading exchange. into these companies.

COVER STORY
ASSET-MANAGEMENT COMPANIES (AMCs)
The money managers

AMCs manage their
clients’ money and aim
to generate superior
returns. In 2017,
Reliance Nippon Life
became the first AMC to
list on the Indian
exchanges.
A
Reliance Nippon Life sset-management companies Size of PMS in managed-funds portfolio:
manage the assets of their Portfolio-management services
Key metrics: Mutual fund clients. In 2017, Reliance carry higher management fees,
Total AUM (` crore) 226,100 Nippon Life became the first AMC which ranges from 1.5–2.5 per cent
Equity Debt to list on Indian exchanges. It runs of assets and also carry prof-
36% 40% mutual funds, including it-sharing clauses.
exchange-traded funds. It also man-
ETF Liquid
ages funds for high net-worth indi- KEY METRICS
5% 19% viduals and institutional investors. Here are some key determinants of
Further, it runs alternative invest- this business:
Weighted average management fees 0.70% ment funds and is a manager of Size of AUM: The higher the size of
0RQWKO\6,3ÁRZ` cr) 750 various pension schemes and AUM, the better it is, for it means
$QQXDO6,3ÁRZ` cr) 9,000 Employees’ Provident Fund. higher fees.
SIP AUM as a % of equity AUM 29% Weighted average management fees:
THE BUSINESS MODEL An AMC which is able to charge
AMCs primarily make money from higher management fees will gen-
Key metrics: Others fund-management fees. Fund- erate higher revenues and profits
Total AUM (` cr) 170,300
management fee is the fee charged on the same asset base.
Pension + EPF 96%
as a per cent of assets under man- Monthly and annual SIP flows:
PMS 2%
agement (AUM). Factors which Constant flows through systematic
Offshore 2% impact management fees are: investment plans (SIPs) show inves-
FY18 data Product mix of the company: Product tors’ belief in the AMC’s ability to
mix means the split between equi- generate constant returns. They
Key financials ty and debt assets. Equity instru- also provide future visibility about
Net sales (` cr) 1,586
ments carry management fees of the profitability of the company.
2SHUDWLQJSURÀW` cr) 531
about 1–2.5 per cent, whereas debt SIP AUM as a per cent of equity AUM:
1HWSURÀW` cr) 522 funds have fees of about 0.1–1 per Systematic investments mean a
Operating margin (%) 33.5 cent of AUM. steady flow of assets to an AMC.
Net margin (%) 32.9 Pension funds managed: Government The higher the per cent of SIP
ROE (%) 25.1 pension schemes carry low man- AUM in the total equity AUM, the
Market cap (` cr) 13,498 agement fees since they consist better it is.
Trailing 12M P/E 26 mostly of debt securities and Top funds: If an AMC’s funds feature
FY18 data. Price-related data as on June 12, 2018 AMCs have little or no bargaining among the top five in the category,
power in this matter. it is likely to receive higher flows.

COVER STORY
DEPOSITORY SERVICES
Safety first
Depository services, like CDSL, provide electronic storage of securities, thus
ensuring safety and ease of transaction
D
epository services, like
NSDL and CDSL, provide
electronic storage for secu-
rities such as shares. Earlier
companies issued share certifi-
cates to their investors, which
many times were lost or
destroyed. With depository ser-
vices, one can conveniently store
one’s securities electronically,
which ensures safety and ease of
transaction. CDSL is the only
depository-services provider list-
ed on the Indian markets.
To ensure transparency in the
financial system, the Ministry of
Corporate Affairs has proposed
mandatory dematerialisation of
all unlisted companies.
Depositories, like CDSL, will be
the key beneficiaries of this.
The promoters of CDSL as a holder of insurance policies
include BSE, State Bank of India, CDSL of various companies, for which
Bank of India, Bank of Baroda, it charges them.
HDFC Bank, Standard Chartered
Key financials Corporate actions: Companies also
Net sales (` cr) 191
Bank, Canara Bank, Union Bank have to pay depositories in case
of India, among others. of any corporate event like initial
1HWSURÀW` cr) 104
As of May 31, the total number public offers, bonus issues, stock
of investor accounts with CDSL Operating margin (%) 59.5 splits, change in shareholding,
stood at 1,51,75,433. Net margin (%) 54.3 mergers and acquisitions, etc.
ROE (%) 18.3 E-voting and e-CAS: Depositories
THE BUSINESS MODEL Market cap (` cr) 3,002 provide an option to companies
Here are the various fees and Trailing 12M P/E 29 to allow their shareholders to
charges that depository services FY18 data. Price-related data as on June 12, 2018 cast their votes electronically. It
levy, along with their additional also sends electronic consolidat-
sources of income: ed account statement (e-CAS) to
Annual issuer charges: Depositories ers’ (individual investors) when investors monthly.
charge companies an annual main- they sell shares. They also charge Others: CDSL has also recently for-
tenance fee based on the number ‘depository participants’ (inter- ayed into providing services relat-
of folios or the size of paid-up cap- mediaries like brokers) annual ed to recording of GST filings and
ital. This is more like an annuity maintenance and settlement fees. various documents like academic
business, which does not have any KYC and e-insurance: Depositories records and warehouse receipts.
cyclicality since the amount of offer know-your-client (KYC) ser- Investment income: Depositories
revenues from this are fixed. vices to banks, brokers, mutual also generate income from their
Transaction charges: Depositories funds, insurance companies and investments in fixed deposits,
charge fees from ‘beneficial own- other institutions. They also act equity shares and debt securities.

COVER STORY
ENERGY EXCHANGES
Ensuring sufficiency
(QHUJ\H[FKDQJHVOLNH,(;FRQQHFWSRZHUJHQHUDWLQJFRPSDQLHVZLWKSRZHU
distributors, thus helping them meet their energy requirements
Energy exchanges enable trading
in electricity. They connect power
producers and power-distribution
companies (discoms). Discoms
that have a dearth buy power
from the producers with surplus
through energy exchanges.
Energy exchanges are also
involved in full settlement process
like other exchanges (BSE, NSE
and MCX). Additionally, they also
deal in power contracts and enable
physical delivery of power.
IEX is the important energy
exchange, which got listed on the
Indian exchanges in 2017. It is the
only energy exchange with a direct
presence in the Indian markets.
The trading on IEX differs from
that on stock exchanges. On stock Day ahead market (DAM): Here
exchanges, orders are matched IEX power can be purchased one day
through the bid-ask mechanism. in advance in blocks of 15 min-
Key financials
But on IEX, the trading price is Net sales (` cr) 230 utes. This is IEX’s most-popular
the point of intersection of maxi- segment and contributes a major
mum buyers and sellers. chunk of its revenue.
1HWSURÀW` cr) 132
Currently, IEX has over 6,000 Term ahead contracts (TAM): In this
Operating margin (%) 80.2
members registered on it. segment, electricity contracts
Net margin (%) 57.1 can be bought for fixed terms in
THE BUSINESS MODEL ROE (%) 46.9 the future. It includes intra-day
Energy exchanges derive their Market cap (` cr) 4,912 contracts, day-ahead-contigency
revenues from the following Trailing 12M P/E 37 contracts and contracts that are
types of fees: FY18 data. Price-related data as on June 12, 2018 up to 11 days in advance.
Admission fees: This is a one-time Renewable energy certificates (REC):
fees charged from members at Indian power producers have
the time of admission. It also based on the number of units targets of producing renewable
includes processing fees. transacted. For instance, for energy. Companies that are
Security deposit: A member also every unit of electricity traded unable to meet those targets buy
has to keep an interest-free secu- on its platform, IEX charges RECs with the help of the
rity deposit and margin money about `0.02 each from the buyer exchange from the companies
with the exchange. The interest and seller. which exceed the targets.
earned on these deposits also Annual subscription fees: Energy Energy-saving certificates (ESC):
adds to the exchange’s income. exchanges also charge its mem- These are similar to RECs.
Transaction fees: Energy exchang- bers annual fees, in advance, for Companies which are not able to
es charge its customer for every using their platforms. meet their energy-saving targets
transaction they do on the Here are the segments in buy these certificates from the com-
exchange. The fees charged are which energy exchanges operate: panies which have exceeded theirs.

COVER STORY
MATRIMONIAL SERVICES
A match made online

0DWULPRQLDOSRUWDOVDUHWKHQHZZD\WRPDWFKSURVSHFWLYHEULGHVDQGJURRPV
Matrimony.com is the only listed company in this space.
M
atrimonial portals, like
Matrimony.com, are the
new way of connecting pro-
spective brides and grooms. They
also provide a wide variety of
options such as community-based
filters, birth-chart matches and
region-wise matches. They also pro-
vide allied services like photogra-
phy, venue, etc. Matrimony.com list-
ed on the Indian stock exchanges in
2017. It is the only listed company
in its sector.
THE BUSINESS MODEL

Matrimonial portals earn their rev-
enues in the following ways:
Matchmaking services: These are the
primary source of revenue for mat-
rimonial portals. Matrimony.com Active profiles: Those users who have
provides differentiated matchmak- logged in at least once during the Matrimony.com
ing services with customised offer- last 180 days. Key metrics
ings: basic matchmaking services Unique visitors: Unique users visiting Ever registrations (mn) 30.5
under BharatMatrimony.com, com- the portal during a period. Free registrations (mn) 3.2
munity-based matrimony services Time spent by users: If users are
$FWLYHSURÀOHVPQ
under CommunityMatrimony.com spending more time on a portal, it
Unique visitors (mn) * 0.99
and personalised matchmaking ser- indicates superior content.
Time spent (mn minutes) * 149
vice under EliteMatrimony.com. Average registrations per day: This is
Marriage services: These are other the average number of users that Average registrations per day 8,806
marriage-related services. For get added on a daily basis. Paid subscription (mn) 0.75
instance, Matrimony.com’s Paid subscriptions: This is the most 3DLGVXEVFULSWLRQVWRDFWLYHSURÀOHV
MatrimonyDirectory.com includes important metric. It tells us how Average transaction value (`) 4,489
listings of wedding-service provid- many users are seriously looking FY18 data. *Data as of June 2017.
ers. Matrimony.com also has differ- for a match and are contributing to
ent portals for photography, appar- the portal’s revenues.
els, venue selection, etc. Paid subscriptions to active profiles: Key financials
Net sales (` cr) 335
This is the ratio of active users who
KEY METRICS have converted into paid users.
Here are some key determinants of Average transaction value (ATV): It is 1HWSURÀW` cr) 74
this business: the average revenue earned per Operating margin (%) 23.1
Ever registrations: It is the total life- user (total subscription amount Net margin (%) 22.0
time registrations till date, includ- divided by number of paid users). A ROE (%) 44.1
ing free registrations. high ATV indicates increasing Market cap (` cr) 1,673
Free registrations: These are non-pay- demand for premium services and Trailing 12M P/E 23
ing users who have registered the company’s power to pass on the FY18 data. Price-related data as on June 12, 2018
during the year. costs to its consumers.

COVER STORY
LIFE-INSURANCE COMPANIES
In your absence
<HDUVDZWKHOLVWLQJRIWZRODUJHOLIHLQVXUHUV6%,/LIHDQG+')&
Standard Life. ICICI Prudential Life, the third listed player, is an older listing.
L
ife insurance is a widely Value of new business (VNB): The
known concept. The present value of the future
insured pays a premium earnings from policies issued
to the life-insurance companies during a period. It reflects the
in return of a payout to his additional earnings expected to
dependents in the unfortunate be generated through the new
case of his demise. Two life policies issued.
insurers, SBI Life and HDFC VNB margin: The profit margin
Standard Life, listed in 2017. on policies issued during a
ICICI Prudential Life is an period, generally within the
older listing. last one year.
Embedded value: The value of
THE BUSINESS MODEL business as of today for its
Life insurers make money in shareholders. It covers all the
the following ways: policies issued since the incep-
s .ETINCOMEGENERATEDFROM tion, along with the policies
selling insurance policies (dif-
ference between premiums and
SBI Life, HDFC Standard Life which are in force on the date
of valuation. Life-insurance
claims) & ICICI Prudential Life companies are valued on price
s )NVESTMENTINCOMEGENERAT- Key metrics to embedded value.
ed in the form of interest, divi- 6%,/LIH +')&/LIH ,&,&,3UX Operating expense ratio: The ratio
dends, rent and profit from *URVVZULWWHQSUHPLXP` cr) 25,350 23,560 27,069 of operating expenses and gross
sale of investments Net premium earned (` cr) 25,160 23,370 26,811 written premium. It indicates
1HWEHQHÀWVSDLG` cr) 11,710 13,110 17,281 the efficiency of operations.
KEY METRICS 1HZEXVLQHVVSUHPLXP` cr) 10,970 11,350 8,402 Claim-settlement ratio: The num-
The life-insurance business AUM (` cr) 116,260 106,600 139,532 ber of claims settled by the
has the following key metrics: 9DOXHRIQHZEXVLQHVV91%` cr) 1,390 1,280 1,286 company against the total
Gross written premium: The pre- Embedded value (` cr) 19,070 15,220 18,788 claims received.
mium due from customers for Operating expense ratio (%) 6.8 13.5 8.2 Solvency ratio: Tests the solvency
the policies issued. Claim settlement ratio (%) 98.4 99.1 97.9 of the insurer in the worst-pos-
Premium earned: The amount of Solvency ratio (%) 206 192 252 sible scenario – all the insur-
premium that a company has 91%0DUJLQ ance claims materialise at once.
earned. It is the gross written Persistency ratio (%): 13 month 83 87 86.9 IRDA has specified it to be mini-
premium less the ‘reinsurance’ Persistency ratio (%): 37 month 70 71 67.7
mum 150 per cent.
premium paid. Insurance com-
Persistency ratio (%): 61 month 58 51 54
Persistency ratio: The ratio of
panies get ‘reinsured’ from life-insurance policies remain-
M-cap (` cr) 71,760 100,918 60,573
reinsurers on policies which ing in force to all the policies
Price to embedded value 3.8 6.6 3.2
they consider risky. issued in a specific period.
M-cap to AUM 0.6 0.9 0.4
Benefits paid: The major expens- Persistency can be measured in
FY18 data. Price-related data as on June 12, 2018
es of an insurance company. terms of the number of policies
They include the claims paid Key financials or premium. It tells us how
on policies and the surrender 6%,/LIH +')&/LIH ,&,&,3UX many customers continue to
amounts paid to policyholders. 1HWSURÀW` cr) 1,150 1,107 1,619 pay premiums in subsequent
New business premium: The ROE (%) 19.0 25.9 24.4 years since policy issuance. It is
amount of premium due in the FY18 data frequently quoted for the 13th,
first year of a policy. 37th and 61st months.

COVER STORY
GENERAL-INSURANCE COMPANIES
For the good life

From health insurance to motor insurance to accidental insurance, general
insurance comes handy in safeguarding yourself from life’s uncertainties
A
general insurer safeguards
the insured from any uncer-
tainties that arise due to an
unforeseen event, such as health
problem, accidents and natural
calamities. ICICI Lombard and New
India Assurance are two general
insurers that listed on the Indian
exchanges in 2017.
THE BUSINESS MODEL

Unlike life insurers, general insur-
ers do not make money from the net
difference between the premiums ICICI Lombard
received and claims paid as in most
cases claims are higher than what
& New India Assurance
they receive as premiums. They are Key metrics
,&,&, 1HZ,QGLD
highly dependent on investment Lombard Assurance
income generated in the form of *URVVZULWWHQSUHP` cr) 12,600 26,554
dividends, interest, etc. less safety reserves. A higher net Net premium (` cr) 7,845 20,956
premium earned means higher
Net premium earned (` cr) 6,912 19,725
KEY METRICS earnings for the insurer.
Investement assets (` cr) 18,193 64,559
Key metrics used in the general-in- Net incurred claims: Claims incurred
Net incurred claims (` cr) 5,315 16,896
surance industry are as follows: in a specific period after adjusting
Gross written premium: The total for those paid by the reinsurer. Combined ratio (%) 100.2 111.2
amount received as the premium High incurred claims could lead to Solvency ratio (%) 205 258
for the insurance policies issued. underwriting losses. Net expenses ratio (%) 23.1 22.4
The higher the total premium, the Combined ratio: How much a general Incurred claims ratio (%) 78.5 85.6
better it is. insurer is paying in claims and FY18 data
Net premium: Total premium less the expenses as compared to the premi-
premium ‘ceded’ to a reinsurer or ums earned. A ratio above 100 per
Key financials
,&,&, 1HZ,QGLD
another insurer plus the premium cent means underwriting losses, Lombard Assurance
accepted from another insurer. A i.e., the company is paying more in 2SHUDWLQJSURÀW` cr) 1,196 2,722
general insurer has to buy reinsur- claims and expenses than the pre- 1HWSURÀW` cr) 862 2,189
ance from companies like GIC Re miums it is collecting.
ROE (%) 17.8 15.2
for at least 5 per cent of its policies, Solvency ratio: A measure used to test
Trailing 12M P/E 38 24
as mandated by the insurance regu- the solvency of the insurer in the
M-cap (` cr) 33,041 52,411
lator, IRDA. This helps in lowering worst-case scenario, i.e. all the
the general insurer’s risk. The pre- insurance claims materialise at
mium paid for this has to be deduct- once. The regulator has mandated it
ed from the total premium. Also, to be at least 150 per cent. Incurred-claims ratio: The ratio of
insurers transfer some of their risk Net-expenses ratio: The ratio of oper- claims incurred to the net premium
to other insurers and pay premium ating expenses, including the cost earned. Incurred claims are a sum
for it or they can take on some risk of acquiring new customers, to the of the claims paid and the claims
from other insurers and get paid. net premium earned. A low net-ex- due during the year. A low
Net premium earned: Net premium penses ratio suggests efficiency. incurred-claims ratio is desirable.

COVER STORY
REINSURANCE COMPANIES
Insurance for insurers

%\WDNLQJRYHUVRPHULVNRILQVXUHUVUHLQVXUDQFHFRPSDQLHVUHGXFHWKHULVNIRU
them. GIC Re is the major listed Indian reinsurer.
GIC Re
Key metrics
Gross premiums (` cr) 41,799

Net premiums (` cr) 37,634
Net earned premium (` cr) 38,096
Incurred claims (` cr) 32,954
Incurred claims ratio (%) 86.5
Net commission (` cr) 6,370
Net commission ratio (%) 16.9
Management expenses (%) 0.6
Combined ratio (%) 104
Solvency ratio (%) 172
FY18 data
W
e transfer our risk to refunds on any other policies. Key financials
life-insurance and gener- Net earned premium: Net premium
al-insurance companies. adjusted for the present value of 2SHUDWLQJSURÀW` cr) 3,630
But did you know that these compa- losses and expenses that the firm 1HWSURÀW` cr) 3,195
nies further transfer part of their may incur in future. ROE (%) 14.4
risk to reinsurance companies, for Incurred claims: Sum of claims which Trailing 12M P/E 20
which they pay a premium. have already been paid during the M-cap (` cr) 64,128
Reinsurance companies are risk- period and the outstanding claims
ier than insurance companies since at the end of the year less the out-
insurers will reinsure policies with standing claims at the beginning of
a higher probability of claims. the year. company is paying as a per cent of
Incurred claims ratio: Ratio of the its net premiums. The lower the
THE BUSINESS MODEL claims paid in comparison to the ratio, the better it is.
Like general insurers, reinsurers net earned premium. A high claims Combined ratio: How much a reinsur-
also do not make money from the ratio indicates that the company is er is paying in claims and expenses
net difference between the premi- paying higher claims in compari- (management expenses and net
ums received and the claims paid. son to what it is earning. commissions paid) as compared to
They are also highly dependent on Management expenses: Operating the premiums earned. A ratio above
investment income. expenses incurred, excluding com- 100 per cent means underwriting
missions and acquisition costs, as losses, i.e., the company is paying
KEY METRICS proportion of net earned premium. A more in claims and expenses than
Here is what you should especially lower ratio indicates lower expenses. the premiums it is collecting.
track in reinsurance firms: Net commission: Commission paid for Solvency ratio: A measure used to
Gross premium: Premium accepted bringing in the business less the test the solvency of the insurer in
from life- and general-insurance commissions received from reinsur- the worst-case scenario, i.e., all
companies, without any deduction ers for giving them the business. the insurance claims materialise
for commissions and discounts. Net commission ratio: Net commis- at once. The insurance regulator
Net premium: Gross premium less the sions divided by net premium. It has mandated it to be at least 150
premium paid for cancellation or interprets how much commission a per cent.

COVER STORY
60$//),1$1&(%$1.6$1'3$<0(17%$1.6
Banking redefined
With their unique business models, small-finance banks and payment banks
are meeting the needs of the unbanked population
Ujjivan, AU & Equitas

Key financials
Ujjivan AU Equitas
Net interest income (` cr) 709.5 940 924.5
1HWSURÀW` cr) 7.3 292 31.4
NIM (%) 10.6 7.2 8.1
Gross NPA (%) 3.6 2 2.72
Net NPA (%) 0.6 1.3 1.44
Cost to income (%) 67.1 55.7 80
ROA (%) 0.1 1.7 0.27
CASA (%) 3.7 32 35
Capital adequacy ratio (%) 23.0 19.3 29.6
ROE (%) 0.4 13.7 1.4
7UDLOLQJ03%
Market cap (` cr) 4,815 20,599 5,256
FY18 data. Price-related data as on June 12, 2018.
S
mall-finance banks are niche telecom companies – Airtel, s 4HEYCANNOTLEND4HEYAREMAN-
banks with the prime motive Reliance Jio and Idea Cellular have dated by the RBI to keep 75 per
of financial inclusion. They their own payment banks. cent of deposits in government
have to lend to small business securities and remaining 25 per
units, small and marginal farmers, THE BUSINESS MODELS cent with commercial banks.
micro and small industries and Small-finance banks have to abide s 4HEYCANNOTISSUECREDITCARDS
unorganised-sector entities, where- by the following rules: but can issue ATM/debit cards.
as other banks can provide loans to s 4HEYHAVETOMAINTAINACAPI- Payment banks earn from fol-
all sections of society. There are tal-adequacy ratio of 15 per cent in lowing activities:
three such banks listed on the comparison to 12 per cent mandat- s 4HEDIFFERENTIALBETWEENWHAT
stock exchanges: Ujjivan, AU Small ed for other banks. they pay on deposits and what they
Finance Bank and Equitas. s 4HEYHAVEAMINIMUMCAPITAL earn on their deposits with the RBI
Payments banks are also differ- requirement of `100 crore versus and other banks. But this is not a
entiated banks like small-finance `500 crore for commercial banks. high-margin source since they
banks, with the prime motive of s -ORETHANPERCENTOF THEIR have to pay a higher rate of inter-
financial inclusion. They aim to loans should be less than `25 lakh. est than other traditional banks to
reach the remotest parts of India There is no such restriction for attract customers.
through mobile phones, which is commercial banks. s 4HEYCANCHARGETHEIRCUSTOMERS
economical as compared to expen- s 4HEYHAVETOLENDPERCENTOF for cash withdrawals.
sive traditional branch networks. their lendable capital to the priori- s 4HEYALSOEARNSOMECOMMIS-
Their main role is to facilitate pay- ty sector in comparison to 40 per sion by selling third-party finan-
ments and remittances. cent for commercial banks. cial products like insurance and
There are many payment banks Here is what differentiates pay- mutual funds.
in the country but none of them ment banks from traditional banks: s 4HEYALSOENABLEBILLPAYMENTS
has a direct presence on the stock s 4HEYCANACCEPTDEPOSITSBUT mobile recharges, e-commerce pay-
market. However, the three major only up to `1 lakh. ments and other transactions. WI

COVER STORY
10
promising
foreign stocks
:HDOWK,QVLJKW-XO\

S
ome seasoned investors in India scout rupee vis-a-vis other currencies. For
the globe for investing opportunities. instance, the rupee has depreciated against
They do not restrict themselves to the the dollar by about 5 per cent annually in
vagaries of a single country. Thus, they get the last 10 years. That means an additional
to truly diversify their portfolios. 59 per cent return over 10 years!
You may say that researching foreign This story is not about buying the
stocks would be challenging, given the companies discussed. It is about showing
unique economic set-up of each country. But why you should keep your mind open to
you do not have to go hunting for obscure investment opportunities wherever in the
international names for handsome gains. world they may arise. Use this story as a
Well-known global names have template on how investing in well-known
outperformed some of our desi stocks. global stocks can reward you handsomely.
While the Sensex doubled in the last 10 In order to arrive at the companies
years, the well-known Amazon, which has discussed in this story, we looked into the
become part of our everyday lives, rewarded top international holdings of domestic
shareholders with gains of 21 times. Apple mutual funds. Then we applied some of
Inc., another well-known company in India, our own financial criteria. Here are they:
rewarded shareholders with gains of close z Market capitalisation should be more
to eight times. There are many other well- than $10 billion.
known names like Facebook, Google, z Returns on equity should be more than
Microsoft, Starbucks, Nike and Walt Disney, 15 per cent.
among others, which have beaten the Sensex z Debt-equity ratio should be less than one.
hands down in this period. What’s more, you z Revenue growth rate should be more
also profit from depreciation in the Indian than 5 per cent.
How to invest in overseas markets

Indians are allowed to invest $250,000 annually as office in Mumbai. You have to fill the online
per the current norms. While most of us are application form at www.interactivebrokers.com.
aware of how to invest in the Indian market, not Your account gets active in about seven to 15 days.
many of us have the clue regarding how to invest What about the charges? Saxo Bank has a slab
abroad. Indeed, there is no easy choice. Most rate for trading in various markets. Interactive
Indian brokers have no facility for investing in Brokers charges flat $1 for US trades. Its charges
overseas markets. But at least one broker ICICI (including taxes) vary for the other markets. It also
Direct provides the facility to invest overseas has a monthly minimum of $10. That means
through its arrangement with Saxo Bank of even if you don’t transact in a particular
Denmark. However, this is more of a client- month, you will still have to pay $10.
referral programme and ICICI Direct’s role What about taxation of your gains and
is quite limited. ICICI Direct completes dividends? These are governed by India’s
your formalities in India and then agreements called the DTAAs (double
you become a client of Saxo Bank. taxation avoidance agreements) with
After that, you have to deal directly respective countries. For most of us,
with Saxo Bank. taking help of a qualified chartered
A good option for Indian investors accountant is the way out.
who want to invest abroad is Barrons.com has data on most
Interactive Brokers. It is a US-based company that companies around the world. Other useful sources
provides trading facility in multiple markets. IB is for research on foreign stocks are Marketwatch.
even registered on the NSE as a broker and has its com and Investing.com.
-XO\:HDOWK,QVLJKW

COVER STORY
ADOBE SYSTEMS
Can’t do without it
Adobe owns software like Reader and Flash Player, without which you will find
it difficult to run many applications on your computers and phones
F 10Y price chart

ounded in 1982, Adobe is the first company in
Silicon Valley to be profitable in the very first
$280
year of operations. Adobe is the founder of PDF
(portable document format), which is widely used
around the world. It launched Adobe Photoshop and
210
19.7%
Annualised return
Adobe Reader in 1989 and 1993, respectively, which 140
continue to be its flagship products. It has been headed
70
by the Indian-American Shantanu Narayen for over a
decade now. 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
How Adobe impacts our lives
12.7% 10.8%
Adobe has a range of products that many of us use in
our computers and phones.
Adobe Reader: Adobe Reader, which is used to read PDF
documents, is one of the most-used software today. 10Y average ROE 10Y annualised EPS growth
Adobe Creative Suite: It is a boon for designers, video
editors and web developers. It includes software like Adobe Experience Cloud, which provides analytical
Photoshop, Indesign, After Effects and Premiere Pro, and digital-marketing solutions, manages 233 trillion
which are widely used by many organisations and customer transactions annually, with most large
individuals around the globe. corporations using it.
Adobe Flash Player: It is another important software. It Adobe can be considered a monopoly due to its
helps us stream videos online, play games and run market positioning and the stickiness it has among its
various other internet applications. Its presence can’t users. Organisations and designers using its products
be felt but if you don’t have it, you won’t be able to find it hard to switch from its products.
play many videos and applications.
Fundamentals
What is special about Adobe? Adobe’s digital-media segment, which includes
Adobe’s Creative Suite is used by over 90 per cent of Creative Suite and other software, contributed 68 per
the world’s creative professionals. Adobe Acrobat is cent of Adobe’s revenues, while its digital-marketing
used on billions of mobiles and computers. It helps segment, which includes analytics and advertising,
open 200 billion PDF documents annually. contributed 29 per cent to its revenues in FY17.
Adobe’s revenues and profits have increased at a rate
of 8.7 and 8.9 per cent, respectively, in the past 10
years. Its 10-year average operating margin and ROE
stand at 22.6 per cent and 12.7 per cent, respectively. Its
current operating margin and ROE of 29.7 per cent
and 21.3 per cent, respectively, are at their highest
levels in the past 10 years.
DID YOU Adobe became profitable in the

very first year because Steve Jobs
KNOW had bought 19 per cent stake in
the company and paid five-year
advance fees for PostScript, a
page-description language.
:HDOWK,QVLJKW-XO\

COVER STORY
AMAZON
Let’s go shopping
With its customer-centric approach, Amazon has transformed consumer
behaviour by making online shopping easier, faster and enjoyable
A 10Y price chart

mazon is the world’s biggest internet retailer
and one of the largest providers of cloud
$2000
services. It was founded by Jeff Bezos in 1994.
Initially, Amazon sold only books. It launched its
IPO on NASDAQ in 1997. In the fourth quarter of 2001,
1500
35.7%
Annualised return
Amazon made its first profit of $5 million on sales of 1000
more than $1 billion. It launched its Web Services
500
(AWS) division in 2002. Currently, AWS is its most
profitable business. 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
How Amazon impacts our lives
11.3% 18.6%
Amazon has made us believe that anything and
everything can be bought online. These days there is
no hesitation among people in ordering even big-ticket
items like air conditioners, furniture or television sets 10Y average ROE 10Y annualised EPS growth
online. Amazon has made our life more convenient
and has helped us in saving our time by delivering all
the goods at our doorstep in quick time. Fundamentals
Amazon Prime is the new craze among youth, with Amazon operates in three segments: North America,
its quick delivery and free music and videos. As of International and Amazon Web Services (AWS), which
April 2018, it had more than 10 crore subscribers. contributed 59.7, 30.5 and 9.8 per cent of revenues,
Amazon’s Kindle device is a popular e-book reader, respectively, in FY17. But AWS contributed 105 per cent
which has redefined reading. of the total operating income, compensating for the
losses made from the international segment. Amazon’s
What is special about Amazon? revenues and profits have increased at a rate of 28 and
The brand image created by Amazon among its users 20 per cent, respectively, in the last 10 years.
makes it special. Its customer service is its USP. Amazon’s profit growth looks depressed due to
Amazon has made online shopping a habit among rapid expansion in international business and
its users. It is believed that 80 per cent of Amazon’s US increase in operating expenses and promotional
customers purchase from it at least once a month. expenses in international and emerging markets. Its
10-year average operating margins and ROE are at 2.5
and 11.3 per cent, respectively. Its ROE looks
depressed due to continuous equity infusion into the
business. Once the fresh equity infusion stops and
international operations turn around, its ROE will
witness a spurt.
DID YOU Amazon was initially launched with

KNOW the name Cadabra, which was later
changed to Amazon in 1995.
Bezos chose this name because he
wanted his company to become as
big as the Amazon River.
Note: Amazon didn’t qualify as per our criterion of 15 per cent ROE. It was selected nonetheless due to its high revenue growth and mutual fund holdings
-XO\:HDOWK,QVLJKW

COVER STORY
APPLE
The apple of consumers’ eyes

Apple has established itself as a premium brand whose products are highly
coveted and have high aspirational value
T 10Y price chart

he iPhone is one of the most-admired products
in the world. It is estimated that around 10 per
$200
cent of the world’s population, around 1 billion
people, use it.
Apple was founded in 1976 by Steve Jobs and his
150
22.4%
Annualised return
two friends and was incorporated in 1977. In 1985, 100
Steve Jobs was forced out of the company. He founded
50
NEXT, a computer-platform-development company,
which was later bought by Apple in 1997. Jobs was 0
again appointed as the CEO. He then acquired many 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
software companies and later launched the iPhone in
37.0% 32.3%
2007, which made Apple what it is today. Jobs died in
2011 and Tim Cook was appointed as the CEO.
How Apple impacts our lives 10Y average ROE 10Y annualised EPS growth
Twenty years ago, no one could have imagined a
phone which will work on touch, but today this is a able to charge a hefty premium. As per IHS Markit, a
reality. Apple introduced humankind to the power of research firm, the cost of manufacturing the iPhone 7
smartphones. Apple products are also a status symbol, is $224, whereas Apple is able to sell it at $649, which
a symbol of luxury. Apple also manufactures Mac, a is 2.88 times the cost of manufacturing it. iPhones
premium computer; iWatch, a watch that can work have a lot of emotional value for their
like a smartphone; and iPad, a premium tablet. customers. This makes them feel good about
themselves and pay a higher price.
What is special about Apple?
Here are the factors which make Apple Fundamentals
special and differentiate it from other Apple is a global mammoth and has
players in the market: a market valuation of over $950
Innovation: Apple’s ability to innovate billion, which is equivalent to
and launch new products regularly approximately 38 per cent of India’s
is its biggest strength. It keeps GDP. It had cash and cash equivalents
launching new versions of its of $74 billion as of FY17. Even at such a
products at regular intervals. large scale, it is able to compound its
Marketing: The way Apple markets its revenue and profits at a rate of 22 per cent and
products is exceptional. The craze that 30 per cent annually in the last 10 years, which is
it builds for its products before launch is exceptional. Its 10-year average operating margin
unparalleled. Its customers eagerly await its and ROE stand at 28.7 and 36.8 per cent, respectively.
new products. Additionally, its ROE has never fallen below 30 per
Distribution: Apple’s distribution network plays a big cent over the previous 10 years.
role in its success. Through its strong distribution
network, it is able to sell around the world. The best
part of its strategy is that Apple does not provide DID YOU In 1976, one of Job’s friend and
KNOW co-founder of Apple, Ronald Wayne,
discounts to its dealers and further prevents them
sold off his 10 per cent stake in
from providing any discounts, which keeps the prices the company for just $800. It
of its products stable. would have been worth over $93
Premium pricing: Due to its market reputation and the billion in 2018.
endowment value attached to its products, Apple is
:HDOWK,QVLJKW-XO\

COVER STORY
FACEBOOK
Everyone’s on it
With a user base of 2.2 billion, about 30 per cent of world’s population is on
Facebook, making it a ‘nation’ bigger than China and India
F Price chart since IPO

acebook is the largest social-media website,
which has changed the way we interact with
$200
others. Through it, people share images,
messages and videos. Its messaging platform
WhatsApp has now become a synonym for messaging
150
31.0%
Annualised return
and has become a verb in itself, just like Google. 100
Mark Zuckerberg, the founder of Facebook,
50
initially created this website only for the students of
his college. He allegedly stole this idea from his 0
college seniors. They later filed a lawsuit against him, 2012 2013 2014 2015 2016 2017 2018
which was settled in 2008 for $300 million. Facebook
15.7% 251.8%
was opened to everyone in 2006 and within four years
it had developed a user base of 500 million, which
later swelled to more than 1 billion in 2012.
Recently, the company faced allegations of data leak 5Y average ROE 5Y annualised EPS growth
of 87 million accounts.
a user base of 1.5 billion and Instagram has a user
How Facebook impacts our lives base of 800 million. Facebook is the second-most
Facebook is an inseparable part of our lives. It has visited website in the world, after Google
introduced us to a whole new virtual world. This world While Facebook is fully monetised, WhatsApp and
keeps us connected with everyone digitally. Facebook Instagram are yet to be monetised fully, which gives
also owns two other popular services: WhatsApp, a Facebook an enormous scale to expand.
messenger that also allows free video and voice calls, Facebook, WhatsApp and Instagram are not just
and Instagram, a picture-sharing application. websites or mobile applications, they are more of a
habit, a social trend, which may not fizzle out soon,
What is special about Facebook? especially in a world which is increasingly getting
Facebook is a country in itself in terms of the number inclined towards virtual world.
of its users. It has a user base of 2.2 billion, which
comes out to be 30 per cent of world’s population or Fundamentals
around 1.7 times of India’s population. WhatsApp has Facebook has become a giant in just 10 years. It has
shown tremendous growth of 75 per cent in revenues,
from mere $0.15 billion in 2007 to $40.6 billion in 2017.
Its profits have risen from -$0.14 billion in 2007 to $15.9
billion in 2017. Its five-year average operating margin
and ROE stand at 41 per cent and 15.7 per cent,
respectively. The current operating margin and ROE,
at 49.7 per cent and 27.3 per cent, are even better.
These are the highest in the last five years.
DID YOU According to an article published

KNOW on The Washington Times in 2015,
in one of the three divorce filings in
the US, Facebook was mentioned
as a contributing cause.
-XO\:HDOWK,QVLJKW

COVER STORY
GOOGLE
You can’t escape from it

Many of us are avid users of Google’s products like Gmail, YouTube and
Android. What’s more, Google may know more about you than you yourself do.
T 10Y price chart

oday digital life without Google is unimaginable.
The importance of this search engine can be
$1200
ascertained from the fact that the word ‘Google’
has become a verb for running internet search.
Alphabet is Google’s holding company.
900
15.0%
Annualised return
Google was started in 1996 by Larry Page and 600
Sergey Brin as a research project while they were
300
pursuing Ph.D. at Stanford University. Page and Brin
launched Google in a friend’s garage, where it was 0
incorporated in 1998. The word ‘Google’ is a play on 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
the word ‘Googol’, which is a large number starting
17.0% 9.8%
with one and followed by 100 zeroes.
How Google impacts our lives

An internet giant which is changing our lives at a 10Y average ROE 10Y annualised EPS growth
rapid pace with its never-ending innovation, Google
is the best search engine in the world, with more
than 3.5 billion searches per day. Apart from its
search engine, here is how Alphabet is making a
difference to our lives:
Gmail: A popular mail service
YouTube: Provides video streaming. Around 1.3 billion
people across the world, which is equivalent to India’s
population, use YouTube and watch almost 5 billion
videos daily.
Google Maps: The most-reliable navigation service
Android: The operating system that runs most
smartphones from the US followed by 33 per cent and 15 per cent
Google Chrome: A widely used internet browser from EMEA (Europe, Middle East and Africa) and
Google AdSense: The biggest provider of online APAC (Asia Pacific) regions, respectively. Its 10-year
advertising average operating margin and ROE stand at 28.5 and 17
per cent, respectively, which appear to be decent given
What is special about Google? the scale of Alphabet’s operations. Increasing use of
Google knows almost everything about its users. Its the internet in developing economies, increase in
database and analytics are its biggest strength. For revenues from mobile-ad services, additional
instance, it knows about what your frequently visited contribution from new initiatives like sale of apps,
places are, your favourite food, what products you are in-app purchases, digital content, Google cloud services,
looking for online, etc. This information helps etc., will provide Alphabet further room to grow.
advertisers reach their target customers, helping
Google earn billions of dollars.
DID YOU In 1999, Google founders wanted
KNOW to sell it for $1 million to Excite, the
Fundamentals second-biggest search engine then,
In 2017, Alphabet generated massive $96 billion but its CEO rejected the offer, even
revenues from its AdSense service alone. It has been when the price was reduced to
increasing these revenues at 19 per cent for the past 10 $750,000.
years. It generated about 47 per cent of its revenues
:HDOWK,QVLJKW-XO\

COVER STORY
MICROSOFT
Winning with Windows

Used by more than 1.4 billion people, Windows commands a share of
83 per cent in operating systems
F 10Y price chart

or many of us, a computer without Windows is
like life without oxygen. The Windows operating
$120
system is owned by Microsoft.
Microsoft was founded by Bill Gates and Paul Allen
in 1975. It entered into the operating-system business
90
13.4%
Annualised return
in 1980 and secured a contract from IBM. It became 60
dominant after the launch of MS DOS in 1981. Within
30
a year of its launch, Microsoft licensed it to 70
companies. It later launched the revolutionary 0
Microsoft Windows in 1985. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
How Microsoft impacts our lives

In the early 2000s, the use of computers gained
prominence. The first thing taught to a person
learning computers was how to use Windows. Since
32.6%
10Y average ROE
6.7%
10Y annualised EPS growth
then, computers have become a regular part of our
lives and Windows has become a necessity. Unlike using it will continue to use it because of high
other operating systems, Windows has a friendly and switching costs, friendliness of the operating system
seamless interface compatible with most software. and lack of any better alternative. This means a
Microsoft Windows is used by 1.4 billion people predictable stream of revenues.
around the world, which is more than the population
of India. Here are some of the ways in which Fundamentals
Microsoft has impacted our lives: Even though Microsoft has shown sales and
z Microsoft Office is the most important suite of profitability growth of just 5 and 4.2 per cent,
applications such as Excel, Word and respectively, over 10 years, it still continues to be the
PowerPoint. dominant force in computers. Windows, its major
z Internet Explorer, the business, still continues to be the cash cow. As of
first browser that many FY17, it had cash and cash equivalents of over
of us used $132 billion, which are equivalent to 17 per cent of
z MS Access, a database its market cap. Its 10-year average operating
management system margins and ROE stand at 31.3 and 32.6 per cent,
respectively. Although its smartphone business
What is special about and the acquisition of Nokia haven’t
Microsoft? reaped meaningful returns,
The dominant and monopoly its traditional business still
position of Microsoft says a lot continues to dominate
about it. About 83 per cent of world markets.
computers use Microsoft Windows,
which is phenomenal, given the size of the
market. Microsoft’s dominant position is such that
these days most computers and laptops come with pre- DID YOU
installed Windows. KNOW Microsoft has never made a yearly
The best part of this business is that the user of loss in the last 34 years.
Windows cannot shift to any other operating system
readily since it requires a lot of time to become
proficient with an operating system. Many businesses
-XO\:HDOWK,QVLJKW

COVER STORY
NIKE
Just doing it
With a global market share of 26 per cent in the athletic-footwear market, Nike
is a one-stop shop for all your sporting requirements
N 10Y price chart

ike is the world’s largest athletic-footwear
supplier, which has created a niche for its
$80
products. It has a shoe for every sport. Endorsed
by the world’s top athletes like Cristiano Ronaldo and
Virat Kohli, Nike is famous for its tagline ‘Just Do It’.
60
15.9%
Annualised return
Earlier known as Blue Ribbon Sports, Nike was 40
started by Phil Knight and his coach Bill Bowerman
20
in 1964. It started as a distributor of shoes for a
Japanese company. Its prime brand Nike was 0
launched in 1976 and in just four years it was able to 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
capture 50 per cent of the athletic-shoe market.
How Nike impacts our lives

Nike is among the first choices of youth when it
comes to sports shoes or sports wear. Some of its
24.8%
10Y average ROE
13.1%
popular products are as follows:
Sports shoes: They are known for their quality, comfort Quality: Not only do Nike products look good, they are
and style. also known for their durability and quality.
Merchandise: Nike jackets, lowers and other Premium pricing: As compared to Nike’s nearest
merchandise are loved by youth, athletes and gym competitors like Adidas, Reebok and Puma, Nike
lovers. Nike bags are the latest craze among products are always sold at a significant premium.
college-going students. This tells a lot about its product quality and
Sports gear: Nike is also known for its sports brand appeal.
watches, gym gloves, wrist bands, caps and
sippers. Fundamentals
These make Nike a one-stop shop for In 2017, Nike had a global market
all your sporting needs. share of 26 per cent in the athletic-
footwear market, which is significant
What is special about Nike? in comparison to its nearest
The factors which makes Nike stand competitors. Its revenue and
out from the competition are: profitability have increased at a
Branding and marketing: Nike is rate of 7.7 and 11 per cent,
endorsed by top athletes, including respectively, over the past 10 years.
Virat Kohli, Cristiano Ronaldo, Its 10-year average operating
Tiger Woods and Roger Federer. It margin and ROE stand at 13.1 per
spends about 10 per cent of its cent and 24.8 per cent, respectively.
revenue on ads. This was about Its current ROE of 34.4 per cent is at
$3.3 billion in 2017. This marketing its highest level in the past 20 years.
strategy has helped it become the preferred sports
brand among youth.
Innovation: Nike has shoes for every need, be it running, DID YOU The person who designed the Nike
KNOW logo was paid $35 for his work.
exercising, specific sports or outing. It has niche
The logo is called Swoosh and
products within its product portfolio. For example, it signifies wings of the Greek
has shoes for different running preferences: jogging or goddess of victory, Nike. Today it is
fast running. Its Nike Air shoes range is one of the worth billions of dollars.
many examples of its ability to innovate.
:HDOWK,QVLJKW-XO\

COVER STORY
STARBUCKS
Over a cup of coffee

By both combining premium service with differentiated offerings, Starbucks
has become much more than a coffee shop for its customers
S 10Y price chart

tarbucks was started by Jerry Baldwin, Zev Siegl,
and Gordon Bowker in 1971. The first two were
$80
teachers and the third, a writer. It started with
just one store in Seattle, Washington, but has now
expanded to 27,300 locations globally.
60
20.0%
Annualised return
It was sold off by its original owners in 1987, when 40
it had six stores in Seattle. By its IPO in 1992, it had
20
140 stores with revenues of $73.5 million. Starbucks
differentiated itself from other competitors by over- 0
roasting its coffee, which made its taste different from 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
the coffees of other brands.
How Starbucks impacts our lives

Though Starbucks entered India in 2012 via a 50:50
joint venture with Tata Global Beverages, it has had a
30.7%
10Y average ROE
16.2%
deep impact on Indian customers in a short span of
time. Its sales are rising in double digits in India. It is coffee as compared to other coffee makers due to
loved by its customers for the following: consumer trust and superior quality of service.
Quick service: Customers repeatedly visit Starbucks Expansion: Starbucks has not remained limited to one
stores due to its superior and quick service. single market. Instead, it has expanded to 75 countries.
Satisfaction and experience: Customers visit Starbucks It has also demonstrated its ability to be successful at
not just for coffee but for the satisfaction they get by multiple regions. Its has also diversified itself into
visiting its stores. Starbucks employees know their other product lines while still maintaining its
regular customers and their preferences very well. dominance in coffee.
What is special about Fundamentals

Starbucks? Starbucks is an efficient and highly profitable
Following are the factors that company operating in quick-service restaurants. Its
differentiate Starbucks from its revenue and profits have increased at a rate of 9 per
competitors: cent and 15.7 per cent, respectively, in the past 10
Market positioning and branding: years. Its strategic decision to focus more on licensed
Starbucks has earned a strong stores instead of company-operated ones has been
brand name by consistently fruitful, thus leading to healthy growth in profitability
winning its customers’ trust for and increase in margins. Its average 10-year operating
the past many years, which has margin and ROE stand at 13 and 30.7 per cent,
resulted in strong brand loyalty. respectively. Its operating margins and ROE have
Differentiation:Starbucks has shown a tremendous increase in the past four years,
created a niche for itself by averaging 19.3 and 47.9 per cent, respectively.
selling roasted coffee, which
differentiates it from other
coffee makers. DID YOU Starbucks’ largest cup Trenta can
Convenience:Starbucks stores are KNOW hold 916 ml of coffee. This is more
located at convenient locations than the average size of human
and are highly accessible. stomach, which can hold 900 ml.
Premium pricing: Starbucks is able
to charge a premium for its
-XO\:HDOWK,QVLJKW

COVER STORY
VISA
Swipe and pay

Commanding over half of the market share in card payments,
Visa has transformed cashless payments
A 10Y price chart

company which saves us from the hassles of
cash payments, Visa has emerged as a synonym
$160
for plastic money.
An older avatar of Visa, called BankAmericard,
was launched by Bank of America in 1958. But due to
120
20.6%
Annualised return
defaults and rapid growth, it invited a lot of trouble 80
for Bank of America. In 1970, Bank of America gave
40
up control of this venture. Thereafter, many banks
collectively formed a separate entity, called National 0
BankAmericard Inc. By 1972, 15 countries were 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
licensed to issue the card. But they did so by different
15.2% 32.0%
names, thus adding to the complexity. Later, in 1976, to
solve all these problems, a common name ‘Visa’ was
given to all these cards.
10Y average ROE 10Y annualised EPS growth
How Visa impacts our lives
Visa is one of the early proponents of digital Visa operates in an almost duopoly market, with a
payments. Many of us use debit and credit cards significant market share (the other major player being
issued by Visa. Visa helps us to seamlessly transact MasterCard). It will be a big beneficiary of the
around the world. increasing ticket size and volume of transactions. It
During demonetisation, in November 2016, the use will also benefit from a growing share of digital
of Visa increased. One can say that the real payments in emerging economies like India.
beneficiary of demonetisation was Visa, not Paytm. Operating in a business with huge barriers to entry
Unlike Paytm, Visa made profit on every transaction further strengthens Visa’s position. Further, its stable
made through it. business model gives it clear revenue visibility and
leaves it with a lot of room to grow.
What is special about Visa?
Visa facilitates trillions of dollars of transaction, for Fundamentals
which it receives a fee of around 0.10 per cent per Visa has about 50 per cent of the global market share,
transaction. It can be called an intermediary, which excluding China, in card payments. Its revenues and
facilitates payments and takes a certain portion of the adjusted profits have increased at a rate of 18 and 26
fees charged by banks. per cent, respectively, during the last 10 years. Its
10-year average operating margin and ROE stand at
52.3 and 15.2 per cent, respectively. Its five-year
operating margin and ROE are at 61 and 20 per cent,
respectively.
DID YOU Visa has issued more than 2.4

KNOW billion cards, including both debit
and credit cards. The combined
length of all these cards is nearly
1,30,000 miles, which is enough to
circle the Earth five times.
:HDOWK,QVLJKW-XO\

COVER STORY
WALT DISNEY
It’s fun time

Known for classic cartoon characters and Marvel superheroes, Walt Disney is
an entertainment giant that also runs amusement parks and produces films
M 10Y price chart

ost of us have seen animation films of Mickey
Mouse and Donald Duck. These popular
$140
cartoon characters belong to the house of Walt
Disney. Named after Walt Elias Disney, a dyslexic,
Disney today is an entertainment behemoth and has
105
12.4%
Annualised return
many popular franchises such as Marvel Studios. 70
Walt Disney was founded in the initial 1920s as
35
Disney Brothers Studio. It developed its most-popular
cartoon character Mickey Mouse in 1928. Its first full- 0
length animated feature film was Snow White and the 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Seven Dwarfs. In 1950, Walt Disney debuted on TV and
15.5% 9.7%
in 1954 launched its first regular television series
Disneyland, which became the longest-running prime-
time series in history.
10Y average ROE 10Y annualised EPS growth
How Walt Disney impacts our lives
We all have grown up watching Walt Disney cartoons. animation films. It has expanded into movies,
Donald Duck and Mickey Mouse are still loved by amusement parks and merchandise, which provide it
children all over world. The Jungle Book, one of the multiple streams of income.
most-famous animated movies in the world was
distributed by Disney. Many of us still dream of Fundamentals
visiting Disneyland, which is considered to be one of Disney operates in four segments: media networks,
best amusement parks in the world. parks and resorts, studio and entertainment, and
Dangal, which is one of the biggest blockbusters of consumer products and interacted media,
Indian cinema, was distributed by Walt which contributed 42.6, 33.4, 15.2 and 8.8
Disney and UTV (a Disney enterprise). per cent respectively to its FY17
UTV is one of the top film distribution revenues. Its revenue and profits
and production studios in India, with have increased at 4.5 and 6.7 per
films like Rang De Basanti, A cent, respectively, in the last 10 years.
Wednesday, Haider, In the last five years, its profits have
Tamasha, Highway and risen at 8 per cent. Its 10-year
many more. average operating margins
Marvel Entertainment, and ROE are 21.2 and 15.5
the creator of superheroes per cent, respectively. In the
like Spider-Man, Wolverine, last five years, its average
The Hulk, Thor, Iron-Man, operating margins and ROE have
Captain America and the team further improved to 23.8 and 18.5
of Avengers, was also acquired by Disney. per cent, respectively. WI
Its comics, movies and characters still rule the hearts
of many worldwide. The recent rush outside theaters
for watching Avengers: The Infinity War is the proof DID YOU When Disney acquired Pixar
KNOW Animation Studios in 2006, Steve
of its fan following.
Jobs, who was also the majority
shareholder in Pixar, became the
What is special about Walt Disney? largest shareholder in Walt Disney,
The influence of Disney’s characters is its biggest owning 7 per cent of it.
strength. The company is no longer limited to
-XO\:HDOWK,QVLJKW

Stock Advisor
A journey
Dhirendra Kumar
well begun
In its first eight months, Value Research Stock Advisor has created a huge
opportunity for investments that are set for strong future gains
I
t’s hard being an equity investor, and perhaps harder what makes it hard being an equity investor. The
still to advise others on equity investment. But I’m everyday situation is terrible on so many days, and yet
not complaining, because it’s incredibly rewarding. the total experience is fabulous. I see so many equity
I don’t just mean financially, but in the sense of doing investors who are constantly stressed. There’s the
something that builds a community of people who will stress of choosing companies, and the fear of having
learn a lot, earn a lot and learn to earn a lot. made the wrong choices. There’s stress when the
Of course, there are no certainties. In equity markets are rising because they may fall soon. There’s
investing, on any given day, there never are. That’s stress when your stocks are doing something different
:HDOWK,QVLJKW-XO\

compared to the rest. For are confident about our investments and we
some people, there’s After some years of such know and understand the logic of why we
additional stress when one’s daily stress, investors who chose each stock, and we are keeping an eye
own stocks are doing well but stay focused start noticing on how business is progressing for each of
others’ are doing even better. how well their money has them, then why would there be any stress?
And yet, after some years of That’s the equity-investment equivalent of
grown on the whole!
such daily stress, investors listening to the pilot and the ATC.
who stay focused start
Somehow, the days and
noticing how well their weeks of worry and stress
money has grown on the add up to years of happiness.
whole! Somehow, the days
and weeks of worry and stress add up to
years of happiness.
Funds, stocks, and something more

However, what many investors struggle
with is that they don’t get involved in any
way of actually acquiring this information
and knowledge and thus never get
confidence. The simplest thing to do – and
that’s something Value Research has been
Knowledge and confidence involved with for decades – is to invest in an
And yet, it’s not as if the stress is compulsory. equity mutual fund. That way, you can
This reminds me of something I read about offset the research and the knowledge part
– a technique for reducing passenger stress to someone else (the fund manager) and
that some airlines in Europe change your task to a relatively easier one
are trying. A lot of people If we are confident about of choosing and tracking mutual funds.
have a deep fear of flying and There are still a lot of mutual funds, but
are always hyper-stressed
our investments and we with the help of Value Research, it’s not
when they are in a flight. The know and understand the that difficult to choose some good funds and
aircraft manufacturer Airbus logic of why we chose each then keep track of your investments.
has discovered that if such stock, and we are keeping However, for some people, it makes sense
passengers can listen in on an eye on how business is to take the next step, which is to study,
the conversation between the progressing for each of understand and choose stocks themselves.
pilots and the air traffic That’s the goal that this magazine serves,
control, then they don’t feel
them, then why would there and has been serving for 12 years now.
scared. Why is that? Simply be any stress? During these years, we have had tremendous
because they know what is success in terms of the ideas that we have
going on. They can hear that the pilots and promoted for choosing stocks
the ATC are carrying on their work in a as well as the actual stock
The actual stock perfor-
calm and routine manner and whatever the choices that we have made. In
passengers are imagining in their fear is
mance for the stocks we fact, the actual stock
not justifiable. Information and have selected as invest- performance for the stocks
understanding are the key to managing ment-worthy in this magazine we have selected as
what tends to be a stressful situation. has been about 23 per cent investment-worthy in this
I think there’s an equivalent in equity CAGR over the years magazine has been about 23
investing as well, and that’s the same. If we per cent CAGR over the years.
-XO\:HDOWK,QVLJKW

Stock Advisor
portfolios are building up at low valuations

that bode well for the future returns that they
will generate. Higher potential returns, with
transparency of research and deep knowledge
– this is the core service that the Stock Advisor
provides. But there’s much more that our
subscribers are taking advantage of.
An advisor of your own

Still, a certain subset of our readers wanted a
different deal, a different kind of product.
They wanted a more direct and focused set of
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maintain, detailed research about these, as
well as a set of digital tools that would enable
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Eight months ago, after years of Stock Screener system that is by far the best
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we launched a premium service available at great value. As investor till now. It enables you to screen stocks
that provided just that. Along we continue to release two based on any kind of a financial criteria that
the way, we evolved – and tested new recommendations every can be applied to a company’s financial and
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The months since the launch that they will generate. familiar to the readers of our magazine, like
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OFFBEAT SANJEEV PANDIYA
THE COLLECTIVE EGO
Ego of the groups

Just like an individual’s ego tries to preserve the individual, the
collective ego has the group’s preservation as its goal
E very sufficiently complex system

tends to exhibit ego.
In an individual, ego is mostly
desire for self-preservation, not just of
the group itself, but also of its internal
structure. That is, it tries to maintain the
understood to represent the id, a sense status quo of the inter-relationships
of identity/self manifested mostly by within the group, especially with
the (rational) instinct of self- reference to the leader. That is what
preservation, self-gratification and makes transformation of groups/
selfishness. But there is also a collective companies such a difficult job.
ego, which provides us a lens through Self-preservation is the objective of
which to understand crowds (groups of the individual ego, but it is not the
people such as teams, companies, objective of life or nature. So while the
political parties, religions, markets, even instinct for self-preservation might seem
countries), both small and large. rational from the point of view of the
For those who care to look for it, there individual, it is not rational from the
is a lot of material on the individual ego, point of view of nature, which really
When the
how to define it, locate it and subdue/ does not care whether a single individual
individual is manage it. But when the individual is survives or not; it’s more interested in
subsumed into a subsumed into a larger group (say, a the survival of the species. Similarly, the
larger group, his company), his behaviour is often driven collective ego develops in groups, but
behaviour is often by the herding instinct, and the herd has evolution does not care whether a
driven by the a different personality, a different id. particular group survives. Nobody wins
This id is called the collective ego. the ego game. If the objective of evolution
herding instinct,
Knowledge of your own ego is, of is to match the environment with the
and the herd has a course, a must. Managing your own ego survivors, that will happen sooner or
different is one of the critical life skills, but later. The collective ego will only delay
personality, a understanding the collective ego will matters but cannot defy its destiny.
different id. This id also add to your intelligence. It’ll help The ego is what prevents an organism
is called the you to understand group dynamics and from dissolving into chaos. The id is the
manage yourself and your life through idea of the self, held together in the
collective ego.
these groups. The laws of groupthink brain as distinctive from the world
are embedded in the collective ego. around us. Similarly, in an organisation,
As is the case with the individual, the the id is ‘we vs they’, the insiders vs the
collective ego manifests itself in the outsiders. From this id, like in any other

organism, comes the collective ego, the labour unions, cities, grassroots
desire/impulse to hold together the campaigns, communes, online fora,
status quo in its original form, like a vocational groups, to mathematics/
CEO who needs his company intact in economics/sciences, universities and Collective ego
order to keep his job. Or a CXO who professional bodies (doctors, lawyers, tries to maintain
needs his CEO in place to keep his job CAs), to races, nations and national the status quo of
and so on. This creates a network of alliances (like NATO), the whole species, the inter-
relationships that seek status quo in culture, language (like the Hindi zealots
relationships
order to maintain their existence. or the anti-English movements), even
In companies, this may manifest itself cancers. within the group,
in strange ways: like the plant head who Remember, the defining characteristic especially with
shoots down the plan for a new plant of complexity comes from connectedness. reference to the
because he does not want a sibling plant The brain may be branded as a monolithic leader. That is
head to compete for the affections of the entity but is actually a highly inter- what makes
boss. In religions, the priest gets his connected network of zillions of
transformation of
power and status in society from how neurons, some similar and many vastly
religion is used to encroach into the different. The other characteristic of groups/
personal affairs of men and women; in complexity comes from a multitude of companies such a
cultures, it is the various stakeholders objectives, with optimising functions difficult job.
who benefit from the power structures doing complex trade-offs. Now look back
that get built over time. at the list of other complex entities and
In the absence of ego, the object does you will find these characteristics are
not care whether it lives or dies, for embedded in them, too. But not yet in a
example, a rock or a computer. Or a single computer or a car (unless they are
temple, but a religion has an ego; it fights connected). So the internet has an ego,
back any attempt to wipe it out. but a single computer has not. But an
Maintaining homeostasis becomes the interacting robot that is meshing with
biggest priority of any complex society will soon develop an ego. Alexa/
organisation – from your family, club, Google Assistant has an ego.
musical band, sports team, gang, So what is the point of this article? To
committee to the Church, a business, an point out that ego exists. It has both
MNC, an ashram/monastery, cults, positive and negative dimensions, which
religions, NGOs, to political parties, need to be understood in order to manage

and pain-averse, addictive fools, who
come to exchange all their foibles (a
market for exchanging one foible with
another). To the somewhat rational
person (who came upon his rationality
through long years of training; he wasn’t
born like that), the market seems like a
mad house, just lurching from one
irrationality to the other. So at what level
do all these establish their connectedness?
This is what gives the market its single,
monolithic ego, the vested interest in its
own self-preservation.
I have explained elsewhere that we
have four components of the brain: the
limbic (aka lizard/alligator brain), the
social/herding (aka monkey brain), the
left (logical) and right (emotional).
Logically, connectedness and
it. Not only in yourself, but in the groups homeostasis can only happen in those
of people you deal with: companies, places where the underlying thoughts
religions, cultures, markets, countries. are unchanging and unlearning. And
That to locate it, you need to stand back that, in the individual brain is in the
and observe its influence. limbic and monkey brains.
And what does this consciousness do So if ego is defined as the ‘rational’
for you? It does not give the next tip for instinct of self-preservation that the
investing in markets, just like traffic organism seeks to protect, then it’s clear
rules don’t tell you where to go, but to that the market seeks to protect the
ensure that you reach your destination, limbic and monkeyness, where its ego is
it’s a good idea to know your traffic housed. Exactly how the market does
rules! this will take another column to
Markets are both complex and elucidate, but you must remember Adam
If ego is defined interconnected and are optimising Smith’s famous quote: “The market will
as the ‘rational’ multiple objectives. They meet every so compose its affairs so as to dispossess
instinct of self- criteria for having a collective ego, yet the maximum number of people of the
preservation that we don’t find a simple description of Mr. maximum amount of their wealth.” If
Market’s collective ego. In a different this be true, then it means that
the organism
context, Carl Jung came close when he irrationality is embedded in the
seeks to protect, talked about the collective unconscious, maximum number of players and to the
then it’s clear that a term which found favour with the maximum extent. If they’re coming to
the market seeks Freudian school of psychologists. the market with a profit motive, how
to protect the So where is the connectedness of come are they losing?
limbic and markets? Theoretically, the definition of That means that the market maximises
markets in classical economics turned our most basal instincts, and unites us
monkeyness,
out to be totally out of whack: the there. We’re joined at the hip by our
where its ego is assumption that markets were fulfilling greed and fear and every basal instinct,
housed. a resource-allocation function in the which is the animal that we are. And in
economy, multi-optimising millions of ways that you must spend time to
diverse objectives, and that each player understand, that is what the processes of
had perfect information and was the market seek to protect, not your
‘rational’. We now know spectacularly intelligence and forbearance (should you
that this is laughable. ever show any). WI
Practically, the market is a connection The author teaches, trades and writes at spandiya.
of ill-informed, lazy, pleasure-seeking blogspot.com

STRAIGHT TALK ANAND TANDON
THE OIL INDUSTRY
An uncertain scenario
Oil investors are in a dilemma whether oil demand has
peaked out or not
I n 1956, M. King Hubbert, a geologist,

published a paper presenting a formal
theory of ‘peak oil’ – a point in time
estimated that oil production had
peaked between 2005 and 2011 (refer
Wikipedia). The reality is that in recent
when the maximum rate of oil extraction years, ‘fracking’ has increased oil
has been reached in the world and post production considerably and better
which, oil production would enter technology has increased oil reserves
terminal decline. Like other theories beyond those predicted earlier. The
that forecast the world running out of world is not in any danger of running
resources, the peak-oil theory did not out of oil anytime soon.
take into account the effect of rapid Enters Tony Seba (https://tonyseba.
changes in technology. com/biography/). In 2017, a book called
Hubbert predicted a peak of 12.5 Clean Disruption of Energy and
billion barrels per year in 2000. For the Transportation, written by Tony Seba,
USA, Hubbert forecast a peak in 1970. was published. It went on to become a
For a while, his predictions seemed to bestseller. Seba, along with some
Hubbert predicted
be accurate. As recently as 2014, a co-authors, also wrote for a think-tank
a peak of 12.5 re-validation of an earlier study in 2004 called RethinkX (rethinkx.com). In the
billion barrels per
year in 2000. For Hubbert’s peak Hubbert’s peak – USA
the USA, Hubbert 14 3500
forecast a peak in
Lower 48 states oil production (Millions of barrels/yr)
12 Proven 3000
1970. reserves
10 250 × 109 bbls 2500
Production (109 bbls/year)
8 2000
Future
6 discoveries 1500
Cumulative 910 × 109 bbls
4 production 1000
90 × 109
2 bbls 500
0 0
1850 1900 1950 2000 2050 2100 2150 2200 1900 1920 1940 1960 1980 2000 2020
year year

The refining cycle
Incremental refining supply Incremental oil demand
kbpd S*pore refining margin (US$/BBL) Surplus from China US$/bbl
and Middle East led to 10
Demand boom from Strong rebound record low utilisation
2900 China (+~1mbpd) following the recession rates (since 1987)
Asian 9
financial crisis Slowdown in
2400 Slowest capacity additions 8
Demand weakness
from Asia supply growth due to lower oil
since 2003 prices and EV 7
1900 cannibalisation
concerns
Surplus 6
1400 created
5
900
4
400
3
-100
Lower prices 2
spurred global
-600 demand growth 1
-1100 Global financial crisis 0

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
estimates
Source: Company data, BP Stats, Thomson Reuters, Morgan Stanley Research
report related to transportation So we now have a prediction of ‘peak

(and the book), he forecasted demand’ with falling oil consumption.
rapid changes in travel
modes. Is Seba’s prediction credible?
One of the key Seba makes a strong case – one can
forecasts was that watch his presentation on YouTube at
by 2030, 95 per cent https://bit.ly/2utYPxG and decide for
of US passenger oneself. The key argument underpinning
miles will be served Seba’s forecast is that technology chang-
by ‘autonomous es happen exponentially and not linearly.
vehicles’ powered When several related technologies con-
by electricity. Car- verge, the adoption of new technology is
utilisation rates determined by an ‘S’ curve, where the
would increase by a straight part of the ‘S’ can be almost ver-
factor of 10x, which tical. This leads analysts to underesti-
would automatically mate changes when they occur. Seba
imply a severe reduction in comes to his remarkable conclusions
car production. The oil industry based on technology changes in energy
would be seriously impacted. To quote, storage (batteries), autonomous vehicle
“Oil demand will peak at 100 million design and economics of car ownership.
barrels per day by 2020, dropping to 70
million barrels per day by 2030. That Refining in a sweet spot
represents a drop of 30 million barrels Setting up a new refinery requires
in real terms and 40 million barrels almost a decade. Whether it is because of
below the Energy Information Seba’s influence or rapid increase in
Administration’s current “business as alternate energy that the world is wit-
usual” case. This will have a catastrophic nessing, investment in refining capacity
effect on the oil industry through price has slowed considerably, and though
collapse (an equilibrium cost of $25.4 demand may slow over the next decade
per barrel).” as predicted by Seba, it is not likely that

US/Asian refiners: P/E and EPS growth
P/E
2019e PE to 2018-20e EPS growth
25e
Asia US Europe
Bubble size = 2019e ROE
20e
15e
10e
5e
0e
-15 -10 -5 0 5 10 15 20 25 30 35
EPS growth (%)
Source: Datastream, Bloomberg, e = Morgan Stanley Estimates
this would be the case over the next two beneficiaries if Morgan Stanley’s
years. In a recent report, Morgan forecasts turn out to be accurate.
Stanleys’ energy anaysts make a case for
a ‘golden age’ for refiners, as slow addi- To buy or not to buy
tion to capacity and still-rising demand Setting up a refinery of 400 mbpd capaci-
lead to a higher refining margin over the ty is a commitment of $10 billion, with a
Morgan Stanley
next couple of years at least. current payback period of 12 years. After estimates a two
Morgan Stanley forecasts suggest that an eight-year construction period, if you times increase
between 2017 and 2020, only three million thought that Seba’s forecast were even (compared to the
barrels of refining capacity would be remotely credible, would you make such a previous three
added in the world as against a demand decision? I think not. Consequently, refin-
years) in diesel
growth of 5.4 million barrels. The ing margins will likely rise higher as
forecast is based on three drivers – capacity additions lag demand growth.
demand, to 3.2
increase in road-construction activity, Does this also mean that secondary-mar- mbpd over the
higher demand of diesel as regulation ket investors should not buy as well? In period. Complex
requires shippers to shift to low-sulphur the true sense of long-term investing, refiners, especially
diesel from fuel oil, and increase in there should not be a difference in the in Asia, will be the
consumption of jet fuel. Morgan Stanley investment approach of a secondary-mar-
biggest
estimates a two times increase (compared ket investor and that of a company CEO.
to the previous three years) in diesel Reality is, however, likely to be different
beneficiaries if
demand, to 3.2 mbpd (million barrels per – and markets will probably look at the Morgan Stanley’s
day) over the period. Complex refiners, near-term profit pop favourably – even as forecasts turn out
especially in Asia – the key region of the long-term picture looks uncertain. WI to be accurate.
demand growth – will be the biggest Anand Tandon is an independent analyst.

BEST OF
WORDS WORTH
NOW
[With GST] Direct and indirect revenue will rise. Jobs will go up. If a
truck does 14 trips instead of 10 trips in a month, many more jobs will
be created... Corruption and leakages will certainly come down... Here,
sales are being reported honestly, and the system is so beautifully
designed that if you don’t report your sales honestly, you’ll be caught
somewhere in the chain. Gradually, we’ll move towards an honest
society where people will not compete on the ability to evade taxes
but on ability to compete on quality of goods, quality of service...
Piyush Goyal Power minister, The Economic Times, July 17, 2017
In terms of cryptocurrencies, generally, I can say The taxation on capital is

with almost certainty that they will come to a bad from several sources… you
en
ending. When it happens or how or have the corporate tax rate,
an
anything else, I don’t know… If I the dividend distribution tax
c
could buy a five-year put on every rate, for dividend income
o of the cryptocurrencies, I’d be
one above `10 lakh, the marginal
glad to do it… tax rate. You (also) have a
Warren Buffett Iconic investor, Mint, January 11, 2018 securities transaction tax and
a capital gains tax. There are
five taxes on capital and that
Any system of banking functions on would obviously also
trust. I think that relationship, in have an impact on
investments and
India, blurred itself out when savings decisions.
a section thought it was not its Urjit Patel
responsibility to pay back. RBI Governor, Mint,
February 8, 2018
Arun Jaitley Finance Minister,
Business Standard, February 21, 2018
This was a major breach of trust

Telephone calls from Delhi [data leak to an analytics firm].
to Bombay, over the years, have been at I am really sorry this
the root of the problem of the public- happened. Our
sector banks. People in Bombay responsibility
is now to
have been unquestionably make sure this
responding to the doesn’t happen
direction from Delhi. again.
M Damodaran Former Chairman, SEBI, Mark Zuckerberg, CEO,
Financial Express, April 19, 2018 Facebook, The Economic
Times, March 23, 2018

Basics of
stock investing
Powered by

Introduction and foreword
M
any of us are highly suspicious of the stock market. in economic growth? The answer is through the stock
Those who have little idea about what it is see it as market. Many companies, big and small, trade on the
some form of gamble. Everyone seems to know market and you can buy their shares. Shares are nothing but
about someone who has lost his shirt in the stock market ownership interests in businesses. Technically, you become
and has thus concluded that investing in stocks is the short part owner of the business. If the business does well, the
cut to financial ruins. Of course, there are many who have stock will appreciate. That’s what stock investing is at its
made a fortune in the market, but their success is seen as a core. Nothing more, nothing less.
miracle or something that has happened by fluke. All in all, What scares people is market volatility – the ups and
the average person is confused about the stock market and downs of the market. In the short term, the market may look
doesn’t want to understand it either. difficult to navigate, but in the long term (five years or
This supplement to the anniversary issue of Wealth more) what eventually gets rewarded is how well the
Insight is an effort to introduce you to the basics of stock business has done over time. This means that if you are
investing. While the field of stock investing is very wide, invested in good businesses over the long term, you can
this short book will give you a crisp summary of all it takes make serious money. Here is one caveat: mind the valuations.
to invest in stocks. After going through this
book, you can pick some classic texts on 4HEÖTHREEÖPHRASESÖTHATÖYOUÖMUSTÖENGRAVEÖ
stock investing and continue your study of it.
A few books are mentioned in a later chapter INÖYOURÖMINDÖAREÖGOODÖBUSINESSESÖ
of this supplement. Like any other field, RIGHTÖVALUATIONSÖANDÖLONG TERMÖFOCUSÖ
mastery in stock investing comes when you
commit to becoming a life-long learner of it. )GNOREÖSHORT TERMÖVOLATILITYÖANDÖBASEÖYOURÖ
Not surprisingly, all renowned stock investors INVESTMENTÖDECISIONSÖONÖTHESEÖPRINCIPLES
are also avid readers and learners.
To start, let’s see what stock investing
isn’t. Stock investing isn’t about making quick gains in the Paying too much for even a good business is a losing
short term; that’s stock trading. Traders have a different strategy. So the three phrases that you must engrave in your
approach to the stock market. They employ leverage to mind are: good businesses, right valuations and long-term
enhance their gains in the short term. Derivatives (futures focus. Ignore short-term volatility and base your investment
and options) are the tools of leverage in the stock market. decisions on these principles.
As a stock investor, you must stay away from them. Those Coming to the procedural part, you need to have a
who make huge losses in the stock market are generally trading and a demat account to buy and sell shares. You can
those who trade in the stock market. As a stock investor, you contact a stock broker and he will advise you how to open
have higher odds of emerging out as a winner. such an account. Many banks also provide brokerage
The stock market is a channel to invest in businesses and services. Brokers also try to sell investment products to you.
prosper with them. In a capitalist economy, businesses are They also give you stock advice and tips. Don’t fall for them.
the engines of economic growth. Now most of us may not Always base your investment decisions on your own
want to start a business. How do we then become a partner analysis. That’s how you can profit from stocks.

Stocks vs other investments
S
tocks compete with many other asset classes, about how to invest in real estate, betting with large
starting from a rudimentary bank account to other sums could be highly risky.
advanced asset classes like currency futures. While Indians’ love for gold has made them infamous in
diversification across asset classes is a good idea, no the world. While the use of gold as jewellery is still
other asset class is more rewarding than equity. understandable, gold as an investment remains
Bank deposits and debt instruments (bonds and questionable. You earn no dividends from it; on the
bond funds, Public Provident Fund, post-office deposits, contrary, you need to spend on its storage if you hold it
etc.) give fixed returns and hence look safer than in physical form. Gold returns have been sluggish
stocks, which can be highly volatile. Debt instruments overall. The metal is also to be blamed for the country’s
were previous generation’s pet. Many of us still vouch fiscal deficit because the country has to import it to
by the sanctity of fixed income. The only problem is satisfy Indians’ insatiable appetite for it. No wonder
that you can’t create wealth with debt. If you account the government has launched schemes to limit
for inflation and taxes, you may actually be losing hoarding of gold. A lot of black money also sits in gold.
money on it. Analysing commodities, such as metals, oil and
The main difference between debt and
equity is that while the former stands for
‘lending’, the latter means ‘ownership’. )NVESTINGÖINÖSTOCKSÖANDÖANALYSINGÖTHEMÖ
By investing in a debt instrument, you
are effectively lending money to the debt
AREÖEASIERÖ7HATlSÖMOREÖTHEYÖPROVIDEÖ
issuer on interest. When you lend money, HANDSOMEÖRETURNSÖTOOÖIFÖPICKEDÖWELLÖ
you can’t expect to earn more than the
interest rate. But when you invest in
stocks, you become part owner of the business. If the agriculture products, requires special knowledge and
business does well, your returns have no upper limit. access to their supply-demand trends, which are not
Stock investments are a bet on the economy. If the readily available. Even if they are, the data are
economy is going to grow, stock investments, in general, generally old. To be sure, commodity derivatives are
should grow by that much rate. Good businesses can do more suited as a hedging instrument than an investment
even better than the economy and hence multiply your tool. The producers and sellers of those commodities
money manifold, something you can’t expect debt use derivatives to protect themselves from future risks.
investments to do. For the individual investor, dealing in derivatives is
For many Indians, real estate is the most ‘respectable’ complex and risky. They can give you deep losses
investment. Don’t fall for the stories that magnify before you realise what’s going on. Ditto with currency
returns from property, for they are flawed. Equities futures. They are complex, derivative-oriented products
trump real estate on many counts: returns, ease of that should best be left to traders.
handling, transparency, tax treatment, liquidity, etc. All this suggests that one should seriously consider
Apart from these, real-estate investments often require equity investments for wealth creation. If picked well,
large sums. Since most people don’t have any idea stocks can do wonders beyond your imagination.

Stock-investing styles
H
ow to make money in the stock market? This is growing at a feverish pace. They were the most
a classic question that most investors ask. And sought-after by investors. Given their ‘privileged’
the answer to this question depends upon status, growth stocks command a premium and are
whom you are asking. There are a number of styles of available at high valuations.
stock investing and their adherents vouch for the Value investing, on the other hand, is about spotting
efficacy of their respective styles. How do you know companies which are available at a ‘bargain’. What’s a
then which style is good? Here is some quick help. bargain? Value companies are available at less than
Broadly, all styles of stock investing can be their intrinsic worth. An analogy for this is how people
categorised into two: fundamental investing and shop for vegetables. You check many stalls, locate the
technical investing. While a fundamental investor freshest veggies, ask the price, and if the price looks
studies financial details and other company-related high, tell the vendor how much you are ready to pay.
information to pick his stocks, a technical investor Value investing is the real form of investing. It
studies price patterns, trends, mathematical models requires you to find good companies available at a
and other graphical data to pick stocks. bargain. Why are they at a bargain if they are really
Which of these two is better? We profess
fundamental investing. The technical
style of investing is mostly used by traders
6ALUEÖINVESTINGÖISÖTHEÖREALÖFORMÖOFÖINVESTINGÖ
to make a quick buck in the market. It is )TÖREQUIRESÖYOUÖTOÖÿNDÖGOODÖCOMPANIESÖ
not just complex but also not suited to
most investors. Neither is its wealth-
AVAILABLEÖATÖAÖBARGAIN
creation track record impressive.
The fundamental style of investing can itself be good? The stock market chases the fashion of the day.
divided into many sub-styles. Since it entails studying Those stocks that get ‘out of fashion’ are ignored by
a company’s financial data and other company- or the market. And that’s exactly why you should pick
sector- or economy-related information, a fundamental the best among them. Such stocks are available at a
investor can use a combination of these to formulate bargain. Later when the market recognises their
his ‘own’ stock-investing style. For instance, an potential, they get rerated and deliver gains.
investor may give more weightage to certain financial Value investing is not just a logical way of investing
parameters and club them with his subjective in businesses, it’s also comparatively ‘safer’. You buy
judgement of the sector dynamics to pick a stock. stocks at low valuations and this acts as a safety net if
Though the styles of fundamental investing are the market itself falls. In market declines, expensively
many, the more popular ones are growth investing and valued growth stocks tend to correct heavily and can
value investing. Growth investing seeks to invest in give investors sleepless nights.
those companies that have ample room to grow and Value investing is essentially long-term investing
expand. Such companies tend to belong to booming as the realisation of value happens over the long
industries. Think of the information-technology term. This is why you should have a time horizon of
sector in the last decade. Indian IT companies were at least five years when you invest in stocks.

Understanding financial
A
company’s financial statements are a window calculate profits is as follows:
into its financial health. No wonder studying Profit (loss) = Revenue – Expenses
them is an integral part of fundamental analysis. The head ‘revenue’ generally has two entries: revenue
While analysts dig deeper into financial statements and from sales and other income. Other income is the
try to unearth the not-so-obvious aspects of a company’s revenue from the sources other than the core area of the
financials, for an investor, understanding basic financial company’s operations. For instance, it could be income
statements should suffice in most cases. from investments, dividends, royalties, etc.
There are three major financial statements: the The head ‘expenses’ constitutes the categories of
balance sheet, profit-and-loss statement and cash-flow expenditure such as cost of raw materials, employee
statement. The balance sheet tells you about the assets costs, etc. On subtracting the total costs from the total
and liabilities of a company. The profit-and-loss revenues, we get the ‘operating profit’, which is
statement tells you about a company’s profitability. And nothing but a company’s profit from its core
the cash-flow statement is about the flow of cash into operations.
and out of the company. In order to arrive at the final profit figure, any
miscellaneous income or loss is to be added to or
Balance sheet subtracted from the operating profit. Finally, net
The balance sheet is called so because it always balances profit is obtained after deducting the tax applicable.
according to this relation:
Assets = Liabilities + Owners’ equity Cash-flow statement
A balance sheet that doesn’t balance is simply wrong. The cash-flow statement shows the movement of cash
The balance sheet shows the assets that a business owns, in a business. While businesses can misstate their
the liabilities that it owes and the funds contributed by profits through accounting jugglery, they can’t fudge
its shareholders. Assets include land, equipment, the movement of hard cash. Hence, a cash-flow
inventory, goodwill, patents, brand value, etc. Liabilities statement provides a true picture of a company’s
include debt (long term and short term) and any other financial health. However, for banks and finance
payables that a business has. Shareholder funds are in companies, the cash-flow statement is of limited use
form of equity and reserves. as these businesses have a different business model
A weak balance sheet is one that is saddled with debt. than other types of businesses.
When a business has a strong balance sheet, it has more The cash-flow statement has three components: cash
assets and equity than liabilities. In order to know the flows from operating activities, from financing activities
balance-sheet strength, you need not actually see the and from investing activities. The statement also
balance sheet; you can just look at the debt-equity ratio. mentions the current cash holding of the business.
What’s that? More on it soon. What you need to see among these data is whether
the flows from operating activities are positive or not.
Profit-and-loss statement If they are positive, it means that the company is able
As its name suggests, the P&L statement tells you about to generate cash from its operations. If they are
the profitability of a company. The simple formula to negative, it means that the company is losing money.

statements and ratios
While it may show profits in its P&L statement, Debt to equity: Companies take debt to run their
negative flows from operations should ring an alarm. business operations. Their shareholders also put
Cash flows from financing activities show the money money, called equity, in the business. The debt-to-
raised for the company’s operations or the money equity ratio tells us about this balance. A high deb-
paid towards debt repayment. The former will be a to-equity is not desirable. But to know what is ideal,
positive number on the statement, while the latter will you must see the industry-wide trend. As a rule of
be a negative number. thumb, avoid companies where the debt-equity ratio
Cash flows from investing activities capture the cash exceeds one.
used in investments. For instance, a business that has Return on net worth (RONW): Also called the return on
generated surplus cash may park it in a bank fixed equity (ROE), this ratio tells us what returns a
deposit. Next year it may withdraw cash from that FD. company is generating on its equity part. A high
The former will be a negative number on the statement, RONW is desirable. Good companies have more
while the latter will be a positive number. RONW than their peers.
Operating margin: This ratio tells us how much a
Financial ratios
If you are not one who likes to dig deep
into a company’s financial statements 'OODÖANALYSISÖGOESÖBEYONDÖRATIOSÖANDÖ
but still wants to make sense of its YOUÖSHOULDNlTÖMAKEÖYOURÖINVESTMENTÖ
DECISIONÖJUSTÖINÖTERMSÖOFÖRATIOSÖ
financials, financial ratios come to your
rescue. They are readymade tools to
interpret what’s happening in a
company. Most financial ratios can be
derived from the three major financial statements: company makes from its core operations. It is derived
balance sheet, profit-and-loss statement and cash-flow by dividing the operating profit by the total revenues.
statement. A high operating margin is a good sign, but do see the
In order to put a company’s ratios in perspective, industry trend.
compare them with the industry trend and peers’ Revenue growth: This ratio indicates how fast a
ratios. Again, good analysis goes beyond ratios, and company is growing its revenues over a period of
you shouldn’t make your investment decision just in time. A high revenue growth is a positive sign and
terms of ratios. shows that the company is expanding.
Here is a summary of the major financial ratios EPS growth: This is a tool related to earnings and tells
and what they mean. You can find these (and more) us the growth of earnings per share (EPS) over a
for any Indian listed company on the Value Research period of time. For instance, if the EPS of a company
website. Just type in a company’s name in the search this year has gone up from `10 to `12, the EPS growth
bar. On the company page, click on the ‘Financials - is 20 per cent. Good companies show higher earnings
Annual’ tab and scroll down. You will find the ‘Key growth than their peers in a sector. A shrinking EPS,
Ratios’ section, as shown in the screenshot alongside. on the other hand, should ring an alarm.

Assessing the business
A
ssessing a business lies at the heart of stock Toubro. The company has unparalleled expertise and
investing. Behind every stock is a business and capability to execute infrastructure projects that no
the fortunes of the stock are closely tied to the other company can match. Hence, it has a moat.
fortunes of the business. If a business does well, it’s Industry outlook: A business could be an outlier in its
highly likely that the stock will also do well. industry but it’s never insulated from the industry-
Assessing a business is not something that can be specific headwinds and competition. The sorry state
covered in one page; there are full books available on of the Indian telecom sector means that even the
this subject. The objective here is to give you a quick largest player Bharti Airtel has been a
primer on what all it takes to assess a business. It disappointment for its investors.
requires both skill and experience to do so. Complexity of the business: How easy is it to
Business assessment can be broadly divided into understand what the company does? For instance,
two categories: quantitative and qualitative most people will have trouble understanding the
assessment. While quantitative assessment focuses on intricacies of the software business. But
financial data, qualitative assessment looks at other understanding what ITC does is quite easy.
non-data factors such as management
quality, industry outlook, product appeal 7HILEÖQUANTITATIVEÖASSESSMENTÖFOCUSESÖ
and so on.
Qualitative assessment can take many ONÖÿNANCIALÖDATAÖQUALITATIVEÖASSESSMENTÖ
forms and it is a function of one’s LOOKSÖATÖOTHERÖNON DATAÖFACTORSÖSUCHÖASÖ
experience in the field. Experienced
investors can read the business MANAGEMENTÖQUALITYÖINDUSTRYÖOUTLOOKÖ
environment much more accurately PRODUCTÖAPPEALÖANDÖSOÖON
than a novice can. Here are some other
factors that one must check in
qualitative analysis: Overall image of the company: How is the company
Scalability of business: A scalable business is one that perceived? Do people complain of its products? Is the
can be extended and expanded. For instance, consider company battling multiple court cases? How
the market for consumer goods. As the market grows, aggressive is it? Paying attention to the overall image
demand for consumer goods automatically increases. of a company helps as it is generally a sum total of all
Strength of the brand: An established brand doesn’t that is going on with it.
require much pushing; the products keep flying off
the shelves on their own. Take the case of Maruti Evaluating the management
Suzuki. Maruti is a go-to name in the car segment. It’s The performance of a company is a direct function of
known for its wide distribution and affordable cars. the competence of its management. A shady
Presence of an impenetrable moat: A moat is a strategic management can destroy shareholder wealth by
advantage that a company has over others. A moat engaging in unscrupulous activities. On the other
also means high barrier to entry. Consider Larsen & hand, a competent management can sail the company

and management
through tough times. Companies with
competent managements are true wealth
creators.
Many investors don’t realise the
importance of evaluating the
management unless some crisis breaks
out. But how do you go about assessing a
management’s potential. Here are some
pointers that can help you do so:
Tenure of the key management: How long
has the key management been with the
company? Good companies have
experienced people in the management
team, who have been associated with the
company for a long time.
Integrity of the management: What is the
general image of the management? Is it
considered clean and competent? Or are
there pending legal cases against it? Have
the promoters ever been convicted?
Decision-making ability: How good have
the decisions taken by the management
been? Has it come under fire due to some
strategic move? If yes, why and what did
All stock-related information is available at www.valueresearchonline.com
it do to solve the crisis?
Treatment of minority shareholders: What is
the management’s attitude towards minority practice by which promoters take a loan against their
shareholders? Do its decisions negatively impact shares in a company. A high level of promoter
them? For instance, diluting equity by issuing fresh pledging is alarming as it signals a deteriorating
shares to fund frivolous expenditures shows a lack of financial condition. In extreme cases, a promoter may
concern for small shareholders. even lose control of his company.
The holdings of big guys: Mutual funds like to own The various disclosures that listed companies have
shares in companies with competent managements. If to make to the stock exchanges have information
a company has little or no fund holding, it’s likely that about key management decisions. Do make use of
fund managers don’t have trust in the management’s them. The Value Research website also has ample
abilities. management-related information. Just go to any stock
Levels of pledged shares: Pledging of shares is a page and click on the ‘Directors Report’ tab.

Valuing a business
I
n the stock market, identifying a good business is Here are three popular valuation measures:
not enough; buying the stock at the right valuations Price-to-earnings (P/E) ratio: The P/E ratio is perhaps
is as much important. Valuing a business means the most widely used valuation measure. It tells you
assessing its worth so that you can know if the price what you are paying for every rupee of a company’s
you are going to pay for it is reasonable. Smart earnings. If you buy a stock at a P/E of 10, it means
investors want to buy a business available at less than that you are paying `10 for the company’s earnings of
what it’s worth. If you pay too much for the stock, no `1. Naturally, you will want to pay as less as possible.
matter how good the business, it’s likely that you will But here is a word of caution. As stated above, study
not make meaningful returns or, worse, lose money. the business before applying this valuation measure to
How do you assess valuations? While there are it. A low P/E doesn’t always indicate a bargain and a
some tools available to assess valuations, there is no high P/E doesn’t always signal expensiveness.
one definite formula that you can apply to all cases. Price-to-book (P/B) ratio: The P/B ratio tells you how
In fact, valuation criteria may vary from industry to expensive a stock is in relation to its worth on the com-
industry. For instance, while it’s okay for FMCG pany’s books. A P/B ratio of over one means that the
stocks to trade at comparatively high
multiples, metals and mining stocks
tend to trade at low multiples. 6ALUINGÖAÖBUSINESSÖMEANSÖASSESSINGÖITSÖ
Assessing valuations is also a matter
of analytical judgement. You can’t always
WORTHÖSOÖTHATÖYOUÖCANÖKNOWÖIFÖTHEÖPRICEÖ
tell whether you are paying the right YOUÖAREÖGOINGÖTOÖPAYÖFORÖITÖISÖREASONABLEÖ
price. For instance, a debt-laden company
may be available at cheap valuation
multiples and a company with good earnings visibility stock is quoting at a premium to its actual worth.
may tend to trade at high valuations. Hence, valuations Both a high P/B and a low P/B should be explored.
can’t be seen in isolation; they should be viewed in Don’t get too excited to find a stock trading below
conjunction with the quality of a business and its book. Such a stock could be a ‘value trap’, i.e., it’s
various intrinsic aspects. cheap valuations are due to its bad fundamentals. On
Valuations also vary with the economic potential of the other hand, sometimes the book value doesn’t
a country. A country with high growth rates and capture the true worth of a company’s assets, which
political and economic stability will have higher can make the P/B look artificially high. The P/B ratio
valuations than a country which is struggling to hold is especially useful in the case of banks and non-
itself together. banking finance companies.
Overall, assessing valuations is like buying Price-to-earnings growth (PEG): Popularised by the leg-
vegetables: you want to buy the good ones at a endary investor Peter Lynch, it factors in the earn-
reasonable price; you don’t want to buy the bad ones ings-growth rate. It is obtained by dividing the P/E ratio
cheap; and you avoid buying the good ones at by the earnings-growth rate. A PEG of less than one is
exorbitant prices. considered attractive.

What is value investing?
T
here are many styles of investing: growth significant potential or assets that are not captured
investing, momentum investing, dividend in their valuations.
investing, tactical investing and so on. One form 4. Spotting value stocks is not just about looking at
of investing that is followed worldwide by many the financials. It’s also about understanding the
sophisticated investors is value investing. business, the management background and estimating
Popularised by the legendary investor Warren how the business will do in the future. A short-term
Buffett, value investing aims at buying stocks that are hiccup in business doesn’t dent the business prospects
available at a discount to their intrinsic value. To put it of a value stock.
in simpler terms, it’s about buying a `100 note by 5. Look for any competitive advantages and barriers
paying `80 for it. to entry the business has. These provide a business an
But why would anyone sell a `100 note at `80? This impenetrable zone of operation, which imparts such
happens because many investors don’t realise that it’s a companies ‘value’. Also, high-quality businesses with a
`100 note. They think it’s a `50 note and are happy to strong pedigree often offer value, even when their
sell it at `80. Hence, the task of a value investor is to current valuations look stretched. Such businesses
unearth such companies which are currently come with an in-built guarantee that they will be
disregarded by the market and other investors. Sooner around and doing well for many years to come.
or later, the market appreciates the error that it has
been making and the price of a value stock surges. Criticism of value investing
This means that being patient with value stocks is a The critics of value investing find the patience that it
part of the game. Also, it requires one to think requires quite irksome. They say that when they can
differently from the herd. make money in the short term by following other
strategies, why they should be concerned about value
Spotting value stocks investing. The answer to this lies in understanding
How do you spot value stocks? It requires quite some the spirit of investing. While money can be made in
sophistication to practise value investing, yet the the short term by following some other methods, that
following points may help: also comes with a fair amount of risk; one may lose
1. A value stock is generally overlooked. Nobody seems money as well. Investing is all about tilting the odds
to care about the sector or the company. Many analysts in your favour as much as you can. It’s not just about
start writing an obituary of the stock or the sector. profits; it’s also about protecting your capital.
2. Look at the valuations. A value stock tends to Does it mean that value investing is not risky? Any
trade at low valuation multiples in terms of price-to- form of investing is risky. But you considerably
earnings and price-to-book. Some value stocks may reduce your risk when you buy something at a
be going through some tough times because of which discount to its intrinsic value. You know that you
their profits would be low. This makes the P/E look haven’t overpaid and you will have the patience to
artificially high. stay invested – even increase your stake – if the
3. Even though the P/E and P/B multiples fail to market falls. This eventually results in handsome
indicate value, on digging deeper, value stocks reveal gains in the long term.

Companies with moats
Great distribution: Companies require many years to
I
n investing, the concept of ‘moats’ was popularised
by the legendary investor Warren Buffett. ‘Moat’ spread their distribution. Hence, companies with a
means a deep, wide ditch that surrounds a castle widespread distribution are in a prime position. Pepsi’s
and is filled with water. In business sense, it stands for Kurkure is a product that looks omnipresent. No mat-
a company that has some sort of competitive advantage ter where you are in India, you can easily find a pack of
and barrier to entry into its area. In simpler terms, Kurkure at a nearby shop.
companies with moats are sort of monopolies and it’s High followership: When numerous people congregate
very difficult to compete with them or usurp their on a network, it increases the value of the network
market share. itself so much that others who aren’t a part of the net-
The sustainability of a moat is even more important work are compelled to join it. Think of Facebook or
than the presence of a moat. While some companies Twitter or LinkedIn or WhatsApp.
may look like companies with moats in the short term, High switching cost: If it’s difficult to switch from some-
their competitive advantages can be eroded in the thing to another, the former can be said to have a moat.
future. When this happens, the company and investors Take Microsoft Windows for instance. Windows is run
both suffer. How do you know whether a
moat is sustainable? For that, you have to k-OATlÖMEANSÖAÖDEEPÖWIDEÖDITCHÖTHATÖ
study what the company does. If its
product or service is such that it will SURROUNDSÖAÖCASTLEÖANDÖISÖÿLLEDÖWITHÖ
never go obsolete and it’s a strong brand WATERÖ)NÖBUSINESSÖSENSEÖITÖSTANDSÖFORÖAÖ
that no competitor can challenge, the
moat is likely to be sustainable. COMPANYÖTHATÖHASÖSOMEÖSORTÖOFÖCOMPETITIVEÖ
ADVANTAGEÖANDÖBARRIERÖTOÖENTRYÖINTOÖITSÖAREAÖ
Features of companies with moats
Identifying companies with moats
requires you to have a lot of experience in investing. on so many computers and so many of us have grown
Not just experience, it requires one to be patient and accustomed to it that switching to a different operating
rigorous in one’s approach. Sometimes moats may not system isn’t easy.
be easily visible. Many times they won’t be sustainable. Low cost: A low-cost producer can drive its competitors
Still, the following pointers can help: out of business. It can sell its product at wafer-thin
Strong brand: A strong brand that cannot be replaced margins, which its competitors can’t emulate. The low-
from its position in consumers’ minds is a moat. For cost advantage is especially relevant when the product
example, Maggi is a strong brand of Nestle. After run- itself is not the differentiator. For instance, take the
ning into trouble in 2015, when it was declared unsafe steel business. Steel is a commodity. A low-cost produc-
for consumption, Maggi has been able to bounce back er has an edge in the business.
and regain its lost market. Such is the brand strength Patents and trademarks: Businesses that have valuable
of Maggi that many of use the name ‘Maggi’ for the patents are insulated from disruption. This feature is
category of noodles itself. especially found in good pharma companies.

Stock-investing psychology
I
f you thought that investing is all about analysis, priced. A recent market fad was IPOs. In the bull run
you will be surprised to know that your own that started in 2014, many IPOs gave good listing gains.
psychology is as much, if not more, important This attracted many more investors to the stock market,
when it comes to investing. who called themselves ‘IPO investors’. Seeing this
You may still wonder what psychology has to do with euphoria, more and more companies started making a
the stock market. Psychology is the study of mind and beeline to list. Herd behaviour often leads to ‘market
behaviour. It is especially important in the stock mar- stampedes’, which leave investors bruised and wounded.
ket because market moves tend to be erratic and often The iconic investor and Warren Buffett’s partner
irrational. If you don’t understand the psychology Charlie Munger has talked about the so-called
behind what causes them, you may be dragged along liking/loving tendency. In investing, it means that inves-
with them. This may hamper your chances of making tors frequently fall in love with their stocks. Because
money in the market. they have researched them, held onto them for a long
A popular way of studying stock-market psychology time and perhaps are making paper profits on them,
is by studying the many thinking biases that investors they stop being objective about them. They tend to
suffer from. A bias is a faulty way of
thinking that we have grown accustomed
to. Take this instinct called loss aversion 0SYCHOLOGYÖISÖESPECIALLYÖIMPORTANTÖINÖTHEÖ
for instance. Investors react to losses STOCKÖMARKETÖBECAUSEÖMARKETÖMOVESÖTENDÖ
more intensely than they react to gains.
So the joy of making a gain of `10,000 is TOÖBEÖERRATICÖANDÖOFTENÖIRRATIONAL
not as intense as the pain of losing `2,000.
This is what makes investors sell in panic if the stock ignore any adverse business development. This eventu-
market goes down. As more and more investors join the ally results in wealth destruction. But even after
frenzy, a crash happens. wealth destruction has happened, the loving tendency
Consider the confirmation and availability biases now. causes investors to stay invested in hope of a recovery.
While researching a company, investors tend to focus These biases are just a few among the many more
on data and information which are easily available to that exist. A number of books are available on this
them. This results in the availability bias. In place of subject. Here are a couple of them: Misbehaving by
looking for data which are not easily available, inves- Richard Thaler Thinking, Fast and Slow by Daniel
tors base their investment thesis on the available data. Kahneman, The Art of Thinking Clearly by Rolf
What’s more, having developed a viewpoint, they Dobelli. A classic on this subject is Extraordinary
ardently focus on the information that confirms their Popular Delusions and the Madness of Crowds by
viewpoint, rejecting any conflicting information and Charles Mackay. A relatively new book is Dollars and
viewpoints. These two biases result in incomplete Sense by Dan Ariely and Jeff Kreisler.
research, which may comes to haunt back later . These books will not only throw light on investor
Herd behaviour is often seen in the stock market. This psychology but also make you more rational about
causes particular sectors or stocks to become over- money, while also improving your thinking skills.

Stock gurus
Charlie Munger
A
n effective way to learn a skill is to go to
someone who has mastered it. Stock investing is Munger is Buffett’s partner at Berkshire Hathaway. He is
no different. There are many stock-market also the chairman of Daily Journal Corporation.
gurus that can help you understand not just how you Munger is famous not just for value investing but also
should invest but also what you should do in times of for his ‘Mungerisms’, which are witty words of wisdom.
crisis. For instance, Warren Buffett said, “Only buy BOOK TO READ: Poor Charlie’s Almanack: The Wit and
something that you’d be perfectly happy to hold if the Wisdom of Charles T. Munger by Charlie Munger and
market shut down for 10 years.” This quote inspires us Peter D. Kaufman
to take a long-term view on stocks and hence not get
flustered in the event of a correction. Peter Lynch
While the stock market has had many wizards, here Lynch was a star fund manager at Fidelity Investments.
are a few stock-market gurus and their brief profiles: He said that in the stock market, professionals have little
edge over ordinary people. Anyone who has time to do
Warren Buffett stock research can generate good returns. Lynch liked to
Popularly known as the Oracle of Omaha, Buffett is visit companies before investing in them. He invested in
perhaps the most-admired stock investor in the world. a variety of companies such as fast growers, asset plays
He is a value investor and likes to invest in companies and turnarounds.
that have moats. He is also known for his
long-term investment horizon. Though
Buffett has himself never written a m4HEÖSUCCESSFULÖINVESTORÖISÖUSUALLYÖANÖ
book, his wisdom has been captured in
many books by different authors. He
INDIVIDUALÖWHOÖISÖINHERENTLYÖINTERESTEDÖINÖ
holds stakes in companies through his BUSINESSÖPROBLEMSn
holding firm Berkshire Hathaway.
Berkshire’s annual letters are a window
Ö ÖPHILIP FISHER
into his mind.
BOOK TO READ: The Tao of Warren Buffett: Warren Buffett’s BOOK TO READ: One Up on Wall Street and Beating the
Words of Wisdom by Mary Buffett and David Clark Street by Peter Lynch
Benjamin Graham Philip Fisher

Graham was Buffett’s teacher and a value investor. He is Fisher was also a strong proponent of long-term invest-
also known as the father of value investing. He popular- ing. He founded an investment firm, Fisher & Co. He
ised the concept of margin of safety. He believed in buy- said that the best time to sell a stock is almost never. His
ing companies that were available at a discount to their most famous stock was Motorola, which he bought in
intrinsic value. 1955 and held onto it until his death in 2004.
BOOK TO READ: The Intelligent Investor by Benjamin BOOK TO READ: Common Stocks and Uncommon Profits by
Graham Philip Fisher


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variety of stakeholders. We firmly

Total pages 94, including cover

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What won’t CIO VIEWS

58 INTERVIEW Neelesh Surana

92 WORDS WORTH NOW

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What won’t change

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The 10-year trail

2,000 10-year return 10-year return

BSE Sensex Worth of `1 lakh

Nifty 200 Worth of `1 lakh

Nifty 500 Worth of `1 lakh

10 Wealth Insight July 2018

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Nifty Midcap 100 Worth of `1 lakh

Nifty Smallcap 100 Worth of `1 lakh

1,000 10-year return 10-year return

Nifty Next 50 Worth of `1 lakh

Nifty Auto Worth of `1 lakh

Nifty Bank Worth of `1 lakh

12 Wealth Insight July 2018

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Nifty Energy Worth of `1 lakh

Nifty FMCG Worth of `1 lakh

Nifty Infra Worth of `1 lakh

Nifty IT Worth of `1 lakh

Nifty Media Worth of `1 lakh

14 Wealth Insight July 2018

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Nifty Metal Worth of `1 lakh

Nifty Pharma Worth of `1 lakh

Nifty PSE Worth of `1 lakh

Nifty PSU Bank Worth of `1 lakh

Nifty Realty Worth of `1 lakh

16 Wealth Insight July 2018

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Tata Consultancy Services IT - Software Kotak Mahindra Bank Bank - Private

Hindustan Unilever Household & Personal Products HCL Technologies IT - Software

return 21.2% return 20.6%

return 17.9% return 16.9%

18 Wealth Insight July 2018

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GMR Infrastructure Engineering - Construction Hindustan Copper Metal - Non Ferrous

MMTC Trading Housing Development & Infra Construction - Real Estate

Aban Offshore Oil Exploration 3784.8 Suzlon Energy Electric Equipment

Reliance Communications Telecommunication - Service Provider Unitech Construction - Real Estate

20 Wealth Insight July 2018

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return 38.6% return 36.9%

Britannia Industries Consumer Food Motherson Sumi Systems Auto Ancillary

Pidilite Industries Chemicals Havells India Electric Equipment

22 Wealth Insight July 2018

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Consolidated Construction Engineering - Construction Videocon Industries Consumer Durables - Electronics

Provogue (India) Textile Gitanjali Gems Diamond & Jewellery

IVRCL Engineering - Construction Educomp Solutions IT - Education