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Qualitative factors of company in stock investing
In yesterdays class, we added a new rule:
Start stock picking from the biggest stocks according to market cap and then keep moving towards the bottom
So far, we have covered three important topics:
1. How to invest? Using methods like Cost Averaging by preparing a daily / monthly investment budget
2. Where to invest? Fundamentally good stocks using our screening rules
3. How to find good stocks? Based on Market Cap and Index.
I hope these topics are clear.
Every one know the rules of the stock market and the terms.
Yet, 80% to 85% people lose money in stock markets every day.
This is because
.. they attempt to time the market (their good time might never come, for them luck plays major role)
.. greed (waiting for more and more profits to come)
.. no discipline (invest as much money they have in bank account)
.. love (doesn't exit the stock they love even when it became expensive)
.. intelligence (they feel they have better understanding about the stock than anyone else)
.. and so on
Stock markets are an emotional game.
You need to use more mind than your heart when it comes to investing.
We already framed 4 fundamental rules for investing.
In this manner, we will come across several rules in our journey of identification of quality stocks.
You may please note down which ever points u feel like are important for your investing.
There are two types of factors we study in fundamental analysis.
1. Qualitative factors
2. Quantitative factors
Qualitative factors talk about the quality aspects of the company.
Quality of the share, the company, the sector etc.
Quality means perception. How we feel and experience.
Quantitative factors talk about numbers of the company.
Financial ratios, Profit and Loss, Balance sheet etc.
Today we shall start with Qualitative factors
Once we identified a potential company, we need to know if the management is a good one or not.
Now this is tricky and not an easy process.
- 1 How to find about the management?
- 2 Background
- 3 Business Ethics
- 4 Corporate Governance
- 5 Minority Shareholders
- 6 Shareholding Structure
- 7 Salaries paid and expenses incurred
- 8 Political parties
- 9 Promoter Lifestyle
- 10 Major Shareholders
- 11 Importance given to quality
- 12 Assignment
- 13 Related Lessons
How to find about the management?
You need to study and collect a lot of information about the company, its promoters, the management.
Promoters = Person(s) who started the company or took the responsibility to list the company on the stock exchanges
Management = People who run the company in its day to day business activities.
Promoters may or may not be the same as Management
1. The background of the promoters and the management is important.
Do they have experience in the area in which they are doing business?
If the promoters or the management does not have enough experience in the area, a competant compititor might overtake it.
Example: GeeCee is originally a chemicals company but they moved into realty, energy and financial services and ignored Chemicals.
Diversification is good if the promoter has experience in the new areas.
Else the new ventures are likely to be failures than success stories.
2. Does the company have Business ethics?
Do they pay taxes on time?
Do they do business in a fair and transparent manner?
Do they pay bribes or experienced IT raids etc in the past?
Example: I will not invest in UBL or Vijay Mallya group of companies because they have tained promoters and chairman.
3. Corporate governance and the way the company is run
Does the company hold meetings regularly?
Is the management giving press releases and disclosures as to what is happening within the company?
FIIs take Corporate governance very serious. Particular, foreign fund managers and pension managers
In some cases SEBI interferes and questions the procedure being followed behind such corporate issues.
Example: Heard that management of a popular group of companies managements force shareholders to abide by their decisions.
The removal of Cyrus Mistry from Tata Sons raises questions on Corporate Governance at the company.
Similarly, Cyrus Mistry removal from the post of Chairman of TCS without sufficient notice raises questions on Corporate Governance at TCS.
4. How does the company treat minority shareholders?
Does the company communicate and show interest about them?
Minority shareholders might hold fewer shares but they combined have a large shareholding.
Example: Apollo Hospitals gives free annual check-up coupons to its investors.
5. Shareholding structure of the promoters is important.
Who are the promoters of the group and how are they holding the shares?
i.e Who are the family members and non-family members in the promoter group and what are their relations?
Are they buying from the open market?
Are they holding shares on proxy names or in the name of other owned companies?
Salaries paid and expenses incurred
6. Salaries paid and expenses incurred for promoters
Crompton Greaves stock fell sometime ago when its promoter bought a private jet for his personal use.
Companies that pay abnormal salaries for promoters are often not invested by FIIs or DIIs.
7. Connection with Political parties
It is better to go for a promoter who has no affiliation with political parties.
But such companies are hard to find these days.
This is a very hard thing. Because promoters themselves in some cases are in political parties and are even MPs in parliament.
8. Avoid companies with hifi lifestyle of promoters.
Such promoters sooner or later will fall on the company money to maintain their lifestyle.
Kingfisher is an example.
9. Keep an eye on major shareholders i.e those who own more than 1% of the company.
Such major shareholders, though sitting outside the company, will influence in the company decision making process.
Example: Rakesh Jhujhuwala, Vijay Kedia etc.
So these 9 months, u need to track about any share that you feel is worth investing for the long term.
For Government-held companies, the promoter is the Government of India.
So, there might not be much to study about apart from the usuals.
Importance given to quality
10. Invest in companies that strive for quality / excellence in the area of their business
Companies need to have a clear vision and strive for quality / excellence in theor area of business.
This makes them have an edge over its peers / competitors.
Since quality work will be recognized by its customers easily, such companies will see long term sustainable business.
Hence repeat customers will be high.
Good brand recall.
Reduce strain on sales promotion / marketing => Lesser expenses.
Increased business and reduced expenses.
Ashok Leyland gets Deming Prize 2016 for Pantnagar plant.
Deming Prize is the Nobel Prize in the manufacturing sector.
These qualitative aspects of the company have to be studied at three levels:
1. Company level
2. Group of companies level (if the promoter runs multiple companies)
3. Sector / Industry level
For example, to know about ITC,
you need to...
1. Read news about ITC
2. Read news about the sector to which ITC belongs i.e FMCG
The factors above are called micro factors. i.e factors specific to the company.
Where to look for news about the companies / sectors?
Look news related to the stock
1. In newspapers
2. In magazines
3. On moneycontrol.com and finance.google.com
4. In message boards like mmb.moneycontrol.com
5. Official website of the company (About the Company, Investor Relations, Press releases etc)
How often should we read / check news?
As i said earlier, doing the investment transaction takes just few minutes. But the time spent on studying and analyzing companies takes hours.
News is the first source of fresh information for us.
Invest in your fundamentally good stocks within the budget earmarked daily irrespective of market conditions.
Buy i dont have time to read news!?
This is why i said, do not pick more than 5 stocks for your core portfolio.
Track what the company has done in the last 1 to 3 years.
In particular, after reading the company-specific news, you should be deciding:
"Is the company management making the right moves?"
There must be some criteria or checklist for that too to judge if management is doing the right things?
Well, there is no ready made checklist for that yet.
We need to make one ourselves.
In some cases we can easily decide if the company management is doing right or not.
This is something related to business strategy or corporate strategy
I will give you an example.
Sometime ago, the management of a stock called VRL Logistics, said the owners wanted to buy an aeroplane for the company needs.
VRL Logistics or Vijay Anand Road lines is a logistics company.
The company is a leading private bus services and logistics company based out of Karnataka.
They expanded their network to several South Indian states, including Maharashtra too.
Its chairman Vijay Sankeshwar one fine day announced plans to start a regional air carrier from Bangalore.
Sankeshwar and his son Anand Sankeshwar will invest about Rs 1,300 crore in the airline venture over the next three years, putting in Rs 300 crore in equity and raising debt for the balance amount.
They will run it independent of VRL Logistics.
However, Shareholders did not like the move.
Some of the big guys just exited the stock and the next day, the stock is down 20%.
Few months later, leading FIIs Ashoka PTE and Goldman Sachs India Fund too sold their holding.
The relational behind the shareholders move is that, an aeroplane is a luxury business and not a necessity for the company.
Aeroplane are just money eaters and do any value-addition to the company and the shareholders.
In another case, the promoter (the one who started the business) said, "I don't care what the shareholders feel"
So, shareholders felt angry and sold the share again.
Some big shareholders sold. Again the stock is down 20%
Reason: The company has poor corporate governance. Doesn't value shareholders interest.
So, follow and track every news and rumour related to your stock
But this logistics stock price is now up and marching ahead!
Because of the possibility that if GST is passed, logistics sector will benefit.
If a sector is up trending, almost all stocks of the sectors go up aswell!
So, we need to keep an eye on the sector specific trends.
But, how to find sector trends?
There are two methods;
1. One by our own analysis (will tell this later)
2. Equity websites (https://stockaxis.com/Top-10-Industry.aspx)
Take one of your favorite stock and do qualitative analysis on it.
Collect as much data as possible about the company that happened in the last 3 years or so.
Put a 10-point write up about it
VLS was asking:
Sir u told pick stocks from nse 50 or bse 100. Not how to pick.
Start with the Top share, the #1, and do the fundamental analysis on it.
So far, we have 4 points + qualitative parameters today.
Other points, we will add them in our upcoming sessions.
If #1 does not fit our criteria, go for #2 and so ... till #500
how the management is behave with its employees is also important
Yes. Management's behavior with its employees is important too.
We have seen Infosys and L&T Infotech not honoring their offer letters to prospective employees and the markets are seeing it as a bad move.
Almost all IT companies have attrition problem and investors closely watch this.