Security Analysis

DICE and EITEMAN picking some issue of security analysis in their book ‘The Stock Market’. The first steps in security analysis are a collection of facts. The problem at this point is to know which facts are important. Obviously one can go for collecting facts about company. Most analysis agrees that facts about the following are essential.What is the nature of the company’s business? What is the financial plan of the company? What are the records of earnings per share? What is the company’s dividend record? What is the high and low price-earnings ratio for the company’s common stock for the past decade? What is the current price of the company’s stock and how does it compare with past high and low quotations? This list does not exhaust the important questions; it merely mentions a few which every analyst would consider essential. But unfortunately there is a tendency for many investors to act as if the mere collection of a mass of statistical data means security analysis. The investor must bear in mind that all the facts and figures he collects must ultimately be resolved to one of the following three words: buy, sell, or hold. This resolution of a mass of data to one word is accomplished by the application of investment principles.

N.J. Yasaswy explain the risk return trade off in his book ‘Stock Market Analysis-for the Intelligent Investor’. He briefly discuss the risk-return trade-off among a variety of equity stocks available to investors. Investment management is essentially a money game in which you have to balance the risks and returns. The risks associated with investments are five-fold. These are Inflation risk(The falling value of the taka erodes the purchasing power of your money)Interest rate risk(Interest rates may change owing to changes in the economic situation)Default risk (The risk of not getting back your principal and interest)Business risk(The risk of business cycles and uncertainties of business)Socio-political risk(The risks of change of government change of social attitudes).On the other hand the rewards come in the form of-Safety of the principal sum invested, Reguler payment of interest and dividends, Liquidity, premature encashment or loan facilities, salability,etc,Scope for capital appreciation, i.e .bonus issues, high market prices, Hassle-free transactions ,i.e., no trouble in buying and selling,encashment of dividend and interest warrants,etc.

N.J. Yasaswy also derive a framework for intelligent stock market analysis.The first critical analysis to be made is regarding your ability and willingness to take risks. Different investors have different risk preferences. Investment decisions should be developed according to these risk preferences. Low risk takers (They should invest in super stocks and aim at long term gains only. They should adopt a buy and hold strategy),Medium risk takers(They should invest in emerging blue chips and aim at medium term (1-3 years). They should adopt a reasonably aggressive strategy),High risk takers(they should invest in turn around stocks and aim at short-term gains only {around 1 year}. Adopting a very bold investment strategy, they should go bargain-hunting).

N.J. Yasaswy derive the type of decisions you have to make in equity investment.1.Macro decision (Analyze whether it is an opportune time for equity investment based on the economy and industry), 2. Micro decision[three silent issue of equity investment; a)Pinpointing a company; you have to pick the right company based on financial criteria or non-financial criteria such as management reputation, past track record, future plans etc. b) Deciding on the right price; decide whether its stock is attractive at the prevailing price. Is it over priced, is it under priced, or is the price just right? c) deciding on the right time; ascertain when it is the right time to buy a particular stock. a good understanding of share price movement charts may help in timing your purchase], 3.disinvestment decisions; having invested in the shares of a particular company, you should not fall in love with them. The disinvestment process is the mirrorimage of an investment decision, 4. Portfolio decisions; prudent investors never put all their money in just one or two scripts because the risk of such concentration is too high. In their book, they discuss market indicator. There are two common ratios which are used as indicators of stock market values. Price earnings ratio: the simple relationship between current or expected earnings per share and the current market price of the stock is often quoted by both management and owners. The ratio is also called the earnings multiple, and it is used as an indicator of how the stock market is judging the company’s earnings performance and prospects. The calculation is quite straightforward, and relates current market prices of common shares to the most recent available earnings per share on an annual basis.Market to book ratio: This indicator relates current market value on a per share basis to the stated book value of owners equity on the balance sheet, also on a per share basis. The market to book ratio leaves much to be desired as a measure of performance for many of the reasons mentioned in earlier discussions of other ratios. They will briefly address the following key points to integration of Financial performance analysis;1. careful definition of the issue being analyzed and the view point to be taken, 2. Identifying a combination of primary and secondary measures and tools, 3. Identifying key value drivers that affect performance, 4.Trending performance data over time, both historical and prospective,5. Finding comperative indicators and supplementary information,6. Using past performance as a clue to future expectations., 7. Recognizing systems issues and pbstacles to optimal performance.

Fisher And Jordan in their book, Security Analysis and Portfolio Management,they mention how to select a suitable common stock by the value line method.these methods are described in three steps. First( decide on the degree of risk you are willing to consume), Second( pick out from among the stocks wiyh acceptable safety ranks those whose current dividend yields appear attractive to you, Third( having picked a list acceptable interms of safety and current yield, cull out from that list the stocks ranked 1{highest} and 2{above average} for performance in the next 12 months. Select one of these and hold it until its ranks falls to 3{average} or lower{4 or 5}. Then sell and replace it with another.

Fisher And Jordan also explain alternative stock selection technique . They says Equity investment strategy has two major categories. Active equity management and passive equity management. In the Active equity management there are severel ways to select the alternative stock. these are 1.Growth stock approach( the basic premise of the growth stock approach is that those companies who have above average earnings growth over a period of time will tend to produce stock values that will lead to above average returns for the investor. Therefore, the analyst must select those stocks that have historically had the highest above average earnings growth), 2.Undervalued stock ( practitioners of this approach are sometimes called managers seeking high yield. They tend to look for companies that have either high dividend yields, low market-to-bookvalue ratios, or low price earnings ratios),3.Small capitalization approach( this new approach is to seek investment in smaller companies that have potential to grow rapidly),4.Market timer approach(Under this approach the analyst merely attempts to mirror the performance of the market). On the other hand, in the passive equity strategy is basically a buy and hold approach to stocks.

Reference: 1. The Stock Market (3rd edition)….Charles Amos Dice and Wildford

Jhon Eiteman. (page No: 421-433) 2. Stock Market Analysis-for the Intelligent Investor….. N.J. Yasaswy.

(Page No:26-41&166-173). 3. Security analysis and portfolio management ( 6th Edition)… Donald.E.Fischer and Ronald.J.Jordan. (Page No:196-203& 258-261)