Eximous Luck
PLANNING TO INVEST! MUST READ IT
PLANNING TO INVEST! MUST READ IT.
In recent time, it has been seen that people do not prefer to take advice from professional financial advisors for investment purposes because they do not want to pay consultancy fees. They make investment decision based on their peers, colleagues, friends and relatives. They think that my friend has invested so why not me?
I can understand for those who have very little money and can not afford consultancy fees which, in some cases, are very high. But I can not understand for those who have abundance of money and make large investments without seeking advice from experienced professional financial advisors. These kinds of people do not conduct any self need based assessment and do large investment. These are the people who have adopted ‘get rich quick’ mentality and regret when they loose out the entire amount. Even though these people do not realize their mistake and blame on their fate and luck.
This article talks about the factors which an investor must consider before making any investment decision. These factors are very-very important which affect the performance of any big or small organization. Through this article I want to help to all short term or long term investors who make investment in share market or in any other investment avenues.
Before talking about these factors, I want to request to all my dear investors that first step to make any investment decision is to perform well organized and planned self need based assessment of various current and future financial needs which can be categorized in following ways:
¨ Medical & Ancillary needs (hospitalization or major illness);
¨ Savings for children education, financing for home, mortgage payment, children marriage, planning to buy two/four wheeler vehicle, short to medium term savings or any other purposes;
¨ Wealth accumulation;
¨ Family income protection or life insurance plans in the event of death or major accident;
¨ Cover for old age disability;
¨ Retirement plans etc.
This list does not end here. It just consists of common needs. Now, I will discuss these factors which seriously affect any company’s financial performance. I have distinguished these factors in 5 categories which are as follows:
a) Financial Factors;
b) External Factors;
- Key Policies;
- Industry;
- Government Stance.
c) Intangibles;
d) Assets & Liabilities and
e) Management.
Let’s discuss these factors one by one.
a) Financial Factors:
This is the most important factor which explains everything about the company and every connected person- shareholders, creditors, financial institutions, foreign institutional investors and governments, to the company wants to know about income statement, financial position statement and cash flow of the company. It further can be divided in following categories:
¨ Historical, current and projected profits, balance-sheet and cash flows of the company;
¨ How well management is able to control the cost;
¨ Need for capex in the near future for the expansion purposes and source of arrangement;
¨ % of FDI allowed in this industry;
¨ Key financial ratios such as debt to equity ratio, return on equity, interest & debt coverage ratio, current ratio, Price Earning Ratio, PEG ratio etc.
b) External Factors:
These are the outside factors in which some are beyond control and may affect in the both ways. I would like to segregate these factors in three key categories which are as follows:
I. Key Policies Adopted By The Respective Authorities:
¨ Credit Policy and its ramifications on the business;
¨ Monetary Policy and its effects on the business;
¨ Fiscal Policy and its results on the business;
¨ Export/Import (Exim Policy) or Foreign Policy.
II. Industry:
¨ Total market size / share of the industry;
¨ Total contribution in the GDP;
¨ Total players operating in the industry;
¨ Demand and Supply Ratio;
¨ Life cycle of the industry;
¨ Total market share of the company in totality;
¨ Market leaders and its aggressiveness;
¨ Number of total products offered in the industry;
¨ Number of total products offered by the company;
¨ Life cycle of the running products;
¨ Key strategic policies adopted by the company;
¨ Key strategic policies adopted by the industry leaders;
¨ Revenue dependence on a particular product by the company;
¨ Technology dependence and fear of outdatedness;
¨ How long the company has been in this industry.
III. Governments Stance
¨ Government’s attitude towards the industry;
¨ Key movements/policies/activities adopted;
¨ Total expenditure by the government;
¨ Total Push Up package/bail out package offered.
c) Intangibles:
These are the factors which are very-very important and very tough to find out the correct value. These factors are as follows:
¨ Goodwill of the company;
¨ Intellectual Properties of the company such as Patents;
¨ Growth Potential of the business;
¨ Customers and Suppliers relationship and how much profitable they are to the company;
¨ Banks and Financial Institutions attitude towards the industry;
¨ Leverage on economies of scale if already not operating at these levels and if yes, then find out the diseconomies of level.
d) Assets & Liabilities:
These are the factors in which every bank, financial institutions, creditors and shareholders are interested in knowing the assets and liabilities of the company. These can be further segregated as follows:
¨ Value of Fixed Assets such as Property, Equipment;
¨ Value of Current Assets such as Debtors, Stock-in-hand;
¨ Total long-term liabilities;
¨ Total short-term liabilities;
¨ Worthiness of the ‘Order Book’ and total number of orders.
e) Management of The Company:
This is a very crucial factor on which every company wants to leverage but very hard to find out the effectiveness of the management and its key personnel. These factors are as follows:
¨ Management’s track record for the last five years;
¨ Achievements of the company in the last five years;
¨ Commitments from the key employees of the company;
¨ Dependency of the business on key/other employees;
¨ Association of the big business tycoons to the company;
¨ Number of employees, location of premises and distribution coverage.
I hope from these factors it is clear that taking decision for own investment or suggesting for clients for investment purposes is not easy task as people think. In present scenario when market is very-very choppy and volatile becomes necessary to seek well experienced professional financial advisors advice before making small or big investment decision. Now I would like to take this opportunity to ask this question from my dear investors that is it not worth to pay small amount of consultancy fees if your financial advisor suggesting you right kind of investment avenues where you not only protect your principle amount but also get considerable returns form your investments?
It is my humble request to my dear investors that please do not adopt ‘get rich quick’ mentality and also do not make any investment in hurry when you yourself are not sure for your risk-return profile. In this competitive environment, where everybody wants to earn plenty of money becomes imperative to adopt the consumer’s thumb rule- ‘Buyers Beware’. These things I am mentioning because there are many persons in this financial industry who get certificates of ‘Financial Planner’ by just cramming books and pass the exams but do not possess the required knowledge and skills. If any person wants to invest and does not have time or resources to look for all these factors then I would like to advise him/her to invest through mutual funds where funds are managed by experienced & well qualified professionals. But there too, it becomes necessary to seek advice from experienced financial professional if you have no clue about the best schemes of the various mutual funds running in the financial market.
Having said that all the views are personal and I can not be held responsible for any untoward happening with anybody. With these words, I also welcome for any suggestions and inputs. People can write mail to me at anoopcfa@rediffmail.com
About the Author
Anoop Jain,CFA