Share

Market_er
Master
Batch 5
FUNDAMENTALS
&
INVESTING
Fundamental Analysis & It's Types

Quantitative Qualitative

Balance sheet Annual Reports

Income Investor
statement Presentations
Cashflow Management
statement Concalls
Financial ratios Research
Reports
Industry Analysis :

"When looking to purchase a

business, Buffett pays careful
attention to a business he
understands not just in terms of
what the business does but
also of “what the economics of
the industry will be 10 years
down the road, and who will be
making the money at that
point.” He is “also looking for
enduring competitive
advantages.” This, in a nutshell,
is what makes a company
great: the width of the moat
“DO NOT MISS
around the company’s core THE FOREST FOR
THE TREES”
business" -Warren Buffett
MACRO FACTORS :
What is the industry growth rate?
Government regulations affecting the
industry
What has happened internationally in the
industry
What are the trends driving the industry
(value migration. E.g- IT, Pharmaceuticals
& Chemical Industry have been gaining
market share due to low-cost advantages.)

Example : The private sector insurance players

gaining market share over the public sector
insurance players. In 2003, market share of
Private sector stood at 2%, whereas, in 2019,
the market share of Private sector stands at
34%. The growth of Private sector insurance
players has been coming due to the industry
growth rates and market share gains which
they have been doing in the last 2 decades.
This example just shows us the importance of
understanding the trends in the industry.
WHAT ARE THE KEY MICRO & MACRO
FACTORS AFFECTING THE INDUSTRY ?

MICRO FACTORS:

Competition with the other players

Fragmentation/consolidation on the supply
study
How stable is the market share of the players
Threat of obsolescence/availability of
substitute products.
Increasing competitive intensity
Understanding the sourcing of raw material
Future potential of the product/service
 Private Sector
2%

Private Sector
33.8%

Public Sector
66.2%

Public Sector
98%

Market share of public & Market share of public &

private sector in insurance private sector in insurance
segment in FY - 2003 segment in FY - 2019

Key Takeaways :

Macro factors
Profit pool 10 years
down the line

Micro factors
Where is the
industry headed

Who is gaining
market share
There are two ways to analyze
a company's business :

1. Quantitative.
2. Qualitative

Characteristics to look
for in a Business ?

NO. 1 MOAT

“We buy barriers, we don’t build them.

Some industries simply don't have
barriers to entry and never will so will
avoid them.”
- Charlie Munger
Importance of MOAT :

Businesses with moats enable companies

to raise prices and earn good margins.

It gives confidence that those growing cash

flows will not be completed away over time.

It prevents companies from their market

share getting divided.

NO MOAT BUSINESS MODEL,

NO BARRIERS TO ENTRY
Stage 5
Stage 1
Return on capital falls down Opens a business in
to the cost of capital 5 a low competition
and sometimes even lesser
1 environment
than the cost of capital

4
Stage 4 2 Stage 2
Earns super normal profits
This leads to a pricing war 3
and erosion of margins
Stage 3
Seeing the profits, competition enters
No. 2 PRICING POWER
The single most important decision in
evaluating a business is pricing power.
If you've got the power to raise prices
without losing business to a competitor,
you've got a very good business. And if
you have to have a prayer session
before raising the price by 10 percent,
then you've got a terrible business.

-Warren Buffett
Questions to be asked :

Can a firm successfully maintain its

premium price versus the competition?

Can the firm periodically raise the prices of

its product or service without reducing
demand?

Does the firm have pricing leadership, in

that it can hike prices and establish new
anchors in the marketplace without losing
customers?

Is the firm’s pricing power sustainable?

Does it work at improving the value it offers
to customers?
No. 3 BRAND POWER

"It is far better to buy a wonderful

company at a fair price than a fair
company at a wonderful price"
- Warren Buffett

According to Mr.
Peter Lynch,
any stock can be classified into the
following categories :

1. SLOW GROWERS
2. STALWARTS
3. FAST GROWERS
4. CYCLICALS
5. TURN AROUNDS
6. ASSET PLAYS
 1. SLOW GROWERS :

Large and aging companies expected to

grow only slightly faster than the
economy as a whole, but often paying
large regular dividends.

Eg: Hero Motorcorp, ITC & Britannia

2. STALWARTS :

Large companies that are still able to

grow, with annual earnings, growth rates
of around 15% to 20%; If purchased at a
good price. Lynch says he expects good
but not enormous returns--certainly no
more than 50% in two years and possibly
less.

Eg: HDFC Bank, Reliance, Infosys.

 3. FAST GROWERS:

Small, aggressive new firms with annual earnings

growth of more than 20% to 25% a year. These do
not have to be in fast-growing industries, and in
fact, Lynch prefers those that are not. Fast-growers
are among Lynch’s favorites, and he says that an
investor’s biggest gains will come from this type of
stock.

Eg: Happiest Minds, Tanla Platforms & Dixon

Technologies

4. CYCLICALS :

Companies in which sales and profits tend to rise

and fall in somewhat predictable patterns based
on the economic cycle; examples include
companies in the auto industry, airlines, and steel.
Lynch warns that these firms can be mistaken for
stalwarts by inexperienced investors, but share
prices of cyclical can drop dramatically during hard
times.

Eg: Sail, Tisco & Graphite

5. TURNAROUNDS :

Companies that have been battered down or

depressed--Lynch calls these "no-growers"; the
stocks of successful turnarounds can move back
up quickly, and Lynch points out that of all the
categories, these upturns are least related to the
general market.

Eg: Thomas Cook, Future Retail & YES Bank

6. ASSET PLAYS :

Companies that have assets that Wall Street

analysts and others have overlooked. Lynch
points to several general areas where asset plays
can often be found--metals and oil, newspapers
and TV stations, and patented drugs. However,
finding these hidden assets requires a real
working knowledge of the company that owns the
assets.

Eg: BHEL & ONGC

PORTER'S FIVE FORCES
We can learn how to analyze industries is
by using the 5 forces analysis and
understanding the value chain by Michael
Porter.

Five Forces Analysis is a mental model that

we can use to understand the competitive
position of a company in relation to the
industry it operates.

PORTER'S FIVE FORCES

Availability of Bargaining power Bargaining power

substitute products of customers of suppliers

Rivalry among Threat of new

existing players entrants

"Strategy is about making choices, trade-offs; it’s

about deliberately choosing to be different"
-Michael Porter
1) Threat of New Entrants :
If we think about this factor. It basically
means, how tall/dense are the entry
barriers which are present in the industry?

For instance: in some industries like retail, there

are no entry barriers. Whereas, in other industries
like banking, a license is required from RBI to open
a bank. In industries like CRAMS, high entry
barriers exist, as once a client's molecule is
commercialized with a certain player, the chances
of switching are very low.

For example, Pi Industries hasn’t lost any

customers and is dealing with all the major
global agrochemical companies.
2) Rivalry Amongst the Existing
Players :
The environment of competitive intensity
between all the players keeps shifting.

For instance: A few years ago there were more

than 15 players in the Indian Telecom industry.
With the entry of Reliance Jio, the entire sector
went through a pricing war, due to which many
players couldn’t survive. From 15+ telecom
operators, we are left with only major Private
ones. Just like an organism that has to adapt to
its environment.

Similarly, businesses, have to keep

changing/adapting to the competitive intensity
in order to survive. As survival ensures the
longevity of compounding and differentiation
will ensure the Rate at which it compounds.
3) Bargaining Power of the
Suppliers :
This relates to analyzing the power that
suppliers have over the company that we
are analyzing.

For instance: if the company that we are

analyzing doesn’t have any pricing
power/power to pass on the price increases.
The price increases by Suppliers would lead to
compression in margins. This is what has
happened in most of the sugar companies.
They do not control the input prices and
cannot control the output prices which are
determined by Minimum Support Prices. It’s a
purely cyclical industry, with investors'
chances of dying (losing capital) being very
high in such cases.
4) Bargaining power of
customers :
This is exactly the opposite of the Bargaining
power of suppliers. While doing the company
analysis of a business, it is important to look at
how powerful the buyers are. In most cases, as the
size of the buyer increases as a percentage of
sales, so does the bargaining power.

For instance: With the take over of Future Retail,

Reliance Retail has become the largest retailer in
the country. Effectively, what can happen is, this
increases the buying power of Reliance while
dealing with the FMCG Companies, they can ask
for more discounts. Moreover, in B2B companies,
the bargaining power of customers is really high, if
the business is not doing well. This can lead to
deferment of orders.

Between 2015-2017, the Global Agrochemical

industry was going through Mergers and
Acquisitions, Since Pi Industries does contract
manufacturing for them, many of their orders were
deferred due to uncertainty surrounding the
Mergers.
5) Availability of Substitute products :
A substitute product provides similar benefits to the
consumer often at a lower cost as compared to product of
the companies/businesses that one is analysing. The
availability of a substitute product and its cost can be a big
source of risk for the business.

Nokia, which didn’t adapt fast enough to make

smartphones, was still stuck in manufacturing Featured
Phones. Just imagine, in 2000s Nokia used to have a ROCE
of 20%+, but its failure to adapt to a substitute product
which in many ways was superior. Led to the downfall of
the company.

Another famous example is that of Mosar baer. It went

through a turbulent time period which eventually led to its
bankruptcy when the world shifted from CD’s to Pendrives
and then to Cloud storage.

All of a sudden, Mosabaer found itself in a world where its

products were no longer required. Such is the pace of
change in technology. In industries that keep on changing it
is important to analyze the availability of substitute
products.
What is a
Good, Great &
Gruesome
Business?

Great Business: The great

business is like a great
savings account that pays
very high-interest rates to
its holders.

Good Business: A good

business pays
satisfactory interest rates
to its holders
Gruesome Business: A gruesome
business pays very fewer interest
rates to its holders and it forces you
to add more money at disappointing
rates of return.

Great Good Gruesome

CAPITAL
Rs. 100 Rs. 100 Rs. 100
ROIC
(Return on invested capital) 50% 20% 10%

Five kind of businesses

1. GREAT BUSINESS + HIGH EARNINGS GROWTH
2. GREAT BUSINESS + LOW EARNINGS GROWTH
3. GOOD BUSINESS + HIGH EARNINGS GROWTH
4. GOOD BUSINESS + LOW/NO EARNINGS GROWTH
5. GRUESOME BUSINESS WITH LOW/NEGATIVE
EARNINGS GROWTH
 A) SALES GROWTH

EXCESS OF 30% - VERY GOOD

EXCESS OF 20% - GOOD.
EXCESS OF 10% -MODERATE.

B) PROFIT GROWTH

EXCESS OF 40% -VERY GOOD.

EXCESS OF 20%- GOOD.
EXCESS OF 10%-MODERATE.
 Company Categories
1. Large Cap

2. Mid Cap

3. Small Cap

LARGE CAP - Market Cap Rs.20000 Cr.+

MID CAP - Market cap Rs.5000cr. to 20000cr.

SMALL CAP - Market cap less than Rs.5000cr

Market Total number of The current

Capitalization shares allotted market price
Formula by the company of each share
Key Concepts Of SIP :

The SIP is no magic. It works on

two cardinal principles: Rupee
Cost Averaging and Power of
compounding.

Based on the concept of

consistent investment strategy,
making investment trouble-free.

Ensures higher probability of gains

for the money invested by the
investors.

It is just a method to invest in any

scheme; not an investment scheme
itself.
Common myths on SIPs :

Markets are high to start a SIP

Only Small investors go in for SIP
SIPs are only for low-risk takers
You will be penalized if you miss
a SIP installment
TECHNICALS
&
TRADING
 There are 3 pillars of trading:

Technical Risk Trading

Analysis Management Psychology
The 6 tenets of Dow Theory :

The market moves in

summation of three trends :

The Primary or Major Trend

The Intermediate or Secondary Trend
The Minor Trend
 The Market trends
have phases.

All news is discounted

in the stock market

The stock market indices discount everything

which is known & unknown in the public
domain.

If a sudden and unexpected event occurs, the

stock market indices quickly recalibrate itself
to reflect the accurate value
 Averages must confirm

We cannot confirm a trend based on just one

index.

For example, the market is bullish only if CNX

Nifty, CNX Nifty Midcap, CNX Nifty Smallcap etc.
all move in the same upward direction.

It would not be possible to classify markets as

bullish, just by the action of CNX Nifty alone

Volumes confirm trends

The volumes must confirm along with the price.

The trend should be supported by volume.

The volume must increase as the price rises and

should reduce as the price falls in an uptrend.

In a downtrend, the volume must increase when

the price falls and decrease when the price rises.
 Trends continue, unless
definitive reversals come about

Irrespective of the day-to-day erratic movement

and market noise that may be witnessed in prices,
Dow believed that prices moved in trends.

It relates a physical law to market movement,

which states that an object in motion (in this case
a trend) tends to continue in motion until some
external forces cause it to change direction.

Understanding Technical analysis in

simple terms..

Technical Analysis is the study of price

charts of the companies.

The prices move based on the emotions

of market participants.
 To take decisions for the short term,
we need to understand demand and
supply. Demand and supply can be
nicely understood with the help of
graphical charts.

The three elements of Technical

analysis are Price, Volume, and Time.

According to John Magee,

Technical analysis has 3 principles :

Stock prices tend to move in trends

Volume goes with the trend
A trend once established, tends to
continue in force
Points To Consider While Drawing
Support & Resistance
The highest and the lowest swing points are
the most obvious areas.

See how many times the price rejected that area.

The more the count, the stronger the area.

Pay attention to the magnitude of rejection when

the price reached that area. The stronger the
rejection, the better it is.

If the area has acted as both support and

resistance, it is a strong area. The newer the
rejection, the stronger that area is.

Support & resistance of higher time frames is

stronger than those of the lower time frames.
Polishing these areas using the lower time
frames is very important.

Do not draw too many lines on your

charts. If it takes a lot of time to identify
an area, it's a weak area.
Fundamental rules taught by
Richard D Wyckoff

The law of Cause & Effect:

In order to have an effect, you must first
have
a cause & the effect will be in direct
proportion to
the cause.

In other words, a small amount of

volume activity will only result in a small
amount of price action.

If the cause is large, then the effect will

be large as well. If the cause is small,
then the effect will also be small.
The law of Effort vs. Result:
The price action on the chart must reflect the
volume action. The two should always be in
harmony with one another, with the effort
(which is the volume) seen as the result
(which is the consequent price action). If they
don’t then there is an anomaly & we have to
spot such anomalies to trade right.

The law of Supply & Demand :

When demand is greater than supply, then

prices will rise to meet this demand, and
Conversely when supply is greater than
demand then prices will fall, with the
oversupply being absorbed as a result.
 Price Spread Volume Behavior
Rising Increasing Rising Normal

Falling Increasing Rising Normal

Rising Increasing Fading Abnormal

Falling Increasing Fading Abnormal

Trading Rules

BUY ONLY IF
Morning opening & low price is more or
1 BUY When less same & Current price above that

2 BUY When The current price is trading above 2.5%

higher than the low of the day.
3 BUY When After Cross of high.
4 BUY Retracement If trading above the last closing.
5 BUY Support If trading above the last closing.
6 BUY Above Pivot If trading above last week’s Low or High.
7 BUY Above Pivot If trading above last Month’s Low or High
 SELL ONLY IF

1 SELL When Morning opening & High same & CMP < that
2 SELL Pull Back CMP is < 2.5% of the high .
3 SELL Resistance After breaking of low.
4 SELL Below Pivot If trading below last closing.
5 SELL Below If trading below last closing.
6 SELL Below If trading below last week’s Low or High.
7 SELL When If trading below last month’s Low or High.

Calculation of Pivot, Support & Resistance

Pivot = Previous day's high + low + close / 3

Resistance 1 = pivot * 2 - low

Resistance 2 = pivot + high - low

Support 1 = pivot * 2 - high

Support 2 = pivot - high + low

Role of psychology in Trading/Investing :

It refers to the emotions and state of mind, which

help determine success or failure in the securities
market.

Trading/Investing psychology reflects different

aspects of the character and behaviour of a person
which influence their acts in stock trading &
investing.

Why is it important?

Psychology is the primary reason for the

failure of 90% of traders

Stock markets are driven by emotions, if

you don't understand your own emotions,
how can you understand the market's
emotions?
 Just observe yourself when you are
into a trade. Emotions such as Greed,
Fear, Hope, Excitement, Doubt,
Frustration, Thrill, etc simply comes
into play

Emotions affect our trading

negatively.

Mark Douglas's
5 fundamental truths of trading :
Anything can happen.

You don’t need to know what is going to

happen next in order to make money.

We need an edge to survive in the market.

An edge is nothing more than an
indication of a higher probability of one
thing happening over another.
 There is a random distribution between
wins and losses for any given set of
variables that define an edge.

For example, you cannot expect to have 20

profitable trades at a stretch. It is normal to
have a losing trade after a few profitable ones

Every moment in the market is unique.

Never let your emotions overpower you !!

Markets are all about human behavior.

Investing/trading is less of a field of finance
and more of a field of human behavior. The
key to investing/trading success is not how
much you know but how you behave.
Your View of the Market Call Option Put Option

Bearish (fall in price) Sell Buy

Bullish (rise in price) Buy Sell

Call Option Buyer Call Option Seller

Pays premium Right to exercise and buy the shares

Right to exercise and buy the shares Obligation to sell shares if exercised
Profits from rising prices Profits from falling or neutral prices
Limited losses, potentially unlimited gain Potentially unlimited losses, limited gain

Put Option Buyer Put Option Writer

Pays premium Receives premium

Right to exercise and sell shares Obligation to buy shares if exercised
Profits from falling prices Profits from rising or neutral prices
Limited losses, potentially unlimited gain Potentially unlimited losses, limited gain
Candle Stick Formation

Upper Shadow High

Open/Close
Real Body
Open/Close

Lower Shadow Low

Green & Bullish Candle

High

Close

Open

Low
 High
Red &
Bearish
Candle Open

Close

Low

Long
Days
Short
Days

White/Green Marubozu

Extremely Strong Line.

It is the first part of a

Bullish Continuation or
Bearish Reversal.
Black Marubozu

Extremely Weak Line.

Shows the Weakness of
a continuing downtrend.

Spinning Tops (Koma)

Small bodies with

shadows.
Shadows are of greater
length than the body's
length.
The Colour of the body is
not important.
Represents indecision.
Doji

Doji is important Candlesticks that provide

information on their own & as components
of a number of important patterns.

Doji's form when an Open & Close

are virtually equal.

Doji indicates indecision. Doji appears

when Bulls & Bears are in equilibrium for
the period.

Any Bullish or Bearish bias is based on

preceding price action & future
confirmation.
 A Doji means there is uncertainity &
indecision.

Doji indicates that the forces of Supply &

Demand are becoming more evenly
matched & a change in Trend may be
near. Doji alone is not enough to mark a
Reverse & further confirmation required.

Stars

Small body gaps above or

below the previous day's
long body.

Indicates some
uncertainity in the
marketplace.
Paper Umbrella lines have
Umbrella
strong reversal
implications.

Two of the umbrella line

are called Hammer &
Hanging Man, depending
upon their location in the
Trend of the market.

Hanging
Man Long lower shadow,
small real body.
Occur in an uptrend.

Indicates a possible
trend reversal.

Confirmation
required.
Hanging Man: Rules of Recognition

The small real body is

at the upper end of the
trading range.
The colour of the body
is not important.
The lower shadow
should be 2-3 times
the real body.
No or little upper
Hammer shadow.

Long lower shadow,

mall real body. Occurs
in a downtrend.

Indication of a possible
trend reversal.

Confirmation required.
Hammer/ Hangin Man

The Hammer & Hanging Man look

exactly alike but have different
implications based on the preceding
price action.

Both have small bodies (black or

white), long lower shadows & short
or non-existent Upper shadows.

As with most Candlestick formations,

the Hammer & Hanging Man require
confirmation before action.
Engulfing pattern

Downtrend

Uptrend

Bearish Engulfing Bullish Engulfing

The Engulfing pattern consists of two real

bodies of opposite colors.

The second day's body completely engulfs

the prior day's body.

A definite trend must be underway.

Confirmation suggested.
Harami Patterns: Bullish & Bearish

Bullish Harami Pattern Bearish Harami Pattern

Harami is a Japanese word for

pregnant or body within.

Harami requires that the body of

the second day be completely
engulfed by the first day. It is
concerned only with the body.
Confirmation required.

A long day is preceded by a

reasonable trend.
The short day should be the
opposite color of the body.
 সঠিক শিক্ষায় বিনিয়োগ
ভালো ভবিষ্যতের জন্য বিনিয়োগ।