Fundamental Analysis!!!

To arrive at Fair Valuation of a company what we require is lots of data, so that we are better equipped while forecasting its future income and hence paying and adequate price for it today!!! These data needs to be not only gathered but sorted and adjusted to level of your estimation too.
The sources to these data’s are endless; what’s more important is to set a pattern for our research activity based on which we can get data and analyze them one by one.
There are two different ways in which analyst may start their research activity.
1. Top –Down Research approach
2. Bottom-up Research approach
Top-Down Research approach: In this approach analyst doesn’t have any particular company at first to analyze but rather take a Countries Economy. Typically it starts with analyzing Economies across the comparable country, then analyzing Industries within the Economy, and then companies within the sector, finding an undervalued growth opportunity and then Investing. (please note I have used Analyzing the economy/industries/company with reference to a comparable, which simply put refers to one of the basic rule of analysis that when we analyze a company it cannot be done on a standalone basis and has to be relative, & compared with other economies/companies but of the same size, We cannot compare a developing or underdeveloped economy with a developed one, neither can we compare a multinational with a local business group irrespective of their presence in the same business.

Bottom-up Research approach: Against Top down in Bottom-up Research Analyst has a company or a script which is analyzed beforehand with comparable, moving then to the industrial performance and its growth prospective and then moving on to the Economy as a whole.

Need and Application of an analysis!!!!

One of the most debatable matters between Fundamental and Technical analyst has been the very need of doing an analysis. Why should we care about the monetary policy or fiscal policy of a country, why analyze a whole Industrial sector, why analyze a company’s management their accounts, forecast their future etc.? When we can buy/sell a stock and buy/sell it as soon we realize our profits (on the basis of demand and supply of stock or volume and trend of a stock or technical reasons discussed latter, I have written buy/sell here because in stock market you can sell a stock first even when you don’t own any stock and buy it latter at lower price and give the shares back, realizing the profit known as shorting).
Well this can be done purely on technical basis but not for a long term basis (I cannot predict what will be volumes or number of shares been traded in the market a year down the line) and by buying today selling tomorrow and repeating this over a period of time even in a stock which is doing good and is in upward trend we are reducing our profitability and exposing our self to the trading risk, only making our brokers rich.
The primary and most important reason for analyzing with such details and precision is to get the Fair value of a stock and the company that we are about to buy to be able to realize its future gains? This is the crux of value investing/Equity analysis. It’s actually more important for an investor that what price are you buy something than what are you buying. That is why Brand such as Reliance power was a bad buy when it was listed at 540 levels & satyam computers was a good buy at 40 levels even after all the hassle it has gone through.By saying that we need to buy something at fare price I mean the actual value of the shares or the company should be equal to market price. (Please note I am using value and price as two different terms as they are never the same, price is defined as the markets willingness to pay you “x” amount against one share of a company, by Value I mean fair price that I should receive today considering the future potential of a business).This makes it our Rule number 1 for our Investment
1) FAIR VALUATION
Now how to calculate the fair value of a share will be discussed over the topic before which I need to cover some prerequisite for arriving at fair valuation, which will be discussed in my next post.
Other Applications of Analysis
In financial world, Analysis is one of the most important aspects of the industry, not only in stock market/Equity market but also as a part of Economic research and forecast, Industrial research, Private Equity market (space where venture capitalist/other companies acquire other non-listed private company)

Most important Anlaysis

With an assumption that we are here to analyse Equity value of a company i.e. the business of which share is underlying asset off, I have to safely assume that we all are clear with basics of accounting and finance, I will still try to cover up basic as much as I can.
Before we start analysing a script or a share I think the most fruitful exercise would be to analyse ourselves as an individual and our objective from this, it’s obvious that we all have a common objective of earning profits but we all are different individuals and carry different belief and concept about this market. Many or in fact all of us at some time or other has hoped/imagined that the script we just bought would fetch us hundred times profit if not thousands. I wouldn't say that can never happen but buying and hoping script goes up isn't always fruitful. I come across many people who say “I don’t put my money in stock market any-more  because whenever I did, the moment I did the stock prices tanked down, guess we are not made for each other.” I generally don’t react to it.
The best thing to start out would be to set our objectives straight to be able to strategies our way out
· What Am I here for?
· What kind of patience level do I have?
· What can be the time period of your investments?If your answers to these three questions are 1) here to make quick bucks, 2)no patience level, 3)less than one year/shorter the better, then you can safely put yourself in traders category and will require to develop a different set of skills (There is nothing wrong in being under traders horizon against the conventional belief, it’s just the skills require to succeed in the market with this object would be different (known as technical analysis) than what we are talking about here. (I am still learning about technical analysis and would add a blog on it soon.)
If your answers to these questions are 1) I am here to make money I don’t mind if it takes time as long as I learn from it too. 2) I have Patience, but doesn't mean I am stupid. 3) As long as the company is earning/sharing profits and growth prospectus is high I don’t mind 2yrs 5yrs 10yrs 20yrs…. Then you will need skills called as fundamental skills to analyse and can put yourself in the horizon of Investors.

There is nothing wrong in having both answers and objectives, ultimately whatever makes money for us….i put myself in both the categories too but then my portfolio is clearly divided into 25-75 horizon not more than 25% with a trading objective and out of that not more than 10% for speculative reasons if not all with a logical trading view. But before I did that I had to make sure I understand both views of analysis and rules of both the game which are like two very different animals. You too can design your own portfolio weight-age and put money accordingly till the time you are clear with the reasons for your call.
With the objectives clear we can then proceed to see what does the most intelligent people on the wall- Street does and how can we all share the title of an Analyst.

Welcome!!!

Equity Analysis/ Security Analysis/Value Investment/Fundamental Analysis ……Call it by any name it will still remain one of the most interesting and important aspect of Financial Industry at least to my opinion, In-fact this topic is the sole reason for my presence in the financial Industry. Quickly I will break the analysis part into
• Need and Application of Analysis
• Analysis – Top down & Bottom up (Economic, Industry, Company),Financial Statement Analysis, Ratio Analysis .....
• Valuation & its Need
• Equity Value, Enterprise Value, terminal Value
• Methods of Valuation –DCF, Relative Valuation…
• Financial Modeling
If you have just started learning about this subject don’t worry about the terminologies I have used here they might sound complicated but It’s actually the nature of the Financial world to make simplest of thing sound as complicated as they can, guess makes them feel sophisticated and intelligent. Had to include the list here so that the outline can be clear for everyone. I am sure I will be able to take you down with this topic as swiftly as possible as my mentor (Dheeraj Vaidya) did it for me Thanks to him. Cheers to you all!!!