My Investment Philosphy

Since some of you mentioned about my investment philosphy, I thought let me write a short blog on what I look at when investing ( Not trading-I am not a trader). Now, some of my investing philosphy is influenced by my educational background, many years of operational experience, analytical & finance work and working in different industries ( Investment Management, Telecom, Private Equity and Business Services -Finance and Accounting space) and also through my friends that I have interacted over many years. I think my philosphy are kind of hybrid - traditional and modern. To explain this further, please continue to read below.

Brief Description:

1. Management, Management & Management Team memebers - I specially review annual reports of the companyies I am interested in by looking who is running the company- is there enough depth in the management team? Are there any members of the team that have questionable dealings ( stock options to their uncles, cousins) or any third party related transanctions? Businesses are run by people and not SW and computers--get out of the mind set.

2. Shareholder oriented management team--what has been done in past?

3. Is the company backed up solid investors or by the Group , by this I would mean, say Tata Motors are backed up by Tata Group - they bring in wealth of resources which are intangible - you cannot quantify this goodwill!!!

4. Balance Sheet review - now it depends on what sectors/space company is operating in, for example one would find lot of debt with heavy capex oriented industries such as Telecom, R&D capex with Pharmaceutical companies, Banking is related to Loan Coverage ratios- basically does the bank have enough reserve to cover the debt ( by law bank needs to have 12% reserve every single day). On Assest side - I prefer company to have more cash - not a big fan of some of the liquidity ratios -- cash is king, so what if company has plenty of cash in marketable/short term securities--if they are taking time to think of planning and growing the company-cash will get used some time or the other, I would rather have companuies with lot of cash then debt. But coporate finance theories suggest that -there is a optimal capital structure for each firm --this is what I am really look for.

5. PL review --change in company PL for one year to another - looking for abnormalities -usually Annual reports will have notes to this. Bottom line impacts and specially looking for if company is doing some "hoaxy" to lift the EPS numbers. For example one way would be to buy buy stocks--it basically reduces Cash on Balance sheet, decreases O/S shares - sometimes this works depending on what strategy management has laid out. Dilution of earnings is something that I dont like to see but will exceptions if the story is right.

6. Cash Flow Statements - I am also always looking for postive operating cash flows --basically refers to having a good operational strategy.

7. PE and EPS growth - I usually look for LOW PEs with Earnings growth in double digits in comparison to competition and sector/industry. This is good indicator of valuation of the companies if you are not interested in running a DCF model. Also, it is good scanner of weeding out loosers. Higher PE sometimes might be justified but it all depends on numerous factors, however, crazy PE such as 400 and 800 in comparison to sectors which trades at 50 PE, this is a HIGH alert--small cap infrastructure, IT/ITES enabled and Real Estate companies have had such multiples...I am extremely caution about this fact.

8. I try to see were the company is going to be headed 2 to 3 years from now and wheather the current price justifies an entry- if it does not, then it goes to my watchlist and I wait for the right price what I think is worth paying for, irrespective of what market is doing.

9. Diversification - I try to read about the sectors were it is headed for and what sectors PE, Std Deviation of companies traded in that sector relates to particular company ( risk measure), Betas of sector and companies withing the sector. From this I try to make a diverfication model - were weights are given to each sector from the total funds. Some load balancing work needs to be conducted on regular basis to bring down the exposure.

Well there is Modern Portfolio Theory -were one could make risk-adjusted optimal portfolios- mathematically ( long and painful process) and I have pretty much forgotten how to construct such models but point 1 through 9 is what my current process is.

Hope this has been helpful.

Aseem
P.S. No spell check/grammer check done.