FMGT 70 Flashcards
What are the investment alternatives?
Deposits
Money Market instruments
Equity shares
Insurance products
Real estate
Derivatives
Precious objects
Retirement products
What are the Investment attributes
Return
Risk
Liquidity
Tax benefits
Convenience
What are the classifications of financial markets
Nature of claim
Maturity of claim
Seasoning of claim
Timing of delivery
Organizational structure
There is an intrinsic value of a security and this depends upon underlying economic (fundamental) factors. The intrinsic value can be established by a penetrating analysis of the fundamental factors relating to the company, industry, and economy.
·At any given point of time, there are some securities for which the prevailing market price would differ from the
intrinsic value. Sooner or later, of course, the market price would fall in line with the intrinsic value.
·Superior returns can be earned by buying under-valued securities (securities whose intrinsic value exceeds the market price) and selling over-valued securities (securities whose intrinsic value is less than the market price).
Fundamental approach
based on the premise that stock prices are guided by emotion, rather than reason.
Psychological approach
It shows that the stock market is a dynamic and unpredictable environment. Although it’s tempting to try to beat the market by analyzing past trends or making short-term predictions, it’s generally better to adopt a long-term investment strategy that involves taking calculated risks
Academic Approach
Fundamental analysis is helpful in establishing basic standards and benchmarks. However, since there are
uncertainties associated with fundamental analysis, exclusive reliance on fundamental analysis should be avoided. Equally
important, excessive refinement and complexity in fundamental analysis must be viewed with caution.
·Technical analysis is useful in broadly gauging the prevailing mood of investors and the relative strengths of supply and demand forces. However, since the mood of investors can vary unpredictably excessive reliance on technical indicators can be hazardous. More important, complicated technical systems should ordinarily be regarded as suspect because they often represent figments of imagination rather than tools of proven usefulness.
·The market is neither as well ordered as the academic approach suggests, nor as speculative as the psychological approach indicates. While it is characterised by some inefficiencies and imperfections, it seems to react reasonably efficiently, and rationally to the flow of information. Likewise, despite many instances of mispriced securities, there appears to be a fairly strong correlation between risk and return.
for a higher level of return often necessitates the assumption of a higher level of risk.
Eclectic approach
What are the common errors in investment management
• Inadequate comprehension of return and risk
• Vaguely formulated investment policy
• Inexperienced extrapolation of the past
• Superficial decision making
• Simultaneous switching
• Misplaced interest for cheap stocks
• Over-diversification and under-diversification
• Buying shares of familiar companies
• Wrong attitude toward losses and profits
• Tendency to speculate
What are the qualities for successful investing
• Contrary thinking
• Patience
• Composure
• Flexibility and openness
• Decisiveness
What are the major trends in the investment environment
▪ Globalizations
▪ Information and Computer Networks
▪ Financial Engineering
▪ Securitization
What are the approaches to succeed as an investor
Physically difficult approach
• Intellectually difficult approach
• Psychologically difficult approach
• Develop an investment policy and adhere to it consistently
• Do not forecast stock prices
• Rely more on hard numbers and less on
judgment
• Maintain a certain distance from the
marketplace
• Face uncertainty with equanimity
Father of modern security analysis
Notable investor
He uses quantitative techniques/navigator
He uses financial analysis to know the status of the company
Analyze stock data to find assets that have been systematically undervalued.
Ben Graham
Most influential economist of 20th century
The government must address the problem
He focused on the economy
He believed that the government solve problem in the short run rather than wait for market forces to fix things over the long run.
John Maynard Keynes
He had an unusual feel for bargain stocks and achieved remarkable success with the help of bargain stocks investing
John Templeton
Most successful stock market investor of his time
The quintessential (long term value investor)
Investment focus is very simple
Buying companies for a low price, improving them via management or other changes, and realizing long-term improvements in stock price (also known as value investing)
Warren Buffett
He is a phenomenally successful speculator
Developed and applied a special insight which he labels the reflexivity principle
Focus on identifying broad macroeconomics trends into highly leveraged plays in bonds and commodities.
George Soros
His investment style has been described as adaptive to the prevailing economic environment at the time
Summing Up
• A confusing range of investment avenues is available.
• For evaluating an investment, the following attributes are relevant: rate of return, risk, marketability, tax shelter, and convenience.
• A financial market is a market for creation and exchange of financial assets.
• Financial markets can be classified by the nature of claim, maturity of claim, seasoning of claim, timing of delivery, and organizational structure.
• Portfolio management is a complex activity which can be broken down into a series of steps.
• The stock market is thronged by investors pursuing diverse investment strategies.
• Investors are prone to various errors
• The qualities of contrary thinking, patience, composure, flexibility, and decisiveness are required to succeed in the investment game.
Peter Lynch
What are the investment alternatives in deposit?
• Bank Deposits
• Savings Account
• Time Deposits
• Monthly Income Scheme
• Company Fixed Deposits
