Here is the link of the video: https://www.youtube.com/watch?v=NUZ2MTJjvnU

Niteen Dharmawat is the speaker in CFA Society India’s program. He started Aurum Capital with his partner Jiten Parmar. They together have more than four decades of experience in equities and also in mentoring investors.

He starts with the discussion on timing the markets. He talks about investing in bear markets. He shares that he has never seen any instance when money is invested in bear markets and the money is lost. But people lose money when they invest in madness of bull market. He talks about compounding. The three components of compound interest are principal, return and time. Even if the principal is small but is invested over a longer tenure the amount could be very large. Investors focus on return and ignore time component. He takes a case study consisting two stocks – one having price of Rs.27 and another having price of Rs. 9785. He asked the attendees to choose between these two stocks and majority was with ‘A’ because they thought it was cheap so it is good. But the cheaper stock crashed in near future and the costly stock went up. He talks about another stock which had low of Rs.200 went up to Rs.2000 in a single year due to boom.

He talks about things which investors can do before putting in their money. Starting with creating an excel sheet, investors can write the buy price and the reason behind their investing, your expectations from this investment because people forget the reason behind their investment. Investors can also classify their portfolio using different scenarios. Further, he shares about annual reports. Often, investors are highly interested in Profit and Loss statement and ignore cash flow statement. But cash flow statement is very critical. Cash flow consist three components – investing, operating and financing. Cash flow from operations can be evaluated further because if company is selling goods and services and is receiving cash against it, it is recorded here. If a sale is on credit, then receivables are recorded and later when payments are done, cash is recognized. However, receivables are something where investors should focus because it may happen that companies are aggressively selling goods without collecting from customers. There may be some exceptions like banking /financing companies which sells cash through lending. Other things apart from CFO are checking interest expenses and comparing with net profit, checking promoter’s unpledged holding company (pledged stake should be considered as sold). It is difficult to manipulate CFO. CFO can be reported positive either by decreasing inventory or receivables or by increasing payables, but this not sustainable. Other things to be noticed are chairman or CEO’s statement or studying Management Discussion and Analysis report. In chairman’s report, first and last two paragraphs should be studied carefully. Management’s new plans to take business forward should be studied. If to the point information is not given and other numbers of industries are given then this can be a negative point because information about company is not provided. However, investors should look for result of operations, changes in financial condition etc.

Consolidated numbers should be considered instead of standalone. Other things to look in financial statements are net profit, sales, operating profit, cash flows, other income, main expenditure costs, inventory; capital work in progress etc.   

Other things to look at:

1. Salary of directors or any revision in the salary of directors or auditors, is the revision in salary in line with growth and profit numbers?
2. Who are the members of audit and salary committee
3. Composition of board of directors and number of independent directors.
4. Attendance of directors in board meeting
5. Independence auditor’s report
6. Shareholding Pattern

The 6 main components one should look while viewing the P&L account are:

1. Sales Trend
2. Operating performance
3. Interest Component
4. Depreciation
5. Tax Paid
6. Dividend Payout Ratio

The 3 main components one should look while viewing the Balance Sheet account are:

1. Equity Dilution
2. Share capital(Equity/Preference)
3. Borrowings(ST/LT) versus interest component from last quarter

The 5 main components one should look while viewing the Cash Flow Statement are:

1. CFO versus Net Income
2. Working Capital changes
3. Taxes paid
4. CFI Trend
5. CFF Trend

Mr. Niteen explains with the help of real life example how pledging of promoter affects the CFO and PAT of the company. He explains that the more the pledging done by the promoter, poorer the numbers would be.

On being asked how to decide whether to invest in a new upcoming company or not, given the absence of historical track record he says that, such stocks can be kept in your portfolio but with a very low stake.

The background of independent directors needs to be checked and it must be ensured that they have a decent educational background. Also, the information provided by the company can be cross checked to know how trust worthy the company is.

Mr. Niteen talks about various companies whose stock price almost came to zero because of insufficient cash flows, promoter pledging, Equity dilution and increasing debt.

Here is the link to the video https://youtu.be/PHe0bXAIuk0

Economy looks complex but it works in simple, mechanical way. It is made up of simple transactions which are repeated over and over again. Transactions are done by everyone. It can be done in two ways either by paying cash or on credit. By adding both of these we get total spending. It can be said that transaction is the building block of economic machine. Economy consist different markets and every market has buyers and sellers that are doing transactions. Every bank, institution, individuals etc. are transacting in the same way i.e. either by paying cash or on credit. Government is the biggest buyer and seller in an economy. Now, government can be divided among two institutions – Central government and central bank. Government is collecting taxes and spending while central bank is managing the money in an economy. Central bank manages money by interest rates and by printing new money. Credit is the most important part of an economy. It can help both lenders and borrowers to fulfil their needs. Borrowers borrow money with a promise to repay the principal with interest. When interest rates are high, borrowing is lesser in economy because it is expensive (higher interest need to be paid) and when interest rates are low, borrowings are high because it is cheap (lower interest need to be paid).

Why is credit important?

Credit is important because when people borrow money they spend and this spending is income for a third person. This third person will further spend it and it will become income for another person and this is how this cycle works. A person having good income has good credit worthiness i.e. banks are ready to lend him as he has ability to repay or put some of his assets as collateral. This is how cycles are created in economy. The more a person earns the more he raises his living standards. This is productivity growth. Productivity matters most in long run because it doesn’t fluctuate much. Debt is a driver of economy because it allows us to consume more when we borrow and we pay it back we spend less.

Let’s assume two case where in one economy doesn’t have credit and other has. In the economy with no credit, the only way through which spending can be increased is by increasing our income which require us to produce more. But in the economy where credit is available there will be cycles. This cycle is because of the nature of credit. Every time a person takes credit he spends more in that time but in future when he will have to repay it he will spend less. Credit is different from money because in money the transaction is settled immediately but in credit transaction is settled in future. Credit can be both good as well as bad depending on its usage. Example – If the credit is used to buy a T.V. it will not generate any return but if it used to buy a tractor, it will help in farming through which you can earn money. Credit leads to short term debt cycle. This is how it works – one person earns, say for example, $100,000 with no debt. He can borrow $10,000. So he can spend a total of $110,000. This $110,000 becomes another person’s income with no debt. He will be able to borrow $11,000. His spending will rise to $121,000 which will later become another person’s income and the cycle goes up. But as the cycle goes up it will need to come down. Over the time as the people will spend more, expansion will be there. As the spending is increased the prices rise too, which we refer as Inflation. In this scenario the central bank increases interest rates. This will lead to fewer borrowings and also cost of existing borrowings will rise. As the borrowing will be lesser and debt payments will be higher, this will lead to lower spending and eventually lower incomes. This again will lead to drop in price and overall economy will face recession. In this scenario, when inflation is not a problem, central bank will decrease the interest rates so that economy pick up again. Overall, when the credit is available easily there is a credit expansion and when credit is not available easily there is a recession. This cycle is managed by central bank (generally by changing interest rates). Now comes in long term debt cycle. At the end of short term debt cycle, growth and debt rises. This is because people spend more rather than paying debt. Even if people have rising debts, lenders lend freely because things are going great. Incomes are rising, spending is rising, asset prices are rising, stock market is rising and overall there is a boom. If this is done in huge volumes it is called as bubble. Rising income and asset values help borrowers remain creditworthy. As this debt burden increases slowly over time, debt repayment grows faster than income. Due to this spending is cut and income for other people decreases which makes them less creditworthy. To pay back the debt, spending is to be cut even further. Economy begins deleveraging. In deleveraging there less income, assets price falls, credit is not available, the stock market crashes. As the income drops and there is a pressure of debt repayment, people are forced to sell their assets. Due to this stock market crashes, real estate market crashes. This appears to be recession but is not. In recession, central banks changes interest rates to stimulate the borrowing. But in deleveraging the interest rates are almost near to zero or zero only. Four ways through which deleveraging (repayment of debt burdens) can be done are – cut the spending, reduce debt through defaults and restructuring, redistribution of wealth and finally central banks printing new money. But it is not that easy. As the spending is cut, income also stops for other people. Businesses cut cost which leads to removal of employees. As the employees will have no income they won’t be able to repay the loans/debt. This will result in banks unable to pay the depositors and there will be defaults all around. When credit is given both assets and liabilities arises. Lender doesn’t want to see their assets disappearing. So here comes debt restructuring. Debt restructuring means lender gets lesser money or gets money over a longer time or at a lower interest rate (from the rate which was agreed earlier). As the incomes are less and unemployment is seen, government’s source of income i.e. collecting taxes is affected. At the same time government has to spend for those who lost their jobs. Basically, government spend more than they earn. In this case government has to borrow more. But the question is from whom to borrow. Now what government does is that they raise taxes on wealthy people and by this wealth is distributed from “haves” to “have not’s”. Then central bank steps in. Central bank prints more money and buy assets and asset prices starts rising. But this will only help those who have financial assets. So government and central banks cooperate. Central bank buys government bonds which result in inflow of money for government. Then government can buy goods and services and eventually help lending money in the hands of people.  If all the factors of deleveraging are done in balanced way then deleveraging can be beautiful. If the deleveraging is done beautifully growth will be slow but debt burden will be reduced. Overall, economy will start to rise again.

Few points to remember:

• Don’t have debt rise faster than income.
• Don’t have income rise faster than productivity.
• Do all that you can to raise your productivity.

Here is the link of the article: https://www.youtube.com/watch?v=1YaWjEwHXtM&feature=youtu.be

Behavioural Finance deals with the human aspect of investing. The investor having the knowledge of behavioural finance is better off while dealing with finances. Behavioural Finance talks about the various shortcuts which investors take while investing which may not be in their best interest.

Behavioural Finance involves the study of how investors go through the cycles of greed and fear. When a particular sector is booming people become greedy and invest without seeing the risk factor. Also, when people fear because of reasons like an economic down turn they sell off all their investments.

Physiology of Finance

This involves linking finance with the biological aspects of humans. John Coates used certain methods to study the physiology of finance. Another method used was to conduct experiment on various species of animals. Levels of biological markers of the people associated with the financial markets were assessed. It involved collecting their blood samples, blood pressure levels, pulse rate at different times of a day.

There is a comparison of behavioural finance with physiology wherein the terms like fear and greed have been replaced by mania and depression in physiology.

The difference between the terms lies in their nature. Greed and fear are just a state of mind whereas mania and depression are clinical conditions.

Hormones send messages from body to brain. Like I am hungry or it is hot outside. Steroids are another class of hormones. They are powerful messengers.

Euphoria (greed equivalent) – Dopamine is chemical related to pleasure feeling in body. Over consumption of dopamine can lead to losing of interest in other things. Different activities can have different effect of dopamine like having food can increase dopamine by 50%. Let’s say by consuming a particular thing you generate a particular amount of dopamine. But this pleasure decreases over time i.e. to have same level of pleasure one has to increase the dosage of consumption. This applies to traders as well. To earn higher profits, higher risk should be taken.

Dopamine is for shorter range. Testosterone is the chemical for longer range. Blood samples were taken for traders at different times and testosterone was correlated with traders profit & loss account.

When people face stress, that time body may react in different ways like increased hear rate, increased blood pressure, sweating, passage of urine (not in all cases) etc. One has to break the cycle of Euphoria or testosterones or else it will lead to clinical situations.

Here is the link of the video: https://youtu.be/MK7EhuudalI

Global Steel Demand-Supply Scenario:

Global Steel Production has risen over the past three years. However, the growth rate has decelerated over the years this is mainly due to slowdown in consumption of steel. Steel consumption depends upon the overall performance of the economy as the demand for steel is derived from the investments made in infrastructure development like Railways, Airport, etc. Globally, almost 50% of the total demand of steel comes from construction sector and 15%-20% comes from the auto-mobile sector. The production of automobile has declined since the past two years and 2019 has been the worst year for automobile globally. The US China trade war and the  uncertainty related to BREXIT has slowed down the pace of global economic growth which impacted demand for steel.

Steel can be manufactured through the blast furnace route or the electric route. In India maximum steel production is done using the blast furnace route. The end use steel production in India is classified in two categories:

1. Long end use consumption pattern – Long products include products like bars, railway products, etc. They are used for construction and mechanical engineering work.
2. Flat end use consumption pattern – These includes products like cold rolled strips, hot rolled coil, etc. They are used for automobiles, pipes and tubes, construction, etc.

Due to low per-capita income and limited urbanization, India’s per-capita income in steel is way below the world average which indicates potential to grow. India is the net exporter of steel. India has been an exporter of raw materials like iron ore and core to the rest of the world. There has been decrease in the price of coal due to excess supply and low demand of steel.

Eventually prices of steel corrected in the global market due to a reduction in the tension between US and China.

Due to the impact of corona virus pandemic, the companies are expected to pose lower profitability and lower revenue till the first quarter of 2021.

In the Steel sector most of the companies come under BB rating or below due to the presence of a large number of small players.

Impact of Covid-19 on base metal prices:

In the past one month as there were lockdown in most countries, there was very less demand for commodities due to which massive price declines were seen in commodities. Oil too went below $25/barrel.

Indian steel players were increasing steel prices since mid November but it started declining since January.

Short term outlook

Industry will face headwinds due to Covid19. Consumption will not increase at the earlier estimate. Both global and domestic demand will be lower. Profitability will remain under pressure in FY 2021.

Long term outlook

Care ratings have a stable outlook for steel industry over coming three to four years. Demand is expected to grow by aroundCAGR of 6% during 2021-2023. Both demand and capacity is anticipated to increase. Scope for infrastructure growth is there.

Conclusion:

Overall global economic growth will be slow due to Covid-19. How countries will bounce back after this crisis will remain important because this will impact prices of commodities and also the global economic growth.

Here is the link to the video https://youtu.be/xigATYEOfiY

In this video, a case is taken of Clariant Chemicals (for Forensic Accounting).

Some related party transactions are shown. But there is no fraud in that. Rs. 240 cr. (almost 30-40% of sales) worth of goods is sold to Singapore entity.

Clariant Chemicals is operating in more than 100 countries. In India the company is private (Clariant India Private Limited) but in other countries it is listed.

This private company is owned by Singapore entity. Deepak Parikh is the KMP in parent company as well as in Clariant India Private Limited. But this information is not given in annual report of parent company.

If this information was available then investors could have sold their shares. From 2014 to 2019 stock price fell 60%.

Here is the link to the video https://youtu.be/skrSif0vhOk

Thomas Russo is a preeminent investor of his times. As he speak with employees of Google and shares his experience and insight in value investing.

He says an investor is always at least in value investing which encourages to be invested for a long term. He talks about 2008 global financial crisis when he thought to leave and run when markets were in free fall but he didn’t left. If he left at that time he would have to face losses but he decided to stay invested. He explains this with his experience in Africa’s safari.

Thomas Russo talks about corporate culture. He takes the example of Nestle’s Japan’s head. He once told about a temple which was seven hundred years old but no wood is seven hundred years old. Thomas Russo connects this with Google’s employees saying that Google will remain Google even after the employees are gone.

While talking more about investing he shared that those businesses are selected which has capacity to reproduce over time. He also talks about Berkshire Hathaway’s share that traded around $900 per share which, over the time, grew at $200,000 per share. He talks about non-taxation of unrealized gains.

He mentions brand loyalty. He shares one incident of him when he was travelling by a plane and the passenger sitting next to him ordered Jack Daniels. Steward said they only have Jim Beam and the very moment the passenger said he will have water. This showed how customers have brand loyalty.

Talking more on investing, Thomas Russo shares that investor should find a business in which he is interested and can follow it. Also he says that managers should be owner-minded.

On family controlled business he says that family controlled business can be good because family holds major power and they take decisions which can be helpful for their upcoming generations.

He talks about capacity to suffer. He says that some investors look for people who have capacity to suffer. For this he shares examples of some companies which had capacity to suffer. One example was of alcohol business in which one entrepreneur refused to do further business in China due to economic downturn whereas one took this as opportunity and entered the market and today is successful.

Thomas Russo, on companies, says that company with good free cash flows have ability to expand. After checking cash flows investors look for companies which have good presence abroad because they can invest free cash flow in emerging markets which have rising GDP and rising disposable income.

He also tells that mangers should be multilingual and multicultural.

On asked by one of the audience about MasterCard he shares that how the business was having great opportunity to grow and this made him to remain invested.

Here is the link to the video https://www.youtube.com/watch?v=USPVHkNB4_M

Ramesh Damani asks where the market is exactly because first it was in bear market and then market rose 20% (technically bull market).

Manish Chokhani says that as this kind of crisis is not seen in the past it is difficult to say what’s going on as the resources are there all safe. About covid19 he believes that a vaccine will be created in the upcoming 12 months so what happens in these 12 months will decide how our country will come out of it.

NASDAQ is nearly 3% away from its all time high. Dow rallied more than 20% from the bottom.

What caused those markets to rise and emerging markets to some more follow them?

Manish tells about the game played by west – a game of printing more money and injecting it in economy to save itself from being bankrupt. He talks about global debt which is impossible to pay without injecting money into economy as the amounts are so huge. But this money ends up in financial markets. Also he said that theoretically US, Japan, Europe are bankrupt. But credit rating agencies don’t remove their ratings and put down countries like India. He assumes that this story will change in upcoming 12 months.

The bull market is there in west but it is technical and not real. Things will change because they have overused their brand power.

As the interest rates and oil are at record lows and China is no longer world’s friend. Isn’t this a good time for India to rise?

Manish Chokhani believes that coming 3 months will decide India’s emergence – either as an emerging market or making it into the big boy’s league. India has already missed its chance in 2008 where it was not able to understand the game but China did and they showed a tremendous growth. Also he talks about currencies of country ahead of India (in terms of GDP) that how they print money and keep their currencies pegged very close to each other. But this time game is not in favour of China as the voices from different countries are against China. He believes that if correct steps are taken then India will become a natural beneficiary. By increasing purchasing power of our people, allowing industry to get more competitive and working with government to ease the ease of doing business in India, India can become glorious just like 1991.

Will this crisis force India to change in so many ways?

As many companies have started slashing salaries of its employees and also started layoff people a different response is required this time. If the response doesn’t come this time India will face depression. Due to Bull Run of 2000’s decade everyone thought there will be consumption boom but most sectors even failed to double. Also the consumer debt is approaching nearly 20% of GDP. Supernormal profits need to be earned by keeping interest rates low and currency high.

India plays the game with the old colonial mindset while other countries play economic game.

On asking how to make a portfolio during such times of pandemic Manish Chokhani tells that after every crisis innovative companies emerge. Companies which think branding, margin and scale are companies that come out of crisis very well.