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Oxford dictionary defines a Moat as a deep, wide channel that was dug around a castle and filled with water to make it difficult for enemies to attack. In medieval times, all the castles had a moat to protect them from outsiders, having a moat made it extremely difficult for enemies to enter the castle.

But have you heard of an Economic Moat

The concept of Economic moat was popularized by Warren Buffett, the concept refers to a business’ ability to gain a competitive advantage over its competitors, in order to protect its market share and long term profits from competing firms.

The strength and the sustainability of a company’s moat help us to determine the firm’s ability to prevent a competitor from taking the business away or eroding its earnings.

Consider an example of a Shopkeeper who owns a sweet shop in Mumbai. He has different varieties of sweet but the one sweet that his shop is famous for is a special type of Kaju Katri, now, in this case, we can say that the shopkeeper has this special sweet which acts as a competitive advantage for him. This competitive advantage will be with him unless some other shop sells the same sweet with the same taste. This competitive advantage has helped him to project his market share over others.

Why must investor look for economic moat in a company?

Here is a question for you – would you want to invest in a company that has a bleak future?

I am sure your answer is NO.

The main reason why we invest is to create wealth. Investors must identify companies that can generate high returns over long periods.

They must first achieve a long-term competitive advantage to sustain in this competitive world. What can make them more preferable than their competitors?

4X Target in 10 Years Economic Moat

How to determine if a company has an economic moat?

Now that we understand what economic moat is, let’s discuss how to identify companies with economic moat. 

Here are three best ways to identify a company’s economic moat. 

1. Historical profitability

Analysing economic moat factors is more qualitative rather than quantitative. Is the firm able to generate solid returns for its shareholders?

But what if the company does not know how to use its resources efficiently to generate profits?

Hence, you must always analyse the company’s past financial record first.

Read the company’s annual report. Conduct ratio analysis. Compare their financials with their competitors.

2. Sustainability of the company

You must evaluate how long the company will be able to keep up with market competitors. You can do this by comparing the sales and profit figures of the companies.

This is also referred to as the company’s competitive advantage period. It can be as long as several decades or just a couple of months. The longer the competitive advantage period, the better is the company’s economic moat.

For example, there was a time when Vodafone enjoyed a huge share of loyal customers. They were one of the leading telecom service providers in India. But things changed when Jio, it’s competitor, entered the market. Today, Vodafone Idea is on the verge of going bankrupt.Watch this video by CA Paras Matalia where he talks about Vodafone Idea Limited and why it is where it is now.

3. Industry analysis 

Does the industry have many profitable firms? Or does it consist of only a few companies that are hypercompetitive? Use Porter’s five forces to conduct an industry analysis. It also helps us identify a company’s economic moat in the simplest way possible.

The forces bring forth a company’s position amongst its competitive rivalry. The five forces include –

  1. Competition in the industry
  2. Threat of new entrants.
  3. Power of suppliers
  4. Power of customers
  5. Threat of substitute products

Porter’s Forces help us check the quality of a company and industry. The model is applied to understand the competition within the industry. It helps identify an industry’s barrier to entry, efficiency, scale of business, cost of capital, pricing power, cost advantages, etc.

By thoroughly analysing an industry, one can easily identify which economic moat a company holds over others.

Watch this video to understand how you can use Porter’s Five Forces to conduct industry analysis –

Four Main Types of Economic Moat

A company can have more than one economic moat. Now that you know how to analyse a company to identify their moats, let’s talk about the different types of economic moat.

Here are four example of strong economic moats a company can hold –

Low-cost supplier

Companies have a distinct competitive advantage if they can produce goods and services at a low cost.

Dmart is a great example of a low-cost provider. Their low operating cost and bargaining power allows them to sell goods to customers at cheaper prices. This makes them more preferable over others by consumers. This makes them one of the dominant players in retailing. 

High switching costs

Switching costs are a one-time expense or inconvenience cost. A customer would incur such costs to switch over from one product to another.

Customers always need a very strong reason to switch services. If a company can make it tough for its customers to use a competitor’s product, it is a good sign. 

The network effect

The network effect is a phenomenon where increased numbers of users, people or participants improve the value of a good or service.

For example, there are millions of people using Whatsapp, Facebook, ClubHouse, Linked In, etc.

This is one of the most influential competitive advantages. It comes into play when a company gives out a new update. The new system update or a new feature will attract new customers and will benefit the existing customers at the same time. This can be considered as a first-mover advantage

They make the company’s product and service more valuable. These products and the ideas can be copied but the network effort will prevent the existing customers from switching to another network.

Intangible assets

Intangible assets include what one can feel but not see. They don’t have a physical presence. Intangible assets give companies a competitive advantage over their competitors. This includes –

  1. Intellectual property rights
  2. Patents and trademarks
  3. Copyrights
  4. Government approvals
  5. Brand names
  6. Unique company culture
  7. Geographic advantage

For example, for a pharmaceutical company, intangible assets play a huge part in determining their moat. This includes trademarks, brands acquired, research and development, designs, technical know-how, licences, etc.

End Note

Economic moat helps companies keep their competitors at bay. But to be able to recognize a company’s economic moat, one must have analytical skills. 

The degree of your analytical skill will help you identify which company is better than the other to invest in.

Successful long-term investing is not just about strong financial numbers. The quality of the company is equally important. Successful investing is more about identifying and investing in companies that have the ability to stand the test of time. 

To identify such stocks, one needs to research various companies aggressively. At StockBasket, along with 2 crore data points, our technology evaluates and invests in stocks who are fundamentally strong and can pass a 5-years bondtest.

That means, at StockBasket, we select stocks which investors can own without losing their sleep even if the markets shut down for the next five years. We strongly believe in Buffett’s saying – ‘our favourite holding period is forever.’

Identifying economic moats is useful while evaluating a long terms investment option. It requires a little more effort than just analysing reported numbers. 

This is one of many qualitative factors which you must analyse before investing. To save you from trouble, allow us to introduce you to StockBasket. At StockBasket, we curate a mini-stock portfolio to cater to your varied financial goals.

For example, here is a basket full of quality stocks of the company which are irreplaceable.Explore the Largest Irreplaceable Networks Basket. This basket allows you to invest in companies that have a large, reliable network of distributors and are virtually irreplaceable.

With StockBasket, you don’t have to worry about reviewing your portfolio every now and then. We do that for you! You can start with a small investment of just Rs 2,500 in one of our baskets. 

Simply open a FREE Demat account with Samco and get free access to StockBasket!

Recommended Read:How does StockBasket work?

Warren Buffett is one of the most respected and popular investors of all time. He was born in Omaha on August 30th, 1930. He developed an interest in the world of investing at an early age of 11. As of April 2021, his net worth is over the US $100.6 billion.

The exciting part that appeals to people is his ability to consistently beat the stock market for over 60 years. He was nicknamed the Oracle of Omaha for his brilliancy in investment selections.

What is his secret to success? What made him an investment legend?

Let’s find out!

Buffett’s First Investment and First Investment Lesson

Buffett made his first investment in a stock at an age of 11. He said, ‘I was wasting my life up until then’ when he was asked about his first investment.

In 1941, he purchased six shares of Cities Service preferred stock at a cost of US $38 per share. Shortly after, the share price fell to US $27. Buffett started to panic as the price declined. But soon, the share price climbed back to US $40 and he immediately sold all his shares.

Soon after he sold his investment, the share price shot up to more than US $200 per share.

This was when Buffett learned his first investment lesson of the virtue of patience.

The stock market is designed to transfer money from the active to the patient.’ – Warren Buffett

To pursue his higher studies, Buffett applied for Harvard Business School but was turned down. He eventually enrolled at Columbia University after learning that Benjamin Graham, the father of value investing, taught there. Buffett had read Graham’s book Security Analysis multiple times and looked at this as an opportunity to learn more from his idol.

Buffett was a successful student and this gave him an opportunity to directly work with Graham. He later claimed this to be one of the most valuable experiences of his lifetime.

Buffett Partnership Years

After his stint with Graham, Buffett started setting up investments focused on bargains. 

He soon discovered companies that were trading at a discount to their net asset value. This is popularly known as the Cigar-butt approach. Buffett adopted this approach from his mentor Benjamin Graham. 

Describing this approach, Buffett said –

‘Cigar Butt approach to investing is where you try and find a really kind of pathetic company but it sells so cheap that you think there is one good puff left in it. Though the stub might be ugly and soggy the bargain purchase would make the puff all free.

In this approach, Buffett would buy a large stake at bargain prices and wait for market sentiments to improve. Improvement in market sentiments would drive the share price up. Buffett would immediately sell this stake to earn profit.

During his partnership years, Buffett would write a letter to his partners every year. These letters would convey his investment rationale, philosophy along with partnership performance.

These letters are available in the public domain and are a must-read for investors. They withhold invaluable investment rationales and philosophies.

Warren Buffett Investment Strategies – Value Investing

Warren Buffett strongly advocates for value investing. He focuses on identifying undervalued quality stocks and investing in them for the long term.

Buffett’s two investment ground rules are –
  1. Buy what you understand 
  2. Invest only for long term

Buffett became one of the wealthiest men in the world by following these two simple rules.

He invests in companies only if he understands their business operations. This habit saved him from suffering massive losses during the dot com bubble burst.

Between 1995 to 2000, internet and technology companies were new and untested. Buffett did not understand the tech and stayed away from investing in such companies. When the markets came crashing down during the bubble burst, Buffett safely avoided the crash  by simply staying away from what he did not understand.

‘Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.’

#DidYouKnow Warren Buffett holds stocks of Coca-Cola, Wells Fargo, and American Express for more than 20 years. He once said that he has no intention to sell them.

You might be wondering, what is the point of holding it for this long? Why not instead indulge in short term and make quick money?

The simplest answer is that the power of compounding needs time and patience to do wonders.

Buffett learned this the hard way when he failed to earn higher returns from his first investment. He never dared to repeat the same mistake again and we all know how well it has paid off. Every year his investment compounds and adds value to his portfolio. All he had to do is research quality companies, invest in them and hold.

When you buy a stock, your intention should be to hold it no matter what. Look beyond the negative news. Most of them are speculations and are short-lived. If the company’s fundamentals are strong, they will outlive all their bad days and fetch you returns in the long run.

Impatient investors let anxiety and emotion control their decision-making. The best way to improve your patience is by ignoring the outside noise.

These two rules seem easy to follow, right?

As easy as they might seem, lot of investors fail to follow them. They normally end up not earning much or even worse losing their capital. 

Every investor tries and wishes. But many fail to follow the route.

But don’t worry. We at StockBasket have the right solution for you. Explore Value Buy 2020 Basket is built to take advantage of Warren Buffett’s investment strategies. Our experts have created a basket of value stocks that Buffett would buy. So you can invest in them with ease.

Value Investing

With StockBasket, you don’t have to worry about checking your portfolio every now and then. We do that for you! You can start with your investment of just Rs 2,500 in your preferred basket. Simply open a FREE Demat account with Samco and get access to StockBasket!

Warren Buffett’s Investment Philosophy –

Buffett started focusing on Berkshire Hathaway, a textile manufacturing company. He originally bought it as a value investment in 1964.

He then realised that the company was getting stiff competition from domestic as well as foreign plants. The future was not very bright. So, Buffett turned Berkshire Hathaway into a holding company for his investments which he operates as a hedge fund. 

Expensiveness in stocks made Buffett shift his investment philosophy. He no longer relied on the idea of bargains to stocks that were merely cheap and had wonderful business prospects. But in fact, he adopted a philosophy which believes that it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Warren Buffett and his Circle of Competence

Buffett says that it is important to know one’s circle of competence and stick with it. He added that the size of that circle of competence is not very important. But knowing the boundaries is very vital.

He says, ‘what an investor need is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence.’

Watch this video to learn how you can develop your own circle of competence with the help of a very practical example –

Here are few Warren Buffett stocks by the number of shares held based on Berkshire Hathaway’s most recent 13-F filing.
 SymbolHoldingsMkt. priceValueStake
AbbVie IncABBV2,05,27,861$120.57$2,475,044,2011.20%
Amazon.com, Inc.AMZN5,33,300$3,421.57$1,824,723,2810.10%
American Express CompanyAXP15,16,10,700$164.26$24,903,573,58219.10%
Aon PLCAON43,96,000$285.34$1,254,354,6401.90%
Apple IncAAPL90,75,59,761$153.12$138,965,550,6045.50%
Bank of America CorpBAC1,03,28,52,006$41.66$43,028,614,57012.30%
Bank of New York Mellon CorpBK7,43,46,864$55.18$4,102,459,9568.60%
Bristol-Myers Squibb CoBMY2,62,94,266$67.21$1,767,237,6181.20%
BYD Co. LtdBYDDF22,50,00,000$33.60$7,560,000,0008.20%
Charter Communications IncCHTR52,13,461$814.20$4,244,799,9462.80%
Chevron CorporationCVX2,31,23,920$98.39$2,275,162,4891.20%
Coca-Cola CoKO40,00,00,000$56.18$22,472,000,0009.30%
DaVita IncDVA3,60,95,570$131.14$4,733,573,05034.40%
General Motors CompanyGM6,00,00,000$49.17$2,950,200,0004.10%
Globe Life IncGL63,53,727$95.98$609,830,7176.20%
Itochu CorporationITOCF8,13,04,200$29.56$2,403,352,1525.10%
Johnson & JohnsonJNJ3,27,100$173.66$56,804,1860.00%
Kraft Heinz CoKHC32,56,34,818$36.12$11,761,929,62626.60%
Kroger CoKR6,17,87,910$46.20$2,854,601,4428.30%
Liberty Global PLC Class CLBTYK18,76,522$28.58$53,630,9990.50%
Liberty Latin America Ltd Class ALILA26,30,792$14.22$37,409,8625.20%
Liberty Latin America Ltd Class CLILAK12,84,020$14.36$18,438,5270.70%
Liberty Sirius XM Group Series ALSXMA1,48,60,360$49.50$735,587,82015.30%
Liberty Sirius XM Group Series CLSXMK4,32,08,291$49.40$2,134,489,57519.20%
Marsh & McLennan Companies, Inc.MMC41,96,692$156.41$656,404,5960.80%
Mastercard IncMA45,64,756$353.05$1,611,587,1060.50%
Merck & Co., Inc.MRK91,57,192$76.50$700,525,1880.40%
MONDELEZ INTERNATIONAL INC Common StockMDLZ5,78,000$62.16$35,928,4800.00%
Moody’s CorporationMCO2,46,69,778$381.09$9,401,405,69813.20%
Organon & CoOGN15,50,481$33.72$52,282,2190.10%
Procter & Gamble CoPG3,15,400$142.93$45,080,1220.00%
Restoration Hardware Holdings, Inc common stockRH17,91,967$716.75$1,284,392,3478.50%
Sirius XM Holdings IncSIRI4,36,58,800$6.27$273,740,6761.10%
Snowflake IncSNOW61,25,376$297.85$1,824,443,2422.10%
SPDR S&P 500 ETF TrustSPY39,400$452.23$17,817,8620.00%
StoneCo LtdSTNE1,06,95,448$49.50$529,424,6763.40%
Store Capital CorpSTOR2,44,15,168$35.89$876,260,3809.00%
Teva Pharmaceutical Industries LtdTEVA4,27,89,295$9.40$402,219,3733.90%
T-Mobile Us IncTMUS52,42,000$137.90$722,871,8000.40%
United Parcel Service, Inc.UPS59,400$194.01$11,524,1940.00%
US BancorpUSB14,65,17,349$57.08$8,363,210,2819.90%
Vanguard 500 Index Fund ETFVOO43,000$415.76$17,877,6800.00%
Verisign, Inc.VRSN1,28,15,613$216.15$2,770,094,75011.50%
Verizon Communications Inc.VZ15,88,24,575$54.77$8,698,821,9733.80%
Visa IncV99,87,460$231.23$2,309,400,3760.50%
Wells Fargo & CoWFC6,75,054$48.41$32,679,3640.00%
TOTAL   $323,861,361,225 
Source: CNBC (as of August 2021)

Buffett created this portfolio by religiously following value investment strategies which we discussed above. But there is one more thing which one cannot ignore which played an important role in the making of The Oracle of Omaha.

Buffett, His Books, and His Reading Habit

One common habit amongst all successful people is their habit to read. Warren Buffett reads more than 500 to 600 pages every day. He reportedly spends almost six hours a day reading books. 

Surprisingly, he has never written a book but infact has more than 47 books with his name in the book’s title. His annual letters to his shareholders always include a couple of book recommendations.

Two very famous books which the Oracle of Omaha has mentioned at multiple occasions are –

  1. The Intelligent Investor by Benjamin Graham, and
  2. Security Analysis by Benjamin Graham and David Dodd

Both these classic investment books majorly focuses on value investing. Benjamin Graham, also known as the Father of Value Investing, led the foundation of this investment style.

So, before anything else, make sure you read at least these two books to understand Buffett’s investment strategy in a better way. We have listed down seven books that Warren Buffett says are a must read for every investor here.

End Note:

Buffett has developed an expertise in looking for quality and fundamentally rich businesses. He selects companies solely based on their overall potential. 

He places a great deal of importance on investing in companies having an economic moat. These are companies with an advantage, legal or operational which prevents competitors from entering and affecting margins of the business. 

There is an ocean of wisdom with this billionaire investor. Few things that I would love my readers to inculcate in their investment philosophy is –

  1. Start investing as early as you can.
  2. Always invest in wonderful businesses with an economic moat
  3. Invest in your circle of competence
  4. Invest for the long term.

This will help you start your wealth compounding journey in the right direction.

If you start investing Rs. 1,000 today, every month, for the next 40 years, you will be able to create a wealth of approximately Rs. 72,788,853.

How did I calculate that? How can your monthly investment give you a return in lakhs?

Warren Buffett made the best of this secret. It is your turn now!

Read what is the power of compounding and how Warren Buffett compounded his wealth over all these years.

The best investment approach is to buy quality stocks after analysing the company’s fundamental aspects.

Invest in the companies who has the potential to give superior returns in the long term. StockBasket operates on the exact same principle. It has various expert-curated portfolios or basket of stocks to suit varied investment requirements.To enjoy these expert services and to invest in StockBasket, open a FREE Samco Account today. It is time for you to start investing smartly!

Is this how you build your stock portfolio?

Blindfolded and without caring about market fundamentals?

Or do you buy any random stock simply because it is trending?

If yes, then you are a gambler… not an investor.

One can select and invest a stock that is in the news. No doubt. But that is what a gambler would probably do.

Buying what seems fancy is not investing but gambling. When you rely on gambling to build wealth, you will need lots of luck to achieve your goals.

But if you take the high road to invest responsibly, you will be better off than any other gambler. Anyone who is thinking of investing in the stock market must know how to build a stock portfolio.

Today, we will lay down how one can build a stock portfolio from scratch. But I’ll be honest with you…Building a stock portfolio on your own requires a lot of time, patience, and energy. And I’m sure you are already overburdened with your responsibilities.

 So, I will also share a shortcut on how you can skip all this hard work and invest in the best stocks in less than 5 minutes.

Can’t wait? Here’s a glimpse of what’s on offer.

StockBasket Performance

When pandemic hit the world in 2020 and investors started panicking StockBasket stood tall. Nine StockBaskets gave more than 30% returns in 2020 to their investors.

Infact, our top preforming basket – Digital India Basket gave a whopping return of 67.14% to its investors.

The best part being, the investors never worried about anything. Their entire stock portfolio was monitored and taken care of by our experts.

We are going to tell you everything about how to get benefit of these expert curated stock portfolios in this article. It will save your time, energy and generate better returns. However, let’s have a look into how an investor can create a stock portfolio himself first.

In this article we cover:

  1. What is a portfolio?
  2. What is a stock portfolio?
  3. How to build a well-diversified stock portfolio?
  4. How to select shares for stock portfolio?
  5. How to save time and energy while building stock portfolio?

Let’s begin!

Selecting a good share to invest in can be overwhelming for new investors. Whether you start with Rs 1 Lakh or a crore, having a well-built stock portfolio is always advisable. It is the first step of becoming a successful investor.

What is a portfolio?

A portfolio is a collection of a range of assets that are owned by an investor. It includes equity, gold, bonds, mutual funds, cryptocurrencies, derivatives, etc.

We invest in such assets to generate returns. Our aim should be to build a portfolio that matches our investment goals and risk capacity.

Building and maintaining a portfolio involves:

  • Selecting assets appropriate to your needs
  • Deciding which assets and how much of each asset to buy
  • Monitoring and rebalancing portfolios at set intervals

Amongst all the asset classes available for an investor, equity covers a very large area. They are the most popular investment option. Within equity itself, an investor can diversify and build a well-balanced stock portfolio.

What is a stock portfolio?

A stock portfolio is a collection of stocks you invest in across sectors and industries.

Stocks refer to the shares of a company. They are considered to be the best reward-generating component of an investment portfolio.

By investing in shares, you can –

  • Buy and hold stocks for short, medium, and/ or long term. In fact, you can create a mix of all these three and change the proportion whenever you wish to.
  • Invest across sectors and industries like banking, pharma, auto, metal industry, etc.
  • Beat economic circumstances by investing in evergreen industries
  • Choose investment in developing, emerging, or developed economies
  • Easily invest and keep a track of your investments

Like any investment, investing in equity involves risk. But the trick is to build a stock portfolio which is well-diversified. Such stock portfolios will continue performing better even during recessions.

How to build a well-diversified stock portfolio?

We do this by making a few basic but important decisions. Let’s begin!

The question you need to ask is, what do you want from your stock portfolio?

The two common options are –

1.Investing for (immediate) income

The older you get, the more likely you are to select this option. If you are investing to generate income immediately, invest in well-established companies.

Your goal must be to invest in shares that yield higher returns than inflation. Especially the ones who pay regular dividends.

Dividend paying stocks is a good source of passive income.

However, it is not advised to invest in any random company just because they pay dividend.

Remember, paying dividend is not an obligation. You need to examine various fundamental aspects before investing in stocks.

Thankfully, you don’t have to analyse each and every dividend paying stock. Investment is not as complicated as it used to be. There are various products which can help you ease this process.

For example, you can invest a portion of your savings in the Dividend Champions Basket. With the help of this basket, you can invest in the best dividend paying stocks in India. Dividend Champion Basket has given a whopping 42.36% return between July 2020 – 21.

2.Investing to build wealth in the future

Young investors with a steady salary prefer this option while investing. The plan is to invest today to build heaps of wealth for tomorrow with the help of compounding.

These investors can follow value investing strategy to pick undervalued quality shares. This strategy helps investors reap high returns in the future.

Warren Buffett once said –

‘Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.’

Value investing is not an easy task. It requires nerves of steel to execute and stick to the strategy. StockBasket offers Value Buy 2020 Basket with top value stocks to let you take advantage of this strategy. Our experts saves you from the trouble of the endless stock selection process and monitors your stock portfolio.

Are you excited to know more about it?

Hold on…have covered everything in detail later in this article.

Once you figure out your investment style, your next step is to ensure that your stock portfolio is diversified. This is the most important step in building a stock portfolio.

The art of diversification:

You must diversify across different sectors and industries. Further, diversify your stock portfolio across large-cap, mid-cap, and small-cap stocks. The final decision depends on your needs and risk-taking appetite.

Benjamin Graham talks about diversification in his book, The Intelligent Investor. He suggests that one can build a perfectly diversified stock portfolio with 10 to 30 stocks.

According to probability theory, we reduce the chances of loss due to price volatility if we invest across sectors with low correlation.

But, you must not under diversify or over diversify your stock portfolio.

Under diversified means not owning stocks of different sectors. For example, you might be invested in auto-sector companies only.

Such stock portfolios carry more risk. This is because, if the auto sector starts performing poorly, it will adversely affect your entire portfolio.

Over diversification means owning an excessive number of stocks in your portfolio. In this case, even if few companies perform well, the overall returns will be low. This will have no major impact on your portfolio.

Peter Lynch described it as diworsification in his book One Up On The Wall Street. It means inefficient diversification.He suggests that if you are planning to buy and invest in 50 stocks, then it is better to invest in mutual funds.

We now come down to our next question.

How to select shares for your stock portfolio?

Selecting shares is not guesswork. Before you buy a stock, you need to thoroughly research the company and its peers.

There are two research approaches on how you can select shares for your stock portfolio:

  • Top-down approach
  • Bottom-up approach

Let’s understand them in brief –

1. Top-down approach

With a top-down approach, you start with the broader area and work it down to a specific company.

Top Down Approach

Let’s understand how to select the sector and industry with the help of an example.

Say the pandemic-hit economy is recovering after the crash. Which sector is going to see a recovery and boom?

Say, for example, people will want to start and work on their own business due to job uncertainties. Many companies have now started outsourcing freelancing contracts.

The new start-up team will inevitably be in need of loans. For the same, entrepreneurs will reach out to banks to meet their capital needs.

There are private sector banks and public sector banks in India. When banks lend funds, they earn interest payments in return. This is their primary revenue operation.

Now that we are thinking about the banking sector, our next step will be to analyse the sub-sectors. That is, public banks and private banks. Now, your job is to short list the promising stocks and analyse their fundamentals.

Let’s have a look at another example – Fast-moving consumer goods (FMCG) sector.

FMCG is one of the few sectors which was not affected by the pandemic. Our lives depend on these FMCG products. One might find investing in the FMCG sector a good investing idea. But are you aware of  FMCG’s sub-sector?

There are four main sub sectors to FMCG sector.

FMCG Sector

Companies provide the revenue breakdown in their annual report’s notes to accounts. For example, ITC Ltd. has flourished in the Indian markets for over 110 years. Here is their revenue bifurcation –

Source: ITC Ltd. Annual Report 2020-21

When you analyse such breakdowns, you realise that over 43% of ITC Ltd.‘s revenue come from cigarettes, that is tobacco products.

One major advantage of the top-down approach is that you can discard an entire sector if its future prospects don’t look promising.

2. Bottom-up approach

Bottom-up investing approach is the opposite to the top-down approach. Here, investors look at the microeconomic factors that can affect the companies that they are analysing. Here, the research begins at the company level.

Bottom-up approach

With bottom-up approach, you first check is the if the business looks sound and perfect. If you are satisfied with the fundamentals, only then you carry on with the analysis. In other words, you find reasons and cross check if you have a worthy reason to invest in a company.

To sum it, the top-down approach goes from the general to the specific. Whereas, the bottom-up approach starts at specific and moves to the general.

You can use both these approaches for building your stock portfolio. If a particular stock comes to your attention, conduct a bottom-up analysis. And if nothing strikes your mind and you have funds to invest, go for the top-down approach. Start with a wider picture and see where your analysis leads you.

Technical and Fundamental analysis

In the above two approaches, one important step is to analyse the company’s financial health. There are two ways you can evaluate a company –

1.Fundamental Analysis

Fundamental analysis (FA) is widely used by investors. People generally use it for long-term investments. In fundamental research, emphasis is on the value of the stock rather than price.

You must analyse every aspect of the company to determine their value. It pertains to evaluating publicly available information about a company.

Benjamin Graham laid the foundation of Fundamental Analysis. In his book Security Analysis, Graham covered the fundamental aspects in great depth.

Here’s a quick overview on how to analyse companies to build a stock portfolio –

build a stock portfolio

You can read our article on how to analyse a company fundamentally if you wish to know more about the process. But like I said earlier we will show you a much easier way to build a stock portfolio in a while. Stay tuned…

2.Technical Analysis

Technical analysis (TA) is widely used by traders. Here, more emphasis is on the price of the stock. One determines the future trend by monitoring the past and current trends.

The basic difference between the two is that fundamental analysis tries to find reasons for the movement in a stock. Based on the reasons, it predicts the price movements.

Whereas technical analysis is not concerned with the reasons. It believes that the way a stock price moves currently tells you where it is heading in the future.

You can check out our playlist on Technical Analysis here.

How to save time and energy while building stock portfolio?

Now that you know what goes behind the scenes of building a stock portfolio, the next question is –

Do you have the time, energy and resources to follow all the above-mentioned steps? Think about it…can you conduct top down or bottom-up analysis yourself?

You might have heard the saying, ‘Jack of all trades, master of none’. Building a stock portfolio is not a cake walk. You need to study the fundamentals and the technical aspects of the company as well as the economy. This is exactly where we come in.

StockBasket is your answer to creating stock portfolios with ease.

Our aim from day one has been to ensure that our readers invest with ease. So, to save you from trouble, we take up the responsibility to build and monitor stock portfolios for you. We at StockBasket, provide expert curated stock portfolios for varied financial needs. It is exclusively available for Samco customers.

Explore stock baskets based on your investment needs. Each basket is carefully designed by experts to achieve a financial goal. These baskets are monitored and stocks are added or deleted from time to time.

For example, if you think the pandemic has been a boon for IT sector. Then what do you do? How do you capitalise on this opportunity? You do not have the expertise to conduct top down or bottom-up analysis. Time is running out.

The simplest and quickest solution is StockBasket’s Digital India basket. With StockBasket, you can invest in companies which leads the country s growth and continue to generate superior long term returns for its shareholders.

The Digital India Basket generated a one year return of whopping 84.99% (13th August 2020 as of 13th August 2021). Imagine what would happen if you let this investment compound? By investing in this basket, you can benefit as India is on a path to becoming US $5 trillion economy.Like Digital India basket, StockBasket has curated various baskets each with a unique theme. Here is a quick historic comparison of an average StockBasket and Nifty Returns.

Impressed? We thought so. What the next step? Simply open a FREE Demat account with Samco and get free access to StockBasket!

You might have come across the term pledging of shares if you are an intraday trader or a long-term investor. Shares can be pledged by individual investors as well as promotors of a company. But what is the meaning of pledging of shares? How does it work?

Let us explore the following in this article:

  • What is Pledging of Shares? Who can pledge shares?
  • Why do investors pledge their shares? How can one pledge shares?
  • Why do promotors pledge shares? Why is pledging shares risky?
  • When does promoter pledging become risky?
  • Solution to your problems.

And more followed with real examples.

What is Pledging of Shares? Who can pledge shares?

Pledging simply means taking loans against the shares that one holds. Shares are considered a type of asset. They act as a collateral against loans. Any individual or institution that holds shares can pledge them.

Individuals pledge their shares for two main reasons:

  • To obtain a bank loan
  • To fund their trading activities.

Promoters of a company can pledge shares to raise funds for various purposes. Companies can raise funds by applying for loans, issuing debt or fresh equity. By pledging shares, companies borrow loans to meet their operational requirements.

It is used to meet different needs like funding other ventures, working capital requirements, paying debts, etc. If a significant portion of the shares held by promotors is pledged, it can adversely affect shareholder’s value. It usually is regarded as a risky investment.

Why? Let’s find out.

Why do investors pledge shares? How can one pledge shares?

Pledging of shares allows an investor to trade higher volumes. 

Investor’s savings there are locked in their trading account in the form of shares when they buy them. Even though they hold an asset in the form of shares, their funds are locked and cannot be used for a new trade. 

Hence, investors pledge their shares in their Demat account. This is also known as Margin Against Shares. With Samco’s StockPlus, you can make the best of this opportunity with many unique features. You can use your Samco account virtually as a Zero Balance Trading Account.

With StockPlus, traders can avail margin against their shares and never miss out on a trading opportunity. The best part is, you can sell the pledged shares without having to unpledge them first.

Related Read: How to subscribe to StockPlus?

How to pledge and unpledged holdings with Samco under StockPlus via CDSL.

Why do promotors pledge shares? Why is pledging shares risky?

Promoters pledge shares to meet various operational requirements. Generally, pledging of shares is considered as the last resort for the promoters to raise funds. Raising funds by issuing debt or equity is comparatively safer than pledging shares held by promoters. If they are planning to pledge shares, it means that all the other options to raise capital have been closed.

Companies consider this option when they are in immediate requirement of funds. If a company’s shares are not performing well in the market due to uncertainty or poor past performance, then pledging shares is the best available option for the promoters.

When does promoter pledging become risky?

Once shares are pledged, they act as aliens. The pledgee, that is the issuer of funds (banks), has the right to recover dues in case of a default.

  1. Bull market vs Bear market

Pledging of shares may not be a red flag for investors during a bull market. However, if the promoters are pledging shares heavily during a bear market, it is a sign of concern.

For pledging, promoters use their stake as a collateral. Prices of stocks keep fluctuating. As a result, the value of the shares pledged as a collateral also fluctuates.

For example, value of loan is Rs. 35 crores. Promoters will pledge their shares worth Rs. 35 crores or more with the bank to raise capital. During a bear market, the value of shares plunges from Rs. 35 crores to Rs. 26 crores. In such a case, the promoters are required to maintain the value of the shares. Hence, additional shares are pledged to meet the loan value.

Keep reading to know more about the risks involved …

2. Fundamentals of the company

As Warren Buffett says, you don’t have to worry about external noise if the fundamentals of the company are strong. Similarly, promotors pledging shares with a strong stable cash position is not a red flag. But a company with poor fundamentals, weak past performance, and cash flow crunch is a sign of a financial threat.

For example, one will put their home on lien only if they are in a financial crunch. Similarly, when a company pledges the promoter’s shares, it signals financial trouble in the company.

The risk involved:

If a promoter fails to pledge additional shares to match the loan value, the bank has the right to sell them in the open market to recover the balance. This leads to two events –

  1. Decreases in the promotor’s shareholdings
  2. Additional shares being infused into the market.

These events eventually result in a decrease in stock value and a change in the shareholding pattern.

Thus, companies with high pledging can experience sharp fluctuations in their stock prices. Hence, investors must keep a close watch on promoter’s holdings. It eventually affects their voting rights and managerial power. This is because they now hold fewer shares to make crucial decisions.

When news of such open-market sale surfaces, the stock prices falls further as the investors start selling their shares. It suggests that the company is not in a good financial position as they failed to repay their loan value, or pledge more shares.

The Satyam Fraud and the current pledging situation:

There have been many fraudulent cases in the past linked to promoter’s pledging of shares. One such cash is the Satyam Scam.

In 2009, promoters of Satyam Computer Services Limited pledged their entire shares with the lenders as security for loans. But on due date, promotors failed to repay the loan amount to the lenders. Gradually, the entire Satyam Scam unfolded in public eyes. The entire pledged stake was sold in the open market.

The demand and supply was mismatched. This led to a massive decline in the shareholding of the promoters in the company. In the end, Satyam promoters owned just 3.6% of the shareholding of the company.

Hence, it is very important for the investors to always check the promoter’s actions while analysing a company.

For example, Future Consumer’s Kishore Biyani and family pledged 92.5% of their shareholding in June 2020. The value of pledged shares stood at Rs. 1,320 crore.

Shares of Future Consumer plunged over 50% within a month in June 2020. The Covid-19 lockdown has hit various manufacturers. Despite having the upper hand, few manufacturers were hit badly leading to losses and operation shut down.

Future Consumer chart

In May 2021, pledging of shares by promoters rose to an all-time high of Rs. 3.35 lakh crore despite the stock markets trading close to their lifetime highs. You can check each company’s share pledging data on bseindia.com.

Click this link to check share pledging related information of any company.

End Note:

Investor invests in a company because they trust their promoters. Management is the backbone of every company. As Warren Buffett says, quality of the management is equally important as much as a strong fundamental records.

Avoid companies with a large portion of pledged shares. This will help you avoid unnecessary troubles later. It could be a sign of poor cash flow or high-debt. Analyse the cash flow statement to understand the cash inflows and outflows. Analyse how much debt the company owes to outsider by checking their balance sheet. 

If the records are poor in the financial statement along with heavy promotor pledging, it is a red flag. If the operating cash flow is increasing, that means that the company is able to manage its day-to-day expenses. This might not be as threatening as the previous case. However, thoroughly analyse before you invest in such companies.

5% to 10% of shares pledged can be efficiently managed. The problem occurs when the pledging increases too much. A decrease in pledged shares over time is a positive sign. Whereas an increase in pledged shares is dangerous for promoters and shareholders. Even quality companies can become a victim if the pledging of shares is not reduced over time.

You can check a company’s pledged holdings data on nseindia.com too. Click on this link to check pledging data of any company.

Solution to the research problem

Examining changes in promotor’s holdings is just one parameter. Our research team conducts aggressive research before finalising a basket for various goals and needs. There are more than two million such data points. It becomes nearly impossible for individuals to conduct such full-proof research independently.

To solve this problem, Samco is here with the best solution for you – StockBasket – exclusively available for SAMCO customers.  With StockBasket, you can start with your investment of just Rs 3,500 in your preferred basket.

StockBasket is a platform that helps you choose from experts curated ready-made baskets of stocks as per your investment needs. Our research team constantly monitors these baskets for you so you have one less thing to worry about.

Explore available baskets and select a basket that matches your investment needs. Watch the following video which explains how StockBaskets are built. Also, learn how StockBasket solves the biggest hurdle faced by retail investors.

To invest in StockBasket, login with your StockBasket Account or open a FREE StockBasket Account today and invest directly in StockBasket.

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