Professional Documents
Culture Documents
Presented By: Abhishek Ranjan D. Arvind Deepesh Tyagi Dhruv Gupta Mohd. Saqib kalam Nipun Singla
The Technical Analyst or Chartist can discern patterns in price or volume movements and by observing & studying the past behavior patterns of given stocks, they can predict the future price movements in these stocks.
An article in Forbes reported the reported the result of a study shows over the period of 1973-90 the average error made by Security Analysts in Forecasting was 40%. From 1985-90 it was 52%.
The Efficient Market Hypothesis (EMH) deals with Informational efficiency, which is a measure of how quickly & accurately the market reacts to new Information. It believes in Past prices do not matter, future ones do. EMH is one of the most important paradigm in Finance. A discussion of fair pricing inevitably leads to the Efficient Market Hypothesis.
5
Weak Form
The least restrictive form of the EMH. It states that future stock prices cannot be predicted by analyzing prices from the past. In other words charts are of no use in predicting future prices. It says a stock arrived at its current price is irrelevant, the only thing that matters is current price. It states that the current stock price fully reflects any information contained in the past series of stock prices.
Semi Strong form takes the Information set a step ahead & include all publicly available information. In addition to past stock prices, corporate reports, corporate announcements, information related to corporate dividend policy, forthcoming stock splits & so on. As soon as this information becomes publicly available, it is absorbed & reflected in stock prices. It says Public Information will not yield consistently superior returns to Analysts.
The most extreme version of the EMH. It states Security Prices fully reflect all public & private information. Tests of the trading of Specialists on the floor of stock exchanges and test of Profitability of insider trading suggest that the possibility of excess profits exists for these two very special groups of Investors. Since both of these trading are illegal that means the excess returns are not possible even in this form.
10
11
RUN TESTS
12
FILTER TEST
If the daily closing price of a security moves up at least X% , buy the security until its price moves down at least X% from a subsequent high, at which time simultaneously sell and go short. The short position should be maintained until the price rises at least X% above a subsequent low, at which time cover and buy.
13
14
DISTRIBUTION PATTERNS
15
The Conclusion- The Market was efficient with respect to its reaction to information on the stock split and with reaction content of stock splits vis-vis changes in dividend policy. Ball and Brown Test- Examination of stock price movement of companies that experienced good earnings reports as opposed to the stock price movements of companies, that experienced bad earnings reports.
The Conclusion- a) A good earnings report reported higher EPS than the forecasts and bad earnings reports, just vice versa. 16 b) The Companies with good earnings reports experienced increases in their stock prices and those with bad earnings reports, a decline.
OTHER TESTS
and McEnally stock price earnings report Test- The Impact of quarterly earnings announcements on the stock price adjustment mechanism. The Conclusion- The favourable information contained in published quarterly earnings reports was not instantaneously reflected in stock prices. Basus Price Earning Multiple Test- Whether low P/E stocks tended to outperform stocks with high P/E ratios?
Joy, Litzenberger,
The Conclusion- The low P/E portfolios experienced superior returns relative to the market and high P/E portfolios performed in inferior manner, relative to the overall market. The Size Effect Test- Whether smaller firms experience larger returns 17 than the larger firms experienced over the same time period?
Using historical price-change information, to predict future prices, would be an unsuccessful endeavor.
Prices at any time, will on the average, reflect the intrinsic value of the security. If at all a stocks price deviates from its intrinsic value, because of evaluation of available information differently by investors or have different insights into future prospects of the firm, professional investors and astute non professionals, will seize upon the short-term or random deviations from the intrinsic value, and through their active buying and selling,18 force the price back to its equilibrium position. will
The RWM says nothing about relative price movements (i.e.) about selecting securities that may or may not perform better than other securities.
It says nothing about decomposing price movements into such factors as market, industry or firm factors.
Discussions about a competitive market, instantaneous adjustments to new information, knowledgeable market participants and easy access to markets are all, not part of the random-walk model.
19
21
22
23
ANOMALIES
24
small firm effect recognizes that investing in small firms(those with low capitalization ) seems to ,on average ,provide superior risk-adjusted returns.
25
26
with low PE ratio provide higher returns than stock with higher PEs.
27
28
earnings growth typically indicates a growth stock. A stock priced low relative to company assets or earnings is regarded as a value stock.
investors search for stocks with the potential for above-average earnings and earnings growth rates. These companies tend to be market leaders and29 innovators, and their stocks often can produce above-average returns. Value investors typically search for stocks with relatively low price multiples and high dividends.
Growth
High-speed
GROWTH INVESTORS
More apt to subscribe to the "efficient market hypothesis" which maintains that the current market price of a stock reflects all the currently "knowable" information about a company and, so, is the most reasonable price for that stock at that given point in time.
Seek to enjoy their rewards by participating in what the growth of the underlying company imparts to the growth of the price of its stock.
31
PROS N CONS
Pros: Potential for incredible returns in a short period of time
Cons:
Hot stock tips, rumors, hype, and market hysteria are not reliable sources of information to act upon Failure to relate the stock price to the company value leads to purchasing overvalued stocks Safety net is low or non-existent Market downturns hit growth stocks far harder than value stocks Potential for total loss
32
VALUE INVESTORS
put more weight on their judgments about the extent to which they think a stock is mispriced in the marketplace. . If a stock is underpriced, it is a good buy; if it is overpriced, it is a good sell. They seek to enjoy their rewards by buying stocks that are depressed because their companies are going through periods of difficulty; riding their prices upward, if, when, and as such companies recover from those difficulties; and selling them when their price objectives are reached.
33
PROS N CONS
The fundamental goal of value investing is, quite simply, to buy a stock when it is low and sell when it is high Pros: Reduces risk of under performing by choosing investments which have a built in safety net Hot stock tips, hype, and mass hysteria do not affect the decisions a value investor makes Cons: The potential returns for value investing are smaller than those of growth investing
34
WHEN TO BUY :
ALTHOUGH THESE SECTORS ARE ON OPPOSITE ENDS OF THE SPECTRUM, INVESTORS MAY BE JUSTIFIED IN PURCHASING EITHER,
DEPENDING ON ECONOMIC AND MARKET CONDITIONS
GROWTH STOCK
REASON TO BUY
REASON TO AVOID Prices divergent from business valuation low correlation between price and earnings, highly volatile P/E There is no growth Relatively slow economic growth/recession Low certainty/stability in earnings growth
Market prices tied to business valuation/earnings high correlation between price and earnings, relatively stable P/E Above average earnings growth (in industry or market as a whole) High certainty/visibility in earnings growth
35
VALUE STOCK
REASON TO AVOID
REASON TO BUY
Market prices have come down significantly and oversold issues are starting back up Overall economic or corporate growth appears to be slowing Certain out of favor securities may be selling for less than value of their assets (i.e. get the business for free)
There is no value (entire market is overvalued) Price appreciation for value so shallow that much better returns for minimally increased risk are possible
36
A valuation ratio of a company's current share price compared to its per-share earnings. Calculated as:
y
high for
37
A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Also known as the "price-equity ratio".
Calculated as:
HIGH
38
A ratio for valuing a stock relative to its own past performance, other companies or the market itself. Price to sales is calculated by dividing a stock's current price by its revenue per share for the trailing 12 months:
HIGH
39
DIVIDEND YIELD:
A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows:
low for
40
CHART OF COMPARISON:
41
CONCLUSION:
Which strategy shows the better returns depends, in part, upon the periods over which they are compared. It has, however, been my impression, over the past several decades, that "value" investing has received the more hype.
42
43
ACTIVE INVESTING
Look to make profit from price fluctuations that occurs over a short period. Believes market is inefficient and so undervalued to be purchased and overvalued stocks to be sell short. Try to outsmart market timing. If bull to enter the stock, purchase and if bear than sell. Use different factors like P/E ratio, short positions, option writing. Gives better results but risk involved much higher.
44
PASSIVE INVESTING
Intention of holding the investment for a long term. Involves limited ongoing selling or buying of stocks. Invest in the portfolio which is well diversified. Believes that markets are well efficient and that the securities market price is the best available estimate of the correct prices. Risk less but return also less. Examples- Purchase of mutual funds or ETF that are indexed.
45
46
TO BE CONTD..
Transaction cost and money spent to obtain information are minimized DRIPS as a Passive Strategy It is reinvesting of the dividends. Valuation Informed Indexing It is a new concept developed by Rob Bennett.
47
48
49
TO BE CONTD..
Buildco 1 Year Earnings Growth 1 Year Stock Return 5 Year Earnings Growth 5 Year Stock Return -30.50% 2.20% 425% 185% Industry 5.8% 12.8% 172.0% 88.5% TSE 300(actual) 6.4% 21.1% 226% 180%
51
THANK YOU
52