SECURITY ANALYSIS

AND
INVESTMENT MANAGEMENT

CHAPTER 1
OVERVIEW

What is Investment?
Investment is the study of process of committing
funds to one or more assets
- emphasis on holding financial assets and
marketable securities
- concepts also apply to real assets
If the current commitment/ holding of money or
other resources in the expectation reaping further
benefits and that will compensate the investor for
- the time the investor holds the fund
- Expected rate of inflation
- Uncertainty of the future

INVESTMENT?
Investment means sacrificing
some money value in the
present with expectation of
making gains in the future.

Why study Investment?

Most individuals make investment
decisions to manage their wealth
- Need sound framework for
managing it
Essential part of a career in the field
- Security Analyst, Portfolio
Manager, Registered Representative,
Certified Financial Planner

Investment Constraints

Time
Age
Risk Tolerance
Tax Liability
Income fluctuations
Economic conditions

The sacrifice takes place now and is certain.

The benefit is expected in future and is
uncertain.
Risk is the chance of having an adverse or low
return in contrast to expected high return

DIMENSIONS OF
INVESTMENT
ELEMENT
OF
FUTURITY
RISK
EQUIT
Y

GOVERNME
NT BONDS
GAIN

ELEMENT
OF
SACRIFICE

How investment is done?

Current Income > Current
Consumption Savings --Investment
Current Income < Current
Consumption Borrowings --- Needs
to pay back ---Investment

Who invests?
Investor Long Period, Moderate
Risk, Own Fund
Speculator Shorter Period, High
Risk, Borrowed Fund
Gambler Very Short Period, Highest
Risk

INVESTMENT,
SPECULATION AND
GAMBLING

PURE (GENUINE) INVESTMENT

A pure Investment is

Carefully thought of
Well Planned
Based on study of fundamental factors about avenues.
Meant for long-time horizon. Expected returns
commensurate with risk assumed.
Low risk (policy of risk avoidance)
Something in which investors do not tend to borrow money
for investment.
Investors have risk aversion tendency.

SPECULATION?

SPECULATION
Speculation starts where investment ends.
It is an act of investing money on the basis of
market-wide
information
about
investment
avenue.
Speculation is
Meant comparatively for shorter duration
Based on market-related information
Risk Taker.
Tendency of speculator is to sometimes borrow
money for making investment , with expectation
of gaining more than the cost of borrowing.
A positive attitude towards losses, in case of
adverse happenings
Ready to book loss

GAMBLING
Gambling is completely based on rumours, tips and hunches,
and entails relatively high risk and return.
It is like betting for an uncertain outcome
Investor is always ready to take high degree of risk thus
creates a situation leading to risk and then assume the risk so
created.
Gambler always expects higher gains in a very short time
horizon due to high degree of risk assumed.

INVESTMENT OBJECTIVES

CAPITAL
GAIN

LIQUIDITY

TAX SAVING

SAFETY
SPECULATION

REGULARITY
OF
INCOME

ARBITRAGE
HEDGING

CRITERIA FOR EVALUATION

1. RATE OF RETURN
= ANNUAL INCOME +(ENDING PRICE-BEGINNING PRICE)
BEGINNIG PRICE

2. RISK
VARIANCE: this is the mean of the squares of
deviations of individual returns around their
average value.
STANDARD DEVIATION: Square root of
variance.
BETA: This reflects how volatile is the return
from an investment relative to market swing.

CRITERIA FOR EVALUATION

3. MARKETABILITY
- Quick transaction
Low transaction cost
Negligible price changes
Depth.existence of buy and sell orders around the
current market price
Breadth.presence of such orders in substantial Volume
Resilience new orders emerge as a result of price
changes
Q? How to judge the marketability of Provident
fund?

CRITERIA FOR EVALUATION

4. TAX SHELTER
Initial Tax Benefit
Continuing Tax Benefit
Terminal Tax Benefit

5. CONVIENCE

BASIC PERSONAL ISSUES

1

At the initial stage of career one should

devote sufficient money for:
A house for Shelter
Life Insurance

After achieving housing and insurance

objectives, one can invest in a balanced way.

Invest in savings schemes for future needs

Invest rest of the savings in equity shares

since these have the chance of getting one a
capital appreciation

INVESTMENT WISDOM
Do Not make
impulsive decision
Diverse Your
portfolio
Aggressively monitor
your
portfolio
and
react to the radical
changes in the market
situation
Do not panic. Wait
for correction in the
market

Never rely on your

shares as these are not
trustworthy
Buy low, Sell high
Go against the mob,
when everyone is
selling you buy, and
vice versa
Be your own master,
take independent
decisions

QULAITIES FOR SUCCESSFUL

INVESTING

CONTRARY THINKING
PATIENCE
COMPOSURE
FLEXIBILITY AND OPENESS
DECISIVENESS

Portfolio Management
Process
1. Specification of investment
objectives and constraints
2. Choice of the asset mix
3. Formulation of portfolio strategy
4. Selection of securities
5. Portfolio execution
6. Portfolio revision
7. Performance evaluation

APPROACHES TO INVESTMENT
DECISION MAKING
1. FUNDAMENTAL APPROACH
INTRINSIC VALUE OF SECURITY
LONG TERM MP TENDS TO EQUATE IV
UNDERVALUED SECURITIES
IV>MP

OVERVALUED SECURITIES
IV<MP

APPROACHES TO INVESTMENT
DECISION MAKING Cont
2. PSYCHOLOGICAL APPROACH
investment decisions are guided more by
emotions than reasons

3. ACADEMIC APPROACH
Efficient market hypothesis(MP = IV)
Random walk(past prices cannot predict
future)
Risk and return

4. ECLECTIC APPROACH

Common errors in investment

management
Inadequate comprehension of return and
risk
Vaguely formulated investment policy
Naive extrapolation of the past
Cursory decagons making
Untimely entry and exists
High costs
Over-diversification and under diverfication
Wrong attitude towards losses and profits

Thank you