1000 Investment lessons

1. Study tools: business profile and financial profile

2. Competitors profiles are extremely important- identify the businesses with similar
profiles- opportunities and risks. Focus on identifying businesses with similar risk and
opportunities
3. Valuation is driven on basis of both historical performance (e.g., last twelve months
(LTM) financial data) and expected future performance (e.g., consensus estimates for
future calendar years)
4. Historical Financials
10-K (Annual Report) annual audited report, provides comprehensive overview of

company and prior year performance

10-Q (Quarterly Report) quarterly unaudited report, provides overview of most recent

quarter and year-to-date (YTD) period

8-K (Current Report) reports occurrence of material corporate events or changes

(triggering event)
Proxy Statement contains material information regarding matters shareholders are

expected to vote on.

Equity Research Estimates
Research reports provide individual analyst estimates of future company performance
and include estimates of sales, EBITDA and/or EBIT, and EPS for future quarters and
future two or three-year period. Initiating coverage research reports are more
comprehensive.
Consensus estimates (e.g., Bloomberg) are used as basis for calculating forward-looking
trading multiples in trading comps

5. Press Releases and News Runs

News of earnings announcements, declaration of dividends, management changes, and

M&A and capital markets transactions

Financial Information Services (e.g., Bloomberg)
Key source for obtaining SEC filings, research reports, consensus estimates, and press

releases.
6. Calculation of Key Financial Statistics and Ratios
Size Market Valuation: equity value and enterprise value
Key Financial Data: sales, gross profit, EBITDA, EBIT, and net income

Profitability Gross profit, EBITDA, EBIT, and net income margins

Growth Profile Historical and estimated growth rates
Return on Investment ROIC, ROE, ROA, and dividend yield
Credit Profile Leverage ratios, coverage ratios, and credit ratings

7. If a company needs capital, it may get a loan from a bank, or it may ask an investment
bank to sell equity or debt (stocks or bonds). Because commercial banks already have
funds available from their depositors and an investment bank typically does not, an Ibank must spend considerable time finding investors in order to obtain capital for its
client. (Note that as investment banks are increasingly seeking to become one-stop
financing sources, many I-banks have set aside billions of dollars of their own capital
that they can use to loan to clients directly.)
8. What is 'Underwriting':
Underwriting is the process by which investment bankers raise investment capital from
investors on behalf of corporations and governments that are issuing either equity or debt
securities.
9. Buy side and sell side
Who are the buyers (buy-side) of public stocks and bonds? They are individual
investors (you and me) and institutional investors, firms like Fidelity and Vanguard, and
organizations like Harvard University and state and corporate pension funds.
10. Hedge funds are one sexy component of the buy side.
11. The Equity Markets
The Dow Jones Industrial Average added 38.93 points to 10,424.41, bolstered by a 1.2
percent gain in component Intel, The Wall Street Journal reported on November 11,
2004. The Journal also reported that Intel gains helped boost the Nasdaq Composite
Index, but oil futures were on the decline again..
12. More specifically, bear markets generally occur when the market has fallen by greater
than 20 percent from its highs, and a correction occurs when the market has fallen by
more than 10 percent but less than 20 percent.
13. Although the Dow is widely watched and cited because its comprised of select, very
large companies (known as large caps), the Dow cannot gauge fluctuations and
movements in smaller companies (or small caps).
14. DOW vs NASDAQ- NYSE is composite index (what's the next one?) and considers
every stock traded in the exchange whereas the DOW and NASDQ only considers the
large companies
15. CAPITALIZATION: Huge caps $25, large caps $1 to $5 middle caps, >1 Small caps
16. When it comes to individual stocks, its all about earnings, earnings, earnings.

17. The market does not care about last years earnings or even last quarters earnings. What
matters most is what will happen in the near future. Investors maintain a tough, what
have you done for me lately attitude, and forgive slowly a company that consistently
fails to meet analysts estimates (misses its numbers).
18. The P/E ratio is supposed to tells investors how many years' worth of current earnings a
company will need to produce in order to arrive at its current market share value. So, let's
say the imaginary company Widget Corp. earned $1 per share over the past year and it's
trading at $10.00 per share. The P/E ratio would be $10/$1 = 10. What this tells us is that
the market prices it at 10 times earnings. Or in other words, for every share purchased, it
will take 10 years of cumulative earnings to equate to the current share price. Naturally,
investors want to be able to buy more earnings for every dollar they pay, so the lower the
P/E ratio, the less expensive the stock

19. Value Stocks, Growth Stocks and Momentum Investors.

Value stocks are those that often have been battered by investors. Typically, a stock that
trades at low P/E ratios after having once traded at high P/Es, or a stock with declining
sales or earnings fits into the value category. Investors choose value stocks with the hope
that their businesses will turn around and profits will return. Or, investors perhaps realize
that a stock is trading close to or even below its break-up value (net proceeds upon
liquidation of the company), and hence have little downside.
20. Growth stocks are just the opposite. High P/Es, high growth rates, and often hot stocks
fit the growth category. Technology stocks, with sometimes astoundingly high P/Es, may
be classified as growth stocks, based on their high growth potential. Keep in mind that a
P/E ratio often serves as a proxy for a firms average expected growth rate, because as
discussed, investors will generally pay a high P/E for a faster growing company.
Momentum investors buy growth stocks that have exhibited strong upward price
appreciation. Usually trading at or near their 52-week highs (the highest trading price
during the previous two weeks), momentum investors cause these stocks to trade up and
down with extreme volatility. Momentum investors, who typically dont care much about
the firms business or valuation ratios, will dump their stocks the moment they show

price weakness. Thus, a stock run-up by momentum investors can potentially crash
dramatically as they bail out at the first sign of trouble.
21. Hiring the managers. The first step for a company wishing to go public is to hire
managers for its offering. This choosing of an investment bank is often referred to as a
beauty contest.
Typically, this process involves meeting with and interviewing investment bankers from
different firms, discussing the firms reasons for going public, and ultimately nailing
down a valuation.

In making a valuation, I-bankers, through a mix of art and science, pitch to the
company wishing to go public what they believe the firm is worth, and therefore

how much stock it can realistically sell?????.

Perhaps understandably, companies often choose the bank that predicts the
highest valuation during this beauty contest phase instead of the bestqualified manager. Almost all IPO candidates select two or more investment
banks to manage the IPO process. The primary manager is known as the lead

manager, while additional banks are known as co-managers.

Marketing. The third phase of an IPO is the marketing phase. Once the SEC has
approved the prospectus, the company embarks on a road-show to sell the deal.
A road-show involves flying the companys management coast to coast (and
often to Europe) to visit institutional investors potentially interested in buying
shares in the offering. Typical road-shows last from two to three weeks, and
involve meeting literally hundreds of investors, who listen to the companys
canned PowerPoint presentation, and then ask scrutinizing questions. Insiders say
money managers decide whether or not to invest thousands of dollars in a

company within just a few minutes into a presentation.

"making it sell with few minutes of presentations is a tough make or break
challenge. For this the I-bank has to be prepared to answer most scrutinizing

questions". One of them being the confidence on the management team.

22. After offering, the value of stock will decrease as the EPS will decline.
Underwriting discounts

23. A private placement, which involves the selling of debt or equity to private investors,
resembles both a public offering and a merger. A private placement differs little from a
public offering aside from the fact that a private placement involves a firm selling stock
or equity to private investors rather than to public investors.
24. "PITCHBOOK"
Apart from the numbers, these Pitch-books also include the banks customized selling
points. The most common of these include:
The banks reputation, which can lend the offering an aura of respectability
The performance of other IPOs or similar offerings managed by the bank
The prominence of a banks research analyst in the industry, which can tacitly
guarantee that the new public stock will receive favorable coverage by a listened-to
stock expert.
The banks expertise as an underwriter in the industry, including its ranking in the
league tables (rankings of investment banks based on their volume of offerings
handled in a given category).
Other:
+track record in investment banking
+Team
+Portfolio
+Advantages- highlighting the company's past and successes is a must
+Working
+Team
The bank must consciously creating the portfolio, ratings, and accreditations, standards to
assure the investors or clients about the company's credibility.
The most important piece of information in preparing the Pitch-book is the valuation of
the company going public. Prior to its initial public offering, a company has no public
equity and therefore no clear market value of common stock. So, the investment bankers,
through a mix of financial and industry expertise, including analysis of comparable
public companies, develop a suitable offering size range and hence a marketable
valuation range for the company. Of course, the higher the valuation, the happier the
potential clients will be. At the same time, though, I-bankers must not be too aggressive
in their valuation if the market does not support the valuation and the IPO fails, the
bank loses credibility.
25. Growth fundamentals

Industrial production
Car and van sale
PMI manufacturing and services
Exports
Consumer confidence index
Infrastructure investment
Investment band
+railways
+corridors projects
+urban infrastructure
+highway
+electricity
+civil aviation
-investment protection
-Tax
-Reporting standards and transparency.
26. Potential for growth
-Market CAP
-High yielding equity market
-Surge in IPO issuance
-Issuance of corporate bond
-Compound Annual Growth Rate (CAGR)
The compound annual growth rate isn't a true return rate, but rather a representational
figure. It is essentially an imaginary number that describes the rate at which an
investment would have grown if it had grown at a steady rate, which virtually never
happens in reality. You can think of CAGR as a way to smooth out an investments
returns so that they may be more easily understood.
27. RECENT INITIATIVES IN CAPITAL MARKETS
28. GOVERNMENT'S FOREIGN DEBT
29. PER CAPITA INCOME
30. DOMESTIC DEMAND
31. LOAN TO DEPOSITE RATIO
32. SOUNDNESS IN BANKING SECTOR
33. LEGAL AND REGULATORY SIDE
34. THE THREE RISKS WE SEEK TO MANAGE ARE:

 Dont miss the truly outstanding stocks; it is difficult to outperform if you don't own
the really big winners
Avoid or mitigate the impact of the big underperforming stocks
Take greater active risk when finding a diversified group of stocks that meet our
investment criteria; however, take less active risk when we are having a more
challenging time finding stocks that meet our investment criteria
35. IDENTIFY THE GROWTH STOCKS IN NEPAL- THE BIG WINNERS
Process
Focused on identifying the stocks that meet our investment criteria and constructing a
diversified portfolio.
Shown for illustrative purposes only. The manager seeks to achieve the stated

objectives. There can be no guarantee the objectives will be met.

Run proprietary quantitative screens on
Evaluate attractiveness of business model
Track record of managements ability to execute
Potential for margin expansion
Balance sheet strength
Bottom-up, fundamental
Portfolio sizes determined by conviction level:
o Quality of business
o Risk/reward
o Diversification impact on portfolio
o Portfolio guidelines:

To the point: Past performance is no guarantee of

future results.
36. Efficient Portfolio Frontier:
The efficient frontier is the set of optimal portfolios that offers the highest expected
return for a defined level of risk or the lowest risk for a given level of expected return.
Portfolios that lie below the efficient frontier are sub-optimal, because they do not
provide enough return for the level of risk.

37. What is the 'Markowitz Efficient Set?'

The Markowitz efficient set is a set of portfolios with returns that are maximized for a
given level of risk based on mean-variance portfolio construction. The efficient "solution
set" to a given set of mean-variance parameters (a given riskless asset and a given risky
basket of assets) can be graphed into what is called the Markowitz efficient frontier.
38. Four non-classical asset classes
Hedge fund
A hedge fund is basically a fancy name for an investment partnership. It's the
marriage of a fund manager, which can often be known as the general partner, and the
investors in the hedge fund, sometimes known as the limited partners. The limited
partners contribute the money and the general partner manages it according to the
fund's strategy. A hedge fund's purpose is to maximize investor returns and eliminate
risk, hence the word "hedge." If these objectives sound a lot like the objectives of
mutual funds, they are, but that is basically where the similarities end.
Real estate
Commodities
Private equity
Private equity is composed of funds and investors that directly invest in private
companies, or that engage in buyouts of public companies, resulting in
the delisting of public equity. Institutional and retail investors provide the capital for
private equity, and the capital can be utilized to fund new technology,

make acquisitions, expand working capital, and to bolster and solidify a balance
sheet.

To the point: pipeline projects. Unstable yes, but the talks

about these do not cease from flashing every now and then.
39. During the first eight months of fiscal year 2014/15, the deposit mobilization
of banks and financial institutions has increased by 7.6 percent (Rs. 106.62
billion) compared to its growth of 9.7 percent (Rs. 115.47 billion) in the
corresponding period of the previous fiscal year.

DEPOSIT MOBILIZATION HAS INCREASES

40. Claim on private sector banks: (domestic credit by commercial banks)

Likewise, during the review period, the claim on private sector of banks and
financial institutions has grown by 11.8 percent (Rs. 132.40 billion) while
such claim had grown by 11.0 percent (Rs. 103.81 billion) in the same period
of the previous fiscal year.

41.Liquidity equivalent to Rs. 271.10 billion has been mopped up through

reverse repo auction under the open market operation in the first eight
months of fiscal year 2014/15. Liquidity of Rs. 270.0 billion was mopped
during the same period of the previous fiscal year.
42.During the first eight months of fiscal year 2014/15, the deposit mobilization
of banks and financial institutions has increased by 7.6 percent (Rs. 106.62
billion) compared to its growth of 9.7 percent (Rs. 115.47 billion) in the
corresponding period of the previous fiscal year.
43.The ratio of remittance to GDP that stood 11.2 percent in FY 2004/05 reached
28.0 percent by FY 2013/14. Remittance income that had registered a growth
of 34.1 percent during the first eight months of the previous fiscal year has
grown merely by 4.0 percent to Rs. 371.0 billion in the same period of fiscal
year 2014/15.
44.The Global Competitiveness Report for 2015-16 published by World Economic
Forum states that Nepals Global Competitiveness Index (GCI) ranking has

improved for this year with 100th position out of 140 countries, which was
102nd out of 144 countries last year.
45.The competitive index is calculated on the basis of twelve pillars. On these
pillars, Nepalese investment environment stood at 37th position on
macroeconomic environment, 88th position on market size whereas the worst
situation is for infrastructure development in which Nepal is at 131nd
position.
46. Similarly, for technological readiness and labor efficiency, the position is
128th and 99th respectively. However, Nepal stood in 72nd position in the
category of financial market development.
47. The report shows that the macroeconomic environment for investment is
good in Nepal and the local equity market is average efficient in channeling
the fund but infrastructure situation, technological readiness and inefficient
labor market are the main issues that should be addressed to make Nepalese
investment environment more competitive.

48. A total of 386,135 industries registered in the first eight months of current
fiscal year 2014/15 comprising 758 large-scale, 1,387 medium-scale, 3,808
small-scale, and 380,182 micro industries are estimated to create
employment opportunities for 2,771,309 people. A total of 213 foreign
investment industries registered in the first eight months of fiscal year
2014/15 are estimated to provide employment to 8,869 people. Based on
total project cost of foreign investment industries, the share of energy,
services oriented, tourism, production oriented, and other industries is 54.45
percent, 9.03 percent, 5.82 percent, 29.57 percent and 1.13 percent
respectively.

49. The total amount approved by Securities Board of Nepal (SEBON), regulator
of capital market in Nepal, for the primary issuance to public on the FY
2014/15 was of Rs. 14235.33 million from 48 numbers of approvals including
ordinary shares, right shares, mutual fund and debentures. This is an increase
of 95.90 per cent in total amount compared to the previous fiscal year. Out of
the total approvals for public issues, 18 companies get approvals for initial
public offering (IPO) of Rs. 6977.34 million. This is also an increase of 200.29
percent on the amount when compared with the previous year. During the
same period five companies get approval to issue debenture for the amount
of Rs. 2900 million. Likewise, three mutual fund has been approved during

the review period amounting Rs. 2050 million. Similarly, total 22 approvals
were provided to companies to issue right shares amounting to Rs. 2307.99
million which is a decrease of 45.61 per cent in amount when compared to
the previous year.
50. Turnover in secondary market is one of the important indicators of capital
market. Trading volume in last fiscal year had increased tremendously by
258.64 percent as compared to the fiscal year 2012/13 but during this fiscal
year the trading volume has decreased slightly by 15.48 per cent as
compared to fiscal year 2013/14. During the FY 2014/15, turnover of Rs.65.33
billion has been realized which was Rs. 77.29 billion last year. Similarly,
during the review period, 159.72 million numbers of shares have been traded
which is a decrease of 25.41 per cent compared to a year earlier. Accordingly,
numbers of transactions have also decreased by 15.73 percent to 477278. It
was 566389 last
51. As usual, the volume of trading amount and the number of shares traded
from the commercial banks group has the highest stake on the total trading
volume and total shares traded respectively. Excluding the trading of
promoter shares of commercial banks, the groups trading volume was Rs
29.87 billion, 45.71 per cent of total traded amount. Similarly, the group of
insurance companies and development banks remained at second and third
position with 13.70 per cent and 13.04 per cent of the total traded amount
respectively. Similarly, the trading volume of promoter share group and
hydropower companies group has remained at fourth and fifth position with
11.56 per cent and 10.24 per cent respectively. It shows that commercial
bank group is highly liquid in comparison to other groups.

52. This is an increase of 18.28 per cent as compared to previous fiscal year.
Similarly, the traded amount of promoter shares is 11.56 per cent of the total
traded volume during the period.

53. List of Top Five Companies (On the Basis of Traded Amount) S.N. Name of the
Companies Traded Amount (Rs. in million) 1 Chilime Hydropower Company
Ltd. 3866.88 2 Nepal Investment Bank Ltd. Promoter Share 3408.04 3 Nepal
Bank Limited 2632.73 4 Nepal Life Insurance Co. Ltd. 2357.65 5 Everest Bank
Ltd. 2083.21
54. Market capitalization is an important secondary market indicator as it is
compared with the indicators of the economy. It is calculated by multiplying

closing price with outstanding shares of the company. It has decreased by

6.41 percent and reached to Rs. 989403.96 million as compared to the
previous year. It was 1057165.83 million in the fiscal year 2013/14. Decrease
in the price of listed companies is the main cause for the decrease in market
capitalization.
55.