Basics of fundamental analysis (part 3)

1.

TOPIC 1. BASICS OF FUNDAMENTAL
ANALYSIS (part 3)
1.
Analysis of the company's investment attractiveness.
2.
Formation of investment strategy and types of investment portfolio.
3.
Principles of investment portfolio formation.
4.
Index funds.

2.

2. Formation of investment strategy
and types of investment portfolio.
Investment strategy is a system of long-term goals of investment
activity and a set of the most effective ways to achieve them.
Most investors choose more than one object of investment, and
form a certain set of them.
Purposeful selection of such objects is a process of investment portfolio
formation.

3.

Investment portfolio/Securities
portfolio
An investment portfolio is a set of financial assets owned by an investor that
may include bond, stocks, currencies, cash, commodities, and alternative
investments (which include real estate, foreign exchange (forex), and
collectibles).
Securities portfolio is a set of securities owned by one natural or legal
person.
The purpose of portfolio formation is to achieve the most optimal
combination of risk and investor income (the goal is to reduce risks to a
minimum and increase returns to a maximum).

4.

What is important for the investment
strategy?
determine the period of the investment strategy
(the main condition - the predictability of economic development in general and
the investment market in particular);
In the current unstable (and in some areas - unpredictable) development of the
economy, this period can not be too long and on average can not exceed 3-5
years (for comparison, it should be noted that the investment strategy of the
largest companies in developed market economy is developed for a period of 1015 years).

5.

Surveys of individual companies, such as the United States, show that:
the longest period (over 10 years) is typical for the development of investment
strategy by institutional investors (investment funds, investment companies, etc.);
a smaller period (5-10 years) is typical for companies and firms engaged in the
production of means of production and in extractive industries;
an even shorter period (3-5 years) is typical for companies and firms engaged in
the production of consumer goods, retail trade and services to the population.

6.

What is important for the investment
strategy?
determine the strategic goals of investment activity
for example:
-
ensuring capital growth (growth investment),
-
increase of level of profitability of investments (income investment)
etc.
Depending on the purpose of the investment and the allowable risk,
there are different types of portfolios.

7.

Types of investment portfolios
depending on the investment strategy
(on the acceptable level of risk):
Aggressive (speculative, high-risk) portfolio
Moderate (compromise, medium-risk) portfolio
Conservative (low-risk) portfolio

8.

1. Aggressive (speculative, high-risk) portfolio - is formed by the criterion of
maximizing current income or growth of invested capital, regardless of the
level of investment risk. Allows you to get the maximum rate of return on
investment, but is accompanied by the highest level of investment risk.
That is, the investor seeks to obtain the highest return on the most risky
financial assets.

9.

2. Moderate (compromise, medium-risk) portfolio - an investment
portfolio in which the overall level of portfolio risk is close to the market
average. Of course, the rate of return on investment is also close to the
market average.

10.

3. Conservative (low-risk) portfolio - formed by the criterion of minimizing
the level of investment risk. It is formed by the most moderate investors,
practically excludes the use of financial instruments, the level of investment
risk for which exceeds the market average. Focus on a stable income for a
long time.

11.

Investments and risk level

12.

Types of investment portfolios
depending on the source of income:
Source of income
Growth of market value
Growth portfolio:
- Aggressive
- Moderate
- Conservative
Current income
Growth and income portfolio:
- Balanced
- Dual purpose
Income portfolio:
- Regular
- Profitable securities

13.

choose shares that meet the demands of the investor is not
enough to achieve the goal (the first step in managing existing
assets)
after the transfer of assets to selected securities, it is necessary to
constantly monitor the market, general economic trends, business
cycle movements and changes in public policy to identify
deviations from the situation.

14.

Methods of securities portfolio
management:
Active portfolio management - constant monitoring of the
securities market, acquisition of the most effective securities and
the fastest possible selling of low-yield securities.
Provides a fairly rapid change in the composition of the investment
portfolio.
Passive portfolio management - the formation of a diversified
portfolio, which is stored for a long time and is transformed only in
the event of significant deviations of current results from planned.

15.

3. Principles of investment portfolio
formation.
diversification (by quantity and quality)
That is, including in the portfolio the securities that have a weak
correlation.
by industries:
- countercyclical (when the market falls, the level of production in
the industry falls less than the market average);
- growing (when the market growth, the industry demonstrates
outpacing growth).

16.

by countries (developed - more reliable; developing - high
profitability);
avoid investing in subsidiaries of one holding (because the
companies are interconnected);
not to allocate more than 10% in the portfolio for one asset
(portfolio value) (if shares, then 10-12 companies from
different industries);
distribution by asset classes (stocks, bonds, deposits, cash,
real estate, cryptocurrencies, precious metals);

17.

gradual inclusion of securities in the portfolio
Buy when the index or securities we are interested in shows an upward
trend (using, in particular, methods of technical and fundamental
analysis), ie if you have the signals to buy.
change components in the portfolio
- if good index trends → more stocks in the portfolio (stocks dominate);
- if uncertainty → more bonds in the portfolio (bonds dominate).
There are different views on the frequency of change (intervention in)
the portfolio.

18.

take into account the timing of investment and risk appetite
- willingness to invest from 5 years (especially for shares) due to
volatility.
A year later, the portfolio may show a drawdown and if you want
to take the money back → losses.
In 5-10-15 years, the stock market will eventually grow.
- determine your own allowable level of drawdown (10, 20, 50% ...)

19.

portfolio history testing is not the best way
After forming a portfolio look at how it has behaved over the
last 5 years (but that's not a guarantee!)
It is necessary to take into account the possible change in the
economic cycle and the corresponding change in profitability.

20.

4. Index funds.
For greater diversification, you can invest part of the capital
(20-50%) in the Index Fund.
→ then the shares of 10 companies will account for 5-8%.
Index fund (classic) - a fund, 100% of the shares of which
consist of shares included in a certain index.
In this case, the shares in the fund's portfolio should be in the
same proportions as in the index.

21.

The world's first index fund is Vangaurd 500 (VFINX) (based on the S&P 500 Index).
It was created in 1976 by John (Jack) Bogle* (1929-2019).
J. Bogle stressed that mutual funds eliminate the risks of individual stocks, market
sectors and the choice of investment manager. There is only the risk of the stock
market.
________________________________________________________________________
* the most famous works "Common sense on mutual funds ", “The little book of
common sense investing“.

22.

J. Bogle owes the idea
of creating an index fund,
in particular, to Paul
Samuelson, a Nobel Prize
winner, who in his article
"Challenge to Judgment"
(1974) called on large
investment companies to
form their portfolios tied to
the S&P 500.

23.

Buffett and Seides bet
According to P. Samuelson, "from a statistical point of view,
the index, which is based on a wide range of stocks,
will outperform the portfolios that are most actively managed."
And so it turned out: investment funds, which were actively
managed, in the long run lost to passive index funds tied, in
particular, to the S&P 500.
(Buffett and Seides bet, co-founder and former investment manager
of the hedge fund Protégé Partners 01.01.2008 to 31.12.2017 worth $
2.2 million)

24.

Seven Commandments to Ordinary
Investors by J. Bogle:
1. You need to invest.
2. Time is your friend.
3. Impulsiveness is your enemy.
4. Simple arithmetic works.
5. Keep it simple.
Basic investing is simple: a reasonable distribution between stocks, bonds and cash
savings; diversified choice of not too expensive securities; careful balancing of risk,
profitability and (again) minimization of costs for financial advisors.
6. Never forget about average values (profitability).
The impressive short-term yield of a mutual fund is likely to return to the norm of the
stock market - or even lower.
7. Do not deviate from the intended path.
"Stay the course" - the most important advice of J. Bogle.

25.

S&P 500 index funds:
1. Fidelity ZERO Large Cap Index
2. Vanguard S&P 500 ETF
3. SPDR S&P 500 ETF Trust
4. iShares Core S&P 500 ETF
5. Schwab S&P 500 Index Fund

26.

Thank you for your attention!

27.

Useful links:
About the EV/EBITDA and P/E ratio:
https://www.investopedia.com/ask/answers/072915/how-canevebitda-be-used-conjunction-pe-ratio.asp
https://www.investopedia.com/ask/answers/061515/which-metricshould-i-pay-more-attention-evebitda-or-pe.asp
About the Qualitative Analysis:
https://www.investopedia.com/terms/f/fundamentalanalysis.asp
https://www.investopedia.com/ask/answers/qualitative-factorswhen-using-fundamental-analysis/
https://www.benzinga.com/money/qualitative-fundamental-analysisfor-traders/