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Guide: Investing in shares of the automotive sector



So yeah, while a car is a depreciating asset, shares in automobile companies are appreciating assets. Personally, I have been investing in the stock markets since the year 2000. Although my first car was bought on a car loan, I have never taken one since then. All my cars (and even real estate) have been purchased from sale proceeds of stocks.







On this thread, I would like to introduce you to the world of investing in stock markets in general, but automobile stocks in particular. A few important points:



- You don't need to have MBA Finance degree or CA degree to invest in stocks.

- Making money in stocks involves just two factors -> application of logic/knowledge (20%) and psychology (80%).



PSYCHOLOGY & STOCK MARKET INVESTING -



Remember that investing in stocks is not too different from investing in real estate. When one invests in apartment, this is what we do -



1) Find the right location. Will there be a Metro subway coming up soon? Is there a smelly drainage close by? Ocean view? How far from airport/mall/schools?

2) Check how much rent one can get. Is there an oversupply or shortage of apartments in that location?

3) How good is management of real estate company building the apartment? Have they delivered on time?

4) Is the apartment reasonably priced? Rs. 4,000 per sq ft apartment might be a great deal. But Rs. 1,000 per sq ft apartment (far away from city center) might be a bad deal.



Extending the above logic to stocks:



1) Find the right sector & stock. Which car company is doing well (Eg: Maruti) and which company is struggling (Eg: Tata Motors)?

2) How much dividends can we get by investing in a stock?

3) How good is management of the car company? Have they made the right strategic decisions? (Eg: M&M Vs Tata Motors)

4) Is the stock reasonably priced? Remember that Rs. 4,000 stock might be "cheaper" than Rs. 400 stock.



WHAT IF STOCK MARKET CRASHES?







The biggest problem with the stock market is that price of the investment changes every day. But the market price of a stock should not bother you much AFTER you made the investment. Let's take the real estate analogy again - Let's say you have bought an apartment for Rs. 40 Lakhs. Let's assume that you have put it on sale on eBay.



Day 1: You got a bid for Rs. 40.2 Lakhs

Day 2: You got a bid for Rs. 38 Lakhs

Day 3: You got a bid for Rs. 41 Lakhs

Day 4: You got a bid for Rs. 48 Lakhs

Day 5: You got a bid for Rs. 20 Lakhs



Here's the deal: just because you got a bid for Rs. 48 Lakhs on Day 4, it does NOT mean you have become RICH. Just because you got a bid for Rs. 20 Lakhs on Day 5, it does not mean you have "lost" Rs. 20 Lakhs. You don't go to a local real estate broker everyday and ask what is the market price of the apartment you just bought. Ditto with the stock markets - it does not mean anything is Maruti stock falls 50%. After you invest in an automobile stock, just ignore the market price. Because the market price changes everyday depending on bids for stock on that particular day. It does not mean you have 'earned' or 'lost' money - unless you sell.



WHEN TO SELL:



Easy. After you buy an apartment for long term investment, when do you sell? After 3 months? 3 years? Or when you need the money for some reason?



GLOSSARY:



There are some simple terms you need to understand before picking up an automobile stock. Note to experienced investors: I have simplified many of these parameters so that it's easy to understand.



Market Capitalization : Marketcap is 'size' or 'value' of the company. Stocks with high market cap are safer for investment than stocks with small market cap. However, good stocks with small marketcap is likely to give better returns over time.



PE Ratio : Roughly marketcap dividend by net profits. This is a measure of how cheap a stock is. Maruti has a PE ratio of 30 while Tata Motors has PE ratio of 20 implies Tata Motors stock is cheaper to buy than Maruti.



Debt To Equity Ratio : Let's say Bajaj Auto is setting up a new factory for Rs. 1,000 Cr. It has taken a bank loan of Rs. 250 crores while it is investing Rs. 750 crores from its own pocket. In this case, the debt to equity ratio of this project is 0.25 (250 divided by 1000). Good companies have low debt to equity ratios.



Return on Equity : Let's say Maruti has setup a new factory for Rs. 1,000 cr, entirely out of their pocket (no bank loans). This factory earned a profit of Rs. 200 crores in the first year. That means the return on equity was 20%. Good companies have high RoE's.



Dividend Payout Ratio : Let's say M&M earned Rs. 1,000 cr in profits. They paid out Rs. 200 crores as dividend to shareholders. The dividend payout ratio of M&M works out to be 20%. Good companies pay out significant percentage of their profits as dividends to shareholders. Remember that when it comes to accounting, everything can be faked (Eg: Satyam). But dividends paid out is REAL MONEY, and can never be faked.



Dividend Yield : It's like Rental Yield of an apartment. If you invest Rs. 1 Cr in an apartment and you get Rs. 3 Lakhs as rent per annum, then the rental yield is 3%. Similarly, if you invest Rs. 1 Lakh in a stock and you get Rs. 3,000 per year as dividend , then the dividend yield of the stock is 3%



RESOURCES:



- Company website

- Investor section (for annual report & investor presentation) of company website

- www.screener.in

- www.valueresearchonline.com

- www.marketsmojo.com

- As car enthusiasts, we have an unique insight into the automobile sector companies when compared to others. Eg: We know how Maruti is killing the competition. We know that Bajaj is innovating & expanding into higher CC segment with the launch of Dominar, and it could change its fortunes. We knew before everybody else that Royal Enfield Bullet has become a lifestyle vehicle. Just look at the popularity of 'Indian Car Sales & Analysis' Thread or other threads in the 'Indian Car Scene' sub-forum. There is a way to harness this knowledge and actually make money - by investing in stocks of car makers, two/three wheeler makers and auto component makers.So yeah, while a car is a depreciating asset, shares in automobile companies are appreciating assets. Personally, I have been investing in the stock markets since the year 2000. Although my first car was bought on a car loan, I have never taken one since then. All my cars (and even real estate) have been purchased from sale proceeds of stocks.On this thread, I would like to introduce you to the world of investing in stock markets in general, but automobile stocks in particular. A few important points:- You don't need to have MBA Finance degree or CA degree to invest in stocks.- Making money in stocks involves just two factors -> application of logic/knowledge (20%) and psychology (80%).Remember that investing in stocks is not too different from investing in real estate. When one invests in apartment, this is what we do -1) Find the right location. Will there be a Metro subway coming up soon? Is there a smelly drainage close by? Ocean view? How far from airport/mall/schools?2) Check how much rent one can get. Is there an oversupply or shortage of apartments in that location?3) How good is management of real estate company building the apartment? Have they delivered on time?4) Is the apartment reasonably priced? Rs. 4,000 per sq ft apartment might be a great deal. But Rs. 1,000 per sq ft apartment (far away from city center) might be a bad deal.Extending the above logic to stocks:1) Find the right sector & stock. Which car company is doing well (Eg: Maruti) and which company is struggling (Eg: Tata Motors)?2) How much dividends can we get by investing in a stock?3) How good is management of the car company? Have they made the right strategic decisions? (Eg: M&M Vs Tata Motors)4) Is the stock reasonably priced? Remember that Rs. 4,000 stock might be "cheaper" than Rs. 400 stock.The biggest problem with the stock market is that price of the investment changes every day. But the market price of a stock should not bother you much AFTER you made the investment. Let's take the real estate analogy again - Let's say you have bought an apartment for Rs. 40 Lakhs. Let's assume that you have put it on sale on eBay.Day 1: You got a bid for Rs. 40.2 LakhsDay 2: You got a bid for Rs. 38 LakhsDay 3: You got a bid for Rs. 41 LakhsDay 4: You got a bid for Rs. 48 LakhsDay 5: You got a bid for Rs. 20 LakhsHere's the deal: just because you got a bid for Rs. 48 Lakhs on Day 4, it does NOT mean you have become RICH. Just because you got a bid for Rs. 20 Lakhs on Day 5, it does not mean you have "lost" Rs. 20 Lakhs. You don't go to a local real estate broker everyday and ask what is the market price of the apartment you just bought. Ditto with the stock markets - it does not mean anything is Maruti stock falls 50%. After you invest in an automobile stock, just ignore the market price. Because the market price changes everyday depending on bids for stock. It does not mean you have 'earned' or 'lost' money - unless you sell.Easy. After you buy an apartment for long term investment, when do you sell? After 3 months? 3 years? Or when you need the money for some reason?There are some simple terms you need to understand before picking up an automobile stock. Note to experienced investors: I have simplified many of these parameters so that it's easy to understand.: Marketcap is 'size' or 'value' of the company. Stocks with high market cap are safer for investment than stocks with small market cap. However, good stocks with small marketcap is likely to give better returns over time.: Roughly marketcap dividend by net profits. This is a measure of how cheap a stock is. Maruti has a PE ratio of 30 while Tata Motors has PE ratio of 20 implies Tata Motors stock is cheaper to buy than Maruti.: Let's say Bajaj Auto is setting up a new factory for Rs. 1,000 Cr. It has taken a bank loan of Rs. 250 crores while it is investing Rs. 750 crores from its own pocket. In this case, the debt to equity ratio of this project is 0.25 (250 divided by 1000). Good companies have low debt to equity ratios.: Let's say Maruti has setup a new factory for Rs. 1,000 cr, entirely out of their pocket (no bank loans). This factory earned a profit of Rs. 200 crores in the first year. That means the return on equity was 20%. Good companies have high RoE's.: Let's say M&M earned Rs. 1,000 cr in profits. They paid out Rs. 200 crores as dividend to shareholders. The dividend payout ratio of M&M works out to be 20%. Good companies pay out significant percentage of their profits as dividends to shareholders. Remember that when it comes to accounting, everything can be faked (Eg: Satyam). But dividends paid out is, and can never be faked.: It's like Rental Yield of an apartment. If you invest Rs. 1 Cr in an apartment and you get Rs. 3 Lakhs as rent per annum, then the rental yield is 3%. Similarly, if you invest Rs. 1 Lakh in a stock and you get Rs. 3,000 per year as dividend , then the dividend yield of the stock is 3%- Company website- Investor section (for annual report & investor presentation) of company website www.trendlyne.com (for brokerage reports) Last edited by SmartCat : 8th June 2017 at 23:42 .