PASSIVE INVESTING

Passive is a term opposite to active. Passive means absence of speedy action .i.e. slow action.

Active investors after monitoring the Income statement, Balance sheet, like each and every companies Finance statements, Analyses the sectors performance connected with those companies, countries Economy, considering various factors select and pick the stocks.

But Passive investors are opposite to those activities. While the countries economy is better, the complete stock market seems to be good. While performing like that, why we can’t choose the best of buying the Entire indexes of Nifty (or) Sensex ! Why to worry about small things. Efficient market theory explains that other than the market nothing can earn more. Those who are accepting the concept , passive investing is best suited.

Definition of 'passive investing'

An investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance.

Also known as a buy-and-hold or couch potato strategy, passive investing requires good initial research, patience and a well diversified portfolio.

Unlike active investors, passive investors buy a security and typically don't actively attempt to profit from short-term price fluctuations. Passive investors instead rely on their belief that in the long term the investment will be profitable.

What is passive investing ?

Passive investing is a strategy focused on achieving long-term appreciation of portfolio values with limited day-to-day management of the portfolio itself.

Passive investing - often referred to as evidence-based investing, or indexing - seeks to replicate the performance of the market by investing to a pre-determined strategy which focuses on:

a) keeping costs low by avoiding unnecessary trading

b) diversifying across a wide set of asset classes - holding all of the market and avoiding over-exposure in any particular sector

c) taking the long term view - markets can do better in some years and worse in others, but passive investors understand that markets are efficient and operate on the basis of all known information. Long term, you cannot beat the market.

How It Works / Example:

A passive investor is one who limits on-going buying and selling activities. A passive investor purchases securities, builds a portfolio, and generally holds the portfolio for the long term.

Passive investors usually do not actively buy and sell as prices change in the market. The general investment philosophy of passive investors is that their portfolios will grow with the long-term growth of the market.
 
Generally investing in Index Funds and E.T.F’s is denoted as passive Investing. For example Nifty and Sensex. Like that in India several indexes are found, not in India, but in various several Foreign countries also investments are increasing.

In this manner functioning Funds and E.T.F,s based on a specific index , under that index containing various stocks invested in the same ratio. While investing like that “Tracking Error” may occur a small value. In that index altered or percentage changed those index tracking funds may also be altered.

Investing in indexes are done by most passive investors. But some pick and buy the stocks in appropriate time and then forget considering as Assets. In Long term they believe definitely those purchased stocks may produce large returns. Based in this criteria the stocks purchased may not give unfortunate results. Good profits has yielded. This is also a passive investing method.

Some others buy some specific stocks in fixed intervals ( like S.I.P ) They never mind of those stock prices fluctuations. They are also passive investors.

Peoples like Warren Buffet, advice those unknown about stock market can invest in Index fund a passive investing method.

Logic of Passive Investing !

If the stock market is not efficient, should you be an active investor? If stock prices are sometimes wrong, then someone with the skill and expertise required to identify these market inefficiencies might do well. Consider other skill based activities, for example, a free throw competition in basketball. Suppose that you get a dollar for every shot out of ten that goes through the basket, and there is no fee to play. This is a conservative assumption with regard to the stock market because there are in fact "fees" to active investing, like transaction costs and tax inefficiencies, which we will discuss later. Like any analogy, the free-throw competition has its strengths and weaknesses, but one important characteristic of this analogy is that most players in the game will make at least some money. This is a critical characteristic, because the stock market is a "positive sum" game in the sense that investors do, on average, enjoy returns greater than the time value of their money. The compounded annual return on U.S. large-cap stocks since 1926 has been about 11 percent, as reported by Ibbotson Associates. This long-run return, in excess of the time value of money (interest rates), is a reward for risk and represents the new societal wealth that is created by the investment of capital in plant and equipment, employee coordination and training, and technological research. In contrast, sports betting and other forms of gambling are "zero-sum" games. A zero-sum game is one in which the profits of all players sum to zero.

Under the no-fee-to-play condition, you should play the free throw game (and perhaps the stock market) even if your self-assessed basketball talent is marginal. But what if we add the twist that, instead of actively participating in the game, you can take the average score of those that do? Passive investing is just such a twist in the investing game, because a total market index fund contains all stocks, and all stocks have to be held by someone. This often ignored but unassailable fact has important implications. Chief among them is that in the absence of the costs of active investing, the index return over any time period must be the weighted-average performance of all active investors during that time period. Thus, while investing in general is a positive-sum game, active investing is a zero sum game with respect to the alternative of indexing. One active investor's ability to outperform the index has to come at the expense of another investor's underperformance. Unlike the children in Garrison Keillor's Lake Wobegone, all investors cannot be above average.

If you were in the basketball free throw game, and were given the alternative to sit out and take the average score of the other players, what would you do? Your first thought might be to look around and make a guess at how your basketball skills compare to everyone else's. If you think your skills are lower than average (and remember, that must be half of everyone) then the smart thing to do is to not play: to take the average. But what if everyone else takes this approach? Then only those in the top-half of the skill pool will choose to play, and the average score you get by sitting on the sidelines will be based on only the top-half players. From this more rational perspective, you should only choose to play if your skills are in the top 25 percent of all potential players. But what if everyone takes this more rational perspective? Eventually no one but the very best player shoots, and everyone else gets his or her score. If everyone were perfectly rational, and not subject to overconfidence, there would be very few active investors. Thus overconfidence, perhaps the most pervasive of all investor irrationalities, is critical to market liquidity. We will return to the role of overconfidence in the marketplace toward the end of this discussion, but it should be clear that at least half, and perhaps more, of all active investors would be better off indexing.

Why It Matters:

Passive investors rely on slow, steady growth in the market. The passive investor builds his portfolio based on an allocation of assets to match his tolerance for risk. After selecting investments for his portfolio, the passive investor will buy and then hold onto his portfolio for the long term. 

PASSIVE INVESTING WORKS IN ALL MARKETS !

Market efficiency is one of the more controversial ideas in finance. Many academics believe that the stock market is a nearly perfect pricing mechanism for companies. If the market is “efficient” then stocks are correctly priced according to all available information. If stocks are correctly priced according to all available information then there is simply no point in doing any kind of analysis, out performance would be a matter of luck and not skill.

The active funds industry is based on the idea that stocks are not efficiently priced. Analysts search for undiscovered opportunities, ranging from the “value” approach where one is essentially a bargain hunter, through to the “growth” approach where one looks for companies with superior profit prospects. Whether value or growth, or a combination, or something else entirely, active managers justify their existence with the idea that a skilled investor can identify superior opportunities and can outperform the market.

I am often asked about where I sit in arguments about market efficiency and whether I feel stocks are correctly priced or not. This is, apparently, very important, why would one adopt a passive approach if there were all of those mispriced stocks out there, allowing skilled investors to outperform?

The answer is that I personally believe the market is highly inefficient and agree that skilled investors can outperform the market. However, that doesn’t mean everyone should invest actively. The key factor to note is the idea that trading and active investment is inherently a zero-sum game compared with the market.

WHY MANY LIKE PASSIVE INVESTING ?

In passive investing , the greatest plus point is the lowest fund expense. In India actively managed many funds “Expense Ratio” is maximum 2.25 % per year. At the same time several index funds & E.T.F’s “Expense Ratio” is maximum 1 %. The balance amount of expense ratio based on long term may produce high gains for investors. Buying an index may get diversification. Tension is reduced. If the market is either lowering or highering your investment also fluctuate similarly.

Moreover passive investors are long term investors. So that Capital gains tax is not required to pay. Short term investors have to pay 15 % as capital gains tax in profit. All are saved. Apart from this paying low brokerage. Being a passive investor there is no need to buy / sell routinely. No need to worry about Fund Managers performance.
 
WHAT ARE ALL THE NEGATIVE FACTORS AFFECTING PASSIVE INVESTING ?

In index participation, of some stocks / sectors would not be liked by us. But buying the total index which includes the disliked sectors also. Learning all those, Indian stock market has not still performed in maximum efficiency. Due to these reasons, active investors had gained much more gain. Even though the gains received does not equal but not even nears the index return is the unfold truth.

Some very big Mutual Fund schemes / E.T.F,s functioning in America are based in passive investing method. The size of those passive investing market is alone several 100 billion dollars. In world level, S&P based (SP – DR,s – Spiders) M.C.S.I. Index based ( I Shares ) Nasdaq 100 based QQQQ, hang Seng based TRAHK – Tracks are the popular passive investing methods.

The entire History / subject about passive investing are all O.K.

WHAT IS PASSIVE MANAGEMENT :-

Passive management (also called passive investing) is a financial strategy in which an investor (or a fund manager) invests in accordance with a pre-determined strategy that doesn't entail any forecasting (e.g., any use of market timing or stock picking would not qualify as passive management).

Passive investment management makes no attempt to distinguish attractive from unattractive securities, or forecast securities prices, or time markets and market sectors. Passive managers invest in broad sectors of the market, called asset classes or indexes, and, like active investors, want to make a profit, but accept the average returns various asset classes produce. Passive investors make little or no use of the information active investors seek out. Instead, they allocate assets based upon long-term historical data delineating probable asset class risks and returns, diversify widely within and across asset classes, and maintain allocations long-term through periodic rebalancing of asset classes.

The idea is to minimize investing fees and to avoid the adverse consequences of failing to correctly anticipate the future. The most popular method is to mimic the performance of an externally specified index. Retail investors typically do this by buying one or more 'index funds'.By tracking an index, an investment portfolio typically gets good diversification, low turnover (good for keeping down internal transaction costs), and extremely low management fees. With low management fees, an investor in such a fund would have higher returns than a similar fund with similar investments but higher management fees and/or turnover/transaction costs.

Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds. Today, there is a plethora of market indices in the world, and thousands of different index funds tracking many of them.

One of the largest equity mutual funds, the Vanguard 500, is a passive management fund. The two firms with the largest amounts of money under management, Barclays Global Investors and State Street Corp., primarily engage in passive management strategies.

Which would be suitable for me either passive or active is the million dollar question ?

Passive investing based on which index ( For example Nifty50 stocks based E.T.F ) those index levels highering, the gains depending upon the price hike , the same gains if possible, insufficient time sharing persons, complete zero about stock market, zero risk persons, able to enter immediately in compulsion, for all the above persons, passive investing is the best method.

Able to manage more time, knowing all the facts about stock market, able to earn money beating the index , risk taking persons are all active investing types.
Passive Investing Is the Solution

If you can’t pay someone to beat the market for you, and you can’t do it yourself, what options do you have? That’s where passive investing comes in.

Passive investing is investing with the knowledge that beating the market for a long period of time is nearly impossible. Instead, passive investors simply attempt to match market returns as closely as possible while keeping fees, taxes, market timing and fund selection mistakes to a minimum.

The most common way to invest passively is through an index fund. An index fund is a type of mutual fund that invests with the goal of matching the performance of an index, which tracks the performance of a market. Index funds accomplish this by investing in all the stocks of a particular index based on market capitalization.

For example, if you invest in an S&P 500 index fund, that fund will take your money and invest it in 500 of the largest companies in the United States based on their market capitalization. The largest portion of your money would go towards buying stock in the largest U.S. companies, such as Exxon, Apple, IBM, and on down the list, all the way to the smallest company (in which very little of your money would be invested). The beauty of this structure is that it allows the index fund to almost perfectly match the index (or market) while making very few trades.

Because very few trades have to be made after the initial purchase, transaction fees for the fund are almost zero. In addition, taxes are much lower because there is almost no turnover. Most importantly, passive managers don’t have to be paid large salaries to run the fund because it follows a set of simple trading rules. Therefore, the expense ratios of these funds can be extremely low, even as low as one tenth of a percent.

Passive investors also don’t lose any investment return to market timing mistakes because they know that attempting to beat the market by jumping in and out will only hurt them. And they certainly don’t attempt to switch between funds, because they already own the entire market in their single index fund!

Basically, once an investor knows that it is impossible to beat the market in the long run, there is no reason for them to be anything other than a purely passive investor. 

Customizing Passive Investing to Suit Your Needs !

Passive investing works for everyone, from young professionals with high-risk appetites to retirees simply looking to draw a steady income from their retirement savings.

The key to making passive investing work for any individual is to determine the correct asset allocation for his or her situation. Asset allocation is simply the mix of investment types that make up your portfolio. For example, a high risk, high return passive portfolio may be made up of mostly a U.S. stock index fund and a foreign stock index fund, with very little in a U.S. bond index fund. On the other hand, a low risk passive portfolio would be made up of mostly a bond index fund with much less in stock index funds.

By adjusting the asset allocation of their portfolio, investors can create a passive strategy that gives them the perfect balance of risk and return, no matter what their situation is.
So, Why Isn’t Everyone a Passive Investor?

Passive investing is not a new idea. The first index fund was created in 1975, and it still exists today as one of the largest funds in the world. The principles of passive investing are supported by hundreds of academic studies, and multiple Nobel Prizes in Economics have been awarded for research findings that detail the superiority of passive investing. You can even read what some of these Nobel Prize recipients have to say about passive investing here on a website. So, why do more than 90% of individual investors in the United States still attempt to beat the market by investing actively?

The fact is, most of the public’s investing knowledge comes from the mainstream financial media and investment professionals (such as brokers) because they have the financial means to get their messages out to the public. However, those financial means can also create very large conflicts of interest.

It is much easier for Wall Street to make money by selling the more expensive investment vehicles used by active investors than to make a living educating people about the advantages of passive investing. A broker’s business would quickly fail if he told every person that walked into his office that they would be better off as a passive investor. And the financial media would run out of well-paying advertisers, not to mention interested viewers, if they only ran story after story about the simple superiority of passive investing.

CONTRA INVESTING

Have you ever swimmed in a river or Sea facing, against the water flow ?  Not studied like all, and being successful in that field ? Not like everyone doing a job or business, choosing some different field and made a success ? If yes for all those, then for you “ CONTRA INVESTMENT ” may be best suited.     

WHAT IS CONTRA INVESTMENT METHOD ?  

Anyone, acting opposite to majority of the people’s  thinking and gaining through those actions. For example, when everyone telling to buy, we sell, when everyone selling, we buy includes in this method. Similarly while everyone selling a stock / sector the specified stocks value will be seemed very low. At that moment buying the stocks with smaller quantity, considerable growth can be obtained in future.    

HEAD WEIGHT AND FEAR ! 

The two important feelings controlling the stock market are Head weight and Fear. While stock market rises someone’s head weight rises. While head weight rising we chase and buy the stocks . This type may be gain for short term investors, but not for Long term investors. For some reason the entire stock Exchange, may have gone down or a sector may have gone down. Or else a specific stock alone may have gone down. Those situations will be cautiously utilized by Contra investors.   

Some big investors, keep an eye upon a sector or stock and may sell all the stocks entirely. A part of stocks value is decided by Supply and Demand. While the supply increases, and the demand decreases, the value of stock reduces. If happening continuously at a certain stage nobody would be seen for a particular stock or sector. During those moments, our God father , L.I.C, or some big Bulls like Warren Bufett take good of that Opportunity and purchase at Bulk Quantity.  

When equity markets are on the move, investors are quite happy to join the bandwagon. In fact, in boom times, we seldom discuss the strategy being used by our fund manager because all that matters is that he is giving great returns. It's only in a downturn that reality checks are done and one looks at strategies to minimize the pain. 

One such strategy is a 'contrarian' investing. As the name suggests, one would expect the fund manager have a completely different strategy to the existing market conditions. 

This basic idea is to protect the downside when markets are falling. But the reverse is also true. Returns in an upside might be lower.   

Understanding the term 'contrarian' is important because it can be defined in different ways. In most cases, contra investing involves selection of stocks that are not popular at the moment but has the potential to deliver over time because of factors like strong fundamentals, future turnaround in the cycle and so on.

For contra investing, there are couple of strategies that are used. The first one involves direct investment in stocks, whereby a particular theme is identified. The stocks are bought, in accordance with the theme and held for a particular time period. The simpler option is to select a contra fund that is offered by mutual funds. 

SO WHAT IS THE BASIC TENET OF CONTRA INVESTING ?

Uncertainties emerge in global events, economic growth, government policy etc. All such events converging today, creating huge opportunity for generating future returns. Thus current environment is apt for contrarian investment.

The reasons why a Contra strategy is apt at the current point of time are Most funds / investors are betting on the safest stocks. Top holdings of mutual funds are all among the top 10 market capitalized companies in India and constitute over 30% of total equity holdings .When these stock don’t move, several MFs don’t perform in the short run and this kind of Risk Aversion prevents more creative stock selection.

THE POSITIVES OF CONTRA INVESTMENT !

Like all people, like a massive goat shrub, traveling in one direction, we travel in opposite direction to purchase the stocks in a cheaper value. Since already gone down stocks further more decline is impossible. While the massive goat shrub taking a U turn a huge gain can be expected. After gaining we can leave the shrub, and for persons , developing the wealth, can be said as a Wonderful situation.  

HOW ARE SUCH STOCKS IDENTIFIED?

There’re no short-cuts involved here. It requires a lot of research and out of the box thinking. Accumulating information about prospects of the sector to which the stock belongs, its management, etc. are key to successful investing. Doing a comparison of PE ratios between stocks of different companies in the same sector as well as checking the balance sheets and annual reports are some ways to identify non-popular and good stocks.

THE NEGATIVES OF CONTRA INVESTMENT !

While all are walking in one direction , we changing our direction in opposite direction with 
no partnership, in the midst of the forest lonely with Fear mixed feeling possible. It may 
check the Individuals Patience. If a new comer while purchasing after entering , it may 
continuously go down. While the entire stock market rising, our portfolio alone remain 
standstill. So excessive patience persons can alone bravely handle this type of investment.  

DISADVANTAGES ! 

Factors to Investing in equities Health. The first law may take more scientific knowledge’s 
you. Each time you collect from pharmaceutical or medical supplies, will be the impact of a deep understanding of the factors underlying medical. Consider whether thiIt works as a 
valid reason to prevent them from doing so.

The last second reason is to avoid investing in shares is to have health permits market watch events near the most important steps as the FDA. I advise people to take seriously this time, it could to lead to a net decrease of the share price if a major event such as a FDA decision is contrary to the company, whether it is yet determined.

So this is. We have seen and assessed the advantages and disadvantages of investing in shares of health care. It is not truly universal, not all, but it is certainly a lot of work for many people. You must occur on more thinking in order to make your personal decision for or against. You can order a optimal decision based on information provided in this article.

HOW TO MANAGE THE UN-COMFORT ABILITY ? 

Any new methodology will be hard at the start. With patience, after investing one or two times, earning more gain may gain self confidence, automatically. Any stock suitable for investing , due to some reason the price lowers. You desire to buy that stock. 

A small quantity of stock can be purchased initially. Afterwards the stock may be dancing in sideways like a see-saw. In another incident a small downfall may happen. 

At that moment, a second small can be purchased. Like this two / three opportunities may knock your door. You have to utilize the situation favorably. In these methods the average price of the stock will definitely be larger than the finally purchased price. Don’t worry. 

Any stock the limit of High / Low cannot be defined even by the concerned company promoter itself. So, you and the promoter both are traveling in the same Boat, need not be forgotten.      

CAUTIOUS MOMENTS ! 

Stock prices after you purchased, lowered average value upto the bottom and making U turn we must be careful. Having claimed moderate gain, immediately sold, getting at not be executed. After good handsome profits we can quit. If you were a Long term investor, like your own house you can hold it for years lifetime. If a new comer then within Sensex and Nifty the stocks can be choosed. 

RISK ! 

Like in any investment method, this method also contains risk. The stock you ought to buy going on lowering and at a stage may disappear from the stock market. Like India, the growing Economy, for large companies nil possibilities are found, we must act cautiously. To safeguard from these problems any stocks weightage can be maintained not more than 5 %. Moreover, not waiting until the least bottom we can enter . Sometimes Contra Investor may loose the entire gains also like the Investment stocks during the Boom at about 2000. Now they were almost papers. 

TOOLS USED BY CONTRA INVESTORS !

Like value investors, they also select stocks of Low P.E., Low book value, further more seeing market sentiment ( While all purchasing, they sell, while others selling, they act Opposite ) they invest. To the Utmost to calculate the Ups and Downs fluctuation of the Market vicks Index ( India VIX – India Volatility Index ) will be seen , and used for Investment. Since the VIX Index, denotes the Ups and Downs of the market suddenly or rapidly rise / low the index value rises. To buy / sell they can use the Index Favorably.   

For Example :- 
By the end of year 2008, the VIX Index had gone to 85. It is a favorable period to buy stocks. Only considering vix , alone investment cannot be decided. It can also be used as a tool.              

GROWTH INVESTING

Let us see the second type of Investment method called as “Growth Investing”. Is there any person disliking growth ? But at the same time, like expecting growth, risk is also found. 

In practice, we could have seen, some young couples, marrying with flimsy family 
background, either Arranged or Love marriage. Being frugal and planned  i.e. in Rs.100/- income , saving of up to 30 to 50 % with 1 or 2 times a day alone taking moderate food. 
In years course, they may be able to buy a Residential plot, later building their own home 
with all comforts. Similar stories can be heard everywhere.  

A strategy whereby an investor seeks out stocks with what they deem good growth 
potential. In most cases a growth stock is defined as a company whose earnings are 
expected to grow at an above average rate compared to its industry or the overall market. 

Growth investors often call growth investing a capital growth strategy, since investors 
seek to maximize their capital gains.

Although it is often said that growth investing and value investing are diametrically 
opposed, a better way to view these two strategies is to consider a quote by Warren 
Buffett: "growth and value investing are joined at the hip". Another very famous investor, 
Peter Lynch, pioneered a hybrid of growth and value investing with what is now commonly referred to as a "growth at a reasonable price (GARP)" strategy.

In the past 15 – 20 years the examples of growth stocks are Reliance Industries, Infosys, 
Wipro, Cipla, B.H.E.L., L&T,O.N.G.C.,HCL Technologies, TCS, etc…can be said. 
Even today in India’s rapidly growing Economy , smaller organizations of today, expected 
to grow large in future years, as larger organizations are called as Growth stocks. 

A new investor while watching each small company, may think as growing as INFOSYS tomorrow. But all companies may not grow as INFOSYS. So while selecting these type of stocks, the investors must be cautious. 

Rapidly growing companies may face sudden problems. While happening they have to overcome the situation with strong Administrative capacity. When compared to value companies, in growth companies, risk will be more, and rewards, may also be more.   

How to select the growth company Stocks ? 

A stock is considered a growth stock when it’s growing faster and higher than stocks of 
other companies with similar sales and earnings figures. Usually, you compare the growth 
of a company with growth from other companies in the same industry or compare it with 
the stock market in general.

If a company has earnings growth of 15 percent per year over three years or more and 
the industry’s average growth rate over the same time frame is 10 percent, then this stock 
qualifies as a growth stock. A growth stock is called that not only because the company 
is growing but also because the company is performing well with some consistency.

Here are some other important things to look at when considering growth stocks:

Fundamentals :-
This refers to the company’s financial condition and related data. When investors do fundamental analysis, they look at the company’s fundamentals: its balance sheet, income statement, cash flow, and other operational data, along with external factors, such as the company’s market position, industry, and economic prospects. The company should have consistently solid earnings, low debt, and a commanding position in the marketplace.

Leaders and mega-trends :- 
A mega-trend is a major development that has huge implications for most (if not all) of 
society and for a long time to come. A good example of a mega-trend is the aging of 
America. Federal government studies tell us that senior citizens will be the fastest-growing segment of our population during the next 20 years. How does the stock investor take advantage of a mega-trend  By identifying a company that’s poised to address the opportunities that such trends reveal. A strong company in a growing industry is a common recipe for success.

Strong niche :- 
Companies that have established a strong niche are consistently profitable. Look for a company with one or more of the following characteristics:

A strong brand :-
Companies that have a positive, familiar identity — such as Coca-Cola and Microsoft — occupy a niche that keeps customers loyal.

High barriers to entry :-
United Parcel Service and Federal Express have set up tremendous distribution and delivery networks that competitors can’t easily duplicate.

Research & development (R&D) :-
Companies such as Pfizer and Merck spend a lot of money researching and developing new pharmaceutical products. This investment becomes a new product with millions of consumers who become loyal purchasers, so the company’s going to grow.

Given below based regulations clearly identifies which are the growth stocks !  

1)  In the past 5 / 10 / 15 years turnover, Net profit, E.P.S similar factors must have attained     better growth.( For example more than 20 % )The stocks other than that sector growth must be large ( Minimum more than 10 % ) 

2)  Not only in previous years, but also in forthcoming 5 / 10 / 15 years the companies, Turnover, Net profit, E.P.S the said growth is possible in forthcoming years. The company connected with the sector, Opponents, and Honest Management particulars whether present must also be Analyzed.

3) Expenses within the Marginal limit / In the coming years is it possible must be go through. 

4) Excellent Management sustainable, Promoters not in an intention to go short cut to increase their wealth.

5) Whether Possibilities found in the next 3 or 4 years, for the stock prices to be Doubled, could be Analyzed.

6) Whether R.O.E ( Return on Equity ) is upgrading ? R.O.E = Net Profit / Investors Capital.

Alright what are the characteristics of Growth stocks ?   

Six Characteristics Of Great Growth Stocks
The market’s upside action this week, in the wake of the Fed’s interest rate cut, has been unusually bullish by many technical measures. But I’m not going to write about that today. I’ll leave that to ace technical analyst Mike Cintolo, who weighs in on Monday. Until then, suffice it to say that you should be heavily invested now. But invested in what? Great growth stocks. We focus on six fundamental characteristics of great growth stocks.

These aren’t just any six characteristics. These are the six fundamental characteristics that correlated most highly with profits in a ten-year study of stocks bought for the Model Portfolio 
of the Cabot Market Letter.

In other words, after ten years of investing (1997 - 2006) these are the factors that were best at bringing us profits. Might another ten years bring a different result? I’ll let you know in ten years. Until then, however, I feel pretty good about these. So here they are, with the very best criteria - in the time-honored tradition of lists - coming last.

Huge mass markets ;-
This one is well known to many investors. The more potential customers there are for a product or service, the greater the possibility that the business will be a success and the greater the possibility the investment will be a success. But how big is a mass market? Sometimes it’s hard to know where to draw the line; there is no right answer. Choosing between a manufacturer of curling equipment (that sport where they slide the rock down the ice) and a manufacturer of shoes, I’d go with the shoe manufacturer. Its mass market was just one reason we added Crocs (CROX), the maker of “funny-looking plastic shoes” to Cabot Market Letter’s Model Portfolio nearly a year ago.

Market dominance / barriers to entry :-
Patents often provide a great barrier to entry. And if there’s no one else providing competition, you can be sure those patents are strong. Intuitive Surgical (ISRG), for example, has been a great winner, partly because it has no competitors. As for market dominance, this can be harder to measure. Game Stop (GME), for example, is by far the biggest retailer of video games in the U.S. But with just 23% of the market, is it dominant? Intelligent minds can disagree.

Accelerating earnings growth :-
There’s no ambiguity here. If a company’s earnings growth rate (measured by comparing the earnings of one quarter to the earnings of the same quarter in the prior year) increases for two quarters in a row, growth is accelerating. In general, faster growth is better growth, and a company whose earnings growth rate is accelerating (whether it’s due to increased revenues or more efficient operations) is becoming an increasingly attractive investment. My perception is that acceleration tends to be under-appreciated by investors (some just don’t see it), so buying when you first recognize it usually works out very well.

Triple-digit revenue growth :-  
In my experience, companies growing revenues at triple-digit rates (100% or better) tend to be small and less well known; thus they’re ripe for buying by institutions as they grow. Almost all solar power companies were enjoying triple-digit revenue growth (100% of better) earlier this year when their stocks were hot … and most still are. When Google came public it was growing at a rate of 125%, now it’s slowed to 58%, while Chinese Baidu (BIDU), which is hitting new highs, is growing at 120%. Crocs (CROX) is growing at 162%. Wynn Resorts (WYNN) is growing at 152%. And little China Security & Surveillance Technology (CSCT), which I’ve mentioned here before and which had a nice jump last week, is growing at a rate 
of 550%!

High profit margins :- 
Software companies tend to have very high margins because they deal in code that costs nothing to ship or store, while iron ore companies tend to have very low margins. In recent decades, high-margin stocks have trounced low-margin stocks. But with the recent strength of companies dealing in steel, potash, coal and other bulk commodities, the times may be changing. Jim Rogers, who for years has been trumpeting the new global bull market in commodities, certainly thinks so.

Excellent, innovative management :- 
Henry Ford, Thomas Watson, Ray Kroc, Jack Welch, Walt Disney, Akio Morita, 
Sam Walton, Bill Gates, Larry Ellison, Steve Jobs, Meg Whitman, Jeff Bezos, Martha Stewart, Craig Venter and Dennis Kozlowski (for a while) were (and are) all great managers who led their companies to success by thinking differently. Admittedly, there is no hard and fast measurement of management talent, but because this is the most important characteristic of 
all - and I think it always will be - it’s worth thinking about very hard. Most managers are nowhere near as good as those legends. But when you find a top manager - especially one 
with a record of prior successes - you should give him or her a little extra leeway. Top managers have a way of overcoming obstacles through a combination of vision, enthusiasm and leadership.

These would be straight opposite to Value stocks. Being with High P/E, P/BV, the profits yielded will again be reinvested. Dividend will be very low. These companies be I.T or Bio Technology related now Economical based companies would be (or ) in Highly growing countries / regions / sectors will be taking place. Due to these companies excellent growth net profit may be going on increasing. So that the stock prices may also be hiking. Investors investing in these companies probably consider for Capital Appreciation.    

Thomas Rowe Price Junior can be called as the Growth investing Technic Priest. In 1937, in the name of Rowe Price Associates, started his company. The stocks he purchased was called as “ Rowe Price stocks” by the market. Efficient Management, Better sectors, High Dividend and Profit, beating the Inflation, countries Economy, More growth stocks he invested. 

Moreover, while selecting for growth stocks, he has to come through some characteristics. They are Excellent analyzing facility, less opposition, very low Government restrictions, very low total salary( Good Salary) Minimum 10 % returns, Higher profit ratio, more E.P.S growth etc….. 

Personalities like Warren Buffett, distinguished that growth investing Vs Value investing contains no great difference. According to him value is one Leg, and Growth is another Leg, both are joining in Hip.  

Peter Lynch, is another popular American investor. He has worked in “Fidelity Investment” as Fund Manager for long time. He has written many books ( One up on Wall Street, Beating the Street, and Learn to Earn )are most popular. He united those value and growth investing and termed as GARP ( Growth at Reasonable price ) a new Technic popularly.  

These type of investors choose the stocks based other than the market growth at the same time, Low value stocks. While searching, not reaching the End of both types, instead growth as well as Low P/E stocks. 

While selecting those type of investment method being various scalar factors present 
“PEG” ( Price / Earnings to (EPS) growth) ratio is used more. If it is lower than one then it 
is a better investment. For example the stocks you have selected P/E is 5. That Organizations past 5 years E.P.S growth yearly 10 % then PEG is ( 5/10=0.5 ) In this example PEG Ratio being lower than 1, this can be considered as a better investment.   
 
             

VALUE INVESTING

Among the various types of investing methods let us first see value Investing. First of all what is value Investing.?  Simply saying buying the Stocks at very low price and selling at Considerable higher price is called value Investing. 

In another words Stocks purchased at lower than the ( Intrinsic value ) Real value. If the market value is very lower than the Intrinsic value , the chances of stock prices further more lowering are less. Let us see with an example,   

For example if Onion is cultivated in your own Garden then the actual cost price is Rs.10 / Kg. During season times we can get the same onion for Rs.6 / Kg. So apart from production rate Rs.4 / - is the gain per / Kg. If we are able to get onion at a cheaper cost, less than the real value, then  

1. In houses we can purchase required for 1 to 3 months. 
2. In hotels for Ambulate, Onion dosa etc…..    
           
For example if you have planned to open a Xerox, with cell phone sales and some Stationery items, shop at a cost of Rs. 2 /- Lakhs. Supposing the same kind of shop with complete required facilities what you expect, is available in Rs. 1.5 /- lakhs. What you may do ? You may definitely purchase the shop ! It is called value investing.  

Even stocks, at some times may be available less than the real value. How to pick at those stocks ? For value stocks P / E, P / BV, and several other factors will be low. Dividend yield will be more. In those companies the growth speed , will be low. Like a Tortoise more as slow and steady. Rapid growth expecting investors don’t like these type of stocks.  
              
This pattern of investing was said to the world by Benjamin Graham and David Dodd, the two experts who worked as Professors in Columbia business school, America in the starting of 20th century. Later they wrote a book “Security Analysis” in 1934, a most popular book of the stock market.  
             
At present age, value investor is Warren Buffet, the disciple of Benjamin Graham. John Templeton, Joel Greenblatt, also were best in value investing. The book of value investing named “The Intelligent Investor” written by Benjamin Graham attained world fame.  
            
In English “Intrinsic value” a term will be used. It means a products real value. From our above example the real value of onion is Rs.10/-Kg. But we are able to get at Rs.6/-Kg from the market. i.e. at a discount of 40 % lesser than its real value. If purchased lower than the real value, chances for further reduction, are very less or sometimes Nil. 

Not that alone, value companies  
1. Income 
2. Expenses 
3. Gain or Profits will be steady.  

In future growth prospects can be calculated easily. Since the activities being steady, investment risk is very low. But generally rapid growth expecting companies future cannot be predicted, moreover the risk will be high.  

How to find out the value stocks ?  

The first point to be noted is any stock must not be purchased at more value. Generally in each period a sector / economy will flourish. During that time that sector / economy stocks price will be rising to its peak. Value investors not even face that direction. Moreover they won’t buy any stock. They start selling.  

When the market is at its peak, they won’t buy any stock. In turn, they start selling their stocks. When the entire market being down, value investors tongue may get wet like the waterhole. They wont stop and try to swallow. Stocks bought will be more. Value factors ( such as P/E, P/BV, Dividend etc…. ) whether, are being attractive will be investigated ! What is the margin of safety will be calculated. ( In the above onion example Rs.4/- ( 10 – 6 ) ) Companies cash flow, how stable they are would be monitored. Those companies selling products have overall brand value, when compared to opponents, strength, monetary strength, several things would be analyzed.  
         
Value investing if told shortly, as explained in the book “ The Intelligent Investor”, stocks may not be purchased like perfumes ( scents) instead they can be purchased as provision items. Our people are experts in buying provision items, but they are not applying in buying stocks.           

The characters required for value investing :- 
1.  Patience. 
2.  Self control. 
3.  Ordinary intelligence. 
4.  Investment discipline.  
           
In executing any actions, in the beginning itself, nobody can make a success. Stock investing also not left apart from this. The investors, I have heard playing irrationally following no specific rules and in the end murmur as “Gambling’. Further they also lament as Luck was not bestowed to them, and never enter the direction of stock market. In spite of this, the mistakes committed previously can be recalled, ascertained and a new investment strategy can be handled, and a successful investment experience, can be attempted. In today’s period the Giants of the stock market also, faced many tremendous losses and finally reached the throne. Failures made them success, but not flaggy.        

Value stocks are stocks that are priced lower than the value of the company and its assets. You can identify a value stock by analyzing the company’s fundamentals and looking at some key financial ratios, such as the price-to-earnings ratio. If the stock’s price is lower than the company’s fundamentals indicate it should be (in other words, it’s undervalued), then it’s a good buy — a bargain — and the stock is considered a great value.

DIVIDEND

More gain yielding stocks doesn't provide dividend. More dividend giving stocks doesn't  
yield high gain. But at the same time much more gain and dividend giving stocks are also present. 

Investing in Highest dividend yielding stocks with Long term pattern may reduce the risk taken considerably. Those stock prices rising and lowering need not be bothered by us. Reason for our investment , like Interest, Dividend may be continuously obtained.  

What is Dividend ?  

An Organization sharing a part of gain, profits (yielding) with shareholders is  called 
“ DIVIDEND ”.  A dividend payment made in the form of additional shares, rather than a       cash payout. 

Companies may decide to distribute stock to shareholders of record if the company's availability of liquid cash is in short supply. These distributions are generally acknowledged in the form of fractions paid per existing share. 

An example would be a company issuing a stock dividend of 0.05 shares for each single share held. A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. 

Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own  stock in stable companies even if they are not experiencing much growth. 

Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders also called payout.

How do corporations pay out their excess cash ( excess capital ) to stockholders? 

1. Dividends 
2. Share Repurchases 

Dividend changes are typically viewed as a stronger management signal about future cash flow (since firms are very reluctant to reduce dividends).  However, each method of distributing cash results in cash being paid out.  The value of a firm’s common stock should always be the Present Value of all the future FCFEs that are expected to be paid out to the stockholders how the cash is paid out should be irrelevant. 

Why dividend is given ?  

A Tree planted, watered, fertilized and grown for what purpose? To get good fruits, and enjoy the Breeze, shade. Likewise the same story is happening here also. 

One of the simplest ways for companies to communicate financial well-being and shareholder value is to say "the dividend check is in the mail." Dividends, those cash distributions that many companies pay out regularly to shareholders from earnings, send a clear, powerful message about future prospects and performance. 

A company's willingness and ability to pay steady dividends over time - and its power to increase them - provide good clues about its fundamentals. 

Dividends Signal Fundamentals 

Before corporations were required by law to disclose financial information in the 1930s, a company's ability to pay dividends was one of the few signs of its financial health. 

Despite the Securities and Exchange Act of 1934 and the increased transparency it brought to the industry, dividends still remain a worthwhile yardstick of a company's prospects. 

Typically, mature, profitable companies pay dividends. However, companies that do not pay dividends are not necessarily without profits. 

If a company thinks that its own growth opportunities are better than investment opportunities available to shareholders elsewhere, the company should keep the profits and reinvest them into the business. 

For these reasons, few " growth " companies pay dividends. But even mature companies, while much of their profits may be distributed as dividends, still need to retain enough cash to fund business activity and handle contingencies. 

The progression of Microsoft through its life cycle demonstrates the relationship between dividends and growth. When Bill Gates' brainchild was a high-flying growth company, it paid no dividends, but reinvested all earnings to fuel further growth. 

Eventually, this 800-pound software "gorilla" reached a point where it could no longer grow at the unprecedented rate it had maintained for so long. So, instead of rewarding shareholders through capital appreciation, the company began to use dividends and share buybacks as a way of keeping investors interested. 

The plan was announced in July 2004, nearly 18 years after the company's I.P.O. The cash distribution plan put nearly $75 billion worth of value into the pockets of investors through a new 8 cent quarterly dividend, a special $3 one-time dividend, and a $30 billion share buyback program spanning four years. In 2010, the company is still paying dividends of 1.8%

Characteristics :- 

Income, gain, Yearly ! For many people this is the main criteria of hopefulness for Investment. Nothing surprise in this fact. Any organizations stock prices rising , lowering and the performance of next year can’t be predefined. But the gains acquired , being shared with shareholders cannot be said like that. It can be presumed. 
                                             
An Organization’s aim is to run profitably to ( for ) the Owners  ( Promoters) , that aim’s identity can be said as dividing the gain in the form of Dividend to the share holders. A part of this gain is required for Re-Investment. Balance amount alone can be given as Dividend. 

Best four characteristics of Good stock !

Dividend provide investors with a return on investment even when markets are down. As a result investors get paid to hold their stocks through thick and thin. It is important however to pick a stock selection strategy that fits with your financial goals. A good entry strategy is just the beginning however. Investors should also be following the strategy at all times in order to be successful.

Four important characteristics of successful dividend portfolios include  

a) Entry and exit criteria, 
b) Diversification, 
c) Dollar cost averaging and 
d) Selective dividend reinvestment.

a) Entry / Exit Criteria

Under my current entry criteria I am looking for companies which have consistently boosted annual distributions for at least one decade. The next step is screening whether the dividend is adequately covered, and that the dividend payout ratio does not exceed 50%. 

The only exception to this rule is for certain special investment vehicles such as Master Limited Partnerships, Real Estate Investment Trusts or Utilities, where I look at the trend of the dividend payout ratio. 

I also check to see whether there is earnings growth over the past decade and whether the company has any sustainable competitive advantage. Once the company yields more than 2.50%, has a price earnings ratio of less than 20 and has a dividend payout ratio of less than 50%, I initiate my position in the stock.

I would hold on to the stock as long as dividend payments keep getting increased regularly and would add to the position on dips. An example of an attractively valued dividend stock is Johnson & Johnson (JNJ). 

I would only consider selling if the dividend is cut for whatever reason. If the company stops raising the dividend I hold onto the stock, but I stop contributing new money. 

Currently the three stocks I have stopped contributing new money include M&T Bank (MTB), British Petroleum PLC (BP) and National Retail Properties (NNN). The three companies have failed to raise distributions for more than 4 consecutive quarters, which makes them a hold. 

An example of stocks I sold due to a dividend cut include American Capital (ACAS), which was sold in 2008 when it announced that it would no longer pay a quarterly distribution.

b) Diversification

Traditional dividend stocks included high yielding utility stocks and financials. Most financial stocks cut or completely eliminated dividends over the past two years. If investors should learn one lesson from the financial crisis of 2007 -2009, it should be to diversify your portfolio, in order to generate sustainable dividend income. 

Canadian Income Trust investors also learned a similar lesson in 2006, after the government decided to phase out the royalty trust corporate structure in 2011, sending stock prices and distributions per unit nose-diving. 

It is also important to own more than 30 stocks from as many sectors as possible, in order to prevent an unfortunate downturn in one sector or a few stocks from destroying your chances of generating sustainable dividend income. 

Owning more than 30 stocks makes your dividend portfolio less exposed to individual company risks, although you will still be exposed to overall market risk.

c) Dollar Cost Averaging

After selecting the stocks to include in your portfolio, it is important to spread your purchases as a precaution to avoid paying too high prices. Few if any investors could time successfully the exact highs and lows in the stock market, which is why having a consistent strategy of making prudent purchases every so often would be a good idea. 

Even high quality dividend stocks such as Procter & Gamble (PG) are not immune from market fluctuations. Dollar cost averaging would have been very beneficial to investors in 2007 and 2008, although a lump sum investment in 2009 would have been better.

d) Selective Dividend reinvestment

Dividends could be either sitting there or get reinvested. The beauty of dividends is that it is under the discretion of the individual investor to purchase more stock, buy equity in a different company / investment or spend it another way. 

I do re-invest only a portion of my stocks directly; most other times however I let my dividends accumulate and I either re-invest in the same stocks or in new stocks that have been on my watch list.

Dividends

The Board of Directors must authorize all dividends. A dividend may distribute cash, assets, or the corporation's own stock to its stockholders. Distribution of assets, also called property dividends, will not be discussed here. 

Before authorizing a dividend, a company must have sufficient retained earnings and cash (cash dividend) or sufficient authorized stock (stock dividend). Three dates are relevant when accounting for dividends:
#  Date of declaration.
#  Date of record.
#  Date of payment or distribution.

The date of declaration is the date the Board of Directors formally authorizes for the payment of a cash dividend or issuance of shares of stock. This date establishes the liability of the company. On this date, the value of the dividend to be paid or distributed is deducted from retained earnings. 

The date of record does not require a formal accounting entry. It establishes who will receive the dividend. 

The date of payment or distribution is when the dividend is given to the stockholders of record.

If a company has both preferred and common stockholders, the preferred stockholders receive a preference if any dividend is declared. Having the preference does not guarantee preferred stockholders a dividend, it just puts them first in line if a dividend is paid. 

Preferred stock usually specifies a dividend percentage or a flat dollar amount. For example, preferred stock with a $100 par value has a 5% or $5 dividend rate. Five percent is the $5 dividend divided by the $100 par value. This means all preferred stockholders will receive a $5 per share dividend before any dividend is paid to common stockholders. Some shares of preferred stock have special dividend features such as cumulative dividend or participating dividend.

A cumulative dividend means if dividends are declared, preferred stockholders will receive their current-year dividend plus any dividends not paid in prior years before the common stockholders receive a dividend. 

Owning a share of preferred stock that includes a cumulative dividend still does not guarantee the preferred stockholder a dividend because the company is not liable to pay dividends until they are declared. 

Having cumulative preferred stock simply reinforces the preference preferred stockholders receive when a dividend is declared. If a company has issued cumulative preferred stock and does not declare a dividend, the company has dividends in arrears. Although not a liability, the amount of any dividends in arrears must be disclosed in the financial statements.

The participating dividend feature provides the opportunity for the preferred stockholders to receive dividends above the stated rate. It occurs only after the common stockholders have received the same rate of return on their shares as the preferred stockholders. 

For example, say the preferred dividend rate is 5% and the preferred stock has a participating feature. This means that the preferred stockholders will receive a larger dividend if the authorized dividend exceeds the total of the 5% dividend for the preferred stockholder and a 5% dividend to the common stockholders.

Who decides the Dividend distribution to the share holders ?

The Board of  Directors formed by the Owners, promoters, recommend a dividend value, affordable by  the Promoters Vs Organization. Also Top level Officials thinking will be kept in mind while recommending.  

When a publicly traded company achieves profitability, it can decide to use those earnings to reward shareholders with a cash dividend. If a cash dividend does not make fiscal sense, however, the company may instead choose to issue stock dividends to investors.

Board Approval

Before a company can reward investors with any dividend distributions, either cash    or stock, the decision must be approved by the board of directors. If the board decides a stock distribution which is in the best interest of shareholders and the company, it will vote to approve the suggested payout or an amount it considers appropriate.

Declaration Date

Stock dividend payments are typically announced on a quarterly basis, in sync with   when a company files its earnings report with a regulatory body in a region. 
This is known as the declaration date, and it is followed by a series of other dates that determine which shareholders are eligible for the distribution.

Number of Shares Increases

When a company issues a dividend distribution, it grants investors additional shares, but it also increases additional shares in the stock market. 
This means that the amount of stock held by investors becomes diluted as the share price drops because there is a greater number of shares outstanding. 

When Dividend ? 

Dividend distribution if approved, then the next question is when it can be given. In each Organization to register and to maintain the stock records a person named “REGISTRAR” will be found. In his records on a particular day, the owners of all the stock holders, obtained are only eligible for Dividend. That date can be called as Registration date (or ) Record date.  
                      
Supposing if we are buying stocks on record date, can we get Dividend. Certainly no. Stocks purchased from a Owner, must be informed to the Registrar. After 1 or 2 days his registration will be renewed. So before registration date ( say 1 or 2 days ) Ex-Date will be decided. This decision will be taken by Stock market and not the said Organization. 

Stocks purchased before Ex-Date, that business will be recorded before record date. Stocks purchased after Ex-Date dividend may not be available. So that the Business before Ex-date can be called as cum Dividend and after Ex-Date can be called as Ex-Dividend.  
                                                                       
The above Record date, Ex-date, matters for dividend signifies others also such as Bonus, Split, Rights shares  ( rights ) and all types of Benefits. 

Let us imagine 2 Companies A and B  
Company stock price                            Dividend Yield  
A Rs.100                                               5   
  B Rs.100                                               1  

Dividend yield of those 2 companies A and B are 5 and 1 %. After 5 years let us consider the stock prices of A as 100 and B as 1500. The same 5 and 1 % dividend is given. Now  Rs.5 /- for A and for company B Rs.15 /- will be obtained as Dividend. 

If merely watching the percentage of dividend yield, we would have lost the entire benefits and also the joy of stock price hike in investment.