Chapter 1

OVERVIEW
A Broad Map of the Territory
 Outline
• Investment Alternatives
• Investment Attributes
• Investment versus Speculation
• Financial Markets
• Portfolio Management Process
• Approaches to Investment Decision Making
• Common Errors in Investment Management
• Qualities for Successful Investing
• Three Approaches to Succeed as an Investor
 Investment Alternatives
Investment
Avenues

Government Saving
Deposits
Schemes

Money Market Bonds or

Mutual Fund
Equity Shares
Schemes

Insurance Retirement

Products Products

Precious
Real Estate Objects

Derivatives
 Investment Attributes

• Return

• Risk

• Liquidity

• Tax shelter

• Convenience
 Evaluation Of Various Investment Avenues
Return Marketability/
Current yield Capital Risk Liquidity Tax Shelter Convenience
appreciation
Equity
Low High High Fairly high High High
Shares
Non-
convertible High Negligible Low Average Section 80 High
Debentures C benefits
Equity
Low High High High High Very high
Schemes
Debt No tax on
Moderate Low Low High Very high
Schemes dividends
Bank
Moderate Section 80 C Negligible High Section Very high
Deposits
benefits 80 C
benefits
Public
Moderate Section Section 80 C
Provident Section 80 C Average Very high
80 C benefit
Fund benefits
benefits
Life
Section Section 80 C
Insurance Section 80 C Moderate Average Very High
80 C benefit
Policies benefits
benefits
Residential
Moderate Moderate Negligible Low High Fair
House
Gold and
Section 80 C Moderate Average Average Section 80 Average
Silver
benefits C benefits
 Investment Vs. Speculation
Investor Speculator

• Planning Horizon Long Short

• Risk Disposition Moderate High

• Return Expectation Modest High

• Basis for Decision Fundamental Technical

• Leverage No High
CLASSIFICATI ON OF FINANCIAL MARKETS

DEBT MARKET
NATURE OF CLAIM
EQUITY MARKET

MONEY MARKET
MATURITY OF CLAIM
CAPITAL MARKET

PRIMARY MARKET
SEASONING OF CLAIM
SECONDARY MARKET

CASH OR SPOT MARKET

EXCHANGE-TRADED MARKET
ORGANISATIONAL
STRUCTURE OVER-THE-COUNTER MARKET
Interrelationship among Various Phases of
Portfolio Management
Specification of investment objectives and constraints

Quantification of capital market expectations

Formulation of portfolio strategy

Selection of securities

Portfolio execution
Investment
implementation
and review
Portfolio revision

Portfolio evaluation
 Approaches To Investment
Decision Making

• Fundamental approach
• Psychological approach

• Academic approach

• MP ≃ IV
• Random walk
• Positive link..Risk & return

• Eclectic approach
Common Errors In Investment Management
Investors appear to be prone to the following errors in managing their
investments.
• Inadequate comprehension of return and risk
• Vaguely formulated investment policy
• Naïve extrapolation of the past
• Cursory decision making
• Simultaneous switching
• Misplaced love for cheap stocks
• Over-diversification and under-diversification
• Buying shares of familiar companies
• Wrong attitude toward losses and profits
• Tendency to speculate
 Qualities for Successful Investing

• Contrary thinking

• Patience

• Composure

• Flexibility and openness

• Decisiveness
 Three Approaches to Succeed
As An Investor
• Physically difficult approach
• Intellectually difficult approach
Ben Graham : Quantitative
Navigator
J.M. Keynes : Insights..Markets
psychology
John Templeton : Bargain Stocks
Warren Buffett : Value Investing
George Soros : Reflexivity
Principle
Peter Lynch : Flexibility
SP. Talent …Diligently Honed & nurtured
• Psychologically difficult approach
• Develop an investment policy and adhere to it consistently
• Do not forecast stock prices
• Rely more on hard numbers and less on
judgment
• Maintain a certain distance from the
marketplace
• Face uncertainty with equanimity
 Summing Up
• A bewildering range of investment avenues is available.
• For evaluating an investment, the following attributes are
relevant: rate of return, risk, marketability, tax shelter, and
convenience.
• A financial market is a market for creation and exchange of
financial assets.
• Financial markets can be classified by the nature of claim,
maturity of claim, seasoning of claim, timing of delivery, and
organisational structure.
• Portfolio management is a complex activity which can be
broken down into a series of steps.
• The stock market is thronged by investors pursuing diverse
investment strategies.
• Investors are prone to various errors
• The qualities of contrary thinking, patience, composure,
flexibility, and decisiveness are required to succeed in the
investment game.