IMPORTANT NOTICE

Dear Friends

For the past few days I am receiving lot of queries from my readers asking whether I am running any paid service. Today  received an SMS as shown below .

In this subject , I would like to again clarify that I am NOT PROVIDING ANY SUCH  SERVICE , and in no way responsible for any loss arising out of such recommendations provided by the persons/entities using the name ‘Valuepick’ in their communication.

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Basic Cocepts of Cash Flow

 Courtesy : Investopedia

Cash flow analysis is a critical process for both companies and investors. It’s also a complex process that can leave the average investor with the feeling that delegating security analysis to a competent financial advisor just might be a good idea. If you aren’t an accountant or a Chartered Financial Analyst, but you want to have a better understanding of what “cash flow from investing” means to business and investors alike, there are just a few basic concepts that you need to understand. 

Cash Flow Components

Corporate cash flow statements include three components:

  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows from financing activities

Cash flows from operating activities refers to money generated by a company’s core business activities. This number highlights the firm’s ability (or inability) to make a profit. While it provides good insight into whether or not the firm is making money, the other components of the cash flow statement also need to be taken into consideration in order to develop a more complete picture of the company’s health.
Consider “cash flows from investing.” Intuitively, cash flows from investing may sound like the amount of money a company generates from investments it has made, but the accountants who fill out corporate balance sheets are generally not referring to the number of shares of IBM the company has bought or the number of municipal bonds it has sold. Rather, from a corporate perspective, they are generally referring to money made or spent on long-term assets the company has purchased or sold. 



Upgrading equipment and buying another company to take over its operations and gain access to its clients and technology are investment activities from a corporation’s point of view. Both of these activities cause companies to spend money, which is captured on a cash flow statement as negative cash flow. Similarly, if a company sells off old equipment or sells a division of its operations to another firm, these activities are also captured on paper as income from investing.

Cash flow from financing activities measures the flow of cash between a firm and its owners and creditors. Corporations often borrow money to fund their operations, acquire another company or make other major purchases. Timely operational expenditures, such as meeting payroll requirements, would be one reason for cash-flow financing. Companies are essentially borrowing from cash flows they expect to receive in the future by giving another company the rights to an agreed portion of their receivables. This allows companies to obtain financing today, rather than at some point in the future. 

What It Means to a Business

Cash flow is a key element of a successful business. Generating positive, sustainable cash flow is critical for a firm’s long-term success. Keeping track of that cash flow is particularly important to business owners. The way that cash flow is captured and tracked plays a significant role in how businesses project their financial health to potential investors. A brief overview of cash and accrual accounting provides insight into the way accounting rules require companies to record revenues and expense.

For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year.
Accrual accounting, however, says that the cash method isn’t accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn’t yet in the bank, the sale is booked to an account known in accounting lingo as “accounts receivable,” increasing the seller’s revenue. 


What It Means to an Investor

Cash flow from operating activities is an important source of data for investors. Net income, depreciation and amortization, as well as changes in working capital, are included in this section of the corporate cash flow statement. The net number can be positive or negative.

As noted earlier, cash flow from financing activities measures the flow of cash between a firm and its owners and creditors. Negative numbers can mean the company is servicing debt but can also mean the company is making dividend payments and stock repurchases, which investors might be glad to see.
While “negative” cash flow doesn’t sound good, it isn’t always bad – sometimes you’ve got to spend money to make money. Companies need to invest in their businesses in order to grow. Of course, red ink can’t be the only color on the statement. Conversely, high cash flow doesn’t mean the company is in good shape – it may just be selling off assets. Non-recurring revenues such as making $1 billion by selling off a division boost cash flow, but that division can’t be sold again next year. When reviewing the numbers, it is critical that income generated by such non-recurring events as sale of fixed assets, securities, retirement of capital obligation or litigation be taken into proper consideration. Any or all of these numbers could represent a one-time profit or loss that would distort the firm’s prospects if viewed as recurring items.

The Bottom Line
 
Clearly, cash flow analysis is complex, but a useful topic for investors when analyzing the health of a specific company. Just keep in mind that a company’s cash flow statement is only one source of data providing insight into a firm’s health. Think of it as a compressed version of the company’s checkbook that includes a few other items that affect cash, like the financing section, which shows how much the company spent or collected from the repurchase or sale of stock, the amount of issuance or retirement of debt and the amount the company paid out in dividends. Other important sources of information include a firm’s balance sheet and income statement. Be sure to conduct a thorough review of all relevant data before making an investment decision. If you have any doubts about your ability to sort through the numbers and make a good decision, there are plenty of professionals available to provide assistance with your stock selection needs.

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The Art Of Cutting Your Losses

One of the most enduring sayings on Wall Street is “Cut your losses short and let your winners run.” Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.No one will deliberately buy a stock they believe will go down in price and be worth less than what they paid for it. However, buying stocks that drop in value is inherent to the nature of investing. The objective, therefore, is not to avoid losses, but to minimize the losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article, we’ll help you stand out from the crowd and show you how to identify when you should make your move.
 Reasons Investors Hold Stocks With Large Unrealized Losses

In spite of the logic for cutting losses short, many small investors are still left holding the proverbial bag. They inevitably end up with a number of stock positions with large unrealized capital losses. At best, it’s “dead” money; at worst, it drops further in value and never recovers. Typically, investors believe that the reason they have so many large, unrealized losses is because they bought the stock at the wrong time or it was a matter of bad luck. Rarely do they believe it is because of their own behavioral biases.
Let’s look at a few of these biases:
  • Stocks Always Bounce Back – Don’t They?
    A glance at a long-term chart of any major stock index will see a line that moves from the lower-left corner to the upper right. The stock market, over any long time period, will always make new highs. Knowing that the stock market will go higher, investors mistakenly assume that their stocks will eventually bounce back. However, a stock index is made up of successful companies. It is an index of winners. Those less successful stocks may have been part of an index at one time, but if they’ve dropped significantly in value, they will eventually be replaced by more successful companies. The indexes are always being replenished by dropping the losers and replacing them with winners. Looking at the major indexes tends to overstate the resiliency of the average stock, which does not necessarily bounce back. In fact, many companies never regain their past highs and some go bankrupt.
 Investors Do Not Like Admitting They’ve Made a Mistake
 
By avoiding selling a stock at a loss, many investors do not have to admit to themselves that they’ve made a judgment error. Under the false illusion that it is not a loss until the stock is sold, they elect to continue to hold a losing position. In doing so, they avoid the regret of a bad choice. After a stock suffers a loss, many investors plan to hold onto it until it returns to its purchase price. They intend to sell the stock once they recover this paper loss. This means they will break even, and “erase” their mistake. Unfortunately, many of these same stocks will continue to slide.
  • Neglect.
 
When stock portfolios are doing well, investors often tend to them like well-maintained gardens. They show great interest in managing their investments and harvesting the fruits of their labor. However, when their stocks are holding steady or are dropping in value, especially for long time periods, many investors lose interest. As a result, these well-maintained stock portfolios start showing signs of neglect. Rather than weeding out the losers, many investors do nothing at all. Inertia takes over and, instead of pruning their losses, they often let them grow out of control.
  • Hope Springs Eternal.

Hope is the belief in the possibility of a positive outcome, even though there is some evidence to the contrary. Hope is also one of the primary theological virtues in various religious traditions. Although hope has its place in theology, it does not belong in the cold hard reality of the stock market. In spite of continuing bad news, investors will steadfastly hold onto their losing stocks, based only on the faint hope that they will at least return to the purchase price. The decision to hold is not based on rational analysis or a well-thought-out strategy; and unfortunately, wishing and hoping that a stock will go up does not make it happen.
     . Realizing Capital Losses

Often you just have to bite the bullet and sell your stock at a loss before those losses get bigger. The first thing to understand is that hope is not a strategy. An investor has to have a logical reason to hold a losing position. The second point is, what you paid for a stock is irrelevant to its future direction. The stock will go up or down based on forces in the stock market, the stock’s underlying fundamentals and its future prospects.
Let’s look at a few ways of assuring a small loss does not become “dead” money or turn into a much larger loss.
  • Have an Investment Strategy
    Having a written investment strategy with a set of rules both for buying and selling stocks will provide the discipline to sell stocks before the losses blossom. The strategy could be based on fundamental, technical or quantitative factors.
  • Have Reasons to Sell a Stock
 
An investor generally has quite a few reasons why he or she bought a stock, but typically no set boundaries for when to sell it. Don’t let this happen to you. Set reasons to sell stocks, and sell them when these things occur. The reason could be as simple as: “Sell if bad news is released about corporate developments”.
  • Would You Buy the Stock Now?
 
On a regular basis, review every stock you hold and ask yourself the simple question: “If I did not own this stock, would I buy it today?” If the answer is a resounding “No”, then it should be sold.
Tax-Loss Harvesting Strategies

A tax-loss harvesting strategy is used to realize capital losses on a regular basis and provides some discipline against holding losing stocks for extended time periods. To put your stock sales in a more positive light, remember that you receive tax credits that can be used to offset taxes on your capital gains.
 Conclusion
 
Taking corrective action before your losses worsen is always a good strategy. In investing, avoiding losses entirely may not be possible; successful investors accept this and try to minimize their losses rather than avoid them. Selling a stock at a loss and receiving a tax credit is one benefit you will receive. Selling these “dogs” has another advantage too – you will not be reminded of your past mistake every time you look at your investment statement.

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