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D. Murali

WHEN the overworked voting machines get tallied up at the counting centres after the ongoing polls, will the result go in favour of the best candidate? What a naïve expectation, like wishing the bourses to be quick indicators of company worth!

Which is why Benjamin Graham said, "In the short-term, the markets are like voting machines, but over the long-term they are like weighing machines."

The fundamental analyst knows that price of a stock, over the long term, will "align with its underlying economic value," explains a recent book titled Technical Analysis and Fundamental Analysis of Companies, from the Indian Institute of Banking & Finance (www.iibf. org.in) and Taxmann (www.taxmann.com).

"Fundamental analysis determines the worth of a business by its future expected earnings potential which, in turn, depends on such fundamental factors as quality of company's management, business outlook for the company, outlook for the industry the company operates in, and the economic backdrop," explains the book.

The `art' of technical analysis or `charting' is in identifying trend changes at an early stage, as Martin J. Pring had said. Here, you extrapolate future price movement not on the basis of company fundamentals but on "historical chart patterns and how the stock has fared recently in relation to support and resistance levels."

Before you take sides on the `fundamental vs technical' issue, the book points out "one fundamental flaw in technical analysis" — that the market will always perfectly evaluate a security based on all known information. Please also note that fundamental analysts need not agree because it all depends upon their "individual perception of the future outlook of the company."

The book has chapters on the process of investment decision-making, efficient market hypothesis, and analysis of economy, industry and company.

Thus, when discussing `economic analysis,' there is an example of how demand of pharmaceuticals is sensitive to growth rate of population and per capita income. The chapter on `valuation' explains two types of models: `discounted cash flow' (DCF) and `relative'. DCF relies on present value, and the simplest type is the `dividend discount model' or DDM, which assumes that dividends are the only cash flows that the investor expects to receive from an equity investment.

`Free cash flow to firm' or FCFF is an alternative, and it considers "cash flow available after all direct costs and investments but before any payments to the capital suppliers."

A book you may invest in if there's some free cash to spare.

Silent risks and floater policies

ANOTHER book from IIBF and Taxmann is Insurance Products & Services.

It starts with a simple definition of insurance as "a means for protection of the economic value of assets," and proceeds through chapters on the organisation of typical insurance company, regulation and legislation applicable to insurance, life insurance, group life products, and other types of insurance. Let me quiz you on some concepts.

Any idea about riders? You ask, "Who?" No, these are special policy provisions "to expand or limit the benefits otherwise payable".

Examples of riders are `days of grace', `revival', and `non-forfeiture'. The last one is "a very valuable privilege to the life assured in case the premiums are not paid." In health insurance, you may come across `dreaded disease rider'.

I know you dread questions more, but let me move on to the next poser: What's GLES? Answer: Group Leave Encashment Scheme. Remember that the Accounting Standards of the Institute of Chartered Accountants of India mandate employers to fund the leave encashment liability.

Well, you know Lalji, but what's LALGI? Here's a clue: "It is the world's largest group insurance scheme." Yes, LAL is for landless agricultural labourers, and the government bears the premium for insuring beneficiaries for Rs 2,000.

There's `silent risk' that fire insurance discussion cannot be silent about. If you're drowning in worries over stock lying at different locations, think of `floater policy'. Towing charges in motor insurance apply when the vehicle "is disabled as a result of damage covered by the policy", and so the insurer bears "a reasonable cost to tow the vehicle to a place of repairs." Bear in mind that `exclusions' to a comprehensive policy include `loss when vehicle is driven under intoxication'.

Overseas medical cover has seen many a change over the years. "Originally introduced in 1984, the policy was modified in 1991 as Employment & Study Policy; and a fully revised Videsh Yatra Mitra Policy was introduced in 1998. This final version of the policy covers several aspects of foreign travel that go beyond the ordinary, such as loss of passport, personal accident, and so on."

To conclude, one last question. What is AOA/ AOY? If you're running for cover already, the answer is Any One Accident/ Any One Year, the usual options in indemnity insurance.

BookValue@TheHindu.co.in

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