What ever is bought with money needs to be monitored and managed. You cannot manage if you don’t monitor it effectively.
Both inventory and investment are bought with money and how they help you earn returns is measured. In inventory, the turn over of the inventory or the rate at which the inventory is rotated is a measure. Many traders and distributors operate on a thin margin of as low as 2% and rotate the inventory multiple times with the same capital to maximise their returns.
Similarly, Return of Capital employed is a measure and this for investor means Return on Investment ( This is the sum of capital appreciation and dividend earned)
Inventory management is an important one in all organisations and also households.
Though inventory is counted as current assets, it will become a liability if not managed effectively.
We don’t buy anything because we have money.
Understanding of Inventory Management
Let us understand how inventory is managed.
There are different control mechanism and methods in managing inventory. At least you can count 9 important ones.
The most common ones which we can look at are
This is done based on valuations of the individual parts. Generally 20% of the parts constitue 80% of the total value of inventory and major attention is given to manage the parts of high value which are known as A. The least value items are classified as C
In the second one, VED analysis, the classification is done based on importance of the part. A part which is when not available, can halt a manufacturing process, or difficult to get, and a combination of these determine its vitality and Similary, E is essential and D deisrable.
This analysis supercedes the previous one, as it is on vitality and not on price.
The FSND focuses on the rate of consumption of the parts whether they are fast moving, slow moving or even Dead inventory.
Understanding of Portfolio management
Like wise when you do an investment, do you review your portfolio.
Construct a portfolio and identify the stocks you must hold, which are vital for the portfolio.
This may vary with individuals as the investment horizon, objective and risk tolerance would vary.
Having too many desirable stocks, compromising on vital stocks, may lead to lower portfolio return.
This is normally done, drilling down sector wise and picking the stock that you must have in your portfolio.
For example, you may identify L&T in the capital goods sector which could be vital for you, Siemens could be an essential stock and stocks like, VA Tech vabag or carborandum universal could be desirable one.
2. FSND Analysis
Though this cannot be adapted like inventory management, identify stocks which are not performing well and see no scope but you have in your portfolio.
Some of you may still be holding Jayaprakash associates, Unitech, Indian overseas bank. Which or either dead or recovery would be very long. These are Dead and D in the FSND technique.
FSN, can be us can also be linked to the ability to liquidate the stocks at the earliest, large caps, midcaps will have a great liquidity. There are few illiquid stocks, like Benares hotels, which is a TATA group stock and trading thing. Depending on the return, liquidity and availabilty of capital
3. ABC analysis
Unlike in inventory, this is redundant. Our primary focus would be earn return and reduce risk and reduction of risk done using diversification.
But generally investors have myth and that is stocks which are over say Rs. 1000 are costly and stocks less than 100 or even 50 are cheaper.
Bajaj Finance moved from 4000 in April 15 and is now at 10000 though it is trading trading at 1000 after bonus and split.
Have ABC in relation to the value the stock offers and not the price.
Therefore to sum up, use the grid below and pick your stock.
Summary & Takeaways
Know what you want to do with your investment.
Clarity of purpose and clarity of action are
There are three types of assets
A appreciating asset which creates wealth over time
A depreciating asset, which depreciates your investment, but does not erode the wealth.
A dead asset, depreciates and becomes a liability. Know what you have, monitor and manage it
It is possible you may not know and understand the above. Have a chat with your advisor
Do contact me for any clarifications.