MARKOWITZ PORTFOLIO ANALYSIS: APPLICATION AND EVALUATION IN INDIAN STOCK MARKET

12.9.2023 Update

Came across a related paper

Kim, Jang Ho; Kim, Woo Chang; Lee, Yongjae; Choi, Bong-Geun; Fabozzi, Frank J. (2023) “Robustness in Portfolio Optimization,” Journal of Portfolio Management, online published.

Stock Portfolio Analysis Using Markowitz Model

Indah Nur Safitri  , Sudradjata, Eman Lesmanaa

Department of Mathematics, Faculty of Mathematics and Natural Sciences, Padjadjaran University, 

INDONESIA.

International Journal of Quantitative Research and Modeling

Vol. 1, No. 1, pp. 47-58, 2020

Available online at http://ijqrm.rescollacomm.com/index.php/ijqrm/index

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16.2.2012

This paper provides the procedure optimal portfolio development using real life data on equity shares and Markowitz Portfolio Analysis.

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INTRODUCTION

Harry Markowitz (1952) published the portfolio analysis method in 1952. Using this method, an optimal portfolio can be determined for an investor who can specify his risk level. Expected return and standard deviation of return for each security and correlation coefficient (or covariance) of return for each pair of securities in the set of  securities that are considered for inclusion in the portfolio are required as data inputs for doing the portfolio analysis. Even though the method proposed by Markowitz is a normative method and detailed implementation steps were described by Markowitz (1959) in a book, the implications of the method were better captured in the equilibrium condition for the risky asset market (Harrington, 1983) and its application in portfolio formation and revision was relatively neglected.  It is difficult to find in the published literature an example for the application of the Markowitz portfolio analysis to real life data based on quantitative expectations of investors or analysts.  We may presume that analysts in stock broking companies and mutual funds and other professional investment organizations may be using the analytical method, but still descriptions of its application are not made available for the public at large. In this paper, the optimal portfolio formation using real life data subject to two different constraint sets is attempted. The objective of the research is to provide an example of optimal portfolio development using real life data.

 

INPUTS REQUIRED FOR PORTFOLIO ANALYSIS

 

For performing the portfolio analysis using the Markowitz method, we need the expected return for the period of holding for each of the securities to be considered for inclusion in the portfolio. We also require the standard deviation of the return for each security. In addition we have to know the covariance (or correlation coefficient) between each pair of securities among all securities from which we have to form the portfolio.

 

The model proposed by Markowitz points out to the need for estimating expected returns in quantitative terms. But this line of enquiry (estimating expected returns over a period of time) was not pursued further adequately in the literature. That may be one of the reasons, why papers outlining the application of the model to real life data were in short supply. Analysts were giving their anticipation regarding the performance of various securities in twelve months or one year ahead even in 1920s. But Benjamin Graham (1940), known as Dean of Wall Street, was not in favor of such analysis. This analysis slowly developed into prediction of target prices 12 months ahead for many securities. These target price predictions can be used to determine the expected returns for one year holding period. Using the target price predictions to determine 12-month expected returns and then using these expected returns to form the optimal portfolios is a feasible and rational line of approach. This approach to quantitative investing is proposed and initiated in this paper.

 

To estimate standard deviations and covariances, past data can be used (Grinold and Kahn, 2004). The historical risk measures of securities are more stable in comparison to historical expected return measures.

 

RESEARCH ON TARGET PRICES

 

Research on target prices is of recent origin. Bradshaw (2002) has examined the frequency with which analysts have used target prices to justify their stock recommendations. He reported that in two thirds of the sample reports that were examined by him, analysts used target prices. The target prices were determined using price multiple heuristics, with PEG (price earnings growth ratio) as one of the important rule for specifying the price-earning (P/E) multiple.

 

Asquith et al. (2004) have examined the performance of target prices set by analysts of All-American Analyst award winners for the period 1997-99. They examined whether the price of the security crossed its target price within 12 months after the recommendation.  When this definition of accuracy was used, the authors have found that 54% of the price targets were achieved or exceeded. Even in the case of remaining 46% of the securities or recommendations, on average 84% of the price target was found to be achieved. This performance is very creditable. But we have to notice that these price targets were targets of award winners, where the award itself was based on their performance. So, to generalize the findings, we require studies of more representative samples.   

 

Bradshaw and Brown (2005) have examined the accuracy of 12-months-ahead target price forecasts over the period 1997-2002. They reported that on an average 24 to 45 percent of forecasts were met. Analysts have shown more skill in forecasting company earnings compared to forecasting target prices. This study generated interest in study of success rate of target price forecasts.

 

Gleason et al. (2006) have examined the performance of target prices over the period 1997-2003. According to this study, the buy recommendations have an average target return of 28 percent. They analyzed results over quintiles.  In the most accurate quintile, 57% of the targets were achieved or exceeded within the 12 month period. In the least accurate quintile, the success rate was found to be 49%.  The interesting finding of the study is that the return that would have been earned by selling each of the securities with buy recommendations at their maximum prices within the 12 months is 42.49% even in the case of lowest quintile.  One needs to compare this 42.49% with average target return of 28%. These studies do provide evidence that target price estimates have utility to investors for their decision making. They also provide the evidence that investors, traders and fund managers are encouraging analysts to provide target prices and many analysts are providing them.

USE OF TARGET PRICES IN PORTFOLIO FORMATION

 

If target prices have information content that is useful to earn return over 12-month horizon, portfolios can be formed using the target prices as the basis. The expected return can be determined as the difference between the target price and the current market price on the date of portfolio analysis and this can be expressed as percentage of current market price on the date of portfolio formation. If the investor/trader has this information with him, an optimal portfolio can be specified for him using Markowitz portfolio analysis.

 

APPLICATION OF MARKOWITZ PORTFOLIO ANALYSIS IN PRACTICE

 

Markowitz portfolio analysis gives as output an efficient frontier on which each portfolio is the highest return earning portfolio for a specified level of risk. It basically calculates the standard deviation and return for each of the feasible portfolios and identifies the efficient frontier, the boundary of the feasible portfolios of increasing returns. The financial planners help the investors/traders to arrive at the risk level that they can assume. If the investor/trader specifies his risk level in terms of standard deviation of the portfolio return, the appropriate portfolio for him can be identified using the efficient frontier. Hence the final portfolio selection for an investor/trader requires the combination of portfolio analysis and financial planning.

     

APPLICATION OF MARKOWITZ PORTFOLIO ANALYSIS IN INDIAN STOCK MARKET

 

Sources of Data: Valueline is a monthly bulletin published by Sharekhan (2005) a broking firm in India. The bulletin contains the target price information and the market price on the date of publication for various stocks researched and recommended by the firm. The data from the bulletin of July 2005, which was made available on the website of the firm for public access, is selected for getting the data of expected returns. Target price data was available for 43 companies. Covariance is to be calculated using 25 months closing price data. The monthly closing price data was taken from Prowess, an electronic data base of balance sheet and share price data of Indian companies published by Centre for Monitoring Indian Economy (CMIE, Mumbai). Out of the total 43 companies, for two companies, data was not available for the full 25 months. These two companies were dropped from the set of securities considered for forming the portfolio.  Hence, the final list of stocks considered for portfolio analysis contains 41 companies.

 

Calculation of Input Variables: The expected returns were calculated as the difference between target price and current market price of each security, expressed as a percentage of current market price. Monthly returns, required to determine the covariances, were calculated for each company from the monthly closing prices. The covariance matrix for the 41 stocks was calculated using excel covariance function. The monthly covariance between each pair of securities was converted into annual covariance by multiplying it with 12. The input data of expected returns and covariance matrix were thus made ready for the next step in the analysis.

 

Portfolio Analysis: The software used is the excel optimizer by Markowitz and Todd (2000) described in the book ‘Mean Variance Analysis and Portfolio Choice’. The software was supplied by Todd on request by the author. The software can handle up to 256 securities.

 

The software requires as input the expected returns of each security, covariance matrix for the set of securities from which the portfolio is to be formed, lower and upper bounds for the proportion of each security in the portfolio and additional constraints if any.

 

In the first alternative, the portfolio analysis was done with lower and upper boundary for investment in a single security as zero (zero percent) and one (100 percent) respectively. The additional constraint specified is that the sum of the proportions of all securities has to be one or 100%, the amount available for investment. In the second alternative, the analysis was done with the constraint for individual security holding for mutual funds in India, which is a maximum of 10% of the portfolio in a single security. In this case, the lower and upper bounds are 0 and 0.1. The constraint that the sum of all proportions add to 1 or 100% remains. The results are reported in Tables 1 to 4.

 

RESULTS AND FINDINGS

 

The 12 month target prices and current market price on 30^th June 2005 for the companies included in the set considered for analysis are shown in Table 1. The expected returns for the following 12 months determined from them are shown in column 5 of the Table 1. The covariance matrix for the set of securities is shown in Table 4.

The output of the portfolio analysis for alternative 1, lower bound zero and upper bound 1 for each security, is shown in Table 2. Corner portfolios describe the efficient frontier. Between any two adjacent corner portfolios, the efficient frontier is a straight line, a weighted average of the two corner portfolios. The analysis returned 23 corner portfolios. The minimum return portfolio has an expected return of 13.54% and standard deviation of 14.35%. The maximum return portfolio has an expected return of 95.96% and standard deviation of 36.12%.

Investor has to decide the risk level (standard deviation) he wants to bear to select the optimal portfolio from this efficient frontier. This action involves consultation with financial planners. For illustration, if the investor chooses a risk level of 20.27%, the corner portfolio number ‘9’ becomes the optimal portfolio. The expected return of this portfolio is 55.98%. The portfolio is a combination of 9 shares. The proportion or percentage recommended for investment in various securities being:

1. X(2) =     3%

2. X(3) =   13%

3. X(9) =   30%

4 X(14) =   3%

5. X(16) = 35%

6. X(17) =  4%

7. X(34) =  9%

8. X(38) =  2%

9. X(40) =  1%

The total adds up to 100%.  The names of companies represented by identifiers X(2), X(3) etc. can be read from Table 1.

In Table 3 are shown the results of portfolio analysis when restrictions on investment imposed on mutual fund portfolios in India are specified in the constraints. The restriction is that upper bound, the proportion invested in any single company’s equity shares, is to be less than 10% of the NAV of the scheme. Accordingly lower bound is specified as zero and upper bound is specified as 0.10. 52 corner portfolios form the efficient frontier in this alternative. The minimum return portfolio has an expected return of 14.02% and standard deviation of 15.59%. The maximum return portfolio has an expected return of 50.64% and standard deviation of 29.35%. It is interesting to compare risk-return characteristics of the maximum return portfolio of alternative 2 with the portfolio selected as an illustration in alternative 1 (55.98% and 20.27%). The expected return is more and standard deviation is lower in the latter case. Thus the constraints imposed through regulation on mutual fund investment are generating an inferior or suboptimal portfolio in this case.

The performance of these two portfolios is compared over one year period from July 05 to June 2006. The mutual fund portfolio (Exp. Ret: 50.64% and Risk: 29.35%) shows a return of 58.4% with 23.13% standard deviation. The other portfolio (Exp. Ret: 55.98% and Risk 20.27%) shows a return of 21.25% with a standard deviation of 21%. As the returns are expected to be more unstable and risk measures are expected to be relatively more stable, the observed performance can be rationalized in such a simple comparison of performance of the two portfolios over one period. Empirical studies to evaluate the superiority of one-year horizon optimal portfolios formed using quantitative methods have to use number of one year periods in the sample.

CONCLUSION AND FUTURE SCOPE FOR RESEARCH

Markowitz’s portfolio analysis can be operationalized and applied to real life portfolio decisions. The 12-month ahead target prices being published for various securities by security analysts can be used as the input for determining expected returns over the next 12 months. The optimal portfolios generated by the portfolio analysis represent the optimal policy for the investor who wants to use the target price estimates rationally.

Acceptance of the methodology for developing and revising portfolios based on target prices provides scope for further research into improving the estimates of the inputs used for portfolio analysis. Also research is to be done to evaluate the performance of the optimal portfolios, in comparison to portfolios formed without using quantitative portfolio analysis models, over a long period of time.

Review of literature reveals that research into the utility of target prices is initiated. Research needs to be extended to find out which target price finding methods are working better. Regarding covariance estimates, Grinold and Kahn (2004) have mentioned that there is possibility of estimation errors in case historical data over a lower number of monthly periods in comparison to number of securities considered for portfolio analysis are used. They suggest structural models. Researchers have to come out with useful models which investors can use on the basis of published data.

Regarding the software for portfolio analysis, the Todd’s program can handle 256 companies. In any particular country, brokers do not normally come out with more than 256 buy recommendations at any point in time. Hence, the software program may not be a limitation. But certainly there will be scope to improve the software, as more and more investors use the methodology, and thereby need efficient and easy to use software with more facilities to come out with various measurements.

REFERENCES

Ascquith, Paul, Mikhail, Michael B., and Au, Andrea S. “Information Content of Equity Analyst Reports.”  MIT Sloan Working Paper 4264-02, 2004.
 
Bradshaw, Mark T. “The Use of Target Prices to Justify Sell-Side Analysts' Stock Recommendations.” Accounting Horizons, March 2002, Vol. 16, no. 1, pp. 27-41.
 
Bradshaw, Mark T. and Brown, Lawrence D. “Do Sell-side Analysts Exhibit Differential Target Price Forecasting Ability?” Working Paper, 2005, Available at SSRN_ID926400_code175449.pdf.

Gleason, Cristy A., Johnson, Bruce W., and Li, Haidan. “The Earnings Forecast Accuracy, Valuation Model Use, and Price Target Performance of Sell Side Equity Analysts.” May, 2006 Available at http://www.nd.edu/~carecob/Paper%20Links/Su'06%20Conf/Gleason%206-06.pdf.
 

Graham, Benjamin, and Dodd, David.  Security Analysis, 2^nd Edition, New York: McGraw-Hill Book Co., 1940.

Grinold, Richard C., and Kahn, Ronald N. Active Portfolio Management, 2^nd Edition, New Delhi: Tata McGraw-Hill Pub. Co., 2004.

Harrington, Diana R. Modern Portfolio Theory & Capital Asset Pricing Model, Englewood Cliffs: Prentice-Hall Inc.,1983.

Markowitz, Harry. “Portfolio Selection.” Journal of Finance, March 1952, Vol. 7, no.1, pp. 77-91.

Markowitz, Harry. Portfolio Selection: Efficient Diversification of Investments, New York: John Wiley & Sons, 1959.

Markowitz, Harry, and Todd, Peter G. Mean Variance Analysis in Portfolio Choice and Capital Markets, Revised Issue, New Hope: Frank J. Fabozzi Associates, 2000.

Sharekhan. “Stock Ideas Standing (as on June 30, 2005).” Valueline. July 2005, p.3,  Available at  http://www.sharekhan.com/articles/ValueLine_july2005.pdf.

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Paper presented in research conference - New York Economic Association 

Article originally published by me on Knol.

http://knol.google.com/k/  portfolio-analysis-application-and-evaluation-in-indian-stock-market

(Knol not available for public access from 1 May 2012)

Ud. 12.9.2023

Pub 16.2.2012

     

Theory Z - Type Z Organizations

Differences between American and Japanese Management Practices

William Ouchi proposed the concept of theory Z organizations. The concept was developed in his efforts to understand the best practices of Japanese management which can be used in companies of USA. He identified the differences between American and Japanese organizations in some aspects.

American Organizations	Japanese Organizations
Short-term employment	Lifetime employment
Individual decision making	Collective decision making
Individual responsibility	Collective responsibility
Rapid evaluation & promotion	Slow evaluation & promotion
Explicit control mechanisms	Implicit control mechanisms
Specialized career paths	Nonspecialized career paths
Segmented concern for employee as an employee	Holistic concern for employee as a person

Then he went around interviewing managers of various companies asking them to identify American Companies which are practicing the characteristics identified by Ouchi as Japanese organization practices. But Ouchi had not told the managers that they were Japanese practices. Many managers identified some American companies as following those practices. The companies identified were IBM, Procter and Gamble, Hewlett Packard, Eastman Kodak, and the US Military. These companies are named Theory Z companies by Ouchi. They are companies in USA but follow practices similar to Japanese companies.

Like Japanese companies, type Z companies tend to encourage long-term employment. They rotate employees around functions. Even though they have modern information and accounting systems, they do not dominate decision making. Explicit and implicit information and issues seem to exist in a state of equilibrium. There is a central set of objectives to which all employees have agreed. The corporation’s philosophy or central set of values preserves the freedom of employees to pursue projects they felt would be fruitful. Organizational life is treated as a life of interdependence. It is team work and individual performance measure in a period has some ambiguity.

The decision making is collective but the responsibility for decision still resides in the individual. In type Z companies, superiors show broad concern for the welfare of subordinates. At peer level also, there is concern for co-workers. Egalitarianism is a central feature of type Z organizations. In egalitarianism in organizational contexts means that it is believed that each person can apply discretion and can work autonomously without close supervision. The belief is that every person can be trusted. 

Ouchi proposes that American companies adopt type Z company practices. In stead of trying to imitate Japanese companies which are very far in a different culture, American companies can learn from some other American companies only, to follow some of the Japanese best practices.

Strategies to Transform the Organization

Ouchi proposed 12 strategies or steps to transform a typical American company, named as type A company to type Z company.  In order for Theory Z to work, skeptics have to be allowed to exist. These people, who think this would not work, should not be discouraged. By involving these skeptics companies begin to form a space of trust. Trust will occur when both parties understands each others view, and know that both are doing it for the good of the company. When a person feels something is not right, by involving them it shows them that neither side is out to hurt the other. Everyone has to realize that with trust comes openness to say what you feel. Another thing people should have is integrity. You should be able to treat people the way you would like to be treated.

The second strategy, the company should audit its philosophy. Here the company will try to figure out a way that suggests how the company is behaving with its employee and vice versa. Companies are going to have to find out were the company "is", not were it should be. First the company is going to have to understand its culture by studying decisions made in the past. They will than have to organize a big meeting and ask themselves, what they think worked, failed, and what they thought was inconsistent. The answers to these questions bring out philosophy of the company.  

The third strategy is management must be able to define desired philosophy and be able to involve company leaders. Here management can not be intimidated by company leaders and the company leader must be willing to hear everything the manager has to say. Company leaders should not discourage his manager from speaking, because when he is intimidated the manager tends to hold back more information. Company leaders must be willing to go into a discussion with an open mind and be able to trust his managers. When both begin to trust each other they are going to make easy decisions because both will be sharing wanted information.

The fourth strategy is the company will have to create both a structure and incentive in the company. Create a place that whenever somebody is struggling, they can feel assured that his team will pick him up.

The fifth strategy is the company will have to develop some interpersonal skills. Here management is going to want everyone to improve on their communication skills. They need to encourage managers to listen more and know when to interrupt. First people are have to recognize patterns of interactions when making a decision and solving problems.

The sixth strategy is the company must be able to test themselves and the system. While implementing Theory Z management is going to begin to question their ability to manage.

The seventh strategy is to stabilize employment. To stabilize employment companies are going to have to challenge every employee, and be able to give him variation of job to do within the company. Here, when a company is doing badly they do not encourage management to lay off people, but rather reduce their hours. This in return gives companies a low turnover rate that results in less waste in training new people.

The eighth strategy is how to design a system of slow evaluation and promotion.

The ninth strategy is to broaden the people’s career paths. In order to retain employees within the organization, let them experience every aspect and every department in the company. When everyone knows what every department is doing, it makes it much easier for the company to pass important information within departments.

The tenth strategy is how to get this theory Z working into the lower level. In order for you to implement Theory Z at the lower level you have to start from the top. The change must occur with top management and professional employees, before you try to change lower level employees. People who are lower level employee are not going to follow a method that top management does not follow. With lower level employees you have to be very patient with them, because they have installed in their heads that management should never be trusted. Employees in the company feel that the company foremen are sell outs, who work more with management and do not care about employees. Like management, the foreman has to gain his employees’ trust.

The eleventh strategy is to find areas where employee participation is allowed in decision making. The way you gain lower level trust is through participation in company’s decision making, and give them rewards for their accomplishments. You need to encourage employees to speak and let them know that the company wants the employees to work as a team and not as individuals.

The final thing is to create a sense of family between everyone.

 

Theory Z of Maslow

Maslow is a well known psychologist. He is known for his hierarchy of needs model.

Maslow's Theory Z , presented in Maslow on Management, presupposes that people, once having reached a level of economic security, strive for a life steeped in values, a work life where the person would be able to create and produce. Maslow's Theory Z and Ouchi's Theory Z are different.

References

http://www.abraham-maslow.com/m_motivation/Theory_Z.asp

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Originally posted by me in Knol (Knol 47 of Narayana Rao)

Ud. 28.8.2022

Pub. 16.2.2012

11 May Knowledge History - Science, Engineering and Management

868 -  Presently available oldest book with a date printed on it. 11 May 868. Diamond Sutra - A Buddhist Book
1928 - Radio station WGY started first scheduled TV broadcasts
1947 - Development of tubeless tyre
1949 - First Polaroid camera sold for $ 89.95
1951 - Jay Forrester patented computer core memory
1960 - FDA approved the contraceptive pill
1987 - A heart transplant was done along with lungs, and the heart of the recipient was donated to another person.

Birthdays

Nobel Prize Winners

1918 Richard Feynman
         http://www.nobelprize.org/nobel_prizes/physics/laureates/1965/feynman.html

1924 Antony Hewish  Physics - Discovery of pulsars
         http://www.nobelprize.org/nobel_prizes/physics/laureates/1974/hewish-facts.html


Other Scientists
1752 Johann Friedrich Blumenbach
1854 Ottman Mergenthaler
1871 Frank Schlesinger
1872 Mary Llewellyn Cooke (Management)
1881 Theodore von Karman
1897 George P. Murdock
1914 Haroun Tazieff
1946  Robert K. Jarvik - Invented Jarvik - 7, the first artificial heart inplanted inside a human body.

http://todayinsci.com/5/5_11.htm


10 May Knowledge History - Science, Engineering and Management

Knowledge History of the Day - Index for the Year

11 May - History and Importance of The Day

Pub 12.5.2014

The Content and Process of Operations Strategy - Revision Notes

The chapter introduces two key ideas: the content and the process of operations strategy. Content means the actual decisions that are taken over time as part of the operations strategy of a company. Operations strategy process is the procedures that a company can adopt (alternatives are available) to formulate the strategy. In other words, the process is the way or the framework with details for every stage on how it goes about making content decisions. A three-level process is proposed in the chapter, known as the “fit, sustainability, risk” model.

Performance objectives for operations function

• The market requirements related to products or services are the performance objectives for the operations function. These performance measures are specified so that they have some meaning to the operations function. Performance objectives are a “translation” into operations terminology of a marketing professionals view or understanding of the market.

• The five performance objectives highlighted by Slack and Lewis are:

• Quality
• Speed
• Dependability
• Flexibility
• Cost

• Authors on operations strategy use slightly different sets of performance objectives. Hayes and Wheelwright of Harvard University do not use speed, seeing it as part of flexibility. Other authorities include “innovation” as a performance objective, while S & L sees it as part of flexibility. In fact all the performance objectives, quality, speed, dependability, flexibility and cost, are really clusters of issues and measures. For example, “dependability” could mean a proportion of services or products delivered late, average lateness, proportion delivered early, etc.

• Each performance objective thus is a bundle of issues that will need separating out. The set of performance objectives is defined in sufficiently broad terms to be applicable to any kind of business or operation.

• One well-known method of distinguishing between performance objectives regarding their importance or priority is classifying them as order winners or qualifiers.

• Order winners are performance objectives that clearly gain more business for the company as its performance in these areas improves. Qualifiers are the “givens” of doing business. No matter how well an organization performs in objectives classified as qualifiers it is not going to gain great competitive benefit. However, if it fails to meet the expectations of the market in a qualifying performance objective, it will suffer disadvantage in the marketplace and may not even get request for quotations

Operations strategy decision areas

• Four decision categories are important. They are:

• capacity
• supply networks
• process technology
• development and organization.

• These decision areas are not totally separate and mutually exclusive. For example, no company can make choices of which process technology it will invest in without considering how it will impact on its suppliers and customers elsewhere in the supply network.

Manufacturing Strategy Decision Categories

The operations strategy matrix

• A simple device called the operations strategy matrix brings together performance objectives and operations strategy decision areas.

• It is essentially a descriptive device that can be used to sketch out and understand current (often implicit) operations strategy and spark a debate on how strategy might be changed.

Fit, sustainability and risk

• Usually the process of formulating operations strategies is seen as one of aligning operations resources with market requirements. This process of alignment is usually called fit.

• Two further issues are associated with the fit decisions. These are sustainability and risk.

• Essentially this idea is that, while it is important to achieve fit in operations strategy formulation, this fit must be sustained over time. This means both coping with the natural dynamics of markets and changes within operations resource capabilities, and also attempting to move to a “higher level” of fit. This is the process of sustainability.

• Yet as operations attempt to cope with the dynamics of business life, they will inevitably move away from perfect fit at times. This is the risk that is associated with operations strategy decisions. Sometimes they will have insufficient resource capability to satisfy market expectations. At other times they may have more capability than the market seems to need (a waste) or fail to be able to exploit their capabilities into the marketplace (another kind of waste).

• Fit, sustainability and risk all have their own chapters in the book to discuss them in detail.

Source:

CHAPTER 2. THE CONTENT AND PROCESS OF OPERATIONS STRATEGY

Nigel Slack and Michael Lewis, Operations Strategy

2nd Ed. 2009

Pearson Prentice Hall

Textbook and Student Guide

http://wps.prenhall.com/bp_slack_operations_1/6/1656/424033.cw/index.html

Powerpoint slides of the chapter from the first edition

http://www2.gsu.edu/~mgtwlw/operationstrategy/chap02.ppt

Originally posted at
Knol - 2utb2lsm2k7a/5894

Ud. 10.5.2022

Pub. 24.12.2011 transferred from knol

Fundamental Analysis – Graham–Rao Method

May 8 - Birthday - Benjamin Graham (1894)  [Graham - Rao Method]

Graham Method for Conservative Investors

Benjamin Graham[1] is credited with systematizing fundamental analysis.

In his books, he outlined methods that could be used by conservative investors for buy and hold investments as well as methods that could be used by active traders.

One comprehensive method recommended for use by conservative investors is as follows:


1. Adequate Size of the Enterprise

Our idea is to exclude small companies which may be subject to more than average vicissitudes especially in the industrial field. The size is specified as not less than $100 million of annual sales for an industrial company and, not less than $50 million of total assets for a public utility.

2. A Sufficiently Strong Financial Condition

For industrial companies current assets should be at least twice current liabilities—a so-called two-to-one current ratio. Also, long-term debt should not exceed the net current assets (or “working capital”). For public utilities the debt should not exceed twice the stock equity (at book value).

3. Earnings Stability

Some earnings for the common stock in each of the past ten years.

4. Dividend Record

Uninterrupted payments for at least the past 20 years.

5. Earnings Growth

A minimum increase of at least one-third in per-share earnings in the past ten years using three-year averages at the beginning and end.

6. Moderate Price/Earnings Ratio

The investor should impose some limit on the price he will pay for an issue in relation to its average earnings over, say, the past seven years. We suggest that this limit be set at 20 times such average earnings


7. Moderate Ratio of Price to Assets

Current price should not be more than 1.5 times the book value last reported. However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets. As a rule of thumb we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5. (This figure corresponds to 15 times earnings and 1.5 times book value)  


This method is a useful method of investment analysis. But I could not locate practical application of this method in published magazines. In my efforts to operationalize this method for Indian stocks, I came out with some modifications that make the method clear and ready for implementation based on past financial data. The modified criteria are[2]:

 Narayana Rao, K.V.S.S., "In search of value", Business Standard-Smart Investor, 8 January 2007.

http://businessstandard.com/india/storypage.php?autono=270553

Security Analysis Article Directory
http://knol.google.com/k/narayana-rao-kvss/-/2utb2lsm2k7a/140




Applications of the Method
2009 based on 2008 results


I T C Ltd.
Graham-Rao Analysis: Reliance Industries Limited.
State Bank Of India
Wipro Ltd.

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Original post in Knol
http://knol.google.com/ k/ fundamental-analysis-graham-rao-method, Knol Number 7

 

A Poem on the Method

I wrote a poem on the method

Fundamental Analysis

The company's life is long

But its loans are small

It makes profits

and shares with partners

Its profits grow

Its assets grow

Its reputation grows

Its liquidity grows

You can calculate its value

and there is a seller who concurs with your view.

For more poems on stock market topics visit Stock Market Poems

 

Related Articles

 Graham-Rao Method

(Customized to India)
The company must have an adequate size (Rs 100 crore sales may be taken as adequate size for Indian companies) and a strong financial condition.

To satisfy this criterion, the current assets should be at least twice that of current liabilities and the total debt-equity ratio should not be greater than 1:1.

The company should have paid dividends and earned profits for the last 10 years. There should be a growth in earnings per share (EPS) of 10 per cent per annum over the last seven years.

The current price should not exceed 20 times the average EPS in the last seven years for companies with past seven-year growth higher than 20 per cent. For companies with past growth rates between 10 and 20 percent per annum, the multiplier has to be the growth rate itself.

The current price should also not be more than 1.5 times the book value last reported.

These prescriptions by Graham require 10-year data to pick stocks. But the method is unambiguous and uses a limited number of ratios.

Investors have to keep in mind that their hard-earned money has to be protected by committing it to companies with a good past record.

 

The method was explained to students as well as investors and they agreed that it was unambiguous. I present this method in all courses that I teach on Security Analysis.
The method was applied twice by me across all the stocks for which data was available on the electronic database and the companies suitable for investment were identified. The article "In Search of Value" published in Business Standard, 8 January  2007, contains the selected scrips using the method at that time. 


Benjamin Graham, Intelligent Investor, various editions, Latest edition, Harper Business Essentials,

May 8 - Birthday - Benjamin Graham (1894)  [Graham - Rao Method]

In Search of Value

https://www.business-standard.com/article/markets/in-search-of-value-107010801010_1.html

The merit of value investing By KVSS Narayana Rao.

https://www.rediff.com/money/2006/nov/27invest.htm

May 8 - Birthday - Benjamin Graham (1894)  [Graham - Rao Method]

A nine-step route to picking value stocks  By K V S S Narayana Rao

https://www.rediff.com/money/2003/aug/25guest.htm  

Narayana Rao, K.V.S.S., A nine-step route to picking value stocks”, Business Standard-Smart Investor, August 25, 2003
Narayana Rao, K.V.S.S.,"The merit of value investing",  Business Standard-Smart Investor,

November 27, 2006

http://business-standard.com/india/storypage.php?autono=265971

Ud. 10.5.2022

Pub 9.3.2012

Values A Manager Has to Possess

Abram T. Collier established the five sets of values for the guidance of a manager to develop them in himself.

 

The “A” Values

 

Self teaching

The virtues of hard work

Self realization

Personal responsibility

Search for justice and honor

 

The “B” Values

 

Organizational skills

Sales techniques

Administrative genius

Communication power

Integration of mental and physical health

 

The “C” Values

 

Professional training

Desire for facts

Legal realism

Historical objectivity

 

The “D” Values

 

People centered teaching

Customer oriented selling

Service

Participative management

Self transcendence

 

The “E” Values

 

The capacity to adapt to change

Ability to integrate viewpoints

The power to go beyond the above four value structures

 

Reference: 

Abram T. Collier, Management, Man and Values,  Harper & Row, New York, 1962, pp. 226-227

 

 

Values - The Concept

 

Schwartz and Bilsky (1987): "Values are a) concepts or beliefs, b) about desirable end states or behaviours, c) that transcend specific situations, d) guide selection or evaluation of behaviour or events, and e) are ordered by relative importance." (Cited in Agle and Caldwell, 1999: 359).

 

Jacob et al. (1962). As cited in Harrison (1975: 117), values are: "…the normative standards by which human beings are influenced in their choice among the alternative courses of action they perceive." (Jacob et al., 1962: 10)

 

Giacomino et al. (2000) discuss the influence of personal values on business behaviour. Values are particularly important because “They determine, regulate, and modify relations between individuals, organisations, institutions, and societies” (Agle and Caldwell, 1999: 327).

 

Kahle et al. link personal values and social values very closely, claiming that “Values are…integrally connected to social change” and that “…values are individual representations of societal goals. As elusive societal goals change, individuals’ values will sometimes lead and sometimes reflect this change.” (Kahle et al., 1998: 35).

 

Macchiette and Roy also connect personal and social values, referring to “…the 1990s…[having]…witnessed some major changes in consumer attitudes…and product-related values that reflect the heightened influence of social issues in the American marketplace.” (Macchiette and Roy, 1994: 55)

 

Source: http://www.hull.ac.uk/hubs/downloads/memoranda/memorandum34.pdf

Original knol - http://knol.google.com/k/narayana-rao/values-a-manager-has-to-possess/ 2utb2lsm2k7a/ 191

Ud 10.5.2022, 25.3.2012

Operations Management - Nigel Slack et al. 4th Edition - Book Information, Review and Summary Chapters

Slack-Operations-and-Process-Management-4th-Edition

https://www.pearson.com/uk/educators/higher-education-educators/program/Slack-Operations-and-Process-Management-4th-Edition/PGM1097639.html

Introduction to Operations Management - Nigel Slack et al.
Summary of Chapter 1 of the book Operations Management by Nigel Slack, Stuart Chambers, and Robert Johnston
http://nraomtr.blogspot.com/2014/10/introduction-to-operations-management.html

Operations Strategy

Nigel Slack
Pearson Education India, 2009 - Production management - 496 pages

""Operation Strategy"" is Ideal for Advanced Undergraduate and Postgraduate students, this book builds on concepts from Strategic Management, Operations Management, Marketing and HRM to give students a comprehensive understanding of Operations Strategy. It features a Comprehensive and accessible with authoritative authorship and an excellent blend of theory and practice, a European context and engaging case studies. This edition has been focused to concentrate on the most significant topics in the subject. New material has been added and coverage of some older topics has been revised.
https://books.google.co.in/books?id=W-0IOqX0Kc8C

Links not working - Have to be changed
_________________________________

Chapter 1 Operations Management

Chapter 1: Operations management   Study guide   Hints on study activities   Weblinks   Case studies with model answers   Multiple-choice questions   Discussion questions

__________________________________

Chapter 2: The strategic role and objectives of operations
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple-choice questions
	Discussion questions

__________________________________

Chapter 3: Operations strategy
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple-choice questions
	Discussion questions

__________________________________

Chapter 4: Process design
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

__________________________________

Chapter 5: The design of products and servies
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

__________________________________

Chapter 6: Supply network design (+ Forecasting supplement)
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

__________________________________

Chapter 7: Layout and flow
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

__________________________________

Chapter 8: Process technology
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

___________________________________

Chapter 9: Job design and work organization
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

____________________________________

Chapter 10: The nature of planning and control
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

____________________________________

Chapter 11: Capacity planning and control (+ Analytical queueing models)
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

____________________________________

Chapter 12: Inventory planning and control
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

____________________________________

Chapter 13: Supply chain planning and control
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

____________________________________

Chapter 14: Enterprise resource planning (ERP)
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

____________________________________

Chapter 15: Lean operations and Just-in-time
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

_____________________________________

Chapter 16: Project planning and control
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

_____________________________________

Chapter 17: Quality planning and control
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

_____________________________________

Chapter 18: Operations improvement
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

_____________________________________

Chapter 19: Failure prevention and recovery
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

_____________________________________

Chapter 20: Total quality management
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

_____________________________________

Chapter 21: The operations challenge
	Study guide
	Hints on study activities
	Weblinks
	Case studies with model answers
	Multiple choice questions
	Discussion questions

_____________________________________

Reviews and Summaries based on Chopra and Meindl's Book on Supply Chain Management

Updated on 10.5.2022,  9 July 2020
9 Feb 2012