Saturday 20 December 2008

Layman's guide to Personal Finance

Layman's guide to Personal Finance

It is that time of the year when we start making New Year resolutions.

At this juncture, considering the gloomy mood (at least financially) - the world over - it makes sense to think of fiscal prudence and financial planning. Hence, I was on the lookout for an article that will make things somewhat easy for a layman to understand.

Someone pointed out this one as being apt for the purpose:

Read, plan and execute!

Regards,

N


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Wednesday 3 December 2008

Bob Farrell's 10 market rules

Bob Farrell's 10 market rules

Got this nice piece from a friend:

Dennis Gartman is an old trader who is read the world over in The Gartment Letter daily. I reproduce Bob Farrell's 10 market rules that he mentioned in his letter recently.

1) Markets tend to return to the mean over time. This is especially noteworthy now, for the housing market is returning to its mean by plunging, as are equity market, the dollar, the Yen, et al.

2) Excesses in one direction will lead to an opposite xcess in the other direction. They always do, and the excesses of the housing bubble and excessive, lenient bank lending, are giving way to the housing collapse and inordinately tight lending practices.

3) There are no new eras - excesses are never permanent. And how strongly does that speak to us now, for the supposed era of unending housing price increases and of globalisation has given way to weak housing and growing protectionism.

4) Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. Markets correct by going in the opposite direction, falling sharply after sustained, broad rallies, and rallying after sustained broad weakness. The world ebbs and the world flows; it has always been thus, and shall always be thus.

5) The public buys the most at the top and the least at the bottom. Of course they do; they always have and they always shall. The public buys when euphoria reigns, and it sells when depression does years later.

6) Fear and greed are stronger than long-term resolve. We are human beings dealing with rational and irrational markets; to believe that "fear" and "greed" can ever be lost is naive for they are the most fundamental of human traits.

7) Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names. Just as volume must follow the trend, so too must good markets have broad support and weak markets have broad weakness... and at the moment, the market is very, very broadly weak.

8) Bear markets have three stages - sharp down - reflexive rebound -a drawn-out fundamental downtrend. This really is how this bear market shall end; not with a hoped for "V" bottom, but with a great washing-out... a capitulation... and then months, or even years, of base building.

9) When all the experts and forecasts agree - something else is going to happen.... or as we like to say, "When they are yellin', you should be sellin,' and when they are cryin,' you should be buyin.' "

10) Bull markets are more fun than bear markets.... or as a friend of ours from Raleigh, N. Carolina used to say many years ago, "Bears don't eat; bulls party!"

Regards,

N


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Monday 24 November 2008

5 COMMANDMENTS FOR THE SMALL INVESTOR

5 COMMANDMENTS FOR THE SMALL INVESTOR

Enjoy the five commandments from NDTV Profit:

In the midst of a global financial crisis and tanking stock markets, what should a small investor do? What is apt and what is not? In trying to grapple with this turmoil, is this an opportune moment to buy or sell shares?

Five rules for the small guy:

  1. This is NOT different. History is marred with instances of financial bubbles resulting in extreme volatility. Markets will go up and down.
  2. Sell when everyone is buying, buy when everyone is selling.
  3. Stick to quality shares.
  4. Use systematic investment planning.
  5. Never, never, never put money into the stock market that you may need urgently and cannot afford to lose.

I tend to agree with the above commandments. Some additional commandments of my own:

  1. When you are in a bull market frenzy and for some strange reason you wish to stay invested in equity markets, choose low beta stocks with consistent dividend paying track record
  2. Be open to doing just the opposite when you are in the throes of a bear market. Be willing to buy very high beta (but frontline stocks) which are likely to have fallen much more than their low beta counterparts.

Regards,

N


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Monday 17 November 2008

Pygmalion Effect

Pygmalion Effect

Recently happened to read the anonymous comments of a supposedly senior fund manager (and presumably an expert):

Many of us might wonder about the dichotomy between the public and private statements by the fund manager. In fact, some of us might even think that it is unfair on the part of the fund manager to express such contradictory views.

However, I'm reminded of the famous movie "My Fair Lady" and the Pygmalion Effect. If the fund manager indeed expresses his concerns for the funds crunch, liquidity crisis, redemption pressures faced by him, etc. in an open forum, the obvious result will be a run on the fund (similar to a run on a bank, NBFC, etc.). When there is a full-fledged run on a financial entity, be it a bank or an NBFC or a mutual fund, our basic Economics Lessons learnt in +2 will enlighten us that it is impossible for even the strongest entity to survive.

Hence, in such a situation, it becomes a moral duty of the fund manager, the CEO of the entity, the Regulators, the Finance Minister, etc. to express truthful yet positive opinions about the situation. If not, the resultin chaos will not only bankrupt the specific mutual fund scheme, NBFC, Bank, etc., but also result in a whole lot of eminently avoidable pain for a whole lot of retail investors.

"Men often become what they believe themselves to be. If I believe I cannot do something, it makes me incapable of doing it. But when I believe I can, then I acquire the ability to do it even if I didn't have it in the beginning." - Mahatma Gandhi

Regards,

N


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Thursday 13 November 2008

Getting to know more about the root cause of our Financial Meltdown

Getting to know more about the root cause of our Financial Meltdown

I've been reading hell of a lot these days about the bear market that we're suffering, past bear markets, potential solutions, etc. Many of the articles sound impressive. However, the one that's given below apparently gets to the root cause:

One of the most educative pieces that I've come across thus far!

Regards,

N


Getting to know more about the root cause of our Financial MeltdownSocialTwist Tell-a-Friend

Monday 10 November 2008

Dangers of investing based on Index levels

Dangers of investing based on Index levels

I've been a long term fan of Parag Parikh. You ought to listen to him on why it can be dangerous to invest purely based on Index levels. And, also why index funds need not necessarily be a great idea!

Read this link:

In the Indian context (I only know about India - It is probably true anywhere in the world ...), bottom up investing is always much better than a top down approach. Top down approach and index based investing is perhaps better suited to lazy fund managers.

Regards,

N


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Tuesday 4 November 2008

What happened to the experts

What happened to the experts

Here's an interesting link giving an idea of what happened to 5 top fund managers over the last five years (4 years of bull run and a few months of a bear phase):

You can review your own performance vis-a-vis the experts to get an idea of how you fared!!!

Regards,

N


What happened to the expertsSocialTwist Tell-a-Friend

Mistakes of a well-known expert (And lessons for us!)

Mistakes of a well-known expert (And lessons for us!)

Read this portion of an interview. If you have the time, you can read the whole interview using the link given below:

The excerpt given below pertains to Mr. Sandip Sabharwal, one of the best-known and highly respected fund managers in India.

SANDIP SABHARWAL:

"I had turned very bearish on the markets last year in October-November. At that time, we had increased the cash allocation in our funds to over 20%.

However, the Indian markets continued to rally even as most other markets were correcting. By January 2008, we took a call that the markets will rally a bit more before correcting and deployed our cash in the markets. Just after that, the markets started correcting sharply.

Besides, most of our funds had a reasonable mix of mid-cap stocks, which corrected much more sharply during the initial phase of the market fall.

Frankly, I had expected a 30% kind of fall from the top, and not the 60% that we have actually seen.

As a strategy, nine months ago, we shifted our portfolio to companies with strong cash flows and those that do not need to raise capital in the immediate future for their growth. The companies in our portfolios are still growing strongly and we believe will outperform the markets as the situation stabilizes."

The full interview:

My take:

If a guy like Sandip Sabharwal can make two crucial (and extremely costly) mistakes and still succeed, so can we. His mistakes, as evident from the above interview excerpt:

  • He became bearish in October / November 2007 & increased cash levels but changed his view and deployed cash in January 2008
  • Later he expected a 30% kind of fall from the peak levels, and not the 60% plus fall that we have actually seen. (Obviously, this means that he has once again invested heavily at around 14000-15000 levels on the sensex, only to take a severe beating - just like the rest of us)!

We all still have some hope, I guess!

Moral of the story:

As all value investing gurus keep emphasising, nobody can predict short term movements of stock prices.

We just have to be disciplined enough to

  • look at margin of safety
  • invest for the long term
  • keep booking profits periodically
  • keep reviewing our portfolio regularly (though obviously not daily/weekly)
  • stick to our asset allocation plans and
  • execute all our noble intentions meticulously

Happy investing!

Regards,

N


Mistakes of a well-known expert (And lessons for us!)SocialTwist Tell-a-Friend

Tuesday 28 October 2008

Price and Value Arbitrage

Price and Value Arbitrage

Source: The World wide web. I was doing a search on value investing in these troubled times and came across this piece. Since it appeared on many different web sites, I've not attributed the same to any specific web site. The copyright, if any, continues to belong to the original copyright holder.

Read on:

One day in March 1955, Benjamin Graham appeared before the Senate Committee on Banking and Commerce after being invited to give his views on the state of the financial markets and the principles of value investing. The Committee chairman was Senator William Fulbright and what follows is an excerpt from the transcripts of the hearing.

Chairman:

....One other question and I will desist. When you find a special situation and you decide , just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realise it until a lot of other people decide it is worth 30, how is that process brought about - by advertising, or what happens? (Rephrasing) What causes a cheap stock to find its value?

Graham:

That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. But we know from experience that eventually the market catches up with value.

I have to admit that I have also spent a considerable amount of time thinking about why undervalued stocks eventually rise to their intrinsic value and more importantly, why they should do so. After all there is the distinct possibility that they could remain undervalued forever. However the more I thought about it, the more I began to realise that the same principle is also at work in the natural world. Here, it takes the form of reversion to the mean whereby plant and animal sizes and their numbers eventually revert to their long term average from extremes. It is also why vacuums do not exist in nature because as soon as they do, air immediately flows towards the vacuum, to bring atmospheric pressure back into equilibrium.

More specifically, I believe that the same principle is at work in value investing whenever there is a discrepancy between the price of a stock and its intrinsic value. The wider the discrepancy, the more things get out of whack and this eventually creates an arbitrage opportunity for discerning investors. When you come to think of it, it is the basis for the so called Yen carry trade, which involves hedge funds borrowing Japanese Yen at ultra low interest rates in Japan , and then using the cheap yen to buy higher yielding currencies such as the Swiss Franc and the Australian dollar. It is also the reason why value investing works because as soon as the price of a stock falls below its intrinsic value, value investors can immediately lock in on a potentially profitable arbitrage opportunity. It then takes no stretch of imagination to realise that as soon as other investors notice that the price has stopped falling and has even begun to rise, they take a closer look and once they too spot the opportunity and act on it, the discrepancy between price and value narrows until eventually price meets value and equilibrium is reached in the same way as in all free markets when supply moves to match demand and vice versa.

Not surprisingly, the same phenomenon also works on the downside when the price of a stock rises far above intrinsic value. This time, the reverse gear is engaged and there is initial selling by some holders of the stock who suddenly realise that they are not getting good value for their money and that there are better investment opportunities elsewhere. This causes the price of the stock to begin to fall, and after some time a negative feedback loop is created as the selling begets more selling until equilibrium is again reached between price and value and the discrepancy is ironed out. There is little doubt that it is this same scenario which is now being played out in the US housing market where prices are beginning to fall from their inflated levels to their long term average relative to rents and median income, as well as returns from other investments such as Treasury bonds.

In conclusion, playing the price and value arbitrage is a relatively simple, safe and profitable way to make money in the markets. However, that is not to say it is easy, as it sometimes requires the patience of Job, and the ability to overcome the super contagious emotions which swirl around the markets everyday. As such while you have a very high prospect of beating the market as a value investor, you will need to perform a major task at the outset: Beat yourself.

Regards,

N


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Monday 27 October 2008

Power of Compound Interest!

Power of Compound Interest!

Did you know Rs. 500 contributed yearly compounded at 25% for 27 years = over Rs. 1 million!

Think about it! I wish that I had grandparents who did precisely that for my sake!

Regards,

N


Power of Compound Interest!SocialTwist Tell-a-Friend

Sunday 26 October 2008

Hope you are not thirsty enough for a glass of water right now!!!

Hope you are not thirsty enough for a glass of water right now!!!

"Today those who are desperate for cash because they fear redemption or have redemptions are forced to sell. Those who do not have any reason to raise cash should not try and value their stocks based on the prices that they are seeing today. This is very important because someone who is desperate for a glass of water will take off his diamond ring and exchange it for water. Those who do not have to should not look at that as any establishment of price either of that water or for that drink." - Vallabh Bhansali, Chairman, Enam Financial.

Makes a lot of sense.

Regards,

N


Hope you are not thirsty enough for a glass of water right now!!!SocialTwist Tell-a-Friend

Thank God for small mercies

Thank God for small mercies

Indeed!

Considering the prevailing atmosphere of extreme fear, it is indeed heartening to note that Warren Buffett appears to have started buying equity again for his personal portfolio. Read on to get reassured:

Regards,

N


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Thursday 16 October 2008

Fear & Greed - 2008 Version

Fear & Greed - 2008 Version

Self-explanatory (Original source unknown - got it through email from a friend):





Regards,




N









Fear & Greed - 2008 VersionSocialTwist Tell-a-Friend

Tuesday 14 October 2008

Warren Buffett on Leverage

Warren Buffett on Leverage

Here goes a gem from Warren Buffett:

"Leverage," he said, "is the only way a smart guy can go broke … You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it's reinforcing when the people around you are doing it successfully, you're doing it successfully, and it's a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it's more and more fun, you think, 'Why the hell should I leave at a quarter to 12? I'll leave at two minutes to 12.' But the trouble is, there are no clocks on the wall. And everybody thinks they're going to leave at two minutes to 12."

Many of us would wish that we read this (and followed the implied advice) in January 2008!

Regards,

N


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Sunday 5 October 2008

Financial Bubbles - A simple illustration for the financial dummy!

Financial Bubbles - A simple illustration for the financial dummy!

Here's a gem that I got from a friend. Didn't know whether it deserves mention on this blog or my "Something to Smile" blog. Hence I'm posting it on both!

* * * * * * * * * * * * * * *

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.

* The net asset of the country now = 3 dollars.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.

*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.

* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.

* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.

* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."

(8) A also thought the same way.

(9) Nobody wanted to buy land anymore.

* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.

(10) So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.

(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.

* A owns the 2 coins; his net asset is 2 dollars.
* B is bankrupt; his net asset is 0 dollar. (He lost everything)
* C got no choice but end up with a land worth only 1 dollar

* the net asset of the country = 3 dollars.

************ **End of the story; BUT ************ ********* ******

There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -

(1) when a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land goes up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depends largely on psychology (or speculation)

* * * * * * * * * * * * * * *

Regards,

N


Financial Bubbles - A simple illustration for the financial dummy!SocialTwist Tell-a-Friend

Saturday 4 October 2008

Need for Retirement Planning

Need for Retirement Planning

Hear out the lament of a retired pensioner - not a rather impoverished, uneducated retired clerk from the back of beyond, but a senior management pro from a PSU giant:

Many of us tend to postpone financial planning for our post-retirement years till it is way too late. Just listen to Einstein's sermons on the "Power of Compounding" being the "Eighth wonder of the world".

The link referred to above is just one more reminder to those of you who are over the ripe old age of 25!

Regards,

N


Need for Retirement PlanningSocialTwist Tell-a-Friend

Wednesday 1 October 2008

Tata Motors, Singur, Transparency, etc.

Tata Motors, Singur, Transparency, etc.

Recently I happened to read an article in Economic Times:

Normally, I expect ET folks to write stuff that is reasonable and fair. This article half-accuses the Tatas of

  • not being transparent
  • almost exploiting the WB government by getting land on terms which are supposedly very favourable to the Tatas, and at a great cost to the general public

Before I express my views on the matter, let me add a disclaimer - I've not invested in shares of Tata Motors & do not have any personal stake if Tata Motors were to gain something significant from their business dealings at Singur.

Now that the disclaimer is done away, here goes:

  1. Whenever any business house proposes new investments in a state, it asks for a basket of concessions in lieu of its commitments in terms of investments, employment generation, etc. There's no reason why details of a purely business agreement should be available in the public domain. It will certainly go against the business interest of the investor(s) vis-a-vis their business rivals. At the maximum, the details can be made available to the plethora of Audit teams that are bound to scrutinise all such deals at various levels, including any review committees of state / central governments, which can obviously include members from the opposition if appropriate. Why should the details be available to the general public??? Is it to enable the TV channels to gain TRPs or to improve the circulation of business journals?
  2. To claim that the concessions given by the WB government are unwarranted is perhaps within the bounds of tolerable limits - one can always argue for and against such concessions on behalf of the Government; But to blame the Tatas for the same is certainly laughable. Certainly, Tata Motors was not negotiating with a small scale industrial unit with 45 employees from Ambattur or Adityapur Industrial Estates. They were negotiating with powerful and highly educated officials of a State Government. Surely, one doesn't expect them to be bull-dozed or bribed into an agreement to the detriment of the state.
  3. If any reviewing authority finds that the terms are unduly and unfairly favouring the Tatas, it can be only due to inefficient negotiations or corrupt practices on the part of the negotiators. In either case, the negotiating team must be taken to task in accordance with the rules and norms for the same, instead of blaming the Tatas. After all, when one goes even to the vegetable market, if we try to bargain beyond a point, the "choota boy" at the shop asks us to take a walk!

Regards,

N


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Tuesday 23 September 2008

Insights into the Financial Mess that the world is into!

Insights into the Financial Mess that the world is into!

Interesting insights, indeed:

Since my comments are unlikely to add value to the excellent article, I offer none!

Regards,

N


Insights into the Financial Mess that the world is into!SocialTwist Tell-a-Friend

Friday 5 September 2008

Beware of Bouncing Demand Drafts!

Beware of Bouncing Demand Drafts!

So, you thought that demand drafts can't bounce. Banish such naivete! Read on:

Regards,

N


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Tuesday 15 July 2008

Cash is King

Cash is King

Hi folks,

Guess that I've been busy enjoying life while someone pointed out that I've not been regularly posting anything in any of my blogs.

Interesting to observe that my blogs are ALWAYS read when I don't post anything! Looks like I should post more infrequently.

Anyway, while I was away, our Indian markets seem to have "re-coupled" (if at all they had "de-coupled" in the first place) with the rest of the world, and have indeed started outperforming the major global indices on the downside!

A bear market is extremely good for real long-term investors for some interesting reasons:

  • Gives you lots of time to read, write, go around golfing, goofing, blogging, bugging, begging, borrowing, etc.
  • Makes you learn a lot about investing (though at a rather high cost)
  • Enables you to crib about all the money that you could have made had you sold out at Jan '08 levels
  • Enables you to advice others on the list of scrips that you can buy at current levels and make tons of money over the long-term (at last, long term means a really long term!)

Considering the free time that the bear market provides, it is time for you to read this wonderful article by Mr. Sanjay Bakshi (originally written in 1999) - Worth saving and reading once a quarter!

Regards,

N


Cash is KingSocialTwist Tell-a-Friend

Monday 30 June 2008

ET Editorial or CPI (M) Press Release???

ET Editorial or CPI (M) Press Release???

Please read this view on the edit page of Economic Times, Chennai (dated June 30, 2008):

I've been a regular reader of Economic Times for well over a decade. Have agreed (or occasionally disagreed) with their views but have always respected their thought processes.

The above article left me speechless. If it was intended as a satirical piece, I didn't quite get it. May be I'm getting too old. Alternatively, if this article had been a press release by the CPI (M) folks, originally written by people like M/s Karat, Raja, etc., I could possibly begin to understand it.

But coming from ET, of all the places! What can I say???

This article actually suggests that Mutual Funds should deploy their cash holdings (which, incidentally, belongs to investors like you and me - not to the general public of India) into shares. The reason: "To change the sentiment in the market".

Since when did "Changing the sentiment in the market" become the objective of the fund managers? I was under the mistaken impression that fund managers were supposed to maximise returns on my hard-earned money invested with them in accordance with the original mandate of the specific fund / scheme. If the fund manager feels that this is the right time to go out and deploy cash to meet the scheme objectives, by all means let him/her do so.

However, if the fund manager thinks that markets are likely to tank further, thanks to factors like:

  • Panicky FIIs, who are getting out of emerging markets to handle their own self-created mess back home
  • Zooming commodity prices, especially that of the rude crude!
  • Imported inflation
  • Political uncertainties
  • Likely earnings downgrades

then, ... ... ... ...

The fund manager ought to wait a few more days / weeks so as to buy exactly the very same shares that he/she thinks is worth buying at an even lower price.

Economic Times, I certainly expected more from you - I didn't expect you to get swayed by such things like "market sentiment" to give such imprudent recommendations to fund managers of AMCs.

Regards,

N


ET Editorial or CPI (M) Press Release???SocialTwist Tell-a-Friend

Sunday 29 June 2008

GM hits a new low!

GM hits a new low!

Recently (a couple of days back) General Motors hit a half-century low level on the exchanges - less than $12 per share, last seen in 1955 - the year in which Bill Gates was born! Talk of coincidences!

Read this link for some interesting details and statistics:

What is this piece doing on this blog?

Simple - When we make investments in what we consider bluest of blue chips, we may perhaps be absolutely right - at that time.

We must, however, have the discipline to keep reviewing the investments periodically (don't bother watching the ticker every day or every hour) - at least once every few months. If the situation that warranted the original investment has changed, we must be willing to go right ahead and be willing to sell the scrip, irrespective of whether we are making some money or we are losing money on the original investment.

Regards,

N


GM hits a new low!SocialTwist Tell-a-Friend

Friday 20 June 2008

Catch them young!

Catch them young!

Financial planning, fiscal prudence, investing skills, knowing the benefits of the power of compounding - These are all terms that each of us should know. More importantly, these are things that all our kids should know.

When should we start teaching them? This is a very popular doubt among parents across the world. Here's an article that addresses the issue eloquently. Read on and also pass it on to your friends for their benefit:

Regards,

N


Catch them young!SocialTwist Tell-a-Friend

Tuesday 17 June 2008

Buffett on Booking Profits

Buffett on Booking Profits

The markets are turbulent. Share prices, as usual, are going up and down like crazy! In the melt-down since January, much of your paper profits have evaporated into thin air. Some of your scrips are still quoting at levels which enable you to get out with some profits. Other scrips are well below your original purchase prices.

What should you do now? Should you sell? If so, which ones? If not, when should you sell?

This has always been a major problem for investors. They get to know what to buy and when - either based on their own research, or based on "expert interviews on TV", "Wonderfully written articles" in business papers, broker recommendations, tips, etc. On the sell side, there's hardly the same quantum of advice available.

Hence, it is worth listening to the ever-green Sage of Omaha:

Warren Buffet, Mr Buy-and-Hold himself, has been known to sell. In a letter to Berkshire Hathaway shareholders in 1987, he wrote: "We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business."

In other words, he would sell when a holding rises to a price well beyond what he thinks it's worth. He has also been known to sell at a loss to raise money for a potentially more lucrative opportunity.

Becoming fixated on what an investment used to be worth is a loser's game. The money that is gone is gone, and there's nothing you can do about it. Far better, then, to focus on where your investments are now and find the best opportunities for the future.

So, when should you book profits? Ideally, when your investment goals are achieved. If a goal is achieved you should book profits and keep moving.

Hope that this gives you some nice clues on when to sell and what to sell from your wide range of winners & losers!

Regards,

N


Buffett on Booking ProfitsSocialTwist Tell-a-Friend

Monday 16 June 2008

Handling Recovery Agents

Handling Recovery Agents

Today, we live in a world of EMIs. For the unfortunate few among us who default on loans, credit card dues, etc., we also live in a world of a dreaded species: "Recovery Agents".

My views on the matter are fairly radical and non-conventional:

  • As far as possible, never take a loan - The only exceptions that I can think of are medical emergencies and low-cost loans for acquiring high-value, guaranteed income-generating assets (like a home loan, for instance - but certainly not a car loan!)
  • In the unlikely event of taking a loan, stick to the mutually agreed repayment schedule, come heaven or high water. Don't ever default.
  • If, for some extraordinary reason, you are unable to pay up, proactively address the issue by sitting with the lender and finding out mutually acceptable and financially feasible alternatives before the due date for the payment which you are likely to default.

Unfortunately, not many of us on this planet have such a reluctance to take loans.

For the benefit of those who do end up taking loans and more particularly for the benefit of the subset ot those who might end up facing recovery agents, here's an article which I found quite enlightening, easy-to-read AND worth learning from - Do read it definitely:

And, if you can, go back to take a look at my views as mentioned above and explore the possibility of following the suggestions!

Regards,

N


Handling Recovery AgentsSocialTwist Tell-a-Friend

Wednesday 11 June 2008

Don't Pay Entry Loads while investing in Equity Mutual Funds

Don't Pay Entry Loads while investing in Equity Mutual Funds

SEBI has recently enabled us to avoid paying entry loads while investing in Equity Mutual Funds. However, I still find that lots of our friends continue to invest through distributors (and hence pay a hefty entry load) instead of investing directly - Please read this link to find out the benefits of not paying an entry load:

So far as choosing an apt fund for you (which is supposed to be the only reason besides "convenience" why you invest to MF distributors), all you need to do is visit websites like valueresearchonline.com to figure out the answers to all your queries!

Every penny saved is a pound saved, over a period of time!

Regards,

N


Don't Pay Entry Loads while investing in Equity Mutual FundsSocialTwist Tell-a-Friend

Tuesday 3 June 2008

Lessons from IPL cricket

Lessons from IPL cricket

Dear Folks,

Now that IPL is over and you've taken rest for a couple of days, it is time to share this mail that I got from a friend while the IPL was still going on. I did not wish to compete with Warne, Watson, Dhoni, Shah Rukh, Slapping Bhajji, crying Sree, etc. Hence I waited till now to share this with all of you!!!

-.-.-.-.-   -.-.-.-.-   -.-.-.-.-   -.-.-.-.-.-

Unfortunately, I don't know the name of the original author - Those of you who know (or have access to the March issue of "Financial Advisor") - pl leave the name of the author as a comment after reading this blog.

-.-.-.-.-   -.-.-.-.-   -.-.-.-.-   -.-.-.-.-.-

The original author of this article says: "In several of my write ups on investments I use analogies from cricket…my article in the March 2008 issue of 'Financial Advisor' was titled 'Lessons from Cricket'."

Cricket today is a highly competitive activity and it has also become a lucrative career, more than its status as a game. There is huge quantum of money involved hence it attracts a lot of attention, talent and is very competitive.

The on going IPL event is a classic case from which analogies can be drawn and lessons be learnt for investments.

(This is based on info available as on 7th May 2008)

The Jaipur team i.e. Rajasthan Royals and Kings XI Punjab-the Mohali team head the rankings so far with 10 points each.

This is followed by the Delhi and Chennai teams running neck to neck currently, in the next slot is Mumbai and at the bottom are the teams from Kolkata, Bangalore and Hyderabad.

More than the cricket, I am fascinated by the 'out and under performance' of various teams, the 'randomness' of out and under performance, as well as the 'expert' prediction regarding this.

To refresh memories,

At the start of IPL-Rajasthan Royals were considered the weakest team. They had a bad start and so did Kings XI Punjab…both these teams are currently at the top.

The team from Kolkata had a dream start; its opening batsman from New Zealand went ballistic in the first match itself and hence the 'Knight Riders' were considered as brilliant.

The team from Chennai was among the best as it went on a winning spree and was headed by MS Dhoni. A few days back an article in a newspaper had mentioned that Dhoni had justified his large pay package, since team Chennai was on a winning streak. Ironically, soon after this, the performance of Chennai Super Kings has tanked.

Welcome to randomness of 'out and under performance'…the harsh reality in any competitive activity wherein expert predictions and forecasts are akin to throwing darts at a swinging pendulum. If the prediction (dart) hits bullseye the expert attains stardom and if his dart misses the mark-one can always give a detailed explanation in hindsight.

As the tournament got under way-the Rajasthan team proved to be better than most teams and are currently at the top of the league.

The strong Chennai team is struggling since the past 3 games which they have lost miserably and have thus fallen in the overall rankings. They were right at the top i.e. the 'top quartile' and now they are down to a lower rung.

The Kolkata team which began with a bang is currently at the bottom of the league and appears to be struggling.

'Past performance is not an indicator of the future' or 'Past is not the prologue' is a harsh reality in IPL. The 'out and under performers' are changing continuously and rapidly.

E.g. no one at the start of the competition could have ever imagined the pathetic performance given by the Bangalore side till date. This side which is captained by the solid Rahul Dravid has done so badly that the team CEO-has been sacked. This was reported by the media today.

The Hyderabad side an otherwise solid team (at least on paper) also has had a below par performance so far and is in the 'bottom quartile' of rankings.

The Mumbai team had a series of misfortunes with its captain and star batsman Tendulkar unable to play because of an injury. The replacement captain is also out of the team on account of unruly behavior.

No one could have 'predicted and forecasted' that Pollock would have to captain the Mumbai side…he has been doing it quite well. The Mumbai team had a forlorn, almost demoralised beginning but is now moving up the ladder.

In fact they beat the strongest team so far-the Rajasthan Royals y'day. The Royals were all out for a miserable score and the Mumbai Indians won convincingly. And as I wrote earlier-the Royals were supposed to be the weakest team at the start of the tournament.

The Rajasthan paceman who wrecked the strong Chennai side by taking 6 wickets just the other day-was thrashed by a relatively weaker Mumbai side y'day.

Phew! Welcome to more randomness and more unpredictability of out performance (s)!

What do we conclude?

    Past performance is no guarantee to the future in any competitive activity whether cricket or investments. Some of the best players have had a below average IPL so far and vice versa. (Bad luck for some one who tried to predict and forecast).
    Cricket and active fund management have highly motivated professionals-most of them with similar skill sets and talent. Their rational self interest to 'out perform' brings out the best in these individuals.
    Unfortunately for them they are 'fighting' against each other in an attempt to 'out perform'. Hence by default some or a large number of individuals will 'under perform' at any given point in time.
    Says Jack Bogle, "By and large, fund managers are smart, well-educated, experienced, knowledgeable, and honest. But they are competing with each other. There is no net gain to fund shareholders (unit holders) as a group."
    Any competitive activity which involves a high number of skilled and motivated professionals like cricket and active fund management results in 'random individual out and under performances' time and again. This inconsistency is a fact of life when so many people using similar techniques and with similar motivation are placed against each other.
    The 'man of the match' is different on different days and this cannot be predicted in advance.
    One may indulge in all kind of expert forecasts-but predicting the future 'out performers' is a futile activity. Almost like throwing darts! The IPL example explains a lot.
    The 'average' or index return is the average of out and under performers. In investments this represents the realistic returns from any asset class or its sub category over the long-term. This is because the 'out and under performers' will keep changing all the time.
    In IPL cricket the final winner will be the long-term 'out performer' (I will not try my luck at this prediction just as I don't for the market, stocks and great fund managers).
    In IPL the average according to me will be the 2nd and 3rd slots, as they also will get handsome financial rewards-just like long-term index fund investors.
    All teams below this are the 'under performers'. Many of my (expert) friends are trying to predict the team that will win the IPL...however, like any good analyst I will personally do this in hindsight by giving a detailed explanation ! Please wait for this till the end of the event.

 

Regards,

N


Lessons from IPL cricketSocialTwist Tell-a-Friend

Thursday 22 May 2008

Inflation - A Powerful Enemy!

Inflation - A Powerful Enemy!

Dear Friends,

Prudent and traditionally conservative middle class Indians tend to spend within their means - Their typical monthly expenses are less than their monthly income and the balance is saved. Usually, (in over 85% of Indian households,) the amount thus saved is parked in banks, small savings schemes and gold (jewellery).  (The not-so prudent Indians actually live it up and freak out, usually with the help of plastic money - the ever-so-easy-to-get credit cards. This post will not focus on this latter group, but only on the prudent folks).

Saving a part of one's income is smart and wise. However, parking those funds in banks, small savings schemes, gold jewels, etc. is certainly not so wise. The reason: Inflation. Let us understand this in simple terms with a hypothetical example of a household that saves Rs. 5000/= per month and buys jewels worth Rs. 20000/= per annum and invests the balance amount of Rs. 40000/= per annum in bank deposits, postal monthly-income schemes, etc., and see what happens to the savings over a period of time.

The jewellery that's bought is almost never sold in one's life-time. While it gives a certain quantum of pleasure and satisfaction to us when we wear those jewels, beyond a point, most of these jewels only land up in bank lockers (for which we spend some more money). In any case, they certainly do not generate any "current income" nor do they generate "capital gains" unless and until they are sold (which, as we mentioned above, rarely happens in one's life time.

The amount invested in banks, postal savings schemes, etc. fetch, on an average, an income of around 8-9% per annum, which is taxable. Net of taxes, the returns are even lower. However, if one analyses our typical expenses, we just have to look around to see the extent to which prices increase every year. Some examples:

Nature of Expense

Approximate Prices

in rupees

% increase

in 2 years

June 2006

May 2008

Monthly rent of a 2-bedroom flat at a decent location in a metro (other than Mumbai / Delhi)

4000-5000

8000-12000

100%

Branded refined oil (per litre)

50

75

50%

Petrol per litre (despite the govt. not raising prices in proportion to increase in international prices)

30

50

67%

Tur Dal per KG

30

50

67%

Movie ticket (balcony) at a decent theatre

50

100

100%

Cost of dinner for two in a mid-range restaurant

150

250

40%

Minimum price of peanuts at the beach

2

5

150%

Of course, some of these prices will be wrong / overstated in certain cities. However, the general trend is more than visible. For most of us, our income levels are not increasing at the rate at which expenses are increasing. Obviously, we need to do something extra to bridge the gap.

Interestingly, prices of some other items have reduced over the past couple of years (like phone bills, electronic gadgets, etc.). Unfortunately, this has not resulted in any real reduction of expenses. Instead, our frequency of upgrading the gadgets, the number of minutes spent on the phone each day, etc. have increased dramatically, more than offsetting the impact of reduction in prices.

Taking into consideration the above, the returns generated by investing our hard-earned money in banks, postal savings schemes, etc. is far from adequate. Inflation, indeed, is a very powerful enemy.

Obviously, we need to:

  • become aware of the power of inflation to reduce our effective disposable incomes
  • identify better avenues to invest our savings so as to increase the rate of return beyond inflation levels
  • implement any suitable ideas that we come up with.

More on these in later posts!!!

Regards,

N


Inflation - A Powerful Enemy!SocialTwist Tell-a-Friend

Beginner's primer on Entry into the Share Market

Beginner's primer on Entry into the Share Market
Part I

Dear friends,

Lots of us who are not already invested in the share market are completely scared about the whole issue. An aunt of mine has been after me to guide her (or better still, invest on her behalf) for quite some time.

Here are some basic fundas for you:

  1. What is a Share (and what do I get by buying shares)?
    • When you put Rs. 1000/= in a bank as a deposit, you only get some interest on the same. However, if you invest Rs. 1000/= to buy a few shares of the same bank, you become an owner of the bank (though you end up owning a very small proportion of the bank). As an owner, you are not entitled to get any interest on the money invested. Instead, you get a proportionate share of the profits and losses of the bank. Part of the profits of the bank is given to you by way of dividends as and when they are declared. Also, depending on how well the bank is performing (from the time you bought its shares) both in absolute terms and vis-a-vis its peers, the share price of the bank keeps going up and down. Whenever you wish, you can sell your shares. The difference between the sale proceeds and the initial Rs. 1000/= that you had originally invested is your profit or loss.
  2. What do I need to buy & sell shares?
    • A bank account
    • An account with a share broker to buy and sell shares
    • A demat account (to hold your shares)
    • A PAN Card (without which you can't open a demat account nor can you buy and sell shares
  3. Is it not too risky to invest in shares?
    • Yes - Indeed shares are risky than most other assets / investments that we are familiar with
      • They are especially if we are buying shares of companies that we don't understand at prices which are too high
    • No - Shares (and equity mutual funds) are often the only option for lower middle class & upper middle class people to beat inflation. Stuff like bank deposits, postal savings, etc. fetch returns that are much lower than the real rate of inflation. (To get an idea of the real rate of inflation, just look at your monthly expenses on a select basket of items (say, groceries, vegetables, dining out, movies, etc.) that you are incurring now, vis-a-vis the corresponding figure a year back.
      • In fact, shares are almost completely low-risk investments if you are buying the shares of the right company (well run, profitable, consistently dividend-paying companies in industries which are growing fast along with the Indian economy) at the right price, with a time horizon of at least a couple of years.
  4. Are mutual funds better than shares?
    • If you don't have the time (or inclination) to study, understand and invest in shares, it is certainly better to invest in mutual funds (look for those funds which are highly rated by folks like CRISIL, Valueresearch Online, Economic Times, etc.)
    • However, if you understand and analyse shares before investing in the same, it is much better to invest in shares
  5. That's theory - What should I do right now - I'm completely new to the share market?
    • Simple - since you are new to the share market, start with mutual funds.
    • However, simultaneously, open your demat account, etc. and start investing a notional sum of money (an amount that you'll consider as a throw-away sum) directly in shares. This will (most likely) result in losses - but will also enable you to learn about the kind of mistakes that one can do while investing in shares. With time and patience, you'll become more confident. After 6-18 months, you're likely to be ready to invest larger amounts of money in shares directly.

Good luck & happy investing!

Watch out for Part II of this series ... ... ... ... ... ...

Regards,

N


Beginner's primer on Entry into the Share MarketSocialTwist Tell-a-Friend

Monday 19 May 2008

Credit card basics

Credit Card Basics

Hi friends! Lots of us have, use credit cards. Some of us (hopefully none of the readers of this blog) misuse credit cards for a variety reason and get into a debt trap. You must have seen a whole host of articles about the issue - and probably read none of them.

Happened to come across a very simple pictorial representation of the same and thought it worth sharing.

Read the link: Card primer - Most urban Indians find credit cards necessary — a necessary evil though. That need not be if users understand what the plastic money really is and how it works. Money Today magazine explains!

Regards,

N


Credit card basicsSocialTwist Tell-a-Friend
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