Friday 11 December 2009

Unusual Alert


Unusual Alert

One of my brokers provides me a daily email alerting me on bullish / bearish technical indicators for specific stocks based on a pre-defined criteria that I've provided.

In the past week / 10 days, I've noticed something extremely unusual:
  • The usual email just talks about a max of 5-10 companies
  • For the past few days, it has been a bit of a laundry list (more like a google search), mentioning the "first 50 stocks" of a list of many more stocks satisfying the pre-defined criteria that I've provided - Only on the bullish side!
  • The bearish side has almost disappeared or has just a single stock or two on most days!
What does one infer from the above? Some obvious thoughts:
  • We're in a very strong bull market, perhaps bordering on a bubble phase
  • We're perhaps ready for a really strong break-out on the upside
  • Which, in turn, should lead us to the end of the next bubble phase
My own suggestions based on the above:
  • Start being very careful in the market
  • Be very wary about making any fresh purchases (except perhaps for the very immediate short term)
  • Start booking profits gradually (if you've not already started doing so)
  • Increase your cash levels
  • When the market suddenly starts zooming upwards suddenly and violently, please recall the period when the Sensex moved from 17000 to 21000 in a matter of just a couple of months. And, aggressively book profits in this phase.
  • Don't regret about shares which continue to zoom after you've sold them - You're better off with cash, and you're likely to get lower levels to re-invest some time during 2010.
Happy investing!

Regards,

N

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Thursday 10 December 2009

Using Credit Cards Effectively

This Pic should tell you all you need to know about using credit cards effectively - Thanks to the friend who forwarded the same to me!






Regards,

N
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Saturday 5 December 2009

Dubai Crisis - A Pictorial Representation


Dubai Crisis - A Pictorial Representation

This one that I got from a friend is timely and cute!


Regards,

N

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Monday 9 November 2009

Some interesting stuff on Behavioural Economics


Some interesting stuff on Behavioural Economics
- Before my holiday
Some interesting stuff on Behavioural EconomicsSocialTwist Tell-a-Friend

Going on a holiday


Going on a holiday

Dear Friends,

Am going off on a longish holiday for 3-4 weeks. I'm unlikely to be blogging during this period.

Once I'm back, I'm sure that I'll be even more energized than ever, and will come up with many more useful and interesting posts.

Do check out from time to time, but certainly come back to this blog in the first week of December, 2009.

Bye for now!

Regards,
N

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Friday 6 November 2009

Which month is the best time to redeem Equity Mutual Funds?


Which month is the best time to redeem Equity Mutual Funds?
A few words of caution: This post might be of interest and utility only if you are:
  1. Investing both in Shares and Equity Mutual Funds
  2. Reasonably financially literate (so that you'll follow the substance of what I'm talking about - nothing complex, but slightly boring stuff nevertheless)

The above question, according to experts, is probably irrelevant.

They'll probably say that your redemption decision should be driven by factors such as:
  • When you need the money,
  • When markets are generally overvalued,
  • When the PE is too high, etc.
However, let me rephrase the question.

If you need to generate some cash for a specific bulk expense from your shares or equity mutual funds, should you be indifferent about whether you sell shares or redeem mutual funds?

Or is there any logic in redeeming mutual funds Before selling shares? If so, will the answer be different in any specific month of the year?

I don't have any definitive answers Yet.

However, I've started developing a hypothesis about the same. Let me share with you the broad idea.

Well, I happened to review the portfolio (which I manage) of a family member for the month of October 2009, and I found something curious:

% Change over the previous monthChange
Equity MF (A collection of Equity funds from different fund houses)-2.16
Sensex-7.38
Nifty-7.38

In all preceding months, through thick and thin, through bull markets and bear markets, the above figures used to be somewhat comparable to each other. I've never noticed a significant difference in the past. Of course, I'll need to re-check the data over the years to see if such differences have occered in the past either for this individual or for any of the other portfolios that I manage.

The difference in October 2009 appears to be huge. While the Sensex and Nifty have fallen by over 7%, the Equity mutual funds net worth has declined by just above 2%. Amazing indeed. An outperformance of over 500 basis points. Within a single month.

Have the fund managers suddenly become "super-efficient"? Or have they got plain lucky?

I've been in the market for way too long to believe in either of the above possibilities.

I delved deeper into the matter and did some quick research. I found something very basic and interesting.

This family member had received dividends (interim and final) on many shares held by him during the month of October. Obviously, many companies forming part of the Sensex & Nifty would also have paid out dividends during October (and hence gone ex-Dividend).

This implies that all those companies which had gone ex-Dividend in October 2009 would have started quoting at a price duly reduced by the dividend amount by the end of October, thereby reducing the Sensex and Nifty levels correspondingly.

On analysing the Mutual fund portfolio of this family member, most of the Equity Mutual Funds in his person's portfolio had Not Declared any Dividend during October 2009. However, most of these Equity mutual funds would have Received dividends from companies held by them in their portfolio. To that extent, the NAV of these Equity Mutual Funds would, as on October 31, 2009, be quoting at levels which would include the impact of dividends received by them.

This could be one of the possible reasons for he huge difference of 500 basis points in the performance of Equity Mutual Funds vis-a-vis Sensex / Nifty during October 2009.

If my above hypothesis is indeed true, while you can be indifferent about whether you sell shares or redeem equity mutual funds in other months, in those months when you receive lots of dividends from companies whose shares you own, you must prefer to redeem equity mutual funds rather than sell shares. Like in October 2009, for instance.

As a corollary, if you must either invest in shares or equity mutual funds in months such as October 2009, obviously, you must prefer to invest in shares directly rather than investing in equity mutual funds.

Think about it. Perhaps there's a grain of truth.

Also, do give me your feedback on the same after making a similar study of your own portfolio.

Regards,

N

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Wednesday 4 November 2009

Power of Trading

Power of Trading

Many people misunderstand the concept of

  • Long-term investing - To mean that one should sell only when one needs the money
  • Asset Allocation - To mean that one should have a by-and-large-fixed proportion of surplus money to be invested in different asset classes at any given life situation (age, number of kids, etc.)

Both the above are completely wrong. I'll explain in greater detail in later posts.

In this post, I'm going to share with you hypothetical figures of the difference that one can make with

  • Periodic trading, ie., periodically booking profits and re-entering at lower levels
  • Slightly higher levels of returns by allocating a larger share in riskier asset classes.

Take a look at this table:

Power of Trading, rather than holding long-term! Wonder if it is feasible???
Initial Amount Invested
Annual Return
No. of Years
Final Value of Investment
 
 
 
 
 
 
 
Impact of buying shares at just 3% lower cost and trading periodically so as to get just a 2% additional return annually
97,000
1.20
10
600,598
 
100,000
1.18
10
523,384
 
 
 
 
 
 
97,000
1.14
10
359,600
 
100,000
1.12
10
310,585

You'll realise something that ought to be obvious:

  • A 6% higher return can mean an enormous difference to your portfolio value at the end of a decade. Hence, do ensure that you allocate a higher proportion of your disposable surplus in riskier asset classes like equity if you are looking at the long term
  • A strategy that involves periodical profit booking and re-entering at marginally lower levels has quite a significant impact on your portfolio value at the end of a decade. Hence, make it a point to book profits regularly. This will also ensure that you
    • Review your portfolio regularly
    • Cut your losses from unintended dud investments far more quickly

Think about it!

And Act!

Regards,

N


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Friday 30 October 2009

Of Pins & Bubbles

Of Pins & Bubbles

A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons. - Warren Buffett

Considering the credentials of the Guru from Omaha, I can't take the chance of disagreeing with the sage all the time.

As enough number of investment gurus have pointed out, bubbles will keep getting formed as long as naive investors are floating around on this planet.

As long as bubbles are in existence, pins will keep searching for them.

On every such occasion when the two meet (I mean the pin and the bubble), inevitably the bubble will burst.

The whole process goes on somewhat along the lines suggested below:

  1. The smart investors would have got in there first, ahead of the rest
  2. The naive ones would have kept observing the bubble, denying its ever-expanding nature and refrained from getting in
  3. Unfortunately, just a few hours / days / weeks before the pin meets the bubble, our naive friends will go right ahead and invest in the bubble, convincing themselves that the bubble "Is different" this time around!
  4. And, pray, whom did these naive investors buy the bubble components from?
  5. Of course, from the Smart Investors referred to in (1) above!
  6. And, the Pin meets the Bubble

Moral of the story:

  • We can't do much about bubbles
  • We just need to learn our lessons from pins meeting bubbles
  • And aspire to become "smart investors" well in time to greet the next bubble.
  • And be smart enough AND fearful enough to get the hell out before the next pin meets the next bubble!

Happy investing!

Regards,

N


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Thursday 29 October 2009

World Thrift Day - Why ALL of us Ought to invest in Equity

World Thrift Day - Why ALL of us Ought to invest in Equity

Dear Friends,

Wishing you all a very happy "WORLD THRIFT DAY" - Apparently, it is celebrated on October 30th!

To me, every day is a Thrift Day.

On this occasion, I'd like to make a preposterous suggestion: All of us MUST invest in Equity (either directly or through mutual funds - at least through Nifty BEES). Many may be aghast at this suggestion, saying that Equity is not appropriate for anyone who can't afford to take a risk.

However, I differ.

Take a look at the following table:

 Reason as to why you must remain exposed to Equity!
Initial Amount Invested
Annual Return
No. of Years
Final Value of Investment
         
Even if the initial investment is half, if annual returns are much better, the final value will be much bigger over a long period of time. Moral of the story: Invest at least part of the amount in Equity to ensure higher returns over a period of time.
50,000 1.14 10 185,361
100,000 1.08 10 215,892
       
50,000 1.14 15 356,897
100,000 1.08 15 317,217
       
50,000 1.14 20 687,174
100,000 1.08 20 466,096

You'll notice that:

  • I've just assumed a one-time investment and have done the calculations for two different sums of initial investments - 50K & 100K.
  • Obviously, I've assumed that the guy investing 50K chooses to invest in Equity while the guy investing 100K has chosen debt instruments like fixed deposits
  • I've assumed a relatively ordinary level of 14% per annum returns for Equity, whereas many mutual funds have given far superior returns.
  • I've assumed truly long-term time horizons.

You'll further notice that beyond 15 years, the guy who initially invested just half the sum initially actually outperforms the other guy.

That's the power of a combination of:

  • Long time horizon,
  • Compounding and
  • Equity investing

If the above results are achieved with just a one-time investment, just imagine what you can achieve with a recurring investment in Equity with a good chunk of your disposable surplus savings!

Happy investing. May all of you grow immensely rich and wealthy beyond your wildest dreams!

Regards,

N


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Wednesday 28 October 2009

Diversification - Warren Buffett's Thoughts on Diversification

Warren Buffett's Thoughts on Diversification
And why I disagree with him for a change!

"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing" - Warren Buffett

Very interesting quote, indeed.

Specific Disclaimer: I'm not too sure whether this is an authentic quote nor am I aware of the context in which the quote was made.

However, for the limited purpose of this post, I'm assuming the authenticity of the quote and proceeding further.

Obviously, for a given time horizon, if we consider the universe of listed entities on the Bombay or National Stock Exchanges, a specific scrip, let's call it ABC Ltd., will produce the maximum returns and a specific scrip, let's call it XYZ Ltd.,  will destroy the maximum value for its investors. And all the other scrips will have performance levels somewhere within that range.

So, as rightly pointed out by Buffett, it ought to imply that all of us should sell all the rest of our portfolio of longs and go long on ABC Ltd., and, likewise, use our "Short" positions exclusively for XYZ Ltd.

I wish that life is so simple.

Unfortunately, it is not.

Here are a few reasons as to why I disagree with Warren Buffett (and why I prefer diversification any day):

  • Nobody can predict the future that precisely.
  • Any significant, material, price-sensitive event that has a positive / negative impact on either that stock or that sector or some other stock can swing the price of your stock wildly, thereby throwing your calculations out of the window. Examples abound:
    • A sudden Lehman Brothers can deplete the value of some other Financial Giant vis-a-vis a Pharma major, for instance.
    • An outbreak of Swine flu or a major Class Action Suit on an unanticipated side effect on a popular drug can impact the price of your favourite Pharma Major either positively or negatively
    • Worms in your favourite chocolate or a sudden war in the middle-east can impact the share price of some other Chocolate company or that of an Oil Marketing major.
  • If your single golden bullet misses its target, you're in doldrums.
  • On the contrary, if you are diversified across sectors, across geographies, across market-caps, etc., chances are bright that no single event is likely to significantly impact your overall portfolio performance - Your portfolio performance is, in that case, more likely to be influenced by your own overall efficiency of analysis, stock picking skills, etc.

Hence do make it a point to keep your portfolio diversified.

At least on this matter, don't listen to Warren Buffett blindly!

Regards,

N


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Tuesday 27 October 2009

Beware of Credit Card Fraudsters

Beware of Credit Card Fraudsters

Credit for this post goes to NM, an uncle of mine, who forwarded this mail to me!

There are problems enough due to credit cards - Debt traps, et al. More about them in some other post of mine.

Unfortunately, there are problems due to credit cards that ought not to occur even for spend-thrift credit-card holders. Here's a mail that talks about highlighting a few of such problems and taking care of the same.

Be sure to read Scene 3.  Quite interesting. This is a new one. People sure stay busy  trying to cheat us, don't they?

Take care!

Regards,

N

SCENE 1. 
 
A friend went to the local gym and placed his belongings in the locker. 
After the workout and a shower, he came out, saw the locker open, and thought to himself, 'Funny, I thought I locked the locker.
 
Hmm, 'He dressed and just flipped the wallet to make sure all was in order. 
 
Everything looked okay - all cards were in place.. 
 
A few weeks later his credit card bill came - a whooping bill of $14,000! 
 
He called the credit card company and started yelling at them, saying that he did not  make the
transactions. 
 
Customer care personnel verified that there was no Mistake in the system and asked if his card had been stolen..  
 
'No,' he said, but then took out his wallet, pulled out the credit card, and yep - you guessed it - a
switch had been made.
 
An expired similar credit card from the same bank was in the wallet. 
 
The thief broke into his locker at the gym and switched cards. 
 
Verdict: The credit card issuer said since he did not report the card missing earlier, he would
have to pay the amount owed to them. 
 
How much did he have to pay for items he did not buy? 
 
$9,000! Why were there no calls made to verify the amount swiped? Small amounts rarely trigger a 'warning bell' with some credit card companies. It just so happens that all the small amounts added up to big one! 
============ ========= =======
 
SCENE 2. 
 
A man at a local restaurant paid for his meal with his credit card. 
 
The bill for the meal came, he signed it and the waitress folded the receipt and passed the credit card
along.   
 
Usually, he would just take it and place it in his wallet or pocket. Funny enough, though, he actually took a look at the card and, lo and behold, it was the expired card of another person. 
 
He called the waitress and she looked perplexed. 
 
She took it back, apologized, and hurried back to the counter under the watchful eye of the
man. 
 
All the waitress did while walking to the counter was wave the wrong expired card to the counter cashier, and the counter cashier immediately looked down and took out the real card. 
 
No exchange of words --- nothing! She took it and came back to the man with an apology.. 
 
Verdict: 
 
Make sure the credit cards in your wallet are yours. 
 
Check the name on the card every time you sign for something and/or the card is taken away
for even a short period of time.  
 
Many people just take back the credit card without even looking at it, 'assuming' that it has to be theirs. 
 
 
FOR YOUR OWN SAKE, DEVELOP THE HABIT OF CHECKING YOUR CREDIT CARD EACH TIME IT IS RETURNED TO YOU AFTER A TRANSACTION! 
============ ========= ======== 
 
SCENE 3: 
 
Yesterday I went into a pizza restaurant to pick up an order that I had called in. 
 
I paid by using my Visa Check Card which, of course, is linked directly to my checking account.   
 
The young man behind the counter took my card, swiped it, then laid it on the counter as he waited
for the approval, which is pretty standard procedure.   
 
While he waited, he picked up his cell phone and started dialling. 
 
I noticed the phone because it is the same model I have, but nothing seemed out of the ordinary. ?
 
Then I heard a click that sounded like my phone sounds when I take a picture 
 
He then gave me back my card but kept the phone in his hand as if he was still pressing buttons. 
 
Meanwhile, I'm thinking: I wonder what he is taking a picture of, oblivious to what was really going
on. 
 
It then dawned on me: the only thing there was my credit card, so now I'm paying close attention to what he is doing. 
 
He set his phone on the counter, leaving it open. 
 
About five seconds later, I heard the chime that tells you that the picture has been saved. 
 
Now I'm standing there struggling with the fact that this boy just took a picture of my credit
card. 
 
Yes, he played it off well, because had we not had the same kind of phone, I probably would never have known what happened. 
 
Needless to say, I immediately cancelled that card as I was walking out of the pizza parlour. 
 
All I am saying is, be aware of your surroundings at all times. 
 
Whenever you are using your credit card take caution and don't be careless. 
 
 Notice who is standing near you and what they are doing when you use your card. 
 
Be aware of phones, because many have a camera phone these days.
 
 
JUST BE AWARE 
 
Never let your card out of your sight.....check and check again! 
 
Scary, isn't it....

Regards,

N


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