High-risk Low Return Opportunities

High-risk Low Return Opportunities

All of you must have heard a lot about fly-by-night "blade companies" which promise extremely high returns and disappear after your friends invested their hard-earned money.

Some of you must have a first-hand experience with one or more of such companies from the past.

Typically, such companies offer returns which are too good to be true.

Often, indeed they are too good to be true! Simply because they are false!

To be more precise, when such companies offer "assured" returns significantly in excess of the kind of returns offered by bank deposits, you know that you should run from them at the first available point.

Taking this on a global plane, I'd invite you to take a look at the following yield curve that I got from the net:



If a finance company offers a return of anything over 14-15% per annum, I'll have grave doubts about whether I'll get my principal back!

When the yield of a sovereign nation scales levels of 30% and above per annum (as the above figure shows), essentially it indicates the high probability of soverign default.

When a company defaults, people who had invested their money in it and a few stakeholders like employees, suppliers, etc. suffer to a certain extent.

When a bank defaults, (like Lehman Brothers did in 2008) a lot more people suffer, because of the impact of "linkages". This is what so-called experts call a "systemic risk".

When an entire nation defaults, believe me, all hell is likely to break loose.

And the danger of highly indebted nations like Greece actually defaulting is increasing every day.

If something like that happens, all bets are off as to how the world markets would be impacted.

That's one of the reasons why traditional "safe" assets like Gold & Silver are going up so much these days.

Take care of your portfolio.

Regards,

N

Pareto Principle

Pareto Principle

There are a few principles that stand the test of time.

Pareto principle is one such. The old, famous, 80-20 rule.

The picture below explains it eloquently:

       

To the best of my knowledge, Pareto principle works perfectly in all walks of life (at least in 80% of the situations).

All the more so, in the world of personal finance, especially in the wonderland of shares & equity mutual funds.

Some of the things that I've observed:

• 80% of the profits that you derive come from 20% of your investment decisions
• 
  

  80% of the profits that you derive come from 20% of your shares & mutual funds
• 
  

  80% of the total losses that you incur in each year comes from 20% of your shares & mutual funds
• 
  

  80% of profits (and losses) are generated in 20% of your holding period of the concerned investment (unfortunately, as David Ogilvy would have perhaps said, you don't know which 20% - Hence it makes sense to refrain from trying to time the markets!)
• 
  

  80% of what you hear / read / listen to from public sources are either unreliable or have already been factored in by the markets already
• 
  

  80% of the "secret tips", "sureshot advice" that you get from friendly brokers, neighbours, relatives, colleagues, well-wishers are junk material
• 
  

  80% of such junk material referred to above are very tempting to act upon. 
• 
  

  80% of our actions based on such advice referred to above result in losses
• 
  

  80% of ALL short-term predictions that you act upon are totally wrong, misleading, unreliable, useless or all of this and more!
• 
  

  80% of ALL short-term players, traders, self-learnt share "dabblers" lose money. Often lose the principal.

So, what does one do?

For those of us who are not making 80% of our total income from trading in shares, it does not make sense to "trade" at all!

Instead, the 80% of us who are not making 80% of our TOTAL INCOME from trading in shares must become investors in the true sense of the term.

And follow some basic norms such as:

• Don't forget - It is your money that you are investing. Never lose the capital. Don't take a risk that you can't accept. Mentally or financially.
• Do not buy before doing your own research - Really.
• Do not invest in shares if you are unwilling or incapable of holding the shares for at least 3-5 years. Really.
• Do not expect returns which are more than double what you get from a fixed deposit in a public sector bank.
• Do not hesitate to book your profits when you get your expected returns. Especially when you get such profits in unexpectedly quick time!
• Do not invest any money that you may require within the next 1-2 years
• Do not invest borrowed money in shares
• Just like you can't catch all the fish in a fishing trip, you will miss buying the right shares OFTEN and you'll sell too early - OFTEN. It is OK, as long as you don't end up buying the wrong shares and end up holding such junk for too long.
• Do not invest ALL your investible surplus in a single company / sector / promoter group.
• Do understand your risk profile and plan your asset allocation carefully before investing in shares.
• If, in the unlikely event of your share zooming into the stratosphere after you bought it, just before selling it to book your profits, ask yourself: "Will I buy this share at the current price if I had the money?" - If the answer is an unequivocal "Yes", Don't sell right now.
• The share market is not for historians. You deal with the future; you deal with uncertainties; you deal with probabilities; you deal with the unknowns. Be prepared by understanding the concept of "Maximum acceptable loss" and get out if your share price falls below this level.
• The shares you have bought are not your parents nor is it your beloved spouse. Be willing to "Let go" and sell it - either to book profits or to minimise losses.
• The share market does not owe you money. The share market does not know that you have bought a particular share. The share market will take the share prices up and down. The share prices will be volatile. Make volatility your friend. If not, it will become your worst enemy.
• Investing in shares is not a game of cricket or chess or soccer. It is like manufacturing steel or creating software or making biscuits. You should not treat it as a game of chance or a game of skill. You should treat it on par with something like buying a house, for instance. Before purchasing a house, all of us go through a whole range of evaluation parameters.

All said, remember the Pareto Principle.

Learn to relax by focusing on the key 20% - Always.

Regards,

N

---

Buy-and-hold is Dead

Happy investing!
Regards,
N

Buy-and-hold is Dead

Long live Buy-and-hold!

Apparently, once one starts writing a blog on any subject, one is inundated with absolute gems from all around on that very subject.

This post is also based on one such gem that I got from some unknown source. First, the original mail:

Buy-and-hold is far from dead but perhaps it has been misunderstood. As with many other investment topics, it is instructive to look to Warren Buffett's example.

Perhaps no other investor personifies buy-and-hold more than Buffett, who has stated that his preferred holding period is forever. But as with all things Buffett, this folksy tidbit is not his final word on this topic. When it comes to the Oracle of Omaha, we need to observe Buffett's actions as well as his words and for that, we go back to Buffett's early days running his hedge fund.

In letters to his partners, Buffett laid out three investment categories (later expanded to four): generals, workouts and controls. The generals were the buy-and-hold portion of his portfolio and usually comprised the largest portion of his holdings. These were value stocks he bought but was unable to predict when he would realize the expected gains. In fact, he warned that these stocks could suffer long periods of underperformance. The controls were similarly undervalued companies but where Buffett could take an activist (or controlling) role which could provide an impetus for realizing the value in these positions. Both of these categories could be labelled as buy-and-hold strategies.

The workouts, by contrast, were short-term investments with defined timelines and catalysts for validating the investment thesis. By their nature, these were not buy-and-hold investments yet they were an integral part of his early investment strategy. It is important to remember that Buffett was running a hedge fund and unlike today's charlatans, refused to be paid unless he made money for his partners. This provision also ensured he was very motivated to deliver positive annual returns. The workouts segment was instrumental in providing near-term, relatively dependable returns to balance out the buy-and-hold portion of the fund's holdings.

My take:

This had been a much-debated topic for discussion as well as introspection.

VIEWS OF Mr. N MERITS OF BUY-AND-HOLD I was thoroughly convinced about the need to "Buy & Hold". It is quite apparent that it generates untold of long-term wealth. All of us have our own favourite examples. Mine is TITAN INDUSTRIES. A couple of decades back - perhaps around the time when Titan was just listed, I was a newbie to the stock market. I'd identified it as a good pick, and picked up a then "huge" quantity for me - 200 shares at Rs. 30/=. As I'd predicted to myself, over the next few months, it moved from strength to strength, and, within 5-6 months, crossed Rs. 60/=. I was thrilled. I'd doubled my money in less than a year. And, I sold all my Titan. Doubled my money in less than a year. The rest, as they say, is history. In due course of time, I learnt one of my most valuable lessons.

I've certainly not come to any conclusions about dumping "Buy & Hold".

However, it is absolutely imperative that we must not be wedded to the "Buy & Hold" strategy. Or else, we would have got sub-optimal returns by holding on to our shares (like most of us did) between November 2007 and February 2008.

Each of us ought to identify our own personal style of investing which works best for us.

I personally prefer to classify stocks into the following categories:

• STEADY BLUE CHIPS - A good example would be a scrip like HDFC Bank - Always looks expensive on PE terms. A couple of quarters after you refrain from buying, if you take a look at it, it would have gone up even further, and will still look expensive. But, surprisingly, the old price at which you originally refrained from buying will now appear to be an attractive price based on the current earnings. The only problem - You'll never be able to catch it at price levels acceptable to you. With such stocks, there are only two alternatives - either buy with either blind faith or conviction and hold forever - or forget about holding them at any point of time!
• UNSTEADY BLUE CHIPS - A good example would be TISCO - Thanks to the commodity cycle (or whatever) it gyrates wildly, but nobody ever disputes about whether it is a blue chip. After all, it belongs to the house of TATAs & it has been around for more years than most of the investors' parents have been around on this planet. With such stocks, try and identify good levels to get in and to partly get out, and keep accumulating ever-increasing quantities. On those rare occasions when you end up buying such shares at the equivalent of January 2008, you can still mentally afford to keep them for good, as part of your long-term portfolio.
• MOMEMTUM BOYS - An excellent example would be Aban Offshore - Of course, the momentum boys keep changing in every cycle of 4-5 years. In some yester years a Silverline or Pentamedia or NEPC could have been momentum boys. These scrips gyrate without any rhyme or reason - and sometimes with reason. In percentage terms, they move around very violently. My strategy for such stocks is to allocate relatively minor sums of money, identify good entry / exit levels, keep buying and selling quickly, and maintain very strict stop losses. The last part about strict stop losses is the most important part, but has been perennially difficult for me. Reason - Behavioural Finance fundas (either listen to people like Parag Parikh to know more or wait for a future post on the subject of Behavioural Finance)
• OVER THE HILL GRANDPAS - These are the stocks that were, once upon a time, great companies. Perhaps were part of the SENSEX in yester-years. And belong to very reputed business houses - with promoters who are typically part of the "Old Rich". These companies may or may not recover their old glory ever again. However, the probability of their disappearing altogether is quite low. And, surprisingly, every couple of years, they end up quoting at sub-par levels (like Rs. 8-10 for a Rs. 10/= share), and in every couple of years, they also reach modest levels (of Rs. 20-30 for a Rs. 10/= share, for instance). Examples of such stocks would include companies like Hindustan Motors, SPIC. I'll be willing to have greater confidence on these stocks than the momentum boys. Hence my allocation could be slightly more. However, I'll strictly look at them as mid-term trading ploys with strict stop losses. Buy when they go to sufficiently low levels and get out when you've doubled your money a few weeks / months or a couple of years later. It is bound to happen. But, please don't ask me why or how - I have no reason to proffer!

Happy investing!

Regards,

N

---

VIEWS OF Mr. N MAKING HAY WHILE THE SUN SHINES I was equally convinced about the wild swings of the "Manic-Depressive" "Mr. Market" - After all, the indices keep going up and down all the time, taking all kinds of good, bad, ugly and crooked stocks along with it. An interesting way to make money would be to keep "trading" by buying 2-5 times a year and selling 2-5 times a year the very same stock. This would also fetch lots of money, provided, of course, you choose the right stocks. Good examples of pretty high quality companies which keep going up and down in 2-3 year cycles would include TISCO, ICICI Bank, etc. If only we learn to use the ups and downs, we can freak out with many of these stocks. I did that with a couple of stocks, and benefitted significantly. In due course of time, I learnt another of my most valuable lessons.

Can you afford to live till 99???

Can you afford to live till 99???

Take a look at this article that talks about the real implications of low interest rates, especially for thrifty savers:

• Can you afford to live till 99???

We, in India, are nowhere near this kind of situation. However, we are moving in that direction. Our interest rates, in the long run, are bound to be aligned with global rates. I distinctly remember getting fixed deposit interest at rates upwards of 11-12% per annum in the 80's & 90's. We've already reached 6-7% levels, and are sure to go down further in the years to come.

And, the average age till which we will live has already gone well past 75 for the middle class and upper middle class. Éven the poor and lower middle class people have started living till 70.

Inflation is far higher than the official government figures. Just check out the prices that you paid for various items like tooth paste, biscuits, dal, oils, petrol, shaving cream, medicines, restaurant dinners, movie tickets, auto fares, etc. just a year back and compare the same with current prices.

To top it off, most of us do not have a good enough pension plan.

The combination of low interest rates, high inflation, increased longevity, nuclear families, and absence of high quality social security systems can be killing.

Awareness is the first step and a key pre-requisite to actual preparedness to face the situation depicted above.

Regards,

N

---

The Advantage of the Individual Investor

The Advantage of the Individual Investor

(Part of a continuing series of periodic posts)

I read with keen interest an interview with the legendary investor Seth A. Klarman last night (Published in the September-October 2010 issue of the Financial Analysts Journal, Volume 66 No 5). One part that I reproduce below is very relevant for lesser mortals like you and me.

First, read this short paragraph from Klarman:

"Klarman: In our minds, ideal clients have two characteristics. One is that when we think we've had a good year, they will agree. It would be a terrible mismatch for us to think we had done well and for them to think we had done poorly. The other is that when we call to say there is an unprecedented opportunity set, we would like to know that they will at least consider adding capital rather than redeeming. At the worst possible moment, when your fund is down because cheap things have gotten cheaper, you need to have capital, to have clients who will actually love the phone call and—most of the time, if not all the time—add, rather than subtract, capital. Having clients with that attitude allowed us to actively buy securities through the fall of 2008, when other money managers had redemptions and, in a sense, were forced not only to not buy but also to sell their favorite ideas when they knew they should be adding to them. Not only are actual redemptions a problem, but also the fear of redemptions, because the money manager's behavior is the same in both situations. When managers are afraid of redemptions, they get liquid."

What does it mean for retail investors like you and me? Here are a few thoughts:

• We don't need to outperform either the index or any specific "competing" investor / fund manager
• We don't even need to outperform our own past performance
• We don't need to be answerable to anyone other than ourselves
• Nothing prevents us from holding a significant part of our portfolio in cash If we are either
• satisfied with the profits already made or
• scared about the comparitively high index levels

Do think about it!

Regards,

N

---

An Interesting Fact after the sharp move of September 13th

An Interesting Fact after the sharp move of September 13th

On Sept 13, we saw the markets zooming ahead. And I got a mail highlighting the limited number of scrips that outperformed the index on this very day.

What are the implications?

Are we seeing the typical blow-out phase of any bull market?

The real answer - I don't know. The bitter truth - No other persons knows, either.

Hence, what should we be doing at this stage?

My own recommendation from Nifty levels of around 5500 would be as under:

• For every 5-7% increase in Nifty, keep lightening up your stock portfolio by around 12-15%, in all the stocks which have run up significantly in the past 3 months, thus increasing your cash levels
• If you have the capacity to be patient, and if you don't mind seeing all your friends, colleagues, etc. making more profits than you in the very short term, sit tight on cash
• If you are the type of individual who must compulsorily remain invested in shares and don't believe in holding cash, at least try to buy in a staggered manner
• Also, in these highly risky global environs, if you insist on buying shares at current levels of Nifty,
• Try not to buy shares which have run up very significantly in the past 3-4 months (After all, I'm recommending that you keep selling such stocks!)
• Instead, try to buy those fundamentally sound stocks which have not run up already - like Reliance Industries, NTPC, Real Estate stocks, Specific Agri-product stocks, Specific cement stocks, etc. Ideally, stick to large-cap stocks at this moment - AND BE PREPARED TO HOLD FOR A LONG PERIOD!
• Make sure that unless you are a past master, don't play with futures & options at this stage
• As always, keep your stock exposure in line with your risk profile and asset allocation norms.

Most importantly, don't ever rely on experts, self-proclaimed experts, including me. Rely on your own individual research - At the end of the day, it is your money - You certainly don't wish to convert it into someone else's money!

An Interesting Fact after the sharp move of September 13th

Posted by: "GV" 

Mon Sep 13, 2010 10:42 pm (PDT)

Yesterday when nifty broke out sharply by about 2.13 % ;

- there were only 26 stocks among nifty category which outperformed the
index and 76 that under performed.

- and among a-z category, there were just 216 stocks that out performed and
as many as 1101 stocks which under performed.

*gv*

Regards,

N

---

Why we ought to depend on our own research

Why we ought to depend on our own research

Just came across an article in an old Business Line giving some info about the limited number of people who virtually control our markets in India:

• http://www.thehindubusinessline.com/2010/08/16/stories/2010081650980400.htm

Apparently,

• As many as 451 client identities accounted for about 50 per cent of the average daily turnover in the cash equity segment of the National Stock Exchange in the first quarter this fiscal. This was stated by the Minister of State for Finance, Mr Namo Narain Meena, in a written reply to question posed by Mr Sukhdev Singh Dhindsa in the Rajya Sabha.
• The number is even more intriguing in the derivatives segment, with only 106 clients accounting for 50 per cent of the average daily turnover.

What are the implications for lesser mortals like you and me who invest in shares? Here are some of my thoughts:

• First, these few persons, through their sheer weight, can take a share up or down by a significant percentage in a short span of time
• Secondly, they don't give advance notice to you and me about their planned course of action
• Therefore, we ought to be aware about the fact that a sudden spurt or tanking of an index or, more likely, a specific share can very well be exclusively due to market actions by these limited number of persons.
• Accordingly, before we decide to buy or sell a share, we must do our own research rather than depending on:
• Research recommendations
• Tips
• Rumours
• Sudden and / or violent movement in prices
• Most importantly, retail investors must very clearly understand the risk involved in investing in equity and take care of themselves by:
• doing meticulous research PERSONALLY before making investment decisions
• knowing our own risk appetite
• adhering to our asset allocation strategies meticuously
• limiting leverage to the extent to which we are ready to lose 100% of the capital that is deployed in derivative and / margin products
• having a long term orientation while investing in shares
• using very strict stop losses in accordance with our actual risk appetite
• being willing to book profits the moment our targets are reached
• irrespective of the time horizon
• and whether or not the stock continues to move further in the predicted direction
• not being too greedy - If you are getting anything more than twice the return on safe bank deposits, it is either too risky or you've just been lucky. 

Take care and happy investing!

Regards,

N

---

Sensible Advise for Volatile times

Sensible Advise for Volatile times

My last post (Beware of Conmen) was about someone inviting you to take what could perhaps be perceived as "unduly high risk". A reader had forwarded this mail from HDFC Securities and asked me for my comments.

First, I'd suggest that you read the inputs from HDFC Securities:

Investors get perturbed when the markets are not moving up in a sustained manner. And rightly so, because most investors have a mindset of buy and hold. And when the markets frequently change their direction, investors find it difficult to cope with such volatility.

Changed environment calls for a change in the strategy we deploy to tackle the markets. Just as you adopt different strategies to face fast bowlers and spinners and play the ball on its merits similarly the strategies need to change to play different market condition.

The volatility could be a blessing in disguise, if you can acclimatize yourself with it.

1.Take your ones and twos

In a volatile market you should learn to take small gains and losses. Instead of yearning for a large gain, hitting a six in cricket parlance, you should settle for smaller gains and take them as they come.

A stock may not give you a 20% return in one go but may give you 25% returns in trenches.  Sounds impossible? Lets see.

We chose Tata Steel and studied how it behaved during the Months of April and May. The stock gave 5 upswings of 5% or more and 5 down swings of 5% or more during the period.  So whether you are a bull or a bear, you got ample opportunities.

The Tata Steel swings were larger than 5%. The 5% was only a filter mark. The upswings were to the tune of 18, 5, 10, 8 and 7% respectively. Even if you could catch any one of them and rode only 5%, it would have been a good return to post. 

On the downside, the swings were 9, 21, 20,10 and 6%. The magnitude of these downswings was larger than those of the upswings.

The best part of a volatile market is that you get to buy the same stock again and again at the same level or lower. The chances are that if you get this act once right, subsequent opportunities will be easier to spot and ride.

2.Create some cash

If you are sitting on a pile of cash, you will see the falling market as an opportunity to buy. But if you are fully invested you will be fearful. In that fear, you are likely to sell some of the stocks at a loss.

On a day like this, when the markets tumble sharply, the one with cash will confidently buy where as some one who is fully invested may end up selling his stocks at a loss.

I have always thought that sitting on a 20-30% cash is a good idea. The very fact that you have to maintain this kind of cash will make your investment decisions well thought out. You will research and then buy and that too when the valuations are compulsive.

And on a day when the markets open down sharply, this cash can be put to good use. The stocks that you buy with this cash will have to sell in a disciplined manner. The cash so generated will be used only when the markets tumble further or a really good investment opportunity is spotted.

If you are fully invested, sell a part of your stocks when the markets move north. Selling and creating  cash at leisure and when the markets move up is better than selling in panic. However, if you realize that the recent investment you made is not a sound decision, selling that stock at a loss is not bad idea for cash generation.

3.Buy Puts

Buying a Put in the stocks concerned protects your portfolio. Protection comes at a cost. In the beginning of the month, the costs are pretty high. So in order to reduce your protection cost, you may perhaps want to trade off writing a lower Put. Your portfolio is protected till the strike price for which you write or sell a Put. When you do such a thing, it is called constructing a Bear Spread.

4.Write higher Calls

When stocks are tumbling and you are not buying Puts, it may worthwhile to write a higher call for the stocks that you have. If the markets tumble you will get to keep the premium you earn. To that extent you are compensated. Should the markets reverse and move higher, what you do next will be a function what is your trading profit or loss in the call written. If the call is going in your favor, cover it. But if you are making a trading loss, don't book it. Hold your position till settlement. On that day, if the call premium is still higher than your buying cost, let it lapse and sell your existing stock (for which the Call was written) in the last 10 minutes of trade in the cash market.

5.Keep your stop losses tight

When you are playing for smaller profits, it is advisable to keep your losses even smaller. So keep tight stop losses. Decide on your stop loss before entering the trade and make it a trailing one as the market moves your way. Even in Puts and Call options stop losses can be kept.

6.Be Nimble footed

Expecting that the markets will tank, you by puts in the Nifty. And after going your way for some time, the market changes direction. While you have the choice of selling your Put option, you may consider buying a Nifty Future to make the best use of the Put that is already bought. If the markets recover to the level where you bought the Put, your buying of the Nifty future would have been justified.

There are further games you can play with this Put you had bought. If you think the Nifty is likely to lose momentum, book profits in the Nifty, still holding on to your put. This gives you another opportunity to enter the Nifty Futures again at lower levels. You can repeat this several times in a week.

The adept amongst you would have understood that with the protection of Put to support you get the full advantage of the range of futures movement. If the Nifty moves in a range of 50 points, you get the full advantage of trading in the Nifty. Where as trading in the option alone would give you only half the range.

Similarly, when the Nifty reaches the upper range of the range, buying a Call and then shorting the Nifty Futures and covering at lower levels will be helpful. Rinse and repeat as many times as you want, till the option you have bought remains relevant.

7.Buy in small quantities

If you hate trading and are not the like who will settle for smaller profits, the least you can do is, defer your buying over three stages. You may buy a third quantity of your researched share at the first go. The next third can be bought 5% or 10% lower depending on the volatility of the stock and the balance quantity still after another same percentage gap.

You may repent buying only a third of your desired quantity if the stock surges after your buying. In such a case, you would probably end up with notional loss, for the quantity you never bought. But if the market does go down, you will appreciate your foresight.

All said an done, if you plan your trading and investing assuming that the volatility will continue, you are likely to land on your feet. As you go through this experience, keeping your cool, you will begin to appreciate the opportunities volatility offers and may in fact begin to love it.

And in a few months you will also get to trade in Volatility Index (VIX) itself. So treat the current volatility as a practice session to master VIX trading.

Sincerely,

HDFC Securities Limited

My comments:

• First, the HDFC folks are not "directly soliciting business" - That by itself makes me positively inclined about the contents of their mail
• Secondly, they do not give any "specific" tips nor any "vague" tips. Instead, they talk about a specific strategy to handle volatile markets. This makes me even more impressed, prompting me to seriously consider and evaluate their strategy.
• Now, to the contents of the strategy:
• First, by and large very sensible strategy.
• Second, this is not for novices except the bit about staggered purchases and holding 20-25% cash levels - which, by itself, is an excellent recommendation for all. The typical novice MUST not be bothered about the "notional" or "real" opportunity loss due to funds lying idle. Typically, the interest lost is of the order of 3-11% per annum. This will possibly be "more than adequately compensated" by the very real "buying low" that would be feasible by patiently waiting for opportunities.
• Third, dealing with futures and options, buying calls and puts, and, worse still, writing calls and puts - This is not for the faint hearted. As one of my favourite anchors on a business channel repeatedly says, "Remember that while you can make 40-100% returns in options in a couple of days, you can, and certainly will, occasionally (hopefully only occasionally and not frequently) lose your entire capital. That's a very real, live probability."
• This is where the importance of stop losses becomes vital. The downside to stop losses in volatile times is that it is very common to be "whip-saw"ed both on the way up and on the way down due to these "strict stop losses".

All said and done, these inputs from HDFC Securities are very valuable with the following caveats:

• Understand the inputs before even attempting to implement them
• Applicable only for "seasoned players"
• Start practicing with  "Throw-away" money, and gradually increase your exposure to the F & O segment.
• Be prepared for "serious losses" in the initial several months before you "see green"
• Make sure that "Greeed" & "Fear" are your servants and not your masters.

Take care!

Regards,

N

---

Need for Savings

Need for Savings

First, some background info for this particular post:

....... ....... ....... ....... ....... .......

Happened to be chatting with a friend, and was suggesting that he get hold of a PAN card in the name of his HUF with a view to having an additional "taxable entity" in his family, thereby ensuring that he gets one more "exemption limit" of a couple of lakhs of rupees.

His response was a shocker. He started asking me as to how having a PAN Card for his HUF can help him reduce his taxable Salary income????

I probed further, and he mentioned that his income from all other sources such as interest, dividends, rent, capital gains, etc. were close to zilch. And he was only interesting in knowing whether the TDS on his salary income can somehow be reduced.

I was perplexed, and delved even deeper. I was curious to know as to how and why he has almost zero-income from Interest, Dividends, Capital Gains, etc. And he told me that he ends up spending almost all his salary income on either expenses or EMIs for his home loan. Thank God for small mercies - At least he had a home loan and hence was not spending ALL his income on running expenses.

And this friend of mine is an Engineer/MBA from top notch schools with a couple of decades of experience! The only saving grace was that he was not maxed out on half a dozen credit cards and that he was not in a deep hole of a debt trap!

....... ....... ....... ....... ....... .......

Now to the main post. Why should a typical salaried person with a kid or two and one or more other dependents save any money? Here is the low down to my dear friend:

• You are not going to
• Live forever
• Stay healthy forever
• Work forever
• Some day, you'll retire and in all probability, you'll live for a few years after that. Today's life expectancy for reasonably healthy upper middle class folks is well beyond 80, and I don't expect you to work for much beyond 65
• Your accumulated savings should keep you and your dependents going for at least 20 years after retirement. And remember, there is a good chance that your dependent may end up outliving you by 5-10 years!!! Look around you.
• There are blocks of "Big Expenses" waiting for you in the years to come
• Higher education of kids
• Marriage of kids
• At least 2 foreign holidays for the family per decade
• At least 6 instances of multi-day hospitalisation per decade
• You will not enjoy the idea of being a "dependent" on anyone, especially if you're used to "being the boss" and the "hand that brings the bread" all your life. Certainly, you'll not relish being financially dependent. And God forbid, what if you outlive people on whom you may be forced to be dependent, financially or otherwise????
• You have a better standard of living today than you did around 10 years ago, 5 years ago, perhaps even in comparison to a year back. And you'll be keen on improving your standard of living in the years to come. It costs money. Just tell your dad or grandma about the price of 1 KG of your favourite vegetable or a gram of Gold or a square feet of land or your last restaurant bill and look at the looks on their faces - That will be your response for every item of expense 10 years later, 15 years later.
• Don't believe a word of the public claims of inflation in the business papers - While they talk about 5-10% per annum, you know better. Things that you MUST BUY like rice, dal, tooth paste, shaving cream, shampoos, shoes, shirts, petrol, movie tickets, sanitary napkins, undergarments, broomsticks, floor cleaners, etc. are all becoming costlier at rates northwards of 15-20% per annum. Things that are becoming cheaper due to technological advancements like TVs, Laptops, Mobile Phones, Cameras, etc. need to be replaced ever more frequently as they become outdated. Even yester-year "once in a life time purchases" like cars are being replaced as frequently as twice a decade. All of this cost money. And loads of money. And I've not even spoken a word about so-called luxuries like jewellery, costly parties, etc.

All the above points are just a small portion of the strong reasons that exist for you to start saving money every month - right away! In case you have not been doing so already.

If you are convinced about the need to save money regularly, you are prepared to start thinking about a few other questions:

1. How much should I save?
2. How should I save?
3. What should I do with my savings?
4. Should I never take loans? Or is it OK to take some loans?
5. How should I invest my savings?
6. What is the meaning of
• Financial Planning
• Asset allocation
• Fiscal Prudence
• Risk Pyramid
• Risk-adjusted returns
• Inflation-beating returns

For answers to all such questions, do keep re-visiting this blog!

Regards,

N

---

Life Insurance Basics

Life Insurance Basics

A few days back, I happened to have two brief conversations with a couple of friends - Both of them intelligent individuals with significant professional achievements to their credit. As luck would have it, both of them were asking for my suggestions regarding life insurance products - thus far, it was OK and normal. What was rather surprising was:

1.      Both wanted my opinion on specific products which were identified for them by "a friend" in one case and by "a tele-marketing guy" in the other instance. And neither "suggestors" - if I may coin such a term - had done any in-depth study of the specific requirements of my friends, if any.

2.      Both my friends were open to the idea of considering committing their hard-earned money (and part of their future income - after all, this would become a regular annual commitment) based on the suggestions received.

Considering the situation prevailing around us, perhaps I'm being naïve to be surprised by the above.

The nature of queries prompted me to post some quick facts about the need for and the method to be followed to choose an appropriate life insurance product.

To know more details, you may download this 4-page article. Do read on:

• Life Insurance Basics

Regards,

N

---

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

---

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

---

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

---