Value Investing

key ratios for picking good stocks

2008-03-25T08:46:00.000-07:00

The following 8 financial ratios offer terrific insights into the financial health of a company -- and the prospects for a rise in its share price.
1. Ploughback and reserves
After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback.
Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.
The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.
Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.
Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.
Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.
As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.
Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.
The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.
2. Book value per share
You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.
The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds.
If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.
Book Value per share = Shareholders' funds / Total number of equity shares issued
The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company.
Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.
Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth.
The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.
3. Earnings per share (EPS)
EPS is a well-known and widely used investment ratio. It is calculated as:
Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued
This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs 10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs 6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share. This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend.
The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.
This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.
Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend, and 20 per cent (Rs 4 per share) the ploughback.
Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.
4. Price earnings ratio (P/E)
The price earnings ratio (P/E) expresses the relationship between the market price of a company's share and its earnings per share:
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.
P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.
For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.
On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.
Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.
To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings.
All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?
The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects.
If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.
5. Dividend and yield
There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends -- capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.
It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- it doesn't really matter whether it comes from capital appreciation or from dividends.
A wise investor is primarily concerned with the total returns on his investment -- he doesn't really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.
Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.
On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.
On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.
Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company's shares. This relationship is best expressed by the ratio called yield or dividend yield:
Yield = (Dividend per share / market price per share) x 100
Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.
Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each.
If XYZ announces a dividend of 20 per cent (Rs 2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.
The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.
Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.
6. Return on Capital Employed (ROCE), and
7. Return on Net Worth (RONW)
While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.
While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:
1. Return on Capital Employed (ROCE), and
2. Return on Net Worth (RONW).
Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company's efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.
Return on capital employed
Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).
The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.
The operating profit of a company is a better indicator of the profits earned by it than is the net profit.
ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.
Return on net worth
Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.
ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.
The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.
8. PEG ratio
PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.
For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.
The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.
As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.
The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.
[Excerpt from Profitable Investment in Shares: A Beginner's Guide by S S Grewal and Navjot Grewal.]

Financial Planning - overview

2007-01-29T01:39:00.000-08:00

Financial planning is a critical necessity for each one of us who seeks financial control of our affairs and wish to create wealth. Then why is it that most of us do not have a Financial Plan or have not even given a thought to it?
Why is it that we keep trudging along and feel that all will become right one day? Why is it that we always think of how to earn more but hardly give a thought to what our earned money is earning for us? Most of us have not even thought of having a dual income stream – one from our work and the other from our investments.
Whether we accept or not, each day or each time we think about creating wealth we are imprisoned by what I call - the seven deadly sins.
Pride: Caused by excessive belief in one's own abilities, Pride happens because in school we were taught to believe in ourselves. But that belief was with knowledge. This sin is committed when we believe in ourselves and choose to act without adequate knowledge. All we want to have is only some idea of what is the best investment. And believing it to be the best for us, we commit that sin forever under the pretext of “I know how this works.”
Envy:You've just seen someone make a killing. And you think, that is reason enough for you to take the plunge as well! But then what if you have taken the plunge at the wrong time. We all know the old age wisdom, “Do not break your own hut by seeing someone else's palace.” Then why is it that we change our asset allocation and bet on something that has worked for another?
Gluttony:Have you incurred credit card debt? Well...in that case know for sure that you are committing a sin each day. Have you taken a loan for a depreciating asset? Now thats an example of financial gluttony. But then, if you're able to manage the instalments of that depreciating asset from your investment returns you're a smarty.
Lust:Whatever you do you are driven by money only. And if you're prepared to move from one job to another for a 20% rise without considering the credentials of the company and the nature of job, you're far from being smart. What if you've just missed on the stock options there. Besides you could have always had the opportunity to create a niche for yourself no matter how large the organisation.
Anger:This is widely seen when you are dealing with an agent to who comes to make a sales call and objects to your knowledge or when your broker did not sell when the markets were falling. In both the cases, you were to take the decision. You recall that with anger and/or arrogance you commanded that nothing be done without your consent. Know that in financial management there are two choices – either you take all decisions yourself or let your advisor take that for you. Of course given that you trust his skills and knowledge.
Greed:I hardly need to say anything here. Most people rush to invest in the stock markets when they touch an all time high. Others think markets will go up forever. Surely you cannot time the market but when the goal is achieved why not sell? After all, that's precisely the reason why you invested in the first place. Now if there is no goal and no plan to manage that goal, it is quite likely that this sin will keep revisiting you from time to time.
Sloth:This is the one that I love to talk about. The bible says “Whatever we do in life requires effort” so if we wish to ask for tips and then act, it is a sure way to disaster. Either we must take effort to do all the hardwork ourselves or take the effort to search for a trusted advisor and outsource our efforts. Finding a trusted, knowledgeable and skilled advisor is not a very easy task to do.
Sins that were spoken of centuries ago are still so relevant. Needless to say, it is up to us how much we wish to cleanse.

Financial Analysis - purview

2007-01-29T01:37:00.000-08:00

You must plan for your financial goals’, ‘We conduct a complete needs analysis and then give you solutions’, ‘Our method is superior’ so on and so forth. These lines are used as punch-lines by most financial product sellers while talking to you and posing as financial planning advisors. Goal planning is a far more complex exercise than you can possibly imagine. In fact, it is the heart of financial planning. A good goal planning structure could give you a lot of control with your cashflows and gives you adequate bandwidth whereby you do not have to compromise now or in later years of your life.

Considering that you have many goals, lets talk about three goals that need to planned viz., down payment for purchasing a vehicle in two years, providing interior decoration to your house in say five years and planning for wedding of your child, in say 12 years. In order to do good goal planning, the amounts for these goals would need to be defined now and a projection must be made (based on timeframe) for the future value of these goals by taking into consideration the inflation rate or rate of inflation pertinent to that goal in question. For example, if you propose that you child should study in Australia perhaps you should look at the Australian rate of inflation rather than the Indian rate of inflation.
Now, as you can see that the time frame for each goal is different and planning would depend on your existing assets, i.e. monthly cashflow available and the time that you have for achieving your goals. The time frame would be your starting point and that coupled with your cashflow would dictate the rate of return that you need to earn on the goal in question. Further, the rate of return would dictate the asset allocation i.e. how much money into risk instruments and how much into non-risk instruments and this then culminates to your risk profile for a goal in question. Yes risk profile is different for each goal. Against this backdrop, how could you possibly have a single risk tolerance framework – the one that is determined by some questionnaire or very crudely put, you being asked by your advisor the level of risk you wish to take? It is the advisor who should advice on the level of risk needed for achieving each goal rather than you choosing it yourself. The purpose of planning is defeated if you choose a generic level of risk.

Once the goal planning is done and if you then feel that the level of risk is higher – you have three choices. To take lower risk, you will have to have an increase in your cashflow and that may not be possible as you suddenly cannot increase your income or change your job. The next is to extend the time frame – but then that is again not necessarily possible with all goals, for example, you cannot say that your child will go to college about five years later when you have more cash. The third is you will have to compromise on the quantum of the goal – but if you had to do that why would you do financial planning in the first case?

Now, from the goals mentioned above, if the goal was two years away perhaps the strategy for goal fulfilment would be biased toward low risk instruments typically generating lesser rate of return but then the contribution from your end would be much larger here. Against this, the goal that is 12 years away perhaps the strategy for goal fulfilment would be biased toward high to very high risk instruments typically generating a much higher rate of return and then the contribution from your end would be much larger lower. That is how you can balance your cashflows so that from what you have you are able to achieve all of your goals.
Remember different goals have a different rate of return and hence they would earn different rates of return. A generic risk level and thereby buying some products viz., ULIP (unit linked insurance plan) or MF (mutual fund) or life insurance would just not help. It would do more harm in the long run and at that time there is a chance that you have to do fire-fighting to provide for the money, there is stress, assets have to be liquidated, some assets just cannot be liquidated as the maturity date is still away and in general the financial situation becomes a complete mess.

Like I said, a goal planning gives you adequate control of your finances and provides a lifetime of peace. If you are not at ease with your finances be sure you don’t have goal planning or that the goal planning you have is just not effective.

RIGHT Stocks @ RIGHT Price

2006-09-01T07:53:00.000-07:00

Take guru Peter Lynch's investment mantra to heart -- one must first find the companies whose long-term prospects look good and have good management quality and then check whether their share price is under-valued using the PEG ratio.
PE ratio, that is the Price/Earnings ratio is a common valuation number used by investors in stocks. The PE number gives an idea as to whether the stock is under-valued or over-valued.
It is defined as: PE ratio = market price of the share / earnings per share.
However, the problem with PE ratio is that it is a meaningless number, by itself. Is PE of five good or bad? Or should it be 10? Or possibly say 25? Mathematically speaking, the lower a PE stock appears, it's considered better than a higher PE stock. But is it really so?
Why do we buy a stock? We buy it so that when its price goes up, we can sell it and make profit. But why should the price of the share go up? Again simple, the price would go up if the company makes higher profits i.e. higher earnings per share (There are, of course, many other reasons for share prices to go up, but from the fundamental perspective, the price of a share is ultimately a reflection of it's profits).
In other words, it is the growth in the earnings, which gets reflected in the share price. And since we are buying a share in anticipation that its price will go up in future, we must look at the expected growth rate of its earnings, especially over the next two-three years.
Comparing the two i.e. the PE ratio and the EPS growth of a company gives a more meaningful picture. PEG ratio or the Price Earning Growth Ratio is defined as: PEG ratio = PE ratio / EPS growth rate
PEG ratio=1 This means that the share price is fully reflecting the company's future growth potential i.e. the share at today's prices is fairly valued.
PEG ratio>1 This indicates that the share price is higher than the expected growth in the company's profits i.e. the share is possibly over-valued.
PEG ratio<1 This indicates that the share price is lower than the expected growth in the company's profits i.e. the share is possibly under-valued.
Therefore, the PEG ratio tells us something more about the future potential of the company. It tells us whether the high PE is a superficial number or is supported by future growth prospects.
Let us look at an example to get a better perspective. We have an information technology company whose PE ratio is 30 and expected EPS growth rate of 40 per cent. And then, we have a banking stock, with PE ratio of 12 and EPS growth rate of 8 per cent.
On the face of it, if we only look at the PE ratio, the banking stock looks cheaper and attractive. But what about the PEG ratio? Let's do the simple math:
IT company PEG = 30/40 = 0.75
Bank PEG = 16/8 = 1.50
Going by the definition of PEG ratio, we find that the IT company's share is undervalued considering its future growth prospects. And so its share price is likely to appreciate more than the bank stock.
However, as usual, there is a word of caution. Like any other financial number, the PEG ratio is not a law, but a very useful indicator of a whether a share price is under or over-valued. It cannot be looked at in isolation. One must:
Look at other numbers such as
P/B value, operating margins, return on equity etc.
Compare it with the peer group
Consider other non-financial factors too, such as brand value, management quality, barriers to entry etc.
This is so because we are only estimating the EPS growth. If our expectations of growth do not materialise, the share prices can fall. Or sometimes the market gives more value to things like brands.
This is so because, even if the growth rate does not justify a high price, the brand value acts as protection. Say there is a fall in the demand, then it is likely that large reputed companies will be less affected, than relatively unknown companies. There is a sort of stability of returns expected.
Therefore, to get the best out of this PEG Ratio, it may be prudent to follow investment guru Peter Lynch's advice - first, find the companies whose long term prospects look good and have good management quality and then check whether their share price is under-valued using the PEG Ratio.
sanjay.matai@moneycontrol.com

Get RICH mantras

2006-09-01T07:51:00.000-07:00

Achieving health, wealth and happiness :

1. Start out with a clear idea of what you want, the clearer the idea the better your chances of achievement. Write it down clearly in a positive way and in the present tense. For example, if you want a car, clearly spell out what kind of car, what colour, what d�cor, and so on.
Let us say a Honda City in blue colour with beige faux leather interiors. Write down: 'I have a blue Honda City with beige faux leather interiors. It has a stereo system of the best quality from xyz, a television monitor, a DVD player, etc'

2. Picture yourself achieving your goal. If you are thinking of the car, picture yourself driving this car. See it in your driveway or parking lot. Give the picture a lot of colour and atmosphere such as smell (those who know will tell you that new cars smell different. For me it is an intoxicating smell), sound, etc. The better your visualisation, the faster you will get there.

3. Convince yourself of the definiteness of achieving your goal however absurd it appears initially. Dream big and see it as absolutely real. Conviction carries the day. Belief is all.

4. To assist you in your visualisation, prepare a scrapbook or a sheet of card paper and stick pictures of all the things you want in life. Only do not put people in it. For instance, you want a good partner, visualise your getting a good partner, the kind of person, his or her qualities and so on. Do not expect Marilyn Monroe to drop into your life, she is long since gone! If you are lucky and you desire it, someone who looks like her just might. . . so all the best!

5. Last of all there are two very important principles:
Be grateful for what you have and are getting everyday. Enjoy the sunrise and the sunset, the smell of flowers, the internet or whatever else you have, and say a silent thanks to all those who made this possible.

IT Sector expected to post solid Q1 earnings - MC

2006-07-08T04:02:00.000-07:00

De-risk yourself by being in the IT sector
Brokerage firms are expecting Infosys' overseas revenues to grow by 38%, Wipro's global revenues to ramp up by 45% and Satyam's overseas revenues to grow by 31.7% in the first quarter of FY07.We never had Infosys and Wipro trading at lesser valuations, so typically whenever the fresh FIIs came in they had to buy these stocks at those valuations and these stocks became richer in valuations. Infosys and Wipro are suitable for fresh investors.
Click here to read full report.

Hot stocks for next week: Experts
Deven Choksey, KR Choksey Sec: Reliance, Infosys, Glenmark, look good in a falling market.
Rahul Mohindar, Viratechindia.com: Reliance, Infosys will be the key stocks to give market direction.
Sumeet Rohra, Antique Stock Broking: Watch out for ONGC, Infosys, TCS and Reliance.
Click here to read full report.

QoQ margins will stay flat for most of the companies and the profits of banks may decline due to the Held To Maturity, HTM, transfers.
Among the non-ferrous stocks, he says that they are expecting strong numbers from Hindalco, while he feels that Tata Steel and SAIL may post strong sequential numbers.
He adds that oil marketing companies may see a strong net profit growth and he expects strong numbers from the auto and infrastructure sector.
For textiles, actually expecting a decline in the PAT and your report mentions that it is primarily because of Arvind Mills.
Click here to read full report.

Stocks trading at a discount to their book value
Market price of 37 stocks from the BSE 500 companies are trading at a discount to their book value. While Chennai Petroleum’s stock price on June 12 was equal to its book value, the next 110 companies were available at a price to book value of between 1-2.
While as many as 80 companies are available between a P/BV of 2-3, 66 companies were trading at a P/BV of 3-4, and 52 companies were available at a P/BV of 4-5.
The 30-stock benchmark, BSE Sensex, on the other hand, is available at a much higher P/BV of 4.05 and 12-month PE multiple of 17.16 as on June 12.
Click here to read full report.

4 foolish money goals... and 4 smart ones

2006-07-06T09:16:00.000-07:00

Human beings need goals to survive. And it's not just goals at work that I am referring to. You need a goal to lose weight or to put on weight. To save money or to spend on a function. The list is endless. Which brings us to personal finances. Do you keep goals?

Even if you vehemently answer yes, are you doing it smartly? Here are four foolish goals and their smart variants.

Wrong goal: I will save.
Smart goal: I will save 15% of my salary.

I learnt this from a dietician. "Saying I want to lose weight is pointless," she told me. "You must be clear how much you want to lose."

Ditto with your money. Saying you want to save will take you nowhere. Everyone wants to save but everyone does not get down to doing it.

Get specific. Put numbers to your goal.

I want to save 10% of my salary. I want to save Rs 3,000 every month. That will get you on track.

Else, you may end up saving Rs 500 the first month, Rs 1,000 the second month, and Rs 300 the third month.
Have you reached your goal? Sure, if your goal is just to save.

But, once you get specific, you get disciplined.

Wrong goal: I will invest.
Smart goal: I will invest in NSC, PPF and a diversified equity mutual fund.

In this instance, it is wise to decide where you are going to invest.

Let's say you decide to save Rs 3,000 every single month. You also decide you want to distribute the money between a safe investment and a risky one.

So you pick up on a diversified equity fund and, every single month, you decide to invest Rs 1,000 in it. This amount can be directly debited from your savings account into your mutual fund. Every month, you also put in Rs 1,000 in your Public Provident Fund account. The balance Rs 1,000 can be put in a recurring one year deposit. At the end of the tenure, when you get a principal of Rs 12,000, you can buy a National Savings Certificate.

But, if you just decide you are going to invest and don't decide how, you may end up putting the entire Rs 3,000 in a mutual fund. Or all of it in your PPF. Worse still, you may invest nowhere and just sit on your money wondering what to do with it.

Don't invest dumbly. Invest smartly and diversify.

Wrong goal: I will be debt free.
Smart goal: I will plan a strategy to get debt free.

Who does not want to be debt-free? To throw off all those loans and forget about the monthly payments and the stress that accompanies it. However, it requires planning to get there.

You have to look at all your loans and see if you have the funds to pre-pay a loan. If yes, which loan will you pick on?

Let's say you are repaying a personal loan and a housing loan. And now you have some money but are not sure which one to prepay. Don't prepay the housing loan. You get tax benefits on interest payment and principal repayment, which works to your benefit. You get no tax benefits on a personal loan.

The interest rate on a home loan will be much less than a personal loan which could vary from 14% (if your company has a tie-up with a bank or it is a promotion) to 21%.

So, it would make sense to pay off the more expensive loan first.

If it is a credit card loan, you will have to stop using the card so that all your additional purchases do not get caught in the interest cycle.

In such a situation, every month, instead of investing your savings, use them to pay off your credit card debt.

Wrong goal: I will live within my means.
Smart goal: I will cut down on partying and not spend on my credit card.

Every month, every spender will make a resolution to live within his or her means. Easier said than done.

A better way to do it is by specifying where you will cut down. For instance, I shall eat out only once a week and I shall visit the pub only twice a month is a great start for someone who splurges on the above.

Or, let's say, you have budgeted Rs 10,000 for monthly expenses. Of this, your essential expenses come to Rs 6,000 (cell phone bill, travelling, etc.)

You can keep limit of Rs 4,000 on your credit card. Once you touch this limit, you will not longer take your card out with you and stop all shopping and spending.

Bollinger Bands

2006-07-06T08:27:00.000-07:00

Bollinger bands are an integral part of just about every charting system We have ever seen but many traders are unfamiliar with how to use them. In this lesson we will cover the basics of Bollinger bands and one particular technique which we have found to be very reliable.The bands are plotted at a standard deviation (statistical term for measuring volatility) around a moving average. Typically the standard deviation used is 2.
A simple moving average in the middle. Most charting software defaults to a 20 period moving average.An upper band calculated around a simple moving average plus 2 standard deviations. A lower band calculated around a simple moving average minus 2 standard deviations. For our examples we will use the most common setting of a 20 period simple moving average. This will give us 3 bands, the middle band of a 20 period simple moving average and the upper and lower bands calculated around the middle band with standard deviation of 2. The closing price is most commonly used to calculate the moving average. Bollinger bands can be used to generate buy and sell signals but that is not their primary use. The main purpose of the bands are to:
To identify areas of high and low volatility.
To identify periods when prices are at an extreme and possibly ready for a reversal.
To identify a trending market. See Chart Below

The SqueezeThe squeeze (tightening) is a period of low volatility and often happens before a big move. It can also help identify potential breakout areas.ReversalIn conjunction with other indicators you can identify potential reversal points. Trending FollowingAlthough Bollinger bands will not tell you when the trend has started if you combine it with certain indicators they will confirm the trend.Our Use Of Bollinger BandsAs we mentioned earlier Bollinger bands are not really meant to be used as a signal generating indicator but in conjunction with another indictors can be very useful. We like to use Bollinger bands and RSI together to generate possible buy and sell signals or to confirm overbought or oversold areas. When the RSI reads below 30 and price is touching or pushing through the lower band then we know we are oversold and We will either consider buying the market or close existing short positions.
See Chart

We have found the bands to be effective on all time frames from Daily to monthly bars.

The power of compounding

2006-07-01T22:10:00.000-07:00

If compound interest is so simple that it is taught in high school, how come it took Albert Einstein, arguably the greatest scientist in the world, to call it the 8th wonder of the world?

Was it to remind us that we forgot about a magic theory? Really, understanding compound interest is very, very difficult. The human mind does not comprehend such growth so easily. We in our physical selves have a simpler type of growth. So we do not comprehend compounding of growth. A few old, really old stories might just help.

Let us start with the famous story of the Persian emperor who was so enchanted with a new 'chess' game that he wanted to fulfill any wish the inventor of the game had. This inventor, a mathematician, decided to ask for one seed of grain on the first square of the chessboard doubling the amounts on each of the following squares.

The emperor, at first happy about such modesty, was soon to discover that the total yield of his entire empire would not be sufficient to fulfill the 'modest' wish.

The amount needed on the 64th square of the chessboard equals 440 times the yield of grain of the entire planet. Just try converting into money in any currency and you will realise the importance of compounding.

A similar analogy is that one penny invested at the birth of Jesus Christ at 4% interest would have bought one ball of gold equal to the weight of the earth in the year 1750. In 1990, however, it would buy 8,190 such balls of gold.

At 5 per cent, interest it would have bought one ball of gold by the year 1466. By 1990, it would buy 2,200 billion balls of gold equal to the weight of the earth!

The example shows the enormous difference 1% makes. It also proves that the continual payment of interest and compound interest is arithmetically, as well as practically, impossible.

Just see what a difference it would have made if your great grandfather had invested in a bank fixed deposit only Rs 100 say 150 years back. What it would have grown to?

Here is a dream sheet. See for yourself. Imagine Rs 100 is invested and it grows at 10 per cent every year.

Column 2 is what it will grow to if it was held for the number of years in column 1. So if your great grandfather invested Rs 100, 150 years ago, you would have inherited Rs 16 crore (Rs 160 million).

No. of years it is invested for-What it would grow to in Rupees:

1 - 110

5 - 61

10 - 259

15 - 418

25 - 1,083

50 - 11,739

100 - 1,378,061

150 - 161,771,784

200 - 18,990,527,646

300 - 261,701,099,618,845

400 - 3,606,401,402,752,540,000

500 - 49,698,419,673,124,400,000,000

So what is the learning from this sheet? Even a 1 per cent difference can make a mountain of a difference, but the greatest difference is made by the number of years the money remains untouched. That is the key.

For those more mathematically inclined, I state below the formula:

Vn = Vo * (1+r)^n

'n' in the compounding formula is the number of times the amount is compounded.

But for practical purposes if you take that as the time for which you stay invested in an instrument, you would not be too wrong either.

What it means is that:

The amount of money that you require (Vn) is equal to the amount invested today (Vo) multiplied by [1+ interest rate (r)] raised to the number of times the amount is compounded (n).

In this formula you as a client can control how much money you want at the end of the waiting period (Vn), how long the money can be invested (n), and how much money you can invest today Vo.

Instead of worrying about 'r', just start investing. That is the key.

Takeaways:

Start investing early.
Do not touch the amount for a long time.
Do not keep jumping from one investment instrument to another.
Let the power of compounding work for you. It would have worked for your grand-dad, dad and you. If they knew it, great. If they did not, you can start the line. At least your grandchild will praise you for it.
To see what it would have become over 500 years is fantasy. What it could have become over 150 is Ratan Tata.
When you read about 'the rich get richer, and the poor get poorer,' it is not about socialism. It is about compounding.

Tax benefits on home loans

2006-06-25T23:05:00.000-07:00

Food, clothing, shelter -- these are more than mere election promises, they are the basic needs of every individual. But to most, owning a home was just a dream.
The real estate boom and steadily rising capital values are now making it next to impossible for most people to fund their own homes.
The good news is that banks and financial institutions are offering aggressively competitive rates on home loans, making it possible for more people to own the home of their dreams. Many builders have tie-ups with banks or financial institutions so that prospective buyers are assured of housing loans without any hassles.
Taking a home loan serves two purposes. One, of course, is that you get to buy your own home and pay for it in easy instalments. The other is that you get several benefits under the Income Tax Act. And since these sops are what make a home loan different from other loan products, it makes sense to take a long, hard look at them.
About deductions
Under the IT Act, income is taxed under five different
heads, one of them being 'income from house property'. Income under this head is taxed based on the annual value of the property. This annual value is, in turn, based on the income earning capacity of the property.
If the property is actually let out, the rent received is the annual value of the property; if the property is not let out, a notional amount (being rent expected to be received) is considered the annual value. The annual value of one self-occupied house is taken as nil.
Certain deductions are available from the annual value of the property, while determining the income from house property. The housing loan can be taken from any source -- bank, financial institution, employer, relative or friend.
The deduction is available on an annual basis and is in respect of interest liability even though interest is not actually paid during the year. But interest paid or payable on unpaid interest amount is not available as a deduction. No deduction is allowed for any brokerage or commission paid for arranging the loan.
An employer paying any salary to his employee shall deduct tax from that amount on the basis of tax rates in force. An employee who has taken a housing loan can, at the beginning of the year, furnish details of interest payable during the year.
The employer should then deduct tax on the lesser amount after allowing deduction for the amount of interest payable. The employee should, at the end of the year, furnish a certificate from the lender, specifying the amount of interest paid or payable by him during the year.
Deduction on interest
Under Section 24, any interest paid on the money borrowed to purchase, construct, repair, renovate or reconstruct the property is allowed as a deduction. The entire amount of interest paid is allowed as deduction if the loan is taken to purchase, construct, repair, renovate or reconstruct a property that is let out.
A maximum deduction of Rs 30,000 is allowed to the tax payer in respect of interest paid if a self-occupied property is acquired, constructed, repaired, renovated or reconstructed with borrowed money.
If the loan is taken after 1 April 1999, to purchase or construct a self-occupied house, an enhanced deduction of Rs 1.5 lakh (Rs 150,000) is allowed, only if the purchase or construction is completed within a period of three years from the end of the year in which the loan is taken.
Why Take a Home Loan
You get to own your home and pay for it in easy and affordable instalments.
Banks and FIs are offering loans at cost-effective rates.
Tax concessions make home loans more attractive than other loan products.
You can get tax deduction on repayment of the principal amount of a loan taken to buy or construct a house.
The interest paid on a loan is deductible from 'income from property', even if it has not been paid during the year.
Interest paid on a new loan taken to repay the original housing loan is also allowed as deduction.
However, the enhanced deduction is available only if the loan is taken to purchase or construct a self-occupied property. If a loan is taken (even after 1 April 1999) to repair, renovate or reconstruct a self-occupied house, the maximum deduction available is Rs 30,000. Also, the enhanced deduction is allowed only if the borrower furnishes a certificate from the lender every year specifying the amount of interest payable.
The interest paid on a new loan taken to repay the original housing loan is also allowed as deduction. So, if you have a loan that was taken before 1 April 1999, it will work to your advantage to take a new loan after 1 April 1999, to repay the original loan. In this case, you can claim a tax deduction of Rs 1.5 lakh in respect of the interest paid on this new loan.
Pre-construction period
The time between the date on which loan is taken and 31 March of the year immediately before which the property is acquired or construction completed is called the pre-construction period. If the loan is repaid before the acquisition or construction is completed, then the pre-construction period ends on the date of repayment of loan.
So, if you take a loan on 1 July 2000, and construction of the house is complete by 30 January 2005, the pre-construction period is 1 July 2000 to 31 March 2004. If the loan is fully repaid on 20 December 2003, the pre-construction period is 1 July 2000, to 20 December 2003.
The interest paid or payable in the pre-construction period is not available as a deduction in the year of payment of interest but it is available as deduction in five equal instalments.
The first instalment is allowed as a deduction in the year in which construction or acquisition of the property is completed. Interest for that year and the subsequent four years plus one-fifth of the interest of the pre-construction period will be allowed as deduction.
Even in such a situation, however, the aggregate deduction for the year in case of self-occupied property cannot exceed Rs 30,000 or Rs 1.5 lakh as the case may be.
If the loan is taken by two or more persons, the deduction for interest paid is available to each co-borrower, based on the amount of loan he actually repays or is liable to repay. The same deduction limits (Rs 30,000 and Rs 1.5 lakh) apply to each co-borrower, though the aggregate deduction available to all co-borrowers can exceed Rs 30,000 or Rs 1.5 lakh as the case may be.
Very often, the borrower includes his/her spouse's name for convenience. In such cases, deduction for interest will be allowed only to the individual who has actually repaid the loan. Since the spouse has actually not paid any amount, he/she will not be eligible to get any deduction.
If a loan is taken from a Non-Resident Indian, any interest payable outside India is subject to tax deduction at source. Any interest paid or payable outside India will not be allowed as deduction if tax is not deducted at source and there is no person in India who can be treated as an agent of the non-resident.
Deduction on principal
Under Section 80C of the IT Act, deduction is available in respect of repayment of the principal amount of a loan taken to buy or construct a residential house. Under this section, a maximum deduction of Rs 1 lakh (Rs 100,000) is allowed per year.
You can also claim deduction under Section 80C towards payment made for stamp duty, registration fee and other expenses for the purpose of transferring the property in the name of the assessee. All these deductions, however, should not exceed the overall limit of Rs 1 lakh.
However, deduction under Section 80C is not available in respect of payment made towards the cost of any addition, alteration, renovation or repair carried out after the issue of the completion certificate.
------------------------------------------------------------------------------------------------
Those of us who tried buying a home in the past 18 months can easily identify with the experience of 32-year-old Rahul Mathur. For this Gurgaon-based senior consultant with recruitment firm Ma Foi, identifying his dream home was more like aiming at a moving target.
Mathur started his search for a three-bedroom flat in Gurgaon in June 2005 with a substantial budget of Rs 25 lakh (Rs 2.5 million). However, during the course of his search in the following months, he would find the property prices going up during every visit to this Delhi suburb. He finally managed to buy a house priced at Rs 32 lakh (Rs 3.2 million) in November 2005 -- Rs 7 lakh (Rs 700,000) more than his budget -- with the help of a 20-year floating rate loan from ICICI Bank.
Of course, there was relief from the success in acquiring what probably would be his life's biggest investment. By stretching himself on home acquisition, Mathur, however, had to make a compromise somewhere else.
"I would have bought a bigger car than the one I eventually bought had the prices not moved up so drastically," says Mathur.
Mathur's predicament is shared by most other home buyers. In the past 18 months, not only have real estate prices soared but home loan interest rates have headed north too, making a substantial impact on affordability of homes. In conditions such as these, should a home buyer go on to make the purchase and stretch his finances or should he postpone his purchase?
Clearly, it is not an easy decision to take, more so if you consider the following risks emanating from rising property prices and home loan rates.
The New Risks
For the sake of convenience one can categorise the new risks according to their sources, that is rising property prices and rising home loan rates.
Risks from rising property prices: On an average, property prices have moved up by 30-50 per cent in the past one year. In some areas, notably Delhi suburbs of Gurgaon, Noida and Faridabad, prices have doubled during the same period. This has exposed the buyers to new risks.
Increased financial vulnerability: This is the one of the major risks that you could face where you, like Mathur, could end up stretching your budget. Home finance companies typically finance 85 per cent of the cost of the property. This means that you will have to arrange for the balance 15 per cent from your resources.
In the backdrop of rising property prices, you run the danger of having to cough up more for the down payment should the prices increase substantially during the period of your home search.
Depending on the state of your finances, you could go through a period of financial difficulty. While Mathur had to compromise only on the car he bought, things could get even more difficult for others. Since you tap liquid funds during your home purchase, stretching your budget might leave you with very little liquidity to address emergencies, especially non-insurable ones.
Cascading effect on associated costs: There are additional costs linked to the cost of the property. Costs such as those for stamp duty payment, registration, builder transfer charges, legal costs and maintenance charges are all linked to the price of the property. For instance, depending on the property's location, stamp duty is 6-10 per cent of the cost.
Last but not the least, when you try to catch up with increasing property prices, you mostly have no option but to take a higher-than-anticipated loan amount. This translates into higher loan-related costs such as administration and processing costs.
Lower Returns: If one of the reasons for buying a home is to have an appreciating asset, you are likely to suffer from less-than-satisfactory appreciation, since you are buying at a high price. What makes the effective cost more is the fact that you are incurring interest costs. In fact, if you compare the current yields from various asset classes such as equity and debt with real estate, you would find the yield from real estate to be the lowest. At times, it may be even less than 1 per cent and post-tax, the figure would go down even further.
Risks from rising home loan rates: The interest rate on housing loan has descended from 13-14 per cent per annum in 2000 to touch a low of 7.5 per cent in 2004. However, there was a reversal in the trend since then and, currently, the home loan rates are quoting at 9-10 per cent.
This week, the RBI has again increased the short-term rates. ICICI Bank was among the first to hike the interest rate on home loans by 50 basis points. Though still below the historical averages, home buyers face a host of risks from this development.
Increasing interest costs: As interest rates are revised upwards by home loan providers, the number of equated monthly instalments (EMIs) and the interest paid out by buyers during the tenure of the home loan increases. Of course, this will be true for home loan products that have rates that are variable, like a floating rate loan, or the ones that have variable element, like hybrid loans that have floating rates for a certain part of the loan tenure. Mumbai-based Ashish Avasthy's experience illustrates the kind of additional burden that can come from home loan rate hikes.
Avasthy, a 30-year-old, who is an assistant manager, legal, at Raymond had been living in a rented apartment at Mumbai's Kandivli-East for one year. After his marriage in 2005, he finally got fed up of shifting his residence every 11 months when his leases expired.
In December 2005, he bought a flat in Wadala that cost him Rs 26 lakh (Rs 2.6 million). He took a 20-year floating loan of Rs 20 lakh (Rs 2 million) at an annual interest rate of 7.25 per cent. The interest rate on this loan has since moved up to 7.75 per cent per annum. While Avasthy's EMI amount has remained the same, the tenure for his loan has already increased to 22 years.
Deadly fine print condition: One of the risks that remain hidden from most home buyers comes from a fine print condition in most home loan agreements. This clause relates to the situation of the property price falling. While many experts rule out this possibility of a real estate price fall in the near future (See below: Bubble Trouble), you will do well to know that many home loan providers have a clause in the loan agreements, whereby they can demand you make good the fall in the value of the property.
"Any remaining balance would have to be borne by the consumer, since he or she is bound by the agreement to repay the debt. Also, if there is a guarantor or a co-applicant, the bank could make them liable," says an SBI official. Thus, more you stretch your finances for acquiring a home, more vulnerable you get to the risk from this clause.
How can buyers cope with the new risks from rising property prices and home loan rates? How does one decide what one can afford? Fortunately, the maze of options and pitfalls of buying a house can be navigated by keeping in mind three factors. We will now explain them in detail.
Strategy # 1: Check the EMI-rent gap
If you are staying in a rented house, figure out how much additional monthly outflow EMIs would entail when compared to your rent. The lesser the difference between your EMI and rent, the more sense it makes to acquire a home. From 2001 onwards, the low EMI-rental differentials were among the major factors that set off the current housing boom.
In the recent past, while property prices have breached the stratosphere, the silver lining is that the rents have not moved up. As a result, the difference between the EMI and rents too has increased. For example, the difference between the EMI outflow and the rents is as high as Rs 65,000-70,000 for some south Delhi properties.
"Such a huge difference between the EMI outflow and the rents is often an indication of a bubble in the market," says Abheek Barua, chief economist, ABN Amro Bank. Till what point is the EMI-rental differential acceptable? Experts say that the ideal difference between the rent and the EMI is not more than 30 per cent.
This is why the decision of Hemant Soreng, 33, a Bangalore-based IT professional, can be termed sensible. While living on rent, he was paying Rs 12,000 per month, while the EMI for the new house he booked in July 2004 and moved into in May 2005, is Rs 16,000. "Since the difference between the rent and the EMI was not much, I decided to buy a house of my own," says Soreng.
However, it is not always possible to conform to such thumb rules, especially when other factors come to the fore.
Avasthy paid Rs 5,250 as rent when he lived at Kandivli-East. For his house in Wadala, he is now paying an EMI of Rs 15,800. "Though the EMI is much higher than the rent, it has helped us improve the quality of our lives and gives us the time and energy to concentrate on our life and careers," justifies Avasthy.
"Staying on rent is an option if you feel that the market is overheated. Otherwise, it may be better to buy at today's prices. The reason being that once in a Bull Run, prices can rise to new highs. Thus, waiting will not solve your housing problem," says Veer Sardesai, a Pune-based financial planner.
Strategy # 2: Keep your EMI within prudential limits
Before you plan to buy a house, you need to know of the loan amount you can afford. Of course, the bank will analyse your repaying capacity. "Generally, the EMIs should be within 50 per cent of the net income of the applicant, subject to an overall limit of 85 per cent of the value of the property," says S.K. Mitter, CEO, LIC Housing Finance.
But financial planning experts suggest that you put a full stop much before that limit. "You should not exceed 30 per cent of your take home salary. In case you have other loan obligations, then your total EMI outflow should definitely not exceed this amount," says Sardesai.
However, there are other financial planners who are of the view that you can stretch the figure up to 40 per cent of your take home salary. Let's illustrate the EMI strategy with the help of an example.
If your take home salary is Rs 35,000, your EMI for the new house should not be more than Rs 10,500-14,000. Financial planners also advise to keep some funds as back up while buying a house. "You should ideally have three months of funds as a backup. This will include your EMI and other expenses," advises Rohit Sarin, partner, Client Associates. This back up helps you to meet contingency expenses.
There is another thumb rule that you need to follow for prudent borrowing. "Your total principal outstanding should not be more than 50 per cent of your assets," says Gaurav Mashruwala, Mumbai-based financial planner.
This means that if you book a property costing Rs 10 lakh (Rs 1 million), take a loan of Rs 7 lakh and you have assets worth Rs 4 lakh (Rs 400,000). You have total assets worth Rs 14 lakh (Rs 1.4 million). Under these circumstances, ideally your total principal outstanding should not be more than Rs 7 lakh.
This is so because in case of any eventuality like loss of job, it would be difficult for you to service the EMIs.You can only ignore the need for prudential borrowing at your own peril. The home buying experience of Kamaljeet Singh, 30, a Delhi-based IT professional will tell you why.
Singh, the only child of his parents, stays with them along with his working wife, who works in Jubilant Organosys. He bought a 324 sq yard plot in Mohali for Rs 37 lakh (Rs 3.7 million) in May 2006, with the help of a 15-year loan for which he pays an EMI of Rs 8,500. His next real estate investment in the same month, a Rs 20 lakh (Rs 2 million) four-bedroom society flat in Mohali, is all set to strain his finances.
If Singh hasn't faced the music so far it is because he has had to pay the deposit money of Rs 5 lakh (Rs 500,000) only. Once the construction starts, he will have to start paying an EMI of around Rs 12,000 on his 15-year loan. This means a total payout of Rs 20,500 on the two EMIs.
At that juncture, one income of either Singh or his wife would go in servicing the two home loans. Of course, Singh has a contingency plan.
"In case any problems arise in repayment of the loan, family's property investments will have to be sold," says Singh. Clearly, this is a case of going overboard. Contrast this with the case of Soreng, who has restricted his EMIs to 25 per cent of take home pay.
Strategy #3: Don't overdraw on your savings for down payment
You will need to organise at least 15 per cent of the cost of the property for down payment. This will give you an idea of how much you can spend on your property. For example, if you are planning to buy a property worth Rs 30 lakh (Rs 3 million), you will need to at least arrange for Rs 4.50 lakh (Rs 450,000). The down payment affordability varies depending on the disposable funds you have. The key lies in knowing which assets to tap for the down payment.
For starters, you can park money specifically saved for buying a house in very low-risk debt instruments like fixed deposits. "Apart from this, liquidate those investments that earn you less return than the rate at which you are borrowing," says Sarin.
This would typically be instruments like your bank FDs, under-performing debt funds, besides equity funds and stocks that have been under-performing for a very long time, with little prospect of future appreciation. Stay away from retirement funds such as your provident fund (PF) and public provident fund (PPF). "This is so, as once people take out money from these sources, they rarely replenish them," says Mashruwala.
Putting the strategies into action: To be effective, all the strategies, especially the EMI and down payment strategies, will have to work together. Let's see how. If your take home salary is Rs 35,000 per month, the EMI strategy tells you that you can have an EMI of up to Rs 14,000 or 40 per cent of your take home pay. If you are to take a 15-year loan at an annual interest rate of 9 per cent, the maximum loan affordable is Rs 14.21 lakh (Rs 1.421 million).
You can similarly arrive at an affordable loan amount from the stipulations laid down by the down payment strategy. Thus, if you can afford to make a down payment of Rs 1.5 lakh (Rs 150,000), the maximum loan possible is Rs 8.5 lakh (Rs 850,000). Clearly, the two approaches throw up two different property prices. Experts suggest that home buyers choose lower of the two figures. In this case, the figure works out to be a property of up to Rs 10 lakh and a loan of Rs 8.5 lakh.
Consider compromise options: What do you do if after adopting these strategies you find home options unaffordable? One option would be to postpone the purchase and wait for the prices to cool down. The other approach would be to buy a home that's affordable even if it means making a compromise on important parameters like the size, that is, settling for a two-bedroom flat instead of a three-bedroom. Many experts suggest that you go for this compromise option.
At a macro level, despite the rise in property prices and loan rates, homes remain affordable. In other words, home buying still makes eminent sense. The only caveat is that buyers need to tread with more caution than they did in the past. But what has not changed is the question that every buyer needs to answer: 'Can I afford this home?' Its relevance has only got heightened. Buyer would do well to remember that the pursuit of a dream home can no longer be a mindless one.
Bubble Trouble
Is there a bubble in the Indian property market? Like all other asset classes, even real estate passes through cycles, and in India, some experts believe, its having an extended run and is expected to rise further in the coming days. In the past one year alone, prices have moved up by 30-50 per cent and, in some places, prices have doubled.
Locations that witnessed unprecedented rise are Gurgaon, Faridabad, Noida and south Mumbai. Even prices of apartments in Bangalore moved up by 70 per cent in the past year.
The increase in prices is not restricted to big cities, but are also evident in Tier-2 cities. "Land prices increased by 150 per cent in some of the Tier-2 cities," says Joygopal Sanyal, business head, urban and infrastructure advisory, Trammell Crow Meghraj. These cities include Indore, Raipur, Siliguri, Bhubaneswar, Guwahati, Kochi, Coimbatore, Vishakhapatnam, Mangalore, Lucknow, Chandigarh, Ludhiana, Ahmedabad, Nagpur and Kolhapur.
There are many reasons for this upsurge. There is a shortage of more than 20 million dwelling units, both in urban as well as rural areas. Apart from this, easy availability of home loans, rising salaries, emergence of India as an outsourcing hub, companies shifting to Tier-2 cities to cut costs and the tax benefits associated with owning a house have been the major drivers.
But how long will the party last? "I think that the property market would continue to go up in the near future with a steady growth rate in almost all the markets," says Sanyal. Though not every one believes that the real estate market is a bubble waiting to burst, there are factors that can reverse the trend.
"Government intervention, rising interest rates and fluctuation in foreign investment in the sector can reverse the upward trend. Also, the last two year's boom has led to an excess of supply, which will ultimately result in stabilisation or even reduction in prices," says Major-General (Retd) Jayant Varma, executive director (North), Knight Frank India.
However, a possible correction may not lead to a crash in prices. Experts believe that it will only lead to a reduction in the rate of capital appreciation. Further, a recent Crisil report suggests that most rallies in home prices across the world end in soft landings rather than abrupt drops.
So how different is the present rally from the one that we saw in the mid-1990s? Experts believe that this rally is very different from the last one. In the '90s, an artificial demand was created and there was no supply to meet that demand -- this led to a crash in prices. In the current rally, however, the supply in new projects is aplenty as are genuine buyers.

Long term investment idea : Sports Management

2006-06-25T07:02:00.000-07:00

Sports in India has for long meant cricket. Just as sports management has largely meant sponsorships and event management for cricket. This still holds true, but change certainly in the air. Lately, India has seen some prominent names in sports management. IMG, World Sport Group, Percept D’Mark Sports Management, Nimbus Sport and Globosport have all built their presence. These firms and other smaller outfits, are expanding the market and creating unprecedented opportunities for those interested in a career in the business of sports. With sports management companies, channels, sports divisions of advertising and media buying firms and celebrity management companies, there are about 40-50 “good” employers in this industry, says Vijay Bharadwaj, lecturer at the Indian Institute of Social Welfare and Business Management (IISWBM), which offers a year-long course in the field. With sports bodies, the number of employers nears 100. With the expanding pool of employers, the profiles that young enthusiasts can hope to handle are also growing. Today, possible areas of employment include event marketing, event management, media planning, producing sports-related content for broadcasting organisations, sponsorship selling, and managing teams, among others. Industry players say that this range will increase as the market grows. But, is it still all about cricket? “With football, there has been big hype around the World Cup and people are seeing other sports,” Niranjan Shah, secretary, Board of Control for Cricket in India (BCCI), told ET. Among sports with high potential, industry players point to golf, a high-value, low-volume sport. Soccer and hockey are still finding their footing. Motor sports and tennis also have high potential. Public interest, icon potential and packaging are the three things to focus on when building an environment that will support the growth of any sport, says Anirban Blah, vice-president, Globosport. In its three years, Globosport has seen the total money in Indian tennis grow from Rs 15-20 crore to a healthier Rs 70 crore, he says. Some, however, complain of a lack of professionalism. “It is difficult to find people who have strong expertise in sports management,” said an industry source. Satish Menon, president- sponsorship, Zee Sports, however, is confident: “There is a large and growing interest, new sports are emerging, it is a young country, sports management will get more professionalised”.

Bears vs. Bulls ... the eternal battle

2006-06-25T05:36:00.000-07:00

As the Sensex rallied from below 3,000 to over 12,500 in just about three years, you were probably pampered into believing that making money in the stock market was easy.

But the sliding market of the last six weeks and the accompanying daily swings in stock prices have made us realise that shares are risky instruments to play with.

And volatility could cut both ways—that is, if you don’t know how to ride the wave.

There’s a breed among marketmen that specialises in profiting from such volatility and also from mis-pricing in the market—when inexperienced investors fail to decide about the price of a stock in the regular segment (that is, the cash segment) and the price of the same stock in the derivatives segment.

In market parlance this breed is called the arbitragers and the process, arbitrage: buy where the price of a stock is lower and sell the same in the other segment, since there the price is higher.

The buying and selling has to be done simultaneously, and without any delay in trade. And since there’s no delay between the two trades, the risk of any loss of money is also nearly zero. But hang on! This is no more the exclusive domain of specialists.

To let retail investors profit from such specialised processes, mutual funds have started launching schemes, termed arbitrage funds. Before we explain the advantages of investing in arbitrage funds, here’s a short take on how the trades are done.

Suppose, the price of stock A in the cash segment is Rs 99 and the price of the futures on stock A in the derivatives segment is Rs 100. The fund manager would buy the stock at Rs 99 and sell the futures at Rs 100, at the same time. Thus making a profit of Re 1, without any risk. There’s no chance of capital erosion as the trades are fully hedged.

“Usually returns in arbitrage funds are higher than most fixed income investments like liquid funds, monthly income plans, 8% RBI bonds, bank fixed deposits etc.” said Biren Mehta, fund manager, JM Arbitrage Advantage Fund, that would close for subscription on Friday, June 30. “These funds do not carry any interest rate risk.

They do not carry any credit rating risk either,” Mehta said. In addition, “investors also enjoy the tax efficiency of equity funds,” said Sundeep Patel, fund manager, UTI Spread Fund, UTIMF's arbitrage fund that closed its NFO on Thursday and would open for regular transactions soon.

Despite choppy market conditions, UTIMF collected about Rs 400 crore in this fund. Fund managers admit that in a sliding market it was tougher to make money even in arbitrage funds than in a bullish market. “But then think about this: Even in a bad market we make money.

When the market is sliding you could even get 4-6% risk-free-tax-free return while other equity funds lose money. In a good market we make 14-16%.

That too without risk and and taxes,'' a fund manager said. With an arbitrage fund, one can get 4-6% risk-free-tax-free return even when the market is sliding, while other equity funds lose money arbitrage funds take advantage of the price difference for the same stock in the cash segment and the derivatives segment.

The buying and selling has to be done simultaneously, and without any delay in trade. Since there’s no delay between the two trades, the risk of loss is nearly zero lUsually returns in arbitrage funds are higher than most fixed income investments. These funds do not carry any interest rate risk or credit rating risk either

Stocks-Sector to watch out for in the upswing

2006-06-19T11:21:00.000-07:00

The market correction has brought a lot of companies to reasonable valuations. There are now many companies quoting at valuations where there’s less risk and a lot of value for the long-term investor. ET Big Bucks crunched numbers for BSE A and B1 group companies to find attractively-priced companies.
The steep fall in valuations now means that there are close to 300 companies in this lot of around 650 companies which have a P/E less than 12 times trailing consolidated earnings. Some of these are from the mid-cap IT space. This is an area which was expected to outperform in FY07. Let’s check some of the valuations here.
NIIT Technologies quotes at 11 times FY06, but if we adjust for cash, then it quotes at 7 times. This company also has a dividend yield of 4% at current prices. Unless future profits fall sharply, there can’t be a great downside at current prices.
Mastek quotes at around 13 times FY06 earnings. MphasiS BFL, which was acquired by US major EDS, quotes at less than 12 times FY06 earnings. 3i Infotech quotes at 13 times. Most of the software companies should grow at upwards of 20% for FY07. This suggests that there could be upsides from this lot. Even a software major like Satyam Computer quotes at 15-16 times trailing earnings.
The entire lot of shipping companies is quoting at low valuations. However, the profitability scenario in this sector is under pressure. Yet, given the low valuations, investors with a long-term view may consider some of the top companies.
PSU Shipping Corporation of India (SCI) is quoting at two times FY06 net profits. Its dividend yield is over 8%. Shipping profits can be very volatile; for example, FY03 net profit of SCI was Rs 246 crore, yet there is considerable downside support at current levels.
There are isolated cases with various businesses. Chemical company Foseco is quoting at a dividend yield of around 5%, and a discounting of around 12 times. Foseco is a zero debt, MNC company. Its performance record in the past four years is reasonably stable, though it posted losses in FY01 and FY00.
A more stable company quoting cheap is BASF. Its share price is now around Rs 170 levels, from Rs 280 levels a few days ago. BASF is now at 11 times trailing and 3.5% dividend yield. FY06 results were okay, with sales up 3.6% and net profits up 19%. Like many MNCs, this company is almost zero debt and conservatively run.
Chennai Petroleum trades at close to 7 times trailing and a dividend yield of around 10%. This is cheap by most standards. The ongoing oil price turmoil has kept prices of some of these refineries at low levels. Current price of around Rs 150 level is a one-year low, and close to levels around two years ago, when the BSE sensex was less than 6000.
Poultry company Venky’s India is now at 8 times trailing with a dividend yield of over 3.5%. The company’s profits were hit in Q4 ’06 due to the bird flu scare, and it declared a Rs 4.5-crore loss. However, that is now past; poultry prices and demand have recovered, and the company could soon return to profitability.
Lanxess ABS, another German MNC, is quoting at 10 times trailing profits, and a dividend yield of around 2.5%. This is not much, so the downside support may not be as strong as in some of the cases mentioned above, but the company has just expanded capacity and is poised for decent growth.
A whole host of auto ancillary companies became cheap in the crash from 12800 levels, though there has been some recovery over Thursday and Friday. Omax Auto, for instance, came down to a low of Rs 65 last Wednesday, but has since recovered to Rs 70 levels.
It was last seen at these levels in August ’03, when the sensex touched 3900. It also hit that level in May ’04, when the market hit lower circuit. The sensex was then at 4800 levels. Omax saw a peak share price of Rs 174 in this rally. So, it has lost most of its gains in the rally. At current price, it has close to 3% dividend yield and quotes at around 10 times earnings. Pricol’s case is similar.
It quotes at 11 times trailing, and 3.2% dividend yield. It was at these levels in December ’03, when the market was at 5600 levels. Pricol’s net profit fell 21% in FY06, but they are still twice the FY03 levels, and sales are 50% higher.
While many pharma companies have underperformed the market in the past two years, and were further battered in this fall, some of them still don’t have adequate downside protection, as they quote at more than 12-15 times and have low dividend yields.
GlaxoSmithKline Pharma appears to be an exception. At current levels, it has a dividend yield of close to 3% and quotes at around 14 times trailing.

While stock markets have tanked over the past month, the growth trajectory of corporate India seems to be on track. Leading companies in sectors like engineering, automobiles, petroleum and software are expected to bring out numbers that display strong profitability in the coming year. The earnings for the 30 stocks which comprise the sensex are expected to increase by 16-18per cent in FY07. Among the major sectors, capital goods and engineering companies are expected to account for the biggest jumps in earnings during FY07. Earnings growth estimates for power equipment companies such as Bhel range from 25-35per cent for the coming year. Engineering & construction companies are projected to record a 25-30per cent rise in earnings. Companies like Bhel and L&T have substantial order backlogs and, hence, there is a higher degree of visibility in sales and future earnings. The earnings growth is expected to be modest for oil and gas companies. While profitability of oil marketing companies has been hit by high crude oil prices, ONGC and Reliance could post a modest increase in profits during the year. Reliance may benefit from higher gross refining margins in some of its major markets, particularly the US. While Reliance is present in petrochem and petro-retail, refining continues to account for the bulk of its sales and profits. ONGC’s profitability is expected to improve on two accounts, a capped subsidy burden and improved production over the last year. In the auto sector, the commercial vehicle segment is expected to show strong performance on the back of infrastructure spending. The top auto companies, Maruti and Tata Motors, are expected to clock a jump of about 15per cent in profitability. Projections for the first quarter remain robust because the market itself is expanding. Operating margins could flatten as expenses relating to product, brand and distribution all weigh in for the quarter. While the sector has shown strong sales so far during the first quarter, further performance is tied to the monsoons. Earnings growth for the software sector is expected to be in the range of 25-30per cent. The steel sector could also spring up a surprise as prices are on the upswing and have seen a recovery of $100/tonne since the start of this year.

Stock markets are like supermarkets: Avail discount offers - MC

2006-06-18T00:16:00.000-07:00

With market volatility increasing every day, investors need to touch base with some basic rules of investing. In a conversation with an investor, Kanu Doshi spells out these 4 gems of investing that he learnt in the book 'Rich Dad, Poor Dad'.
Advisor
I came across a book called 'Rich Dad Poor Dad' by Robert Kiyosaki. Its on the best seller list for quite some time. This book contains gems for investors like you and me and for everyone wanting to know more about 'money'.
Investor
Then let us know about making money.
Advisor
Yes. The author in this very lucidly written book says that in life, when you desire to fly an aircraft you must and therefore you do 'learn' flying aircrafts. When you wish to enjoy a bicycle ride, you must and you do 'learn' how to ride a bicycle. Maybe you will fall several times before you finally succeed.

But a lay investor who wants to make money on the stockmarket tends to just pick up the phone, speak to his stockbroker, buy a stock and starts dreaming of becoming rich. That is not the way the rich investors who become richer with every passing day go about investing into stocks.

The rich follow the same principle of 'learning' to ride a bicycle or flying an aircraft. They therefore first 'learn' to 'invest'. They learn all there is to know about the art of investing in stocks. All about the stocks they wish to buy and only then do they take the plunge.

Above all, they keep practicing what they have learnt. They keep sharpening their saw. This single factor of learning before hand separates the rich investors from the poor investors, says the author.
Investor
What is the other gem on investing you found in the book?
Advisor
There are several. The next is the author's comparison of Stock Market with the Super Market.
Investor
That's an odd one. Could you elaborate please?
Advisor
Yes. The author says that when Super Markets reduce the prices of the goods and announce a 'sale', customers flock into the stores and buy up every little item and build up at home piles of grocery, soaps, etc.

But when Stock Markets reduce the prices of shares and announce a 'crash' every investor rushes in to 'sell' and runs away from the market.

Again, conversely, when Super Markets raise their prices, customers shy away and refrain from buying till the next 'sale'; but when Stock Markets announce rising prices, every investor rushes in to 'buy'.

This is not the way, again, the rich investors behave. They follow the same principle of buying at the Super Markets. They buy stocks only when the Stock Markets crash. Ask Warren Buffet or John Templeton.
Investor
These two ideas, though simple, are no doubt educative. Do you have any other gems to share?
Advisor
Yes. As I said earlier, the author has several.

The next one, the author says, is `investing is knowing your assets'. When you move your money from your bank account in order to `invest' you are putting your money into assets like shares, real estate, deposits, etc.

The rich never keep their wealth in the form of liquid money in a bank account. They always keep acquiring assets while the poor acquire liabilities, which they mistakenly believe are their assets.

The author, citing the scene in America, says that acquiring your house through a bank loan on the mortgage of your house is acquiring a liability. The same goes for paying for groceries through credit card.
Investor
Please go on. It sounds interesting.
Advisor
In life, according to the author, what is important is not how much money you `make' but how much of that money you succeed in `keeping' and `multiplying'. The rich know how to keep it because they know how to invest it. Money well invested is money well kept. Good investing is often more rewarding than good earning.
Investor
Any more such gems.
Advisor
Yes. 'Real money is made when you `buy' an asset and not when you sell that asset' is yet another gem from the author.
Investor
This one surely needs elaboration.
Advisor
Yes. What the author conveys is that the 'price' of the asset when you buy is the sole determinant of your profit on that asset when sold. If you buy that asset cheap, your profit on sale is obviously larger.

The message from the author is simple. Be careful of the price you pay when investing in an asset. Don't rush into buying any investment at any price. Wait till the prices come down the way Super Markets announce sales.
Investor
In other words, do as the shoppers do at Super Market Sales.
Advisor
Yes.

Stock review - Dabur India

2006-06-17T11:40:00.000-07:00

Dabur India has been able to post a double digit topline as well as bottomline growth in tough environment, leveraging its age old Ayurveda platform. Also, its unique herbal platform coupled with the franchise value that the brand enjoys mitigates the risk of fierce competition from other FMCG players.
Core brands enjoy strong recall value: Dabur's portfolio of products remains relatively insulated from the ongoing price wars in the FMCG space, providing it with a sustainable competitive advantage. All its core brands, viz. Dabur, Vatika, Anmol, Real and Hajmola enjoy tremendous recall value for consumers, and provide with a platform to leverage on going forward.
Demerger of Pharma business unlocks value: Demerger of Dabur Pharma has unlocked value, with one of the biggest positives being Dabur India's working capital turned negative for the first time ever. De-merger brings to fore the core FMCG business of Dabur, which is its inherent strength. We expect the RoE to improve to 39.2% in FY05 as against 31% for FY04.
E-sourcing initiatives to enhance margins: While geographical expansion and new product initiatives to take care of topline growth for the next few years, e-sourcing initiatives coupled with higher in-house production would help enhance margins going forward. For FY04, Dabur procured 50% of its raw materials requirement through e-sourcing. We expect higher e-sourcing and in-house production to enhance EBITDA margins by 170 bps for FY05.
Healthy balance sheet to fund acquisitions: With cash & cash equivalents at Rs 115 cr, the company has built a war chest for meaningful acquisitions. We believe that there could be interesting opportunities in the herbal space, and acquisitions could open up new avenues for growth and lead to higher than expected topline growth.
Investments in excise free zones lead to tax savings: The company has earmarked a capex of Rs 50 cr for FY05 most of them being in excise free zones, which would help tax savings, providing a fillip to the bottomline. 80% of products would be manufactured in-house by FY05, which would help reduce dependence on vendors and enhance margins.
Valuations look attractive when adjusted for growthWe expect the company to grow sales at 10% CAGR and net profit to grow at 23.1% for the next two years. At the CMP of Rs 73, the stock trades at 17.2x FY05E earnings and 12.9x EV/EBITDA. Valuations on a growth adjusted basis look attractive. We recommend a buy with a target price of Rs 91, based on 17.5x FY06E earnings, at which it would trade at par with the FMCG leaders. Higher visibility of growth and predictability of earnings stream would lead to further re-rating on the stock. Sluggish pick-up in rural economy and pricing pressure in Ayurveda genre are key risks to our target.

Biz rules of Corporates.

2006-06-17T11:33:00.000-07:00

Professional tips and life-altering words of wisdom from the patriarch have stood our head honchos in good stead throughout their illustrious careers.

Click here to read the full article.

10 biggest mutual funds

2006-06-07T09:39:00.000-07:00

Reliance Equity FundRs 5,988 crore / Rs 59.88 billion
Return: 1.97%During: March 30, 2006 – April 30, 2006Average return: 5.46%

Fidelity Equity FundRs 3,160 crore / Rs 31.60 billion
Return: 80.30%During: May 18, 2005 – April 30, 2006Average return: 79.50%

HDFC EquityRs 3,117 crore / Rs 31.17 billionReturn: 99.84%During: One year ended April 30, 2006Average return: 88.06%

SBI BluechipRs 3,062 crore / Rs 30.62 billion
Return: 10.19%During: February 17, 2006 - April 30, 2006Average return: 17.79%

Franklin India Flexi CapRs 3,045 crore / Rs 30.45 billion
Return: 104.71%During: One year ended April 30, 2006Average return: 88.06%

Reliance Growth FundRs 2,813 crore / Rs 28.13 billion
Return: 100.56%During: One year ended April 30, 2006Average return: 88.06%

Franklin India PrimaRs 2,445 crore / Rs 24.45 billion
Return: 72.31%During: One year ended April 30, 2006Average return: 88.06%

Franklin India Bluechip FundRs 2,368 crore / Rs 23.68 billion
Return: 96.88%During: One year ended April 30, 2006Average return: 88.06%

Reliance Equity Opportunities FundRs 2,258 crore / Rs 22.58 billion
Return: 100.51%During: One year ended April 30, 2006Average return: 88.06%

UTI Mastershare Unit SchemeRs 1,931 crore / Rs 19.31 billion
Return: 65.28%During: One year ended April 30, 2006Average return: 88.06%

Click here to read the full report

Incredible TIPS

2006-06-05T11:16:00.000-07:00

The biggest mistakes investors make
Money is an integral part of our day-to-day life. From the time we start earning till we die, we are involved with money -- earning, spending, investing, managing, donating, lending and borrowing.
Strangely, when we leave school, we have a fair amount of knowledge in math, history, geography, science, languages and what not. But when it comes to money, we are left on our own. It is our family, friends, books, magazines, television channels and the Internet that contribute to our financial upbringing.
Hence, we grow up learning about money in a highly unstructured manner; the end result is generally a poor understanding of it.

Click here to read more.

How to read a company's annual results
Click here to read the first part
Click here to read the second part

Why should we welcome the stock market crash

2006-05-24T12:33:00.000-07:00

Economics assumes that human beings are rational. But human reactions to stock market movements are utterly irrational. When markets rise, everybody cheers. When markets crash — as has been the case for two weeks — everybody moans. A hunt for culprits often ensues. No such hunt is ever announced when the markets are rising. In past scams, when manipulators like Harshad Mehta and Ketan Parekh sent share prices through the roof, they were hailed as geniuses and became celebrities. Some market experts cautioned that the markets had shot up to insane levels. But this plea for sanity was widely dismissed as stupid, and ordinary housewives and college kids bought frenziedly in the belief that share prices could only go up.

However, when the markets inevitably fell, the hero-manipulators were suddenly denounced as villains. They were accused of the dreadful sin of rigging markets, and thus misleading small investors. Ironically, no investor complained as long as the manipulators rigged prices upward.

The complaints began only when the manipulators were unable to rig markets any more, and prices crashed. Truth be told, the real public complaint against Harshad Mehta and Ketan Parekh was not that they manipulated prices upward, but that they failed to manipulate it upward forever. For that, this could not be forgiven. The underlying assumption of small investors is that share prices should rise forever. Now, if the price of rice, sugar or petrol rose forever, the small investor would complain bitterly. Yet he seems to think it perfectly fair that share prices should go up forever, and very unfair if share prices crash. How greedy and hypocritical humans are! Consider the current moaning over the stock market crash. The fall of the sensex from 12,624 to 10,400 represents a sharp 20% decline within two weeks. But few people seem to remember that sensex was at just 9,390 at the start of 2006. So, even after the crash last Monday, the sensex was still up 10.5% since the start of the year. No bonds or fixed deposits could give such a high return within five months. This point escapes the CPI(M), which sees the market crash as reason enough to stop pension funds from investing in equities.

Remember that the sensex was around 5,000 during the last general election in 2004. It then slumped to 4,282 on panic selling. From that low point, the sensex tripled in two years to 12,624 on May 10, 2006. That has been a bonanza, fuelling speculative frenzy. So, the 20% correction is to be welcomed. Stock market valuations remained stretched by historical standards, though not by developed market standards. If the sensex falls all the way to the 9.390 level at the start of the year, the market would still have yielded enormous gains to investors since 2004. The long run prospects of the economy are excellent. So, some investor exuberance is understandable. Yet such exuberance needs to be tempered by sharp corrections from time to time. This sends the valuable message that exuberance is no substitute for judgement. Human beings quote many aphorisms that they seem to forget when they enter the stock market. All that glitters is not gold. Don’t be penny-wise and pound-foolish. Look before you leap. There is no such thing as a free lunch. Better safe than sorry. A fool and his money are soon parted. All who invest in markets must remember these aphorisms. Risk and reward go together. If there were no risk, there would be no market reward. Share prices represent subjective judgements of the day, so bouts of euphoria and depression will necessarily drive share prices up and down.

Marxists find this terrible. They deplore “casino capitalism”, and lambaste foreign institutional investors (FIIs). Marxists cannot bear to acknowledge that FII pressure has sparked capital market reforms that have made Indian markets among the best in the developing world, far ahead of China or South Korea. FIIs were earlier reluctant to invest in a market where one-tenth of all paper share certificates were forged, settlements were delayed for months on end, and thin turnover facilitated rigging by big brokers (and by companies before every public issue). But after capital market reforms, FIIs have flooded in. They have invested in all emerging markets, but disproportionately more in India. They have favoured companies with good governance and transparent accounting, rewarding these traits for the first time (earlier, the ability to rig markets was rewarded most). Stock market reforms and FII inflows have hugely improved the ability of Indian companies to raise equity finance for expansion. This has reduced their dependence on debt, thus reducing interest rates as well as over-leveraged balance sheets. The CPI(M) can see none of this. It believes only that foreign devils are making millions and paying no tax. So it demands a capital gains tax and an end to the Mauritius treaty that has been used as a tax loophole by FIIs. The CPI(M) seems unaware that Mr P Chidambaram is in fact taxing dividends and capital gains in ways that have made the Mauritius loophole irrelevant, and so ensured that FIIs are indeed taxed. Dividend tax is now paid by companies rather than recipients; so FIIs cannot avoid it. A transactions turnover tax is being collected in lieu of capital gains tax. This brings all investors including FIIs into the tax net, and the Mauritius route has been rendered irrelevant. Domestic crooks used to avoid capital gains tax through benami small accounts, but now cannot escape the transactions tax. Thus Mr Chidambaram has ended tax avoidance and evasion, brought FIIs and Indian crooks into the tax net indirectly, and created a level tax playing field between domestic and foreign investors.

That is a considerable achievement. So, our problem today is not untaxed FIIs. It is the notion that markets should rise forever. They will not, and should not. We need sharp dips, not Marxist controls, to remind investors from time to time that stock markets have risks as well as rewards.

Click Here to read the full story.

'value investing' - Happy investing!

2006-05-21T11:09:00.000-07:00

After the carnage witnessed on the first trading session of the week, the markets displayed immense volatility yesterday, yet managing to close in the positive. The pressure was triggered by apprehensions regarding the Fed continuing with its stance of raising rates, which could have a restrictive effect on global economic growth.
This makes us reaffirm our belief that investing is a long-term game that requires not only skills but also patience. The factor, which separates investing from speculation, is the well thought out planned approach for deploying funds which speculation lacks. Speculation is about maximizing your return in the shortest time (though undertaking high levels of risk), while investing is all about garnering adequate returns from a well thought out investment strategy.
Various investment styles have been popularized to beat the street in the past. One of the most popular styles, which date long back, is 'value investing'. Benjamin Graham, the father of investing, popularized this style of investing, which is the method of picking up undervalued stocks and holding them over a long-term. The value of the stock is worth the future cash flows (that can be taken out of business) discounted to the present value. Simply put, value investing means (attempting) to buy 'something' for less than it is real worth.
Parameters of value stock selectionGood value means buying of shares of companies, which have low price earnings ratio, high asset backing, high dividend yield, robust business model and clear and visionary business mission. The management creates value through its policies. Thus, value investing dwells into all aspects of business and tries to visualize the impact of business policies on the earning potential of the firm.
Value investors also look for bargain prices (priced low for temporary or irrational reasons, under-priced in relation to the company's potential). According to Benjamin Graham, value investing consists of patience, common sense and in-depth analysis of published information. It also involves contrarian investing, which says - 'hunting when hunters have left.' Value investors look at margin of safety. They look at buying stocks at maximum discount possible on their intrinsic value. Though the subject of intrinsic value is a matter of subjectivity. Value investing involves separating emotions from investing and investing on a common-sense basis. The investors following value investing ignore market sentiment, short-term swings and other factors affecting stock prices.
Thus in conclusion, you, as an investor, need to compare intrinsic value of the company as a whole to its current market capitalization. Success will, however, depend on skill in accurately determining the intrinsic value. It can also be said that to be a good value investor, one needs to harness the qualities of a contrarian investor, a patient investor, a rational investor, an analytical investor, and above all, a long-term investor.

The fact that the Indian stock markets, and for that matter even the global markets, have had a very volatile week is not a news to anyone. From our perspective, falling stock markets offer significant buying opportunities for long-term investors. It is time to take a long-term call and invest.
Instead of focusing on the gainers and the losers in the last one week, in this weekly round up, we have focused on macro issues and how they will impact the stock market performance over the next two to three years. We have consciously stayed away from sounding ‘we said so’.
Random thoughts on the current trends…On Thursday, the benchmark BSE Sensex fell by over 826 points. Investors attribute the same to largely three factors.
The recent inflation report in the US and the Federal Reserve’s stand on interest rates did raise concerns among the global investing community with respect to whether there is a possibility of interest rates rising much faster. Commodities, including crude oil and gold, witnessed significant correction.
Secondly, domestic investors were ‘concerned’ about the prospects of new tax being imposed on select FII trades, which the Finance Minister later denied.
Significant unwinding of open interest position in the futures and options market.
If the proposal to tax FIIs was the reason for the Thursday fall, even after the FM clarification on the issue on the same day, what triggered the fall yesterday? We do not have answers to that and neither do the market participants. But one thing is for sure. It is time investors in India recognize the fact that global factors can have a dramatic impact on the Indian stock market performance. Till now, the increase in interest rates, including US, was sidelined with a view that the ‘India story’ was on a strong footing. Indeed, we subscribe to the India story. But we also acknowledge the fact that the investment decision of FIIs depends on their evaluation of ‘India’ and its valuation in relation to other emerging markets.
Valuation conundrum…As our subscribers are well aware, we have recommended a Sell on stocks from sectors including engineering, power and cement purely based on fundamentals. Why should a ‘X’ cement company (and that too, a regional one) trade at a EV/tonne (enterprise value per tonne) of US$ 200 when the best of cement companies in the global markets are trading between US$ 125 to US$ 150 per tonne.
Similarly, why should an engineering company trade at a price to earnings multiple of over 40 times trailing twelve months earnings when the best of the engineering companies globally are trading at less than 15 times trailing basis. Yes, growth is robust, but we do not wish to upgrade our valuation multiple just to make sure that we have a ‘BUY’ rating on a stock. But yes, we have reviewed our valuation metric and wherever it was necessary, we have upgraded/downgraded our valuation multiple to reflect the fundamental change in the sector.
We continue to believe that certain stocks from sectors are trading at rich valuations and we see downside risk outweighing the upside potential. That said, even at these levels, we do recommend our subscribers to invest in stocks from a long-term perspective, provided the valuations are justified.
Where to from here?As we mentioned in our view on the market after the Thursday fall, this decline should be taken as an opportunity to invest and build a long-term equity portfolio. Needless to say that the equity component of the overall asset allocation should be in line with one’s risk-return profile. We would also like to remind investors that with the rise in interest rates (and prospects of further increases), debt is becoming attractive.
Therefore, we suggest investors to invest in short-term fixed deposits or floating rate funds that further invest in shorter duration government securities. Overall, you, as a retail investor, should not shy away from equities given the recent decline in the stock market. Invest in good companies with a sound business models (i.e. ability to ride through cycles) from a two to three year perspective and one need not worry about the day-to-day market movements. Happy investing!

MF investing in these testing times

2006-05-17T08:16:00.000-07:00

Over the last two years, the world of money has changed for Indians. Interest rates have come down dramatically. Borrowers have become more powerful than ever before, with plenty of lenders slugging it out for their attention. For investors, however, the choices have become fewer. Investment options such as the 8% Reserve Bank of India (RBI) bond have died. Bank fixed deposits, the most preferred investment for decades, have lost their sheen. Stock market has boomed all right, but the risks have increased too.

In this scenario, one investment choice stands out—the mutual fund. Mutual funds offer everything an investor looks for: easy availability, risk containment, liquidity, transparency, professional management and decent returns. What’s more, you don’t need millions to invest in a mutual fund. Standard Chartered Mutual Fund, for example, allows investors to start with just Rs 500! Investors seem to have accepted the importance of mutual funds; for many, they now constitute the most important part of their portfolios.

Which is the right fund for you?
Mutual funds suit all classes of investors. You may choose a fund depending how much risk you are willing to take and when you want the money back. Go for an equity fund if you don’t mind a little higher risk. If you are slightly risk-averse, prefer a balanced fund, which invests in stocks only up to 60-70%. If you are largely risk-averse, stick to debt funds. Have very little appetite for risks? Choose liquid funds like Cash Funds or short term floating rate funds. You may also choose funds based on when you want your funds back. Look at a cash fund if you need the money in a few weeks. A short-term bond fund would just be fine for you if you expect a return in three to six months. An income fund or an equity fund would fit in if you can afford to leave it with the fund manager for over a year.

Even within each category, you can pick and choose. In equity funds, for example, you have a variety of options: blue chip funds, mid-cap funds, contrarian funds, opportunity funds, dividend yield funds, sectoral funds that invest specifically in select business segments etc. Equity-linked savings schemes allow you to reap tax gains up to Rs 1 lakh a year.
You may want to invest but may not have a large corpus right now. Not to worry. Stash away a little every month. Many equity funds offer the option of systematic investment plan (SIP) that allows you to invest a certain sum every month or every quarter. This way, you not only discipline your investments but to a great extent can protect yourself against the vagaries of the market. Debt funds don’t lack lustre either. Choose among medium term debt funds, short-term bond funds, floating rate funds, dynamic bond funds and cash funds. If you want an aggressive debt fund, then go for gilt funds. If you prefer a mix of both equity and debt, MIPs or balanced funds would do just fine.

Transparency
A mutual fund is nothing more than a collective savings pool. Several investors have come together to invest in stocks, bonds or in both. That is all. However, mutual funds are strictly regulated. They have to declare their portfolios from time to time. Almost all the funds declare their portfolios every month. The net asset value (NAVs) of a fund, which points to how much a unit of the fund is worth on a particular day, is declared every working day. You know where your money is going and how it is doing.

Availability
A few years ago, even if you wanted to buy a mutual fund, it was not easy. Few distributors, most of them small, sold mutual funds. The quality of their advice often left a lot to be desired. But today, you could buy mutual funds in over 60 cities or towns, either through their own offices or through banks. All private sector banks now sell mutual funds across the counters in most branches. Some public sector banks too have begun marketing mutual funds through select branches. As for advice, only a person who has qualified in a rigorous test conducted by the Association of Mutual Funds of India (AMFI) can now sell mutual funds.
Professional Management and Customer Service
When you buy a mutual fund, you hand over the task of investing to a qualified and probably more knowledgeable fund manager who is paid for finding the right opportunities for you. As for customer service standards, mutual funds in India have been constantly raising the bar they have set for themselves. The service standards are comparable to what you will get anywhere else in the world. For example, most fund distributors will come to your residence or office and explain the product features and also collect your cheque.

If you want to sell your fund, you can do so pretty quickly too, mostly within one or two working days. There is no paperwork to fear. For example, in the case of Standard Chartered Mutual Fund’s (SCMF) income funds, the money will be credited directly into your bank account if the account is held with select banks.
In case of systematic investment plans too, you can do so with auto debits. Every month, on a day you choose, your bank account will be debited with a particular sum and specified mutual fund units available for that sum will be bought. No more hassles of issuing post-dated cheques.
Despite all these facilities, you may have myriad doubts and queries. Not to worry. Mutual funds offer toll-free lines at over 200 locations. For example, on the SCMF call-free telephone line, you can get to know valuations, order for account statements and even redeem your investments without any personal identification number.

Conclusion
Mutual funds tower over other investment choices. If past collection figures are a testimony, investors seem to have realized this. Most public offerings of mutual funds have collected in excess of Rs 500 crore from thousands of investors.

To sum up, mutual funds offer you a large menu of choices. Pick a fund based on how much risk you can digest and how long you can wait for returns. Do your homework and shun false expectations - you will not get fabulous returns overnight from equity funds or even income funds. Both require time to fetch decent returns, and you need to be patient. And remember, your job does not end after buying a fund. Keep a watch on what the fund manager is doing with your monies. Check if your investments are in line with your goals.

Great readings on MF from MC

2006-05-17T07:21:00.000-07:00

Risk a little and Gain a whole lot - A calculated risk can go a long way in enhancing your profits

The inside track to profiting in the long term - The best way to assure returns is to pick a fundamental stock well and be in it for the long haul as the Equity markets are tricky

Foolproof strategies to maximize your profits - If you are looking to increase your returns from the buoyant equity market, watch out for some clear tips on the best way to profit from mutual funds

Investing situations that cause Panic - Illogical, split second, decisions can radically reduce your profits, read for a responsible solution to most calamities

The smart guide to picking the best MF - MF investments are subject to market risks, please read the offer document carefully before investing

Is it time to say Goodbye to your fund - Do you understand the concept of a mutual fund

8 investment tips that can turn beginners into PROs - If you are looking to invest directly in the equity market there are some basic areas to take into consideration

7 reasons for SIP in a booming market - Systematic Investing in a Mutual Fund makes good sense especially in the booming markets

6 steps in the right direction - Better safe than sorry with your investments, insurance, taxes, wills and trusts and mortgages

5 corners of a sound Investing Strategy - Don't invest in haste

4 reasons why debt funds are smart buys - Investments in debt funds would normally not lead to a capital loss, though the holding period of the investment could prolong

Stocks are risky, but not buying them is riskier - It is no longer sufficient to 'save', the need of the day is to 'invest'

Why hybrid funds are best hedge against risks - As the Sensex inches higher, how to work towards safer investing at a reasonable price

How to earn more, even as you spend more - The more you spend the more wealth you create! Sounds like an anomaly. But in India this is becoming the norm

Some Do’s and Don’ts of investing - Planning ahead, keeps you ahead. Before you start investing here are some integral issues that you should think through in order to maximize your investments

Failproof strategies for uncertain markets - If you are looking to increase your returns from the buoyant equity market

Hidden bombs in your portfolio? Find out NOW - Your portfolio may be full of risks that can wipe out everything. Read on to check if you are guilty of any of these points

Learn how to invest in Mutual Funds - There are many who are still not sure whether to include mutual funds in their portfolio or not

The Investors biggest Dilemma - Mutual Funds or Stocks

The rich don't work for money,they make money work for them

2006-05-14T13:58:00.000-07:00

What is the difference between making money work for you and working for money? In first case where individual makes money work for him/her, s/he becomes master of money. In second case where individual works for money, s/he becomes slave of money and money becomes his/her master. Well known fact is that money is a very good slave but extremely poor master.

How can one make money his/her slave? Simple, by regularly saving and investing. Whenever you earn, first pay yourself. Invest at least 10% of your gross income. Over a period of time your investments will grow and start generating returns. Soon you will reach a stage where return from investments are enough to take care of routine expenses. Moment you reach that stage you are on fast track. Your investment will generate return to take care of your life style and your fresh new earnings will increase your investment corpus. Now you are not working for money. Your investments are working for you. Money is your slave and you are its master. Remember one golden rule in life, earn-save-spend. People who follow this will eventually make money their slave.

There are other set of people. They first earn than spend and lastly save. They will always remain slave of money. When they earn more they spend more. If they do not earn more they probably will borrow. People who cannot control expenses and save become slave of money. They will have to keep working for money whole of their life.

In first instance people are working for themselves. Whatever they earn they save for themselves. From their savings they further generate returns for themselves. Second set of people work for others. When they spend on goods and services, shopkeepers and service providers earn profit, so they are working for them. If they borrow money, they pay interest. Interest paid by these people is income for someone else and hence they are earning for the lenders. These people even end up paying higher tax. This is because all governments give tax benefits to savers, no government gives tax benefit to spenders. Being spenders first they work for paying taxes. After paying everyone, if there is any surplus left they are able to save or should we say spend??

Another important thing rich do is to create assets. Others create liabilities. Definition of asset is different for financial planning perspective. Any cash outflow which has potential to generate returns either immediately or in distant future is an asset. Rich invest in income generating assets. On the other hand majority of people create liability. If any of your outflows are likely going to result in spending either now or in further future it is liability. For example when one invests in fixed deposit s/he will generate income by way of interest and hence it is an asset. On the other hand if one buys car, s/he is likely to further incur expenses by way of fuel, maintenance etc and hence from financial planning perspective car is a liability.

Often people struggle even after earning more or getting pay hikes is because they would have created lots of liabilities. They would continue working for all those liabilities (READ: Others.) Rich create lots of assets and make those assets work for themselves.

An investment is like sowing a seed. Initially you need to water it but soon it starts fending for itself and grow. The rich sow seeds of assets and later make the assets work for them. The others sow the seeds of liabilities and work for them.

TOP FUNDs of 2005-6

2006-05-06T04:50:00.000-07:00

Funds that gave good returns

Will your investments give max returns - ET

2006-04-28T05:22:00.000-07:00

Underlying fundamentals do matter when it comes to explaining rising or plummeting stock prices. And a shrewd investor studies the fundamentals and driving forces before pumping his money into the market. A speculator, on the contrary, does not make his decision to buy or sell on the basis of factual company data. Instead, he tries to book profits in bullish markets based on conjectures, well aware of the possibility of his entire capital being washed away. Let's delve into popular investment strategies that will, to a certain degree, protect your money against complete erosion even in adverse market conditions.

Value strategy

The main idea behind value investing is to identify stocks that are currently not treated well by the market and are trading at numbers less than their actual worth. This strategy assumes that market pundits take time to realise the intrinsic worth of some companies but will do so in due course of time. A value investor puts his money in such undervalued stocks after a detailed study of the company's underlying fundamentals.

Why are some stocks undervalued? The company could be into manufacturing of products that are not exciting or alluring enough, yet are indispensable. Value investors believe that stocks of such companies would get their due attention in near future. Speculators believe that stocks trading at low prices are a bad choice. But a value investor can differentiate between the low priced stock of a company that is going bankrupt and the low priced stock of a company whose management and business strategy has undergone a complete revision.

The biggest challenge to value investing is spotting stocks that are undervalued. Value investors do a thorough study to find out if the company is not debt-ridden and has steady cash flow. Other valuation measures to detect undervalued stocks include low price-earning ratio, low price-sales ratio, rich dividends and low price-book value. It is important to note that volatility is quite low here with ample shock cushion in bear markets. Longer holding period in this strategy amounts to large income in dividends.

Growth strategy

Growth investment is a long-term strategy. The growth strategy attempts to find shares of companies that are growing and will continue to grow rapidly. Rightly estimating future growth potential of a company will yield you superior results. However, keep in mind that past growth is not always indicative of future growth potential. Further, most future growth estimates tend to be overstated and hence this strategy needs adequate caution.

It is always better to have an error or safety margin for all your estimates. While the more cautious investors bet on large cap companies, typically growth investors go in for small or mid-cap companies that have more room to grow. Price earnings and growth or the PEG value is a superior measure for screening stocks. PEG value less than one is considered a good pick.

Momentum

Momentum investing is a short-term holding strategy that works well in bull runs. Momentum investors seek to double or triple their money in a matter of few months. While they do not often go in for thorough stock analysis, they base their picks on stocks with rapid earnings growth, positive earnings growth, forecast and solid price chart.

Momentum investors prefer stocks that are trading high volumes and at high rates. Such stocks are the ones that are favoured by the market today. With high volatility and short holding periods, investors must be aware of tax implications on profits booked. Earnings per share rank measure a company's EPS growth relative to the entire market.

4 habits that make stock market investors rich - Value Investing Series I

2006-04-26T09:48:00.000-07:00

Advisor

I came across a book called "Rich Dad Poor Dad" by Robert Kiyosaki. Its on the best seller list for quite some time. This book contains gems for investors like you and me and for everyone wanting to know more about "money".

Investor

Then let us know about making money.

Advisor

Yes. The author in this very lucidly written book says that in life, when you desire to fly an aircraft you must and therefore you do "learn" flying aircrafts. When you wish to enjoy a bicycle ride, you must and you do "learn" how to ride a bicycle. Maybe you will fall several times before you finally succeed.

But a lay investor who wants to make money on the stockmarket tends to just pick up the phone, speak to his stockbroker, buy a stock and starts dreaming of becoming rich. That is not the way the rich investors who become richer with every passing day go about investing into stocks.

The rich follow the same principle of "learning" to ride a bicycle or flying an aircraft. They therefore first "learn" to "invest". They learn all there is to know about the art of investing in stocks. All about the stocks they wish to buy and only then do they take the plunge.

Above all, they keep practicing what they have learnt. They keep sharpening their saw. This single factor of learning before hand separates the rich investors from the poor investors, says the author.

Investor

What is the other gem on investing you found in the book?

Advisor

There are several. The next is the author's comparison of Stock Market with the Super Market.

Investor

That's an odd one. Could you elaborate please?

Advisor

Yes. The author says that when Super Markets reduce the prices of the goods and announce a "sale", customers flock into the stores and buy up every little item and build up at home piles of grocery, soaps, etc.

But when Stock Markets reduce the prices of shares and announce a "crash" every investor rushes in to "sell" and runs away from the market.

Again, conversely, when Super Markets raise their prices, customers shy away and refrain from buying till the next "sale"; but when Stock Markets announce rising prices, every investor rushes in to "buy".

This is not the way, again, the rich investors behave. They follow the same principle of buying at the Super Markets. They buy stocks only when the Stock Markets crash. Ask Warren Buffet or John Templeton.

Investor

These two ideas, though simple, are no doubt educative. Do you have any other gems to share?

Advisor

Yes. As I said earlier, the author has several.

The next one, the author says, is `investing is knowing your assets'. When you move your money from your bank account in order to `invest' you are putting your money into assets like shares, real estate, deposits, etc.

The rich never keep their wealth in the form of liquid money in a bank account. They always keep acquiring assets while the poor acquire liabilities, which they mistakenly believe are their assets.

The author, citing the scene in America, says that acquiring your house through a bank loan on the mortgage of your house is acquiring a liability. The same goes for paying for groceries through credit card.

Investor

Please go on. It sounds interesting.

Advisor

In life, according to the author, what is important is not how much money you `make' but how much of that money you succeed in `keeping' and `multiplying'. The rich know how to keep it because they know how to invest it. Money well invested is money well kept. Good investing is often more rewarding than good earning.

Investor

Any more such gems.

Advisor

Yes. "Real money is made when you `buy' an asset and not when you sell that asset" is yet another gem from the author.

Investor

This one surely needs elaboration.

Advisor

Yes. What the author conveys is that the "price" of the asset when you buy is the sole determinant of your profit on that asset when sold. If you buy that asset cheap, your profit on sale is obviously larger.

The message from the author is simple. Be careful of the price you pay when investing in an asset. Don't rush into buying any investment at any price. Wait till the prices come down the way Super Markets announce sales.

Investor

In other words, do as the shoppers do at Super Market Sales.

Advisor

Yes.

Failproof investing principles Warren Buffet bets on - Value Investing Series - II

2006-04-26T09:42:00.000-07:00

Your reviewer enumerates below these twenty-four ideas with his comments for your ready reference:

1. Choose Simplicity over Complexity

When investing, keep it simple. Do what’s easy and obvious.

If you don’t understand a business, don’t buy it.

2. Make Your Own Investment Decisions

Don’t listen to the brokers, the analysts, or the pundits. Figure it out for yourself.

Become a value investor. It’s proven to be a very rewarding technique over the long term.

3. Maintain Proper Temperament

Let other people overreact to the market.

To succeed in the market, you need only ordinary intelligence. But in addition, you need the kind of temperament to help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can surely prevail.

4. Be Patient

Think 10 years, rather than 10 minutes

Don’t dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future. If the question is, “How long will you wait?” – “If we’re in the right place, we’ll wait indefinitely” says Buffet.

5. Buy Business, Not Stocks

Once you get into the right business, you can let everyone else worry about the stock market.

Business performance is the key to picking stocks. Study the long-term track record of any company that is on your buy list. Buffet looks for following five main things before investing in a company.

(i) Business he can understand

(ii) Companies with favorable long-term prospects

(iii) Business operated by honest and competent people

(iv) Businesses priced very attractively

(v) Business with free cash flow

Don’t think about “stock in the short term.” Think about “business in the long term”.

6. Look for a Company that is a Franchise

Some businesses are “franchises”. Franchise generates free cash flows.

7. Buy Low-Tech, Not High-Tech

Successful investing is rarely a gee-whiz activity. It’s less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.

Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies). They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will be doing more business, e.g Gillette Blades.

8. Concentrate Your Stock Investments

A the “Noah’s Ark” style of investing – that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each.

Portfolio concentration – the opposite of diversification – also has the power to focus the mind. If you’re putting your eggs in only a few baskets, you’re far less likely to make investments on impulse or emotion.

9. Practice Inactivity, Not Hyperactivity

There are times when doing nothing is a sign of investing brilliance.

Be a decade’s trader, not a day trader.

10. Don’t Look at the Ticker

Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth.

Abstain from looking at share prices every day. Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.

11. View Market Downturns as Buying Opportunities
Market downturns aren’t body blows; they are buying opportunities.

Change your investing mind-set. Reprogram your thinking. Learn to like a sinking market because it presents great buying opportunity. Pounce when the three variables come together. When a strong business with an enduring competitive advantage, strong management, and a low stock price come onto your investment screen.

12. Don’t Swing at Every Pitch
What if you had to predict how every stock in the Standard & Poor’s (S&P) 500 would do over the next few years? In this scenario you have very poor chance of being correct. But if your job was to find only one stock among those 500 that would do well? In this revised scenario you have a good chance.

A few good investments are all that is needed.

13. Ignore the Macro; Focus on the Micro
The big things – the large trends that are external to the business – don’t matter. It’s the little things, the things that are business-specific, that count.

It’s possible to imagine a cataclysm so terrible that the markets would collapse and not bounce back. Externalities don’t matter – and you can’t predict them, anyway. And what can you do about them? Focus on what you can know: the workings of a good business.

14. Take a Close Look at Management
The analysis begins – and sometimes ends – with one key question: Who’s in charge here?

Assess the management team before you invest. A investing in any company that has a record of financial or accounting shenanigans, (creative accounting, accounting jugglery). Weak accounting usually means weak business performance. Strong companies do not have to resort to tricks.

15. Remember, The Emperor Wears No Clothes on Wall Street
Wall Street is the only place where people go to in Rolls Royce to get advice from people who take the subway.

Ignore the charts. A value investor is not concerned with charts. Invest like Benjamin Graham. Graham told investors to “search for discrepancies between the value of a business and the price of small pieces of that business in the market.” This is the key to value investing, and it’s far more productive than getting dizzy studying hundreds of stock charts.

Offer documents of most mutual funds say – in small print – that past performance is no guarantee of future success. Buffet says the same thing about the market: If history revealed the path to riches, librarians would be rich.

16. Practice Independent Thinking
When investing, you need to think independently

Make independent thinking one of your portfolio’s greatest assets. Being smart isn’t good enough, says Buffet. Lots of high-IQ people fall victim to the herd mentality. Independent thinking is one of Buffet’s greatest strengths. Make it one of your own.

17. Stay within Your Circle of Competence
Develop a zone of expertise, operative within that zone.

Write down the industries and businesses with which you feel most comfortable. Confine your investments to them.

18. Ignore Stock Market Forecasts
Short-term forecasts of stock or bond prices are useless. They tell you more about the forecaster than they tell you about the future. Take the time you would spend listening to forecasts and instead use it to analyze a business’s track record. Develop an investing strategy that does not depend on the overall movement of the market.

19. Understand “Mr. Market” and the “Margin of Safety”
What makes for a good investor? A good investor is one who combines good business judgment with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, remember Ben Graham’s “Mr. Market” concept, and look for a “margin of safety”.

Make sure that you also understand Buffet’s concepts of Mr. Market and the margin of safety. Like the Lord, the market helps those who help themselves. But, unlike God, the market doesn’t forgive those who “know not what they do”.

Bide your time, and wait for Mr. Market to get depressed and lower stock prices enough to provide a margin-of-safety buying opportunity.

20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful
You can safely predict that people will be greedy, fearful, or foolish. Trouble is you just can’t predict when or in what order.

Buy when people are selling and sell when people are buying.

21. Read, Read Some More, and Then Think
Mr. Warren Buffet spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks.

He therefore advises get in the habit of reading. The best thing to start is to read Buffett’s annual reports and letters. Finally, restrict your time only to things worth reading.

22. Use All Your Horsepower
How big is your engine, and how efficiently do you put it to work? Warren Buffett suggests that lots of people have “400 – horsepower engines” but only 100 horsepower of output. Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200-horse-power engine, says Buffett, is a lot better off.

Make sure that you have the right role models. Strive for rational behaviour, good habits, and proper temperament. Write down the habits, practices and philosophies that you want to make your own. Then be sure to keep track of them and eventually own them. Financial success is a “matter of having the right habits”.

23. A the Costly Mistakes of Others
This is self explanatory and need no comments!

24. Become a Sound Investor
Buffet says that Ben Graham was about “sound investing”. He wasn’t about brilliant investing or fads and fashions, and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor.

To become a sound investor, you need to develop sound investing habits. Always fight the noise to get the real story. Always practice continuous improvement.

It’s less about solving difficult business problems, says Warren Buffet, and more about a ing them. It’s about finding and stepping over “one-foot hurdles” rather than developing the extraordinary skills needed to clear seven-foot hurdles.

12 principles of speculation strategies in stocks - Value Investing Series III

2006-04-26T09:31:00.000-07:00

Enumerated below are twelve major principles and sixteen minor ones with brief comments by Kanu Doshi on each of them:

First Major Axiom: On Risk

“Worry is not a sickness but sign of health. If you are not worried, you are not risking enough.”

Adventure is what makes life worth living. Every occupation has its aches and pains. The rich have to worry about their wealth. But, if there is a choice between remaining poor and worry-free, the selection is obvious. It is better to be wealthy and worried than to be worry-free and poor. Minor Axiom I:

“Always play for Meaningful Stakes.”

If you invest Rs. 1000 and your investment doubles, you have only Rs. 2000 and are still poor! So if you want to be rich, you must increase your stakes. Minor Axiom II:

“Resist the allure of diversification”.

Firstly, diversification negates the earlier principle of playing for meaningful stakes. Secondly, it may keep you where you began so that your gains on few will cancel out the losses on the other few. Thirdly, it entails keeping track of many more items leading to confusion and occasional panic.

Second Major Axiom: On Greed

“Always take your profit too soon.”

Lay investors having made the investment tend to stay too long on it out of greed for higher profits. But, one must conquer this weakness and book profits soon. If one is less greedy for more profits one will take in more. Don't stretch your luck. In effect, it suggests, SELL sooner than later. Minor Axiom III:

"Decide in advance what gain you want from the venture, and when you get it, get out. Decide where the finish line is before you start the race".
This is self explanatory and hence needs no comment.

Third Major Axiom: On Hope

“When the ship starts to sink, don't pray, jump”

This axiom is about what to do when things go wrong. Learn how to accept a loss. One should accept small losses to protect oneself from big ones. When the market starts falling, sell, take your money and run!

Minor Axiom IV:

"Accept small losses cheerfully as a fact of life."

Expect to experience several smaller losses while awaiting a large gain.
Fourth Major Axiom: On Forecasts

"Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly."

The story of a monkey throwing darts on the stock exchange page of a newspaper, to select the companies to buy, and coming out a winner is too well known to be recited. Recent news from London, further proves the truth, when an untrained chemist's stock selections, in a widely publicised contest open to all and sundry, registered higher appreciation over several full time highly qualified fund managers' well researched selections. Human events cannot be predicted by any method by anyone and, hence, don't trust anybody's predictions.

Fifth Major Axiom: On Patterns

"Chaos is not dangerous until it begins to look orderly."

The truth is that the world of money is a world of patternless disorder and utter chaos. This axiom is a commentary on Technical Analysis - a branch of investment strategies based on charts and patterns. The fact is, no formula that ignores own intuition's dominant role can ever be trusted.

Minor Axiom V:

"Beware the Historian's Trap".

This is based on the age old but entirely unwarranted belief that history repeats itself. Minor Axiom VI:

"Beware the Chartist's Illusion".

Life is never a straight line. Let us not be hypnotised by a line on a chart. Minor Axiom VII:

"Beware the Co-relation and Causality Delusions."

Don't be taken in by coincidences in the market. Minor Axiom VIII:

"Beware the Gambler's Fallacy."

There is a gambling theory which suggests that one should put small stakes initially and test their luck, and if these turn out well one should go for big stakes on the dice table. But this is not correct. It only shows that winning streaks happen. But nothing is orderly about it. You can't know how long it will last or when it will strike.

Sixth Major Axiom: On Mobility

"A putting down roots. They impede motion".

You may feel socially comforting to have roots. But in financial life, roots can cost a lot of money. Have a flexible approach while investing. This axiom implies a state of mind. Minor Axiom IX:

"Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia."

Do not develop emotional attachment to your investment. You should feel free to sell when desired. Minor Axiom X:

"Never hesitate to abandon a venture if something more attractive comes into view."

Never get attached to things, but only to people. Otherwise it hits your mobility. Never get rooted in an investment. You should remain footloose, ready to jump away from trouble or into a profitable opportunity as and when circumstances demand.

Seventh Major Axiom: On Intuition

'A hunch can be trusted if it can be explained.'

A good hunch is something that you know but you don't know how to recognise it. When a hunch hits you, try to locate some data in your mind for any familiarity. Then only should you act on it.

Minor Axiom XI:

'Never confuse a hunch with a hope'.

Be highly skeptical. Examine every hunch with extra care.
Eight Major Axiom: On Religion and The Occult

'It is unlikely that god's plan for the universe includes making you rich'.

You can't only pray that you should be made rich. You will have to work at becoming rich. Mere prayers will not suffice.

Minor Axiom XII:

'If Astrology worked, all astrologers would be rich.'

This is self explanatory. Don't trust predictions. Minor Axiom XIII:

'As superstition need not be exorcised, it can be enjoyed provided it is kept in its place.'

In your day-to-day financial matters, act rationally. But, when buying a lottery ticket, give it a full play to amuse yourself.
Ninth Major Axiom: On Optimism and Pessimism

'Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.'

In poker and a lot of other speculative worlds, things are never as bad as they seem - most of the times they are WORSE.

Confidence comes not from expecting the best but from knowing how you will handle the worst. Optimism can be treacherous because it makes you feel good.

Tenth Major Axiom: On Consensus

'Disregard the majority opinion. It is probably wrong'.

It is likely that the Truth has been found out by a few rather than by many.

Minor Axiom XIV:

'Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.'

This is the best way to get a good stock cheaply.
Eleventh Major Axiom: On Stubbornness

'If it doesn't pay off the first time, forget it'.

If at first you don't succeed, try and try again and you will succeed in the end. This is good advice for spiders and kings but not for ordinary persons with regard to financial matters. Every trial is a costly error.

Minor Axiom XV:

'Never try to save a bad investment by averaging down.'

If the price of the stock goes down after your purchase don't buy more to bring down' the average cost of your total holding. Investigate why the price went down rather than put good money in a bad bargain.
Twelfth Major Axiom: On Planning

'Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people's seriously.'

This is self explanatory and hence needs no comment.

Minor Axiom XVI:

'Shun long-term investments.'

If possible try to a long-term investments. The author noticed that the Swiss group never took a long-term view of their stock purchases. They always sold out as soon as their targeted profit was achieved.

MF insight

2006-03-09T12:41:00.000-08:00

Don’t fall for the dividend bait!

Are ULIPs really expensive?

Add more zip to your ULIP!

Magnum Tax Gain - paid preview

2006-03-09T12:31:00.000-08:00

While the fund's performance has been impressive, we would like to see it replicate the same over a longer time frame.
Is this fund for you?
Magnum Tax Gain (MTG), is one of the leading, open-ended tax funds in the country today. Launched more than 13 years ago, the fund took its time to announce its 'arrival' about 3 years ago. This came by way of a blistering performance, through a high risk mid cap investment strategy that propelled it to the top of its peer group.
While the fund's performance has been impressive, we believe there are two factors that go against the fund. First, it does not have much of a track record to speak of beyond 3 years despite being in existence since 1993. Second, all its growth has come in only in one rally (mid caps) and we have yet to see it perform during a market cycle (market upturn combined with a downturn). We believe that the investor's interests will be better served by investing in tax-saving funds with longer track records like HDFC Tax Saver, Franklin Tax Shield and HDFC Long Term Advantage.
Fund Outlook
MTG's high risk investment strategy is a double-edged sword. While it has reaped returns by pursing a concentrated mid cap strategy over the last 3 years, this could change very easily if the tide in that segment were to turn. Also SBI Mutual Fund's track record on identifying investment opportunities on the large cap side has not been as impressive. Equally significant is the recent change in the composition of the fund management team. Given that there is a new 'Head of Equity' at the helm, it is difficult to comment on whether MTG's superlative performance can be repeated with the same degree of success going forward.
Fund Profile
MTG is an open-ended tax-saving fund from SBI Mutual Fund (assets under management as on February 28, 2006 - Rs 131.9 bn). Launched in January 1993, the fund was pitchforked into the limelight only 3 years ago when a concentrated mid/small cap investment strategy turned its fortunes completely. Forgotten were the indifferent start and the patchy performance for most of its history. Where sheer performance goes, it is now a leading tax-saving fund. Over 1-Yr, its NAV has appreciated by 94.8%. Over 3-Yr and 5-Yr, it has appreciated by 100.0% CAGR and 35.7% CAGR respectively.
Fund Manager
Mr. Gopal Agarwal is fund manager (equity) at SBI Mutual Fund. He manages Magnum Tax Gain, Magnum COMMA Fund and Magnum Midcap Fund among other funds. He took charge of Magnum Tax Gain after Mr. Sandip Sabharwal quit SBI Mutual Fund in October 2005.

MTG's performance over 1-Yr (94.8%) is impressive on two counts. First, in absolute terms it has nearly doubled the investor's investment in just 12 months. Second is in sheer outperformance of peers; HDFC Tax Saver (71.1%) is a distant second. Admittedly, a shorter time frame of 1-Yr is not an ideal period to evaluate an equity-linked fund, least of all a tax-saving fund with a mandatory 3-Yr lock-in.

MTG's performance over the longer time frames of 3-Yr and 5-Yr is mixed. Over 3-Yr, it stands head and shoulders over competition with an outstanding 100.0% CAGR. Again, the pace of its performance is too scorching for its peers; its nearest competitor is PruICICI Tax Plan (83.6% CAGR). However, its impressive show is blemished by the 5-Yr track record (35.7% CAGR). It is the penultimate fund in its peer group over this time frame. PruICICI Tax Plan (44.9% CAGR) and HDFC Tax Saver (43.9% CAGR) fare better than it. As we have mentioned earlier, MTG's relatively superior performance over the shorter time frames of 1-Yr and 3-Yr is due to a high risk investment strategy of targeting mid/small caps.

Volatility
MTG's performance on volatility parameter (Standard Deviation 6.23%) could have been better when you look at what its peers have achieved. All its peers save PruICICI Tax Plan (6.80%) have done better at restraining volatility in performance. Birla Equity Plan (5.62%) impresses the most on this count.

Risk-adjusted return
In terms of generating a risk-adjusted return, (Sharpe Ratio 0.76%), MTG is way ahead of its peers. HDFC Tax Saver (0.64%) is a distance second, followed by PruICICI Tax Plan (0.61%). This implies that MTG has done a far better job than its peers in rewarding investors per unit of risk taken

Portfolio Strategy

MTG's investment style is opportunistic and it invests heavily in trends. For quite some time now, the fund, like a lot of other equity-oriented funds from SBI Mutual Fund, has had a strong mid cap bias. This has paid handsome dividends as its performance indicates. In terms of stock selection, it is relatively consistent in its stock picks.

As on January 31, 2006, the fund had 89.7% of its assets in equities with cash/current assets accounting for the balance 10.3%. In recent times, MTG has maintained a high cash component. This could be due to profit-booking in view of the forthcoming dividend declaration.

In terms of diversification, the top 10 stocks in MTG's portfolio accounted for 42.3% of net assets. This makes the fund relatively well-diversified, given our view that a diversified equity fund must have no more than 40% of its assets in the top 10 stocks to counter volatility from stock market turbulence. To that end, the most diversified fund is Franklin India Tax Shield (37.3%). HDFC Tax Saver 49.4% is the most concentrated fund.

Sectoral Allocation

MTG's sectoral allocation across its 5 leading sectors compares well with that of its peers. With 56.0% of net assets in 5 sectors, the fund is the second most diversified fund in the peer group; Birla Equity Plan (55.0%) is the most diversified. HDFC Tax Saver (68.0%) is the most concentrated fund.

For calculation of sectoral allocation, similar-natured sectors have been combined; for example in MTG's case, Industrial Capital Goods and Industrial Products have been combined under Engineering.

Objective Vs Actual

The prime objective of the fund is "to deliver the benefit of investment in a portfolio of equity shares while offering tax rebate on such investments". "It also seeks to distribute income periodically depending on distributable surplus."

Since distributing surplus by way of dividends is a function of the capital appreciation generated by the fund, it is important understand if the fund has performed on that front. With 100.0% CAGR and 35.7% CAGR over 3-Yr and 5-Yr respectively, it is reasonable to conclude that the fund has generated wealth for investors.

In terms of distributing surplus, the fund has declared dividends regularly over the years.

Your feedback is important to us.
Name
E-mail
Your comments

Definitions

Expense ratio is the expenses of the fund including the management fee, administrative costs divided by the net assets of the fund under management. A lower expense ratio indicates a more cost efficient fund.

Sharpe Ratio is a measure developed to calculate risk-adjusted returns. The Sharpe Ratio is the difference between the annualised return (Ri) and the risk-free return (Rf) divided by the Standard Deviation (SD) during the specified period. Sharpe Ratio = (Ri-Rf)/SD Higher the magnitude of the Sharpe Ratio, higher is the performance rating of the scheme.

Standard Deviation (SD) tells us how much the values have deviated from the mean of the values. SD measures by how much the investor could diverge from the mean return either upwards or downwards. It highlights the element of risk associated with the fund. The SD is calculated by using returns of the scheme i.e. Net Asset Value (NAV). Higher the SD, higher the element of risk (volatility) in a scheme.