Make extra cash on the side - some ideas

1. Buy things for cheap from goodwill and sell them on eBay
2. Clean up garage and put them on craigslist - this was a simple one
3. Buy tickets in pre sale(amex and citi have some) and then sell them on stubhub for double.
4. Follow Clark Howard on saving
5. Buy name brand products but wait for them to come on sale. I have a calendar I will publish here when is a right time to buy all consumer goods. Example: you would think that buying a big screen tv is best in thanksgiving time, but they are the lowest in March April timeframe.

more ideas coming soon...

Annuity demystified

I am investigating the field of Annuity nowadays. Interest annuity, Variable Life Annuity, Indexed Annuity and Indexed Life Annuity. From what I got till now is that they are all instruments to beat the market returns with putting a floor underneath you in case the markets give way. I will be investigating more and  putting my thoughts in thsi blog post regarding that.

key ratios for picking good stocks

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

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

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

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

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

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

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

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

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.