Investment Planning

January 2017

The Golden Rules for Investing

10 rules for investing, Risk, Compounding, SIP, Greed, Fear, Taxes, Tips, Value Investing, Personal Finance, Financial Planning

The Golden Rules of Investing are essentially a common sensical approach which largely comes down to the emotional aspects such as Discipline, Patience, Greed & Fear. 

Remember these 10 golden rules of Investing.

1. Risk is inevitable – What is Risk?  Understanding Risk is the first part and then learning to Manage it. 
2. Start early – Benefit from compounding. Einstein has acknowledged Compounding as the 8th wonder of the world.
3. Have realistic expectations – Greed is bad. How much is too much. You never know what is enough, until you know what is more than enough.
4. Invest regularly – Not even God can time the markets. Timing/Forecasting the markets is an illusion.
5. Stay Invested – Be a marathon runner. Markets tests patience and rewards conviction.
6. Don’t churn your investments – It only increases costs. If you like gambling, go to a casino. For serious investing, stay put.
7. Spread your corpus – Each investment class is important. Don’t put all your eggs in one basket. 
8. Sell your losers – Hope doesn’t make money, Wisdom does. We are biased against actions that lead to regret. People attach too much weight to gains and losses rather than wealth. 
9. Hot tips usually burn your investments – Avoid them. Remember the reverse of TIP is PIT. So a tip usually dumps you in a PIT almost always. 
10. Taxes are important – But not at the cost of a bad investment. Only Death and Taxes are certain, true ~ But don’t make bad investments just to save tax. Don’t be Penny Wise Pound Foolish.

Happy Investing

June 2016

Types of Investors – What type are you?

Types of Investors , Conservative, Aggressive, Risk taker, Risk Profiling, Risk Averse, Savers, Specialists, Speculators

I came across this good article at http://www.threetypes.com/philosophy/investor-types.shtml and wanted to share. It essentially discusses the various types of Investors viz : Savers, Speculators and Specialists and then goes on to explain how becoming a Specialist, is something which generates immense wealth over lesser periods of time , but which also requires tremendous efforts on the part of the investor.

Go ahead and decide which type of investor you are and then invest accordingly. Enjoy Investing…..

Savers

Savers are those people who spend the majority of their life slowly growing their “nest egg” in order to ensure a comfortable retirement. Savers explicitly choose not to focus their time on investing or investment strategy; they either entrust others to dictate their investments (money managers or financial planners) or they simply diversify their investments across a number of different asset classes (they create “a diversified portfolio”). For those who create a diversified portfolio, their primary investing strategy is to hedge each of their investments with other “non-correlated” investments, and ultimately generate a consistent annual return in the range of 3-8% (after adjusting for inflation). Those who entrust their money to professional money managers generally get the same level of diversification, and the same 3-8% returns (minus the management fees).

Savers seek low-risk growth of their capital, and in return, are willing to accept a relatively low rate of return. While there is certainly nothing wrong with striving for consistent returns, what the Saver is doing is really no different than putting their money in a Certificate of Deposit, albeit with slightly higher returns. The bulk of Savers are investing for long-term financial security and retirement. They start saving in their 20’s and 30’s by putting money in 401(k) accounts, mutual funds, and other diversified investments, and in 30 or 40 years, they have enough to retire on.

Savers rely in a single force to grow their capital: time. Because their rate of return is generally consistent, a Saver’s primary mechanism to achieve wealth is to invest and wait. In fact, Savers often use The Rule of 72 to calculate long-term investment growth and plan their retirement. While passive investing is an almost surefire path to a comfortable retirement, it also generally means 30-50 years of work to get to that point.

Speculators

Unlike Savers, Speculators choose to take control of their investments, and not rely solely on “time” to get to the point of financial independence. Speculators are happy to forgo the relatively low returns of a diversified portfolio in order to try to achieve the much higher returns of targeted investments. Instead of just spreading their money across stock funds, bonds, real estate funds, and a variety of other asset categories, Speculators are always looking for an investing edge. Perhaps they get a hot stock tip and try to cash in on the next Google. Or perhaps they hear about all the real estate investors who have made a bundle flipping houses, so they go out and buy the first run-down house they see.

Speculators recognize that they can have higher returns than Savers, and are willing to do or try anything to get those returns. They’re not scared to throw some money in an Options account and try their hand at derivatives trading; or run out and buy a bunch of inventory from a wholesaler they know and open up an eBay selling account. Speculators are always looking for the next great investment; for them, it’s all about being in the right place at the right time, and taking a chance on getting rich. If today’s investment doesn’t work out, there will always be another one tomorrow. (more…)

December 2015

How to avoid investing in MisManaged Companies – Understand Balance Sheet

How to avoid investing in mismanaged companies, Misallocation of capital, Successful Investing Tips

Most investors keep looking for the magic investing mantra which can keep compounding returns. Many burn their fingers by getting into wrong companies. The first step of successful investing and to avoid investing in MisManaged Companies is to Understand Balance Sheet of a company.

A balance sheet, also known as a “statement of financial position,” reveals a company’s assets, liabilities and owners’ equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

Here is a great starting point from Investopedia to understand reading a balance sheet. Another article talks about the due diligence that should be followed before choosing a stock to invest is another checklist which the investors should always keep handy when doing a first cut analysis before giving a ‘pass’ and research further.

Bala writes about a wonderful article on Misallocation of capital  which gives examples of why to avoid investing in companies which misallocate capital.

When you start looking at a balance sheet, a quick first cut analysis can help you eliminate researching further if you come across these common account red flags…

The Indian stock market, in aggregate, carries a relatively high risk that a minority shareholder will not realize the value in a listed firm because the controlling shareholder (or promoter as they are known in India) will appropriate value for himself, leaving little on the table. The risk is higher relative to certain other stock markets mainly because of limited regulation. In addition, lax enforcement indirectly encourages such behavior. Kimi writes on how one can avoid such landmines in his elaborate article peppered with examples.

Successful investing is all about avoiding the companies/ sectors/ industries which are mismanaged and going aggressively after the good ones…As Charlie Munger famously said “Tell me where I’m going to die, that is, so I don’t go there.”…..

Happy Investing….