January 2016

Why every aspect of business is about to change ? ~ Article from Fortune

Investment Planning, Identifying multibaggers, Stocks , INvesting for 2016 Ideas

What better way to start new year than analyzing the past ? A Brilliant Summary of changes that is going to hit us one way or other sourced from www.fortune.com

Why every aspect of your business is about to change

Geoff Colvin

Imagine an economy without friction-a new world in which labor, information, and money move easily, cheaply, and almost instantly. Psst-it’s here. Is your company ready?

Cars bursting into flames are never a good thing. So when a Tesla Model S ran over a metal object in Kent, Wash., in October 2013 and burst into flames, owners, potential customers, investors, and company executives got worried. When the same thing happened a few weeks later in Smyrna, Tenn., federal regulators opened an investigation. We all know what happens next: a massive recall, costly repairs at dealerships nationwide, and a painful financial hit to the carmaker. Yet none of that occurred. The problem was that the Model S could lower its chassis at highway speed to be more aerodynamic, and if debris hit the car’s battery pack in just the wrong way, it could catch fire. So Tesla  beamed a software update to the affected cars, raising ground clearance at highway speed by one inch. The problem went away. Just four months after opening their investigation, the regulators closed it.

Using software and the mobile-phone network, Tesla avoided any need for a recall. It doesn’t have any dealerships; customers can configure and order a car online, and they can test-drive cars at company-owned showrooms. Tesla’s advanced electric technology is simpler than gas or diesel technology, so cars can be built with fewer employees and less capital. Combine those factors and here’s what happens: General Motors  creates about $1.85 of market value per dollar of physical assets, while Tesla creates about $11. GM creates $240,000 of market value per employee, while Tesla creates $2.9 million. You don’t get differences like that just by being more efficient. Tesla, though in the same business as GM, is a fundamentally different idea

 

GM is changing, but for now it’s still a 20th-century corporation. Tesla is a 21st-century corporation, built for sweeping new realities that change the rules of success. The big theme is the arrival of the long-heralded friction-free economy, a new world in which labor, information, and money move easily, cheaply, and almost instantly. Companies are forming starkly new, more fluid relationships with customers, workers, and owners; are rethinking the role of capital (as traditionally defined), finding they can thrive while owning less and less of it; are creating value in new ways as they reinvent R&D and marketing; and are measuring their performance by new metrics because traditional gauges no longer capture what counts. (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….

November 2012

The Illusion of prediction ~ Hindsight Bias

The Illusion of prediction , Hindsight Bias, Financial Pundits, Predicting the stock markets, Stock trends

Everything makes sense in hindsight, a fact that financial pundits exploit every evening as they offer convincing accounts of the day’s events.  

And this Illusion that we understand the past fosters overconfidence in our ability to  predict the future. The idea that the future is unpredictable is undermined every day by the ease with which the past is explained. This is especially true in the financial markets.

Value Investing

October 2012

Returns from various asset classes for the period 1979-2012

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Returns from various asset classes for the period 1979-2012
Investment
Returns in %(average annual)
Rs 10,000 invested in 1979 becomes in 2012
 
Bank deposit
8
1,36,902
Gold
8.7
1,75,000
PPF
9
 1,87,285
Stocks (BSE sensex stocks)
16.5
18,50,000+ Tax free Dividends (@ Sensex Level 18500)
Over Long terms, Equities have outperformed, the other asset classes by a handsome margin. However, having said that it requires tremendous patience, discipline, good advise, serendipity  and avoiding some costly mistakes in between to achieve those returns. 
 
The ERLI Principle sums it up very well ~ Invest :
 
– Early
– Regularly
– Long term perspective
– Intelligently
 
More on Investing Process and Costly Mistakes to avoid.

Warren Buffett on Investing in Gold

Warren Buffett Quotes, Gold Investments, Value Investing, Fundamental Analysis, Asset Allocation, Financial Planning

Buffett’s disdain for gold as an investment asset is very well known. Here is a quote from one of the world’s greatest investor on investing in Gold :

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head. ~ Warren Buffett

September 2012

Prediction or Protection ~ Basis of Investing ~ Graham Style

Prediction , Analysis,  margin of safety concept , Basis of Value Investing, Stock Picking, Benjamin Graham Style, defensive Investor, Diversification

Basis of Investing

We invest in the present, but we invest for the future. But unfortunately the future is always uncertain 

  • Inflation and Interest rates are undependable
  • Economic Recessions come and go at random
  • Geo-political upheavals like war, commodity shortages & terrorism arrive without warning
  • fate of individual companies and their industries often turns out opposite of what investors expect.
Analysts and financial shenanigans keep busy forecasting and urging retail investors to invest based on projections.
As per Graham, though, investing on the basis of projection is a fool’s errand. He goes on to say that the forecast of so called experts are less reliable that the flip of a coin.
So, what is the alternative.
Graham goes on to suggest that it is in the best interests of the investor to invest on the basis of protection. 
What exactly is basis of protection? Well… It simply means
(1) Do not overpay for a stock and  
(2) Avoid overconfidence in your own judgement.
It’s a simple, yet a brilliant insight for successful investing ~ requires patience and discipline~ yet rarely followed and largely ignored by a vast majority of investors :
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– First, Don’t Lose… Losing some part of the money is an inevitable part of investing, and there’s nothing you can do to prevent it.
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An intelligent investor must take the responsibility upon himself to ensure that he never loses most or all of the capital whilst investing.  
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– The Risk is not in the stocks ~ Guess what ~ It is in ourselves.
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Graham expands this concept as the ‘Margin of Safety’ ~ which he has acknowledged as the core philosophy of his success….More on this concept, Risk, Investor Psychology and Uncertainly later…..

<<<Welcome Home>>> 

August 2012

Investing process and costly mistakes to avoid

Investment Mistakes, Investment Planning, Life Goals, Successful Investing, Value INvestingJust yesterday, I was having a discussion with a friend who was keen on knowing about the markets and where they are heading. He is interested in investing for long term.

Instead of providing an answer ( Well!!! I myself do not know, nor does anyone else know where are the markets headed…. Anyone who claims he does should would just be sitting in Hawaii, enjoying the beaches and punching away his trades to glory isn’t it!!!! 🙂 )

OK so I probed hime further with a few questions about his financial goals, current assets and liability situation, savings etc and made him aware about the kind of questions he should be asking in order to achieve financial (investing) success over a long run.

Of course, he will have to devote some time towards understanding the products available to invest further… But diagnosing the current situation and having a clarity of financial / life goals is the important first step.

Here is a nice article in 4 parts which I had written quite some time back and wanted to bump up.

Life can only be understood backwards; but it must be lived forwards.

In the process of investing, one often makes mistakes. There is nothing wrong in it. However, repeating the same mistakes should be avoided. This is so much easier said then done. Never-the-less, we can always try. So, Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years.

I have been investing since 1997. Earlier part of the investment was when I was in US and then later after moving to India in 2005. I have been investing in both shares and real estate.

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can also cultivate good habits of investing by avoiding the following most common mistakes.

So here goes……..

#1. Investing without a Goal

If one does not know to which port he is sailing, no wind is favorable.

Beginning investors often begin by Casual Investing without any goals. This quite often leads to pain and heartburn because, without any goals, investments are treated as speculation instruments solely aimed at making more money in a shorter span of time, by chasing market performance and acting on market swings, something similar to get-rich-quick scheme. (Speculation is a different ball game and of course, many people do succeed at it. However as in Investments, there are different set of rules, full time efforts, and a different mind set and discipline which needs to be followed.).

Different goals require different strategies. Broadly goals can be divided into three types according to time frames.

Long term Goals – typically 7+ years (e.g.: retirement corpus, child education, child marriage etc.) should invest in Long term high risk/high return growth investment assets.

Medium term goal – typically 2 – 7 yrs (e.g.: deposit on house, planning a sabbatical from work etc.)  Require balanced risk investment strategy,

Short term goals – typically less than 2 yrs (e.g.: overseas holiday, purchase of car, any major house improvement expense etc) require conservative investment strategy.

So, Some of the following questions have to worked upon and answered to full satisfaction before setting out for investment: What am I investing for (Goal)? How much do I need for the goal to be met? What is the time frame of the investment going to be? Where do I need to invest? Should I do lump sum investment or Periodic investment? And so on…

Remember, failing to plan is planning to fail

#2. Not Starting to invest Early enough

This is one of the most common mistakes made by investors. Most of us keep waiting for the right time, or the right price, or the right time to begin investing. Remember, Time in the market and not timing the market is the simple way to success in investing. Please read my earlier post on Invest early, Invest Wise, Utilize the power of compounding.……….. You can read posts here. (Part IPart II , Part III & Part IV)

Investors Guide to the Capital Market & 20 mantras for investing

Investors Guide to the Capital Market ,20 mantras for investing, India Stock Markets, Investing in IndiaI came across the document ‘Investors Guide to the Capital Market’ produced by the Ministry of Corporate Affairs under the Aegis of ‘Investor Education and Protection fund’ (IEPF)

It contains some 20 generic mantras for investors to follow for successful investing. It would have been nice if the document contained some more depth in terms of the material. It appears to be put together in haste.

Also, I disagree with Mantra 4 (Invest in IPO & book profit on listing) & Mantra 5 (Invest in all PSU IPO’s. Don’t bother about listing price, stay invested). These two mantra’s mention that the investor will not lose money while investing in IPO’s and should try to take the profits on listing, aka recommending trading and timing.

Also, why should an investor invest in all PSU’s. Investors should invest in companies which will generate cash flow and maintain growth year on year and give returns in forms of either dividends or capital appreciation. Do all PSU’s guarantee outperformance over Private sectors. Answer is NO.

Beginner investor can refer to the document (albeit with a pinch of salt.) It starts off as follows.

Save prudently…
Invest even more wisely
Investing
• Investing is compulsory.
• You have to invest otherwise your savings
will depreciate in value/purchasing power.
• However, mindless or reckless investing is
hazardous to wealth.
20 Mantras to Wise Investing

The complete link to the document is here. Investors Guide to Investing – NSE

June 2012

Relative Valuation ~ Primer

relative valuation, multiples, PE Ratio, EPS, EBIDTA, ROE, ROI, WACC, Cost of equity, researchRelative Valuation is Valuing an asset by comparing with prices of similar assets in market. In relative valuation the value is relative to how the market is pricing comparable firms
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There are three basic steps
–Identify comparable assets
–Standardize – price of the asset or the value of equity
–Adjust for differences  
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Why popularity of Relative Valuation in analyst circle?
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•It is Easy to sell a story based on comparables
–Pebble beach golf – Japanese paid 750$ mn in late 1980’s
–At that time All of Tokyo real was estimated to be cost more than all of US real estate put together
–Business potential did not justify the price
–Imagine selling a DCF based valuation!!!
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•Most  Assumptions and inaccuracies are hidden
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•If you mess up so would have others
–You don’t want to be wrong all alone on the street
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Is there widespread use ?? Of course …
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•Majority of research reports are based on Relative Valuation
•Mergers and Acquisitions derive valuations based on a  multiple based prices of comparable firms.
•Many investment strategies  are based on multiple (eg: Venture Capital/PE fund investing in entrepreneurial ventures)
•Terminal Value in DCF often calculated using Relative Valuation
•DCF used to justify Relative Valuation quite often
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More on Common Multiples later….

May 2012

Investing in Real Estate : How is it different from other alternative Investments?

Investments, Alternative investments, Stocks, Bonds, Gold, Real Estate, Risk, Returns, Diversification,
 
Here are some successful people talking about investing in real estate :
 
“Ninety percent of all millionaires become so through owning real estate.”
-Andrew Carnegie
“The major fortunes in America have been made in land.”
-John D. Rockefeller
“I would give a thousand furlongs of sea for an acre of barren ground.”
-Shakespeare
“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”
-Marshall Field
“The best investment on Earth is earth.”
-Louis Glickman, American business executive
 

So, obviously, real estate can be a good investment, provided the investment is planned properly.

How RE is different from any other form of alternative assets?

– There is Low correlation with equities in the short run only

– However, Both equities and RE are adversely affected in a recession

– RE investments produces apparent low volatility

– Location specific investments – The local factors affect the real estate prices a lot more than global factors (unlike commodities, stocks, gold etc which are impacted by global macro economic factors)

– Interdependence of land uses

– Large transactions which are typically leveraged by use of substantial amount of debt.

– RE investments typically habe long gestation period

Here are some of the reasons for Including RE in Investment Portfolio :

– RE investments can produce high absolute returns

– It is a Hedge against inflation

– Portfolio is diversified to reflect overall investment universe

– It provides tax benefits – may not be available in any other alternative investments

– Suitability to various investors

– Risk tolerant investor

– Risk-sensitive investor

– Inflation sensitive investor

But as Raplh Waldo Emerson says “Fear always springs from ignorance”…. The first thing is to obvious do a lot of planning and become aware about the purpose of investments

 

April 2012

September 2010

Reliance – 2nd among world’s largest value creators

There is a report in Business Standard which mentions many Indian Companies amongst the world’s largest value creators in this decade. The report is here :

Mukesh Ambani-led Reliance Industries has been ranked second in the list of world’s 10 biggest ‘sustainable value creators’, companies that have been successful in creating the most shareholder value over the last decade, prepared by Boston Consulting Group.

Reliance Industries again comes second in the ‘Large Cap firms’ for 2005-2009 of 112 global companies with a market valuation of more than 35 billion dollars.

In the chemicals industry, Reliance Industries has been named the second biggest value creator of 53 global firms during the period behind South Korea’s OCI.

However, the stock has virtually not given any returns over the past 2 years….. Many investors are losing patience now and
letting go of the stock in favor of Banks, Pharma and FMCG Companies…. which have outperformed…
If you compare the returns of Reliance with the BSE Index, the result is quite glaring….Sensex is up almost 40 % in last one
year……Whereas Reliance has not given any return at all ……
So , What is next …….. Well a relief rally should be on cards till 1200 at least if the stock holds above 960 levels. …. And this will definitely bring smiles to the investors… and the markets as well.

August 2010

What and How of Nifty Index!!!

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One of my friend recently just wanted to get an idea about Nifty and How it is calculated. I am presenting some basic facts about Nifty here….

Background of Nifty

S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.

S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India’s first specialised company focused upon the index as a core product. IISL has a Marketing and licensing agreement with Standard & Poor’s (S&P), who are world leaders in index services.

  • The traded value for the last six months of all Nifty stocks is approximately 44.89% of the traded value of all stocks on the NSE
  • Nifty stocks represent about 58.64% of the total market capitalization as on March 31, 2008.
  • Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.15%
  • S&P CNX Nifty is professionally maintained and is ideal for derivatives trading

What and How of Nifty Index, How is stock selected in Index, Sensex, India Index Services and Products Ltd. (IISL)NSE, CRISIL, Liquidity,  Impact Cost, Floating Stock, index calculation

How Stocks are selected :

The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria:

Liquidity (Impact Cost)

For inclusion in the index, the security should have traded at an average impact cost of 0.50% or less during the last six months for 90% of the observations for a basket size of Rs. 2 Crores.

Impact cost is cost of executing a transaction in a security in proportion to the weightage of its market capitalisation as against the index market capitalisation at any point of time. This is the percentage mark up suffered while buying / selling the desired quantity of a security compared to its ideal price (best buy + best sell) / 2

Floating Stock

Companies eligible for inclusion in S&P CNX Nifty should have atleast 10% floating stock. For this purpose, floating stock shall mean stocks which are not held by the promoters and associated entities (where identifiable) of such companies.

Others

a) A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligiblity criteria for the index like impact cost, market capitalisation and floating stock, for a 3 month period instead of a 6 month period.

b) Replacement of Stock from the Index:

A stock may be replaced from an index for the following reasons:

i. Compulsory changes like corporate actions, delisting etc. In such a scenario, the stock having largest market capitalization and satisfying other requirements related to liquidity, turnover and free float will be considered for inclusion.

ii. When a better candidate is available in the replacement pool, which can replace the index stock i.e. the stock with the highest market capitalization in the replacement pool has at least twice the market capitalization of the index stock with the lowest market capitalization.

With respect to (2) above, a maximum of 10% of the index size (number of stocks in the index) may be changed in a calendar year. Changes carried out for (2) above are irrespective of changes, if any, carried out for (1) above.

And Finally how is the index calculation done

S&P CNX Nifty is computed using market capitalization weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value.

Source : NSE