Investment Insight

Show me the multibagger!

2012-02-20T21:08:00.000+05:30

First a small update.

Over the last one month we saw a nice little rally in the market. Regular readers of the blog would remember how we spoke about a V shaped recovery which is what seems to have happened. Short term movements are not our forte and lets just conclude that we just got lucky with that prediction. The market seems to be discounting a lot of positive events that have not yet happened - but can happen over the next few months, or not. This includes lower inflation, rate cuts, no disaster in Europe etc. What really happens is something no one knows but the "experts" as usual have already started extrapolating, but i digress.

Now to the idea that i want to discuss today.

You talk to most amateur investors and they are constantly looking for that multibagger idea which will make them rich and then they won't have to work again for the rest of their lives. Mostly this behavior is due to stories and statistics about stocks that have grown 100 times or 1000 times in the last ten or so years. Immediately we start doing the calculations, if i had invested Rs. 1000 in Wipro i would have been a millionaire ten times over by now. Then the quest starts to look for the next Wipro or next big thing (biotech or digital media, you tell me.). So they go through their entire investing careers looking for that undiscovered stock that will make them rich beyond belief. If you think about it, this is nothing but lottery. Yes you may get lucky, but what are the chances? Is it any wonder that most people consider the stock market as a gambler's den?

People invest like this (assume over one year):

A low return (Fixed deposits say 7% return) with high probability(100%) [95% of my money goes here]
A high return (Stocks say 1000% return) with a low probability (1%) [5% of my money goes here]

What is the payoff (allocation x probability x possible gain):

(0.95 x 1 x 1.07) + (0.05 x 0.01 x 11) = 1.022

That's about a 2% return.

What they can do instead is invest in established companies that won't become multibaggers in an year but would return say 20% per annum with a 75% probability. Lets look at the payoff here.

A low return (Fixed deposits say 7% return) with high probability(100%) [95% of my money goes here]
A above average return (Stocks say 20% return) with a above average probability (75%) [5% of my money goes here]

What is the payoff (allocation x probability x possible gain):

(0.95 x 1 x 1.07) + (0.05 x 0.75 x 1.2) = 1.021

That's about the same 2% return.

Now think about this for a while. While in your gamble stock you could invest a maximum of 5% of your money, in the second case when you go for a much more stable company you can increase your allocation to stocks dramatically and push your expected return much higher.

Its such a simple concept. Instead of investing minuscule sums in unknown stocks hoping for a big return, invest a reasonable amount in the stronger and stable companies and you'll end up making much more money.

So while chasing the big returns in "undiscovered stocks" looks lucrative, sticking to the simple and tested names with a higher allocation could take you much further in your investing career.

First ask, what's the downside?

2012-01-14T10:39:00.001+05:30

When you go out looking for stocks to buy, most likely the first question that comes to mind is - "How much money can i make in this one?"

This is precisely the wrong question to ask. At least not at first. The fascinating, strange and ironic thing is that the ones who set out to make money from the market more often than not lose it.

You can read books about it and eventually you will figure out that every great investor and every great trader has succeeded on this single principle - Focus hard on not losing a lot of money and in a few years you will be surprised with your investment results.

Don't confuse losing money with volatility. If you buy something at 100 and in a week it goes to 90 - that's not losing money.Losing money is permanent loss of capital. For instance the ones who bought infra and realty stocks in 2007-08. Chances are those companies won't see those prices for years to come. So if you bought Unitech at 100 and now its at 25 after 3 years - that's money down the drain. We have to take the loss and get on with life. Some people indulge in what's called "averaging" - in this world there are very few things which are more stupid than that.But let me save that for another blog post.

So now, how do i make sure i don't lose money permanently. Continuously ask yourself what can go wrong with this company or investment? Every day, every week or every quarter - keep asking and keep reevaluating. Charlie Munger says," All i want to know is where i am going to die, so i won't go there."

Avoid paying too much for growth - ideally don't pay a forward PE of more than 35-40 no matter how interesting the growth prospects. Yes, out of ten such stocks you skip, two might go on to become very successful but remember our focus is to avoid losing money than making it.
Avoid buying "cheap" companies. Mostly they get cheaper. There are a couple of points to note here:

Anchoring - Just because a stock fell from 800 to 500 doesn't automatically make it cheap. At 800 the market was discounting a different future and now at 500 a lot of things could have changed. The stock may not see 800 again for years till earnings catch up.
Buying low quality companies just because they are trading at 5 PE - unless you're very sure its worth more than 5 PE (This is the scuttle-butt investing - very hard to practice successfully for amateurs ). Lay investors might say how much lower can they go from 5 PE. What they don't know is that there is a huge opportunity cost involved with buying such companies.In other words the money that is rotting/waiting for a rebound in such low quality companies can be put to much better use in say a bank FD, if not some other company. Opportunity cost is the most important thing in investing and very very few people ever consider it.

Avoid predicting turnarounds in companies, unless you know a great deal about a specific company or industry. Even if you do know a great deal,make sure you don't suffer from any misplaced confidence about your knowledge which is a very common behavioral bias.
Avoid predicting turnaround in prices.

The key to successful investment is NOT to try and reduce the risk to zero. This is what people who invest only in "zero risk-low fixed returns" try to do or so they think.

The key is to try and reduce a larger risk into a smaller one.This is where lies the fortune.

This is not 2008!

2011-12-18T10:07:00.000+05:30

A lot of discussion is happening about identifying bottoms.

I think its important to understand that bottoms are made when:

1. everyone who wants to sell has sold off and
2. no one - including most of us - is interested/courageous in buying either.

Volumes fall and prices remain where they are more or less for a period of time.

If one sits and ponders over these two points it will be clear that we are no where near the bottom. Selling is happening with volumes and there are enough people waiting on the sidelines with cash for the selling to stop so that they can begin their "bottom fishing".

We are getting biased by the recency effect of 2008. This is not 2008.

In May 2008 people were invested to the hilt. All the cash they had was into equities and when the bust came they lost almost all their money in a matter of 6 months. When the selling finished no one had the cash or the courage to buy.So we had our bottom. A good 3-4 months of prices neither going down nor up.Now that was a bottom - some smart ones (you know who you are :) )identified this and made a killing in the subsequent recovery.

After that 2008 episode most people never went into equities and when this fall arrived it would be safe to say that most market participants were NOT invested fully.Everyone was cautious and playing it safe. The volumes will tell us that. Everyone had sufficient cash waiting to be invested when the next 2008 like bottom comes - except it won't!

I don't know what happens to Europe or our very own reforms or inflation,I don't know when will the selling stop. But when it does and people are waiting for it, the buying is going to be swift and we are most likely to see a V shaped recovery or a trignometric wave - one of which will break out and never come back. Will you be able to catch it? I hope you do!

Comments welcome.

The importance of reinvesting capital

2011-11-07T14:24:00.002+05:30

Everyone loves dividends.

But very few know that for a company earning high returns on their capital, giving out large dividends as a percentage of profits earned (known as payout) actually prevents value creation.

Lets work this out to see if its really true.

Case 1 - 100% payout

1.Assume there is company with an EPS of 10 in the first year
2. It makes an ROE of 100% and gives out everything as dividend.
3. So every year you get Rs.10 as dividend which you use to buy the company's shares.
4. Let the PE of this company be 30 and remain so over five years.So that gives us a price of 30*10=300 in the first year.
5. At the end of five years you have Rs.50 accumulated as dividends which you have used to increase your stake in the company to 1.16 shares from the 1 share you originally held.
6. At the end of the fifth year your networth is 1.16*300 = Rs.348

Case 2 - 0% payout

1.Assume there is company with an EPS of 10 in the first year
2. It makes an ROE of 100% and gives out NOTHING as dividend.
3. Not Applicable
4. Let the PE of this company be 30 and remain so over five years.So that gives us a price of 30*10=300 in the first year.
5. At the end of five years the EPS is Rs.160. So price at the end of five years is 160*30=4800
6. At the end of the fifth year your networth is 1*4800= Rs.4800

That's a whopping difference. And that is the difference between owning a Hindustan lever and a Nestle although both earn the same 80-100% return on capital.

HUL's book value (net assets) has remained where it was in 2001, all these 10 years at Rs.13 per share - which means they have hardly retained any earnings. Whatever they earn every year is more or less paid back as dividends - nothing is reinvested back into the business.

Nestle on the other hand has increased its book value (net assets) from about 20s in 2001 to about 90 today - all this while earnings the same 80-100% return on capital as HUL did BUT on an increased capital base and this has made all the difference.

HUL's stock price has returned a total of about 60% in 10 years while Nestle has returned 900% since 2001.

So the next time you find a company earning high returns on capital ask two questions:

1. Can they sustain the high return for an extended period of time?
2. How much of the profits are they retaining/ploughing back into the business?

Market valuation of a growth stock

2011-11-05T01:12:00.001+05:30

Continuing from my earlier article i thought i will take a shot at how i think market values growth companies. Typically there are four phases:

Phase 1: Growth? Where? - This is the first phase when due to a catalyst unknown to the market a company starts to grow at above average growth rates compared to its own historical past. Think about a company like TTK Prestige - this was a no shakes stocks and it hardly moved from 2000 to 2005. It price moved from about 35 to 45 in those 5 years. Market was least interested in this stock.

Phase 2: Growth? Meh. - But then suddenly it started growing much faster from 2005 onwards - thanks to a cut in excise duty on branded cookers as well as a more prosperous India in general. But the market refused to pay much attention to this growth and the stock price moved much in line with the profit growth without any PE rerating to talk about. The stock price moved from 38 to 130 from 2005 to 2009. A very decent 35% CAGR growth rate - this at a time when stocks like Pantaloon, Educomp etc were growing at 100% and infrastructure stocks were growing at half that rate but trading at twice the PE. All in all the market gave our stock (TTK Prestige) its due but wasn't too enthused about the "story".The stock price grew at the rate of earnings growth.

Phase 3: Growth! Wow this could be big -Then came the trigger for the market. After having consistently grown at a decent rate for 4-5-6 years the market figured this company really has something going for it. 2010 turned out to be a bumper year for TTK Prestige since their raw material Aluminium's price was in the dumps thanks to the 2008-09 recession and the company posted a profit which was two and half times 2009's profit. The market acted promptly and in one year the stock was up from 130 to 430 (300% increase!). The market had by now figured out this could be a great growth stock. Time for fireworks.This is the best time to get in, if you are lucky enough or smart enough or both!

Phase 4: Growth! Lets extrapolate! - The imminent PE re-rating finally happened. This is when the biggest money is made in stocks. From 2010 to 2011 TTK Prestige grew profits by 60% and can you guess how much the price grew? From 430 in 2010 to 1650 in 2011 - that's about 4 times in one year. Since the beginning of 2011 the price is up about 60% more to 2600 in line with a profit increase of about 50%. The market is now expecting TTK Prestige to grow profits at about 40% every year. The company will continue to enjoy this high PE till such time that it grows in that range.This is a good time to enter too as long as you think the company still has steam left to grow at these rates for another 2-3 years, if not more.

Phase 5: Growth? This Story's over! - Ofcourse a company cannot grow at 40-50% forever - there will come a time when the growth rate will start slowing down. Initially the market will shrug it off expecting the company to bounce back - this is the time to get out when the PEs are still reasonably high but growth starts to falter! Eventually after 3-4 quarters of less than anticipated growth the PE will start to contract permanently and will plateau to a level.

This then is the story of every growth company. Some companies remain in phase 1 or phase 2 forever while some jump from phase 3 directly to phase 5. But the real growth companies that make the biggest amount of wealth make a smooth transition from phase 2 to 3 to 4 and then onto a bumpy phase 5. Now figure out which phase is your growth company in.

7 things to look for in a "growth company"

2011-10-29T12:54:00.003+05:30

Whenever i try to buy a company for its growth potential (that's always by the way!) here is the list of 7 things i look for in the company:

1. Size of the sector - Here the rule is to buy companies whose market cap is much lesser than the size of the overall sector. A simple way to find out the size of the sector is to find a particular company's market share and divide its annual sales by that number. For eg. if the market share of a company XYZ is 5% and its annual sales are 100 cr then the size of the sector is 100/0.05 equals 2000cr. Now this company's market cap should be much less than 2000cr for me to consider it growth worthy.

2. Relative position of the company in the sector: Always always buy the number 1 or number 2 company. I have come to prefer sector leaders even if it means paying a higher PE. In 1999 this was the difference between buying Infosys/Wipro and DSQ/Silverline,

3. Competitive advantage: Does this company have a differentiated product, brand or any other competitive advantage that will ensure no other company can come in and take away its market share easily? I measure competitive advantage by margins over the years. If the company is able to hold on to its margins or increase them across four,five, six years and still earn a above average ROE (of which margin is one component) then one can easily conclude there is some sort of a sustainable competitive advantage.

4. Management and Strategy: Decent topline growth and above average ROE consistently can again help you decode the management's abilities. I believe it's the management that can make or break an investment rather than the business alone. You need risk takers at the top who also know how to fix things and get back on track if the plans don't work out. Good managements won't bet the house on anything but will bet substantially so that it makes a meaningful difference to the bottomline. Good managements also ensure that any new investments are not made that drive down the long term return on capital of the company.

5. Sustainability of self funded growth: This simply means you look for companies that are growing without taking on a lot of debt compared to the size of the its equity+reserves. These are generally companies that throw back excess cash or are net producers of cash.

6. Corporate Governance and history: A company which has a track record of not cheating shareholders in any way. Cheating would include preferential allotment to insiders, insider trading allegations, very low dividend payout for a business with low RoCe, bad capital allocation decisions - buying a private jet whose cost equals one quarter's profits and so on.

7. Catalysts to growth: This is most important. What are the external factors driving the growth? Why wasn't this growth seen five or ten years back? Every successful company first needs to get lucky and then have the capability to build on that luck. Look at any company from Google and Apple to Microsoft or our very own Infosys/Wipro - most of them just got lucky in the beginning - being at the right place at the right time and then they had enough sense to build on that luck and create something much bigger than they initially thought would be possible. So its important to figure out what are the external factors benefiting the company.

Three such companies that satisfies all the 7 conditions and that i own are:

1. Hawkins Cooker

2. TTK Prestige

3. Page Industries

If you have your own list of such screens or any company that you think satisfies these 7 conditions do let me know!

Allocating Capital - A Formula

2011-07-07T18:02:00.002+05:30

Capital allocation is probably one of the most important aspects of investing. Every time I need to decide how much capital to allocate to a particular company i use the following steps:

Step 0: Identify the companies whose business dynamics you understand reasonably well - either because its inherently a simple business and/or because you've spent time and energy to understand what factors affect a particular business' performance. This is basically your universe of companies.

Step 1: Predict the approximate EPS (a range,may be) one year down the line.If you are unable to predict the EPS with a reasonable degree of accuracy then it means two things:
a) This is a complex business where profits depend on a number of totally unpredictable factors.Its better to remove such companies from your universe/sample space.
b) You don't understand the business well enough.Read more about the business.Do some scuttlebutt.This is a learner's game.If you spend time understanding simple businesses, their sources of profit and external factors that affect business, eventually you'll be able to estimate the one year forward EPS with a reasonable degree of success.

Step 2: See if there is a possibility of a PE re-rating. Or will the PE remain the same. Or may be the PE will be de-rated? Estimate what the PE might be based on your projections in Step 1.Remember to be conservative.In most cases assume PE will remain the same or there'll be a slight re-rating(if expected profit growth in step 1 is out of the ordinary).If you think there's going to be a de-rating you know what to do.

Step 3: Now you have an approximate PE and an approximate EPS range. Arrive at your target price.

Step 4: Now based on the CMP and target price - check what the expected return is.

Step 5: Repeat steps 1 to 5 for all companies in your universe (step 0). Compare the expected returns arrived in step 4. For example if you have three companies A,B,C and the return expectations are 40%,25% and 10% respectively you should invest:
a. 40/(40+25+10) = 54% in company A
b. 25/(40+25+10) = 33% in company B
c. 10/(40+25+10) = 13% in company C

Assumptions
a. Ofcourse this is not exact science.Every year that you repeat this exercise,learn from your mistakes, learn new things about your business you'll get better at predicting the EPS of the businesses you understand and hence better at capital allocation.
b. I use just one year because I feel predicting more than one year ahead for ANY business is futile. The business environment and the capital market that we operate in is way too dynamic to talk about the 'really long term'.So we take one year at a time.

You! Retail Investor!

2011-06-18T17:32:00.004+05:30

So you've heard it all - inflation, scams,Europe,slowdown and what not. Every time stocks go up and you miss the train the smart reporters on CNBC and their experts tell you how you should've bought stocks when no one else was interested in them.They tell you how stupid you were to not buy stocks when they were cheap and how you always get interested when the market is peaking.The big investors also have a joke on you,yes you - the best time to sell stocks is when the retail investor and housewives start buying stocks.If you thought it really is a joke, its not.The big (and successful) investors more often than not sell when you enter the market. They think you are a fool and predictably so, because this happens again and again and again.Happened recently with silver and believe me i predicted it - the day my aunt came and told me how i should really be buying silver and nothing else. Silver crashed from 75k (i was told it will go to 100k in six months) all the way down to 50k today.

You've heard it and now you resolve that the next time no one is interested in stocks you'll be a buyer. That time has come,it really has and no one on the TV is telling you.No one will talk about it until you miss this train again.

No one wants to buy stocks today.The market has not gone anywhere for the last one year. FIIs - the darlings of our market are sitting on record cash levels,waiting to deploy this money the moment there is a positive news and the market is up 20%. Mutual funds (the big but not necessarily smart guys) are waiting for the FIIs to buy. These guys will enter when the market is up 40%.And you are ofcourse waiting for the mutual funds to buy! So when the market is eventually up 50% you'll happily invest a little something which you hope doubles in six months and guess what? It doubles. Unfortunately, by the time you start your SIP the smart investors start their SSP (Systematic Selling Plan). Then its all downhill from there.

So wake up right now! This is an opportunity for you to buy before the FIIs do and by corollary before the mutual funds do.This is an opportunity to make some returns without much risk.Risk in the market comes from expectations - and when companies fail to live upto them. Right now there are very little to no expectations. Its a classic heads i win, tails i don't lose much.This is what smart bets are all about.Go do it. Buy something - a company stock, a mutual fund,anything! Keep buying slowly till random people come and tell you which stock to buy.Then sell.You won't be too disappointed with the results.

Stock Price - Will it go up or down?

2011-04-25T12:27:00.004+05:30

Alright, so today i am going to share with you the secret formula that'll tell us if the price of a particular stock is going to go up or down.

First lets see how the market calculates stock price.

Price = Earnings per share x The Magic Number (a.k.a. the PE ratio)
So if you were take the stock price of say TTK Prestige which right now is about 2400 we have:

2400 = 80(which is what it will earn this year) x 30

Last year the price was about 700 so we have:

700 = 47(what it earned per share last year) x 14

While the earnings have not even doubled the stock price is up 3.5 times.How did it happen? It is because of the magic multiple which increased from 14 to 30.

So in order to figure out whether the stock price is headed up or down we need to answer only two questions correctly:

1. Are the earnings going to increase?
2. Is the PE multiple going to expand,remain the same or shrink?

Answering the first question is relatively easy but like most things with life what matters the most - the PE multiple, is difficult to predict.

This magic number or the PE multiple is the key to making the big money in stocks.We need to buy stocks where we think the market is going to increase the multiple for our stocks or atleast retain it.

There are number of factors which decide what the PE is going to be but the most important is stock's expected earnings growth.This is something which the market as a whole predicts.So in our example the market expects TTK Prestige to grow at around 30% or higher for the foreseeable future,which means an earnings per share(EPS) of 80*1.3 = 104 in FY12.If it gets there the price will most likely be 104*30 = 3120 but if it grows only 25% which is an EPS of 80*1.25 = 100 - the market will cut down its PE multiple to around 25 and after an year it will trade at 100*25 = 2500.So as you can see inspite of increasing profits by 25% the stock will still be at more or less the same price.That is what a PE de-rating can do and that is why, what market is expecting out of your stock more important that what it actually does.

Other important factors which make up the PE ratio are:

Management capability
Return on capital
Dividends
General Market Sentiment

Cheers!

Some thoughts about investing!

2011-03-27T18:47:00.003+05:30

Buying at declines

A lot of people become indecisive when it comes to buying a particular stock.Should I buy now or will prices fall a little more? Should I do a SIP instead? My advice to all such people is to look at two things: a)For how long am I going to be invested in this stock? b)What is the return that I am expecting?

If you are going to hold a stock for the next 3 years it makes no sense to wait for that 10% fall.After three years would you be happy to have missed out on an opportunity to buy a stock just because it was 3% more(10% adjusted approx. for three years) expensive.

Also it makes sense to do a SIP when the stock you want to buy or the market in general is overvalued.When index is trading at 10-15 times it makes no sense to do a SIP IMHO.But people act like robots and do it anyway.

Selling winners and holding on to losers

You have two stocks both of which you bought at 100 and one of them falls to 50 while the other goes to 200.Now you need some money.Which one will you sell? Most people will sell the one that has made them the money and keep the ones where they've lost money hoping to break even someday.This is a sucker's strategy.What generally happens is that while the loss making stock might recover to 75 the winner will go on to 300 or 400.But once you sell the stock you stop following the stock and then one fine day after 5 years check the price and tell stories to your friends about what could've been and how unlucky you are.Its hard and painful but always sell your losers and hold on to your winners.

Buying on news

A lot of retail investors buy on the basis on what is said on CNBC or what they read in the newspaper.What one needs to understand is markets discount events even before they happen.For instance if a company's result is due in a week the market will make an educated guess about what the result could be and adjust the prices much earlier.Now on the result day depending on how the results turn out only minor adjustment will be made.Also such news reaches the retail investor last,so by the time you punch in your order,chances are that the stock would have already discounted the news.So don't make short term bets on what you hear on tv and read in the newspapers.

Incorrect focus

People focus only on risk when markets are falling and focus only on returns when markets are rising.There has to be a balanced view to be able to do well and take advantage of market volatility.

Will add to these soon.

Fooled!

2011-01-27T20:10:00.006+05:30

Over the years I have come to believe that successful investment is mostly about learning how to not let your mind trick you into doing exactly the things which you should not do.This insight drove me to learn more and more about human behavioural tendencies and how it applies to investing. Daniel Kahneman and Amos Tversky won the economics Nobel for this very subject.Their findings are extremely interesting and once you've read this you'll realize how naive we've been all this while to fall for the common behavioural traps.

1. Mental Accounting: If you buy a stock for Rs.100 and it goes up to Rs.150 in a week you are naturally elated but then if it goes back to 100(a loss of Rs.50) you are not really bothered since it was something you won and was never a part of your initial capital.On the other hand if your initial 100 goes to 50 you are devastated and you keep cursing yourself for buying that stock in the first place.This is strange because in both the cases you lost the same Rs.50.Then why the different emotions?This is because the mind creates two accounts - my hard earned money(Rs.100) and the easy money(Rs.50).You don't mind losing the easy money although the value of the easy money in the world is the same as your hard earned money.

2. Sunk Cost Fallacy: You bought a stock for Rs.500 and it went down to Rs.250.You've figured out that this is a bad investment but you don't sell.Your mind tells you "I've already lost 250,let me average it so that my cost of acquisition comes down".Basically what you are doing is to recoup the money you've already lost you are investing more money after the bad investment, which is downright stupid.This is also known as the Concorde fallacy(after the famous airline) - referring to the guys who kept investing more and more in the airline even after it was apparent that it was an economic failure.

3. Endowment effect - This is about how our mind reasons out that whatever we own is good and shuts itself to any criticism.For example you research a stock for a week and then go ahead and buy it.The moment you've bought it you are susceptible to endowment effect - no matter how much anyone convinces you that its a bad investment,you'll try to prove that it is not so bad after all.But if the very same arguments were made before you bought the stock you probably wouldn't have bought it.

4. Recency Bias - Humans try to extrapolate into the future any dramatic event that happened recently.So if the markets fall 20% we think they'll fall another 20%.On the other hand if the stock markets are going up we believe they'll continue to go up forever. For e.g., during the great bull market of '95-'99, many people implicitly presumed that the market would continue its enormous gains forever, forgetting the fact that bear markets happen almost as often as bull markets.

5. Anchoring - This is the most dangerous of all biases.Stocks like Suzlon,Educomp etc that once saw dizzy heights have fallen back to the ground due to various business reasons but some people are still anchored to the old prices.They reason - it has fallen from 3000 to 300 so it must be cheap now and a good buy? Hardly - when it was at 3000 the market was anticipating huge growth but then something bad happened and now they are biting the dust.The complete external environment has changed so we need to forget about those high prices and objectively value the company based on its current prospects.Just because a stock went to 4000 and then fell back to 3000 doesn't mean its cheap.We should not get anchored to old prices.

There are tens of such biases which trick us into losing money. Analysing businesses is just one aspect.To be successful in investing we need to correct our biases and not let them fool us into making un-economic decisions.

Cheers!

Be a better investor in 2011!

2011-01-01T10:20:00.004+05:30

I am sure you're all busy planning how you can try and build a great 2011 for yourself.While you are at it,here are a few things which can help you become a better and richer investor:

1.Try direct investing (not trading!): Take 10-20% of the money that goes into your fixed deposit/mutual fund and invest it in the market yourself.The education will be worth it even if you lose all the money.You probably won't lose anything -unless you trade this money on a tip and will end up outperforming your fixed deposit handsomely over the next 3 years.Try it,go open an account with a broker this week.

2.Read two books written by/about investing legends: and not accounting professors.The first names that come to mind are Warren Buffett and Peter Lynch.Go to flipkart (No unfortunately they don't pay me,i just love that website) and get these.Reading and understanding these books will make you better than 90% of the investors out there.

3.If you follow point 1 and buy some stocks - you'll receive a glossy annual report sometime in May-June.Don't just look at the beautiful pictures and throw it away.Spend half an hour to read it and try to understand how your company has done in the last one year and try to extrapolate what it possibly can do over the next one year.Once you do this for a couple of years you'll probably know more about a particular company than your fund-manager/analyst who has to unfortunately follow 400 companies and hence read 400 annual reports.Since you know more about the company,you'll take better decisions than your fund manager and hence you'll do much better than him/her.

4.Before you buy an insurance cum investment policy or a ULIP read some of the millions of articles on the internet or the easier way is to just avoid them.Read about term insurance.It will save you more money than you can imagine.

5.Evaluate your equity portfolio every 3 months.Don't evaluate the returns(whether it has gone up or down) rather check out the quarterly results of the companies and the funds that you own.With mutual funds you can check what their top five holdings are and evaluate how those companies are doing.Everything you need is available on www.nseindia.com or www.bseindia.com .

Try taking control of your investments rather than just handing it over to fund managers/insurance agents none of whom care about you or your money.So the investing theme for 2011 is 'Do it yourself'.

Cheers!

What no one will ever tell you about markets!

2010-12-04T19:03:00.002+05:30

I have often wondered why don't all accountants,CAs and MBA graduates do well in the markets.I mean they spend years learning about valuing businesses and managements and yet very few of them end up building serious wealth.Of-course some of them do but i am sure that is inspite of their education rather than because of it.What you learn in a business school or in a textbook has very little to do with how markets really work.There are some things no book will tell you.So lets thrash a few myths that people generally have about markets:

1. If I buy Reliance/Tata/Infosys I'll do well: In other words there is this tendency to buy established companies or names.But established names are hardly ever the best investments.A number of these managements do stuff which will put most corporate finance and accounting books to shame.Ask people who bought Rpower,RPL and off-late Rcom and you'll know what i am talking about.On the other hand i know people who've made serious retire-at-35 type wealth investing in the likes on Pantaloon retail and Bharti Airtel - first generation managements that no one trusted.I am not saying one should not buy a Tata/Reliance/Infosys/Wipro but that blindly investing in a company because you've heard of the management since your childhood without understanding the business dynamics is full of pitfalls and will give you substandard returns.

2.Buy low PE stocks: Nothing could be further from the truth.A PE is just ONE tool in evaluating companies.A 10 PE stocks making 10% on capital a year is not better than a 40 PE stock making 40% a year.The PE is just an indicator of what the market expects the stock to do over the next one/two years.Most of the times low PE stocks remain low PE all their life while high PE stocks with a sustainable growth rate end up making all the money in the world for their investors.What one needs to do is to identify low PE companies that will become high PE over the years.

3. Buy debt free companies: A company that earns more on its capital than the interest rate it pays on the debt is actually adding value.This is a tightrope but one should not dismiss companies just because they have a high debt/equity ratio.

4.Find out what FIIs and Mutual funds are buying and just buy that: Ok no finance book tells you that but this is a popular past-time of many a investors.Just because a fund has bought a stock doesn't automatically make it a great stock.If you look at their record these guys have been wrong almost as often as they've been right.Its better to ask your grandma to pick a stock randomly than bet on something because a fund has bought it.On the other end stocks like HDFC,Infosys etc which today are owned by almost all FIIs and MFs have very little cream left in them.There will hardly ever be a positive surprise because these stocks are over-researched and any news good or bad is immediately discounted in the price.

5. Buy companies that give bonus: This one is classic.I am sure 90% of retail investors don't know that a bonus makes NO DIFFERENCE to the companies prospects.It is just an accounting change.If you get a 1:1 bonus,one share for every one share you hold,the price falls to half.So there you are no richer.Your capital is the same as before.I guess the name "bonus" is the culprit which misleads people.

6. Don't buy illiquid companies or companies where only a few trades happen every day: Hero Honda,Crisil were all extremely illiquid but all ended up making bundles of money.Silverline,DSQ were traded like there is no tomorrow but eventually went to zero! Daily volumes make no difference to a stock over the long term, neither positive nor negative.

I can go on but I'll save the rest for another day!

Risk

2010-10-03T14:17:00.004+05:30

Stock market is perceived to be a risky asset class by most.If they invest in a fixed deposit or in real estate or in gold, they sleep much better.Now consider this data

US Markets Nominal Return1802-2001	Starting Wealth	Ending Wealth	Annual Return
Stocks	$1.00	8’800’000	8.32%
Bonds	$1.00	13’975	4.88%
Bills	$1.00	4’455	4.29%
Gold	$1.00	14.38	1.30%

Source: Ibbotson Associates and Jeremy Siegel, Wharton Business School & TheEquityDesk

Over an extended period of time stocks outperformed all asset classes, followed by bonds and then gold. Bonds were the most consistent while stocks and gold were erratic. Gold never did enough to beat inflation while bonds did only slightly better.

The only difference that you are going to see here in India is that the absolute numbers will be higher,so stocks can be expected to return about 10-12% and bonds about 4-6% over time but stocks will always outperform other asset classes.

So why are stocks considered risky?

1. Stock prices are volatile and its unsettling for most people to see their net-worth fluctuate on a day to day basis.It is much like how one would feel if someone gave you a price quote for your house everyday .So if today your house is worth 40 lakhs it might be worth 38 lakhs the next day.This can be extremely disturbing.The fix is simple,stop watching the quotes daily.Check your portfolio once in three months or so.

2. People want symmetrical returns. So if stocks return only a 3% return for two years they generally provide a 30% return the subsequent year.But that just isn't good enough for most.They are much happy with a 10% return year on year.This perverse need for symmetry is extremely costly.

3. Short term horizon.Most of us think stock market is some kind of a gambling den where you can become a multi-millionaire in six months or where you can make ten times your money in an year.That kind of a mindset is a sure way to failure in the market.Although such things do happen but it is mostly chance and almost never talent.One needs to take a 5-10 year view to build wealth.

4. Selling too soon.Most people sell their good stocks on a 50% gain and then watch the stock double or triple.What generally happens is that a stock goes up 50% and then falls 10%.This triggers a loss aversion in people and the moment it scales back to that 50% gain people sell it off.Stocks (with good underlying fundamentals) need to be held for a long time to create serious wealth.Why people do well in real-estate is because they hold on for 10-15 years.If they do that with stocks they will be surprised how much wealth stocks can create.

5. Mis-understanding risk.Risk is not just the possibility of loss of capital.It is also the possibility of earning sub-par returns on your money.So investing in a fix deposit and earnings sub-inflation returns is as risky as losing your capital.The idea should be to increase your purchasing power every year,rather than focusing on absolute returns.

Comments welcome.

Expensive or Cheap?

2010-07-31T13:32:00.002+05:30

I have been talking to a number of people about their investments off late and whenever I have recommended certain stocks I often get the reaction, "Oh,that is a 2000 rupee stock.Isn't that expensive?"

I ask expensive compared to what? How do you judge if a stock is expensive or cheap? Definitely not on the basis of the absolute value of its current market price.A 2000 rupee stock could be cheaper than a 100 rupee stock.A stock price always needs to be compared to its earnings(or profits) before you pass a judgement about it.

There is something known as a PE - Price divided by earnings ratio(available for all stocks on any financial website) that one needs to monitor to get a reasonable idea about how expensive or cheap a stock is.Also,this ratios should be used to compare stocks in similar industries.For example you could compare the PE ratios of Maruti and Tata Motors but not that of Maruti and Reliance.

Let me take an example:

PE ratio of Hawkins right now is: 14.40

And that of Prestige is : 20.63

Although the market price of Prestige is less than Hawkins it is considerably(about 50%)more expensive than Hawkins.

Stocks with extremely high PE ratios(above 50) in any industry are best avoided unless the growth prospects are humongous.I have bought stocks at a PE of 40 and done well because the company's were growing at a very high rate.But this is not recommended for someone who is new to the market.

Generally you should buy stocks which are growing at rate higher than their PE ratio and sell those which are growing at a rate lower than their PE ratio.If you remember this you will do alright in stocks.

Disclosure:

1. I have exited some of my position in Hawkins to pursue better opportunities.I am not very clear about how they aim to grow sales and bottomline from this point onwards while maintaining operating margins.It remains a decent stock with a good dividend yield and can be held for a 20-25% CAGR kind of returns unless it throws any extremely positive surprises.I was expecting them to ramp up their cookware sales and when i get some clarity on that i might just buy it back.

2. VST Tillers has done extremely well in the last 1-2 months delivering about 40-50% returns from the recommended price.

Cheers!

A 3-bagger!

2010-06-15T13:33:00.003+05:30

Hawkins today crossed the 1200 mark to become a 3 bagger.A 200% return in about 10 months flat.Lucky bet,i will say.But nonetheless its been a good ride for those who bought the analysis.

Hawkins was analyzed on this blog.Here's the link to that post.

Some updates were also made along the way.

The other recommendation on this blog,VST Tillers & Tractors hasn't done badly and remains a good company to be invested in.Sometimes stocks don't move at all for years and then within months they make up for all the waiting.

Gold!

2010-05-27T20:45:00.004+05:30

Gold is breaking all records and the 'news' is all over the place.The story that you hear is "The world's central banks are printing currency to bail themselves out of one crisis or the other. That should inevitably devalue the currencies.Gold is something 'real' unlike paper money and hence it should become more expensive as the underlying currency loses its value."

The reasoning is sound.But if you've read history you'll know that gold is a cyclical commodity,which means it never continuously goes up or down in one direction.Anyone who bought gold in the 70s got no where till 1999.That's 30 years with zero returns.But any one who bought gold in early 2000 has made four times his money today.There-in lies the beauty and at the same time the tragedy of a cyclical.If you've caught the cycle correctly you'll make enough money to retire at thirty but if you are caught on the wrong foot you'll regret it more than anything else.

So yes currently we are in the middle(who knows really?) of what looks like a big bull cycle.But what we need to understand is that gold prices are completely driven by demand and supply.You buy today hoping that someone else will buy it from you at a higher price tomorrow.Gold generates no cash on it owns unlike a stock/bond which provides you with a regular dividend/interest.Warren Buffett put it aptly in one of his talks. "Gold gets dug out of the ground in Africa, or someplace," he said. "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."If you bought a stock you can at least reason out whether it'll do well or not based upon the product,its utility,brand value and the company's management.But buying gold seems like a 'buy and hope' scheme to me.

Lets be very clear, I am not saying gold is going to fall or any such jazz.All I am saying is I cant predict when this cycle will peak and when someone else will stop paying me more than what I paid for my gold bar.I don't own any gold because today one can buy stocks in India that can easily grow at 20-30% per annum,which is above average by all standards.Gold might very well touch $6000 but then again it might just go back to $600.That's a tough call to make. At least for me.

Whats up with Greece?

2010-05-07T18:21:00.001+05:30

Most of you probably have been hearing a lot about the debt crisis in Greece and some of you must be wondering what the noise is all about.So here goes.

Whats up with Greece?

The problem is simple.Greece has borrowed a lot of money and is now unable to pay interest to its debtors,let alone the principle.This issue is nothing new,just that it has now reached a proportion where debtors are worried if they will ever get their money back.In all these years the Greek government had failed to reform the economy and reduce public spending.Then Greece entered the recession and was unable to cope with it. Government debt was getting bigger and bigger and now their total debt is much more than what their entire economy produces in one whole year.The situation is similar to what would happen to a person who has bought a house so expensive that his EMI is greater than his entire salary.

Ok so whats the situation now?

Greece needs to borrow fifty billion euros to pay its bills this year and nobody is willing to lend that money to them.Sometime this month they need to pay eight billion euros to its debtors.Whether it will pay this money(or get someone else to pay ) or not will decide the fate of so many people and so many markets.

And how does all this affect the Euro?

The Euro zone rules require members to keep their deficit below 3 per cent of GDP. Greece’s deficit is 12.7 per cent and the Government has been lying about the true state of its finances. Drastic cuts in public spending and tax rises are now necessary to bring the deficit down by 2012.The financial markets are betting that Greece won’t make it and investors have turned their attention to other states on the eurozone periphery such as Spain, Portugal and Ireland, which are also burdened by big deficits. A rescue by the European Central Bank, the European Union, the International Monetary Fund or all three would constitute a big loss of credibility and cause the euro to fall against major currencies.

Will Greece get a bailout?

The markets think so,otherwise we would have a seen a big crash by now.

Data:Times Q&A

Floating rate funds

2010-03-31T22:02:00.002+05:30

There are times when you have some excess cash that you don't need for the next six months to one year lying in your savings bank account earning you a paltry 3-3.5% per annum interest.So what do you do?Get it Fixed Deposit'ed'(FD'ed) and now you are happy that you'll earn a decent 7% on your money.Now consider this,what happens if the interest rates are revised upwards.Now the bank will be offering say 8% to all the new customers while you'll be 'locked-in' at 7%.Too bad.Is there a way out?

Enter Floating rate funds.These are funds that invest your money in floating rate debt instruments which means if the interest rates go up so does your rate of return and also vice versa.

Some points.

- Floating rate funds make better choice when interest rates are set to rise.

- Floating rate fund can be considered to establish emergency fund.

- If investment period is 1 to 2 years and liquidity is a concern, then one can look at floating rate funds over fixed rate debt funds.

I did some work and here's a list of some good floating rate funds:

1. HDFC - This is a good one,but if you take your money out before 18 months there is a penalty of 3% of your investment.Thats the only drawback.Otherwise this is the best option. http://www.hdfcfund.com/Products/SchemeDetails.aspx?SchemeID=74779436-b9f5-4e86-b310-e623aa907886

2. Birla Sun Life - There is a penalty of 2% in case you take your money out before an year.This is also a decent option. http://mutualfund.birlasunlife.com/Products/RetailProducts/OtherSchemes/BSLFloatingRateFundLongTermPlan/SchemeFeatures/tabid/342/Default.aspx

3. Kotak - This is another good option.If you take your money out before 6 months,a penalty of 0.5% is imposed. http://www.indobase.com/markets/mtfi-india/kotak-floater-long-term.php

Cheers!

Buying insurance

2010-03-05T12:19:00.005+05:30

I have ranted enough number of times in my earlier posts about how we should not buy ULIPs and instead separate investments and insurance.Personally I was postponing buying insurance till now since I do not have any financial dependants currently but while playing around with this premium calculator it hit me that once i cross the threshold of 25 years(my age) my premium amount will go up into the next slab and i will have to pay the extra premium throughout the tenure(typically 25 years).So i decided to take the plunge into my first and hopefully only insurance product.

I chose a term insurance plan called Anmol Jeevan from LIC.~~The private insurers are way too expensive compared to LIC~~(Thanks Raag for the clarification) and hence it really makes no sense to go with them.Also with private insurers you cant be sure that they'll settle your claims in a smooth manner in case something unfortunate happens.

In a term plan the premium for insurance cover is very less but you don't get any money back.Basically i am paying LIC to cover the financial risk that my dependants will incur in case i die.The premiums for regular insurance products(with money back) that most people buy are almost 3-4 times the premium of term insurance and you get the money back with a 5-8% annual return after 15-25 years.That deal really doesnt make sense to me since i can earn muchl higher returns by investing myself or via a mutual fund over such a long period.

Will put up the calculation soon.

Cheers!

VST Tillers goes Ex-Bonus

2010-02-08T20:36:00.004+05:30

Like i mentioned in the previous post,VST tillers had announced a bonus issue in the ratio 1:2,which means for every two shares you own you will get one share extra.No you are not getting this share free like most people are led to believe.The price will come down by an appropriate amount on a decided date(which happens to be today) so that your overall invested capital remains the same.Let me explain the sequence of events:

1.VST tillers announced that they will come up with a bonus issue in the ratio 1:2.The ex date will be 8th Feb 2010 and the record date will be 9th Feb 2010.

2.Now assuming you held 2 shares of VST tillers and the CMP was 480,your total capital invested is 480*2 = 960.Now on the ex-date you will technically be assumed to get an additional share.So now to keep your capital the same as mentioned before we do 960/3 = 320.So this is the ex bonus price of VST tillers.Ex bonus means that the shares are trading without bonus privileges.So anyone who buys today or later will not get the bonus shares.The record date is set so that if you buy the share one day before the ex date your name can appear in the register on the record date and the company can consider you for the bonus issue.

A lot of people pinged me today wondering if VST has fallen by 35%.One particular person even gave me a reason why it has 'fallen' by such a huge magnitude.Rest assured,this is just an accounting entry and the extra share will be credited to your account soon and everything else will be the same as before.

Result Update - Hawkins and VST Tillers

2010-01-31T20:09:00.005+05:30

Hawkins Cookers

Hawkins declared its financial result for the quarter ending December 2009 yesterday.A great set of numbers yet again.They have increased their sales by about 23% and their Net Profit by 243% compared to the quarter ending December 2008.EPS for the quarter is 22 and for the nine months in FY2010 is 54 compared to the whole year EPS of 36 for 2009.

Hawkins is on its way to post a full year EPS of about 65-70 which means its currently trading at about 10-11 times FY10.Valuations still look compelling to me even though it has run up almost 70% (in a more or less flat market) since it was first recommended on this blog.The company should pay a dividend of about 40 per share which gives us a juicy dividend yield of 5.8%.I couldn't ask for anything better. Management is doing a great job for its shareholders.

VST Tillers and Tractors

VST Tillers (the other stock recommended on this blog) could manage to increase its sales only marginally and the net profit was about 7% less this quarter compared to the same quarter last year.This mediocre result could be attributed to the drought that a number of Indian states faced this year.Higher raw material prices also weighed in on the margins affecting the profits this quarter.The company has done quite well over the complete nine months in this financial year,increasing sales by 24% and net profit by 48% compared to the same period last year.

Although the results are not as good as i expected them to be,the positive is that we have bought the stock at very reasonable valuations.I expect VST Tillers to post a full year of about 65 which means its available at about 8 times FY10.The market doesn't expect VST tillers to do well, hence there is very little downside.

This remains a company with high return ratios and investors would do well to hold or buy more if it is available cheaper. Of course we will be watching the results closely in the upcoming quarters and in case the company fails to perform we should proceed to sell(whether the investment has been profitable or not should not make any difference to your sell decision) and find better opportunities.After all one should not fall in love with their stocks.

PS: VST Tillers has announced a bonus issue of 1:2 which means you will get one share for every two shares held.The price will consequently come down as a result of this jig.A bonus issue has no material significance on your returns but is generally considered good since liquidity in the stock increases.

Investment Idea - VST Tillers & Tractors

2010-01-03T19:13:00.006+05:30

VST Tillers & Tractors(CMP - Rs.517/344,after bonus issue)

Investment Rationale

VST Tillers manufactures power tillers,tractors and diesel engines.It has a market share of about 50% in this business.Most of the company's sales come from the sale of power tillers.A power tiller is like a miniature version of a tractor.In a farmer's hierarchy it comes right after a bull/ox but right before a full fledged tractor.Therefore power tillers are generally bought by farmers belonging to small/middle income group who own a small piece of land and who really cannot afford a tractor.The market for such small farmers is quite big in India and growing.A tractor can cost you upwards of two lakhs whereas a power tiller could be bought for about fifty to seventy thousand. Moreover the farmer friendly Indian government gives generous loans to purchase these farm equipments.With the advent of mechanisation and non-availability of labour in agriculture, more and more farmers are going for these farm equipments.

VST is the market leader in power tillers with good brand recall among farmers.They also sell low HP tractors and rice transplanters where the growth seen is quite good.There are about eleven tractor companies in India but what i like about VST Tillers is that they are growing in a niche segment viz power tillers.No major player has entered the tiller space yet and if they do we may have to revisit our fundamentals.But till that time we have a good management running a business with good potential for growth.The company also enjoys good technical help from Mitsubishi of Japan that has about 4% stake in the company.The company also has great support from the government in terms of farm loans,increasing Minimum Support Price for various crops that makes buying VST's products lucrative for farmers.

Financials & Valuations

The company has an impeccable balance sheet.It has negligible debt.The return on net worth is 21% and the return on long term funds is 33%.The company has increased their sales at a CAGR of 25% and their profits at a CAGR of about 45% in the last five years. The company has also declared a bonus of one share for every two shares held in FY09.This is always a good sign and it also improves liquidity in the stock and helps improve the company's valuation in the market.The company's current dividend yield works out to about 1.5%.This company also enjoys the rare privilege of being one of the few companies with a 17 year unhindered dividend payout history. The company has always been cash flow positive which means they generate free cash every year for their owners.

This company which is growing at 40% every year is available at about 8 times FY09 earnings.The company has had two phenomenal quarters in FY10 with a half-year EPS of 32.I expect the full year EPS to be in the range of 68-72 .The company should grow at a good rate going forward and at this price is a steal.If the price goes lower that'll make it even more of a steal and not less contrary to popular opinion.

Additional Kicker - A hidden asset play

VST tillers owns about 20 acres of land in Whitefield and also another 9 acres on the outskirts of Bangalore.This land should fetch anywhere between 200-300 crores in the current market.Compare this with the current market cap of the company which is also around 300 crores.This means that we are getting the business for FREE.Never a bad deal that one.But these asset plays sometimes take years for the market to recognize and hence we should not attach too much value to it.

Either way we have a good business with good underlying economics available at a decent price.

Disclosure:

I own this stock.

Disclaimer: I don't do stock specific recommendations and i am writing this for my own reference.I reserve the right to be wrong.Please consult your financial advisor before investing.

Happy New year 2010

2009-12-31T18:43:00.005+05:30

This blog is one year old now.Thank you all for your encouragement.I hope to keep it going for a long long time.

In 2009 i primarily blogged about how having an equity(stock) orientation with a long term view is more beneficial than investing your money elsewhere in low return instruments.I initiated a few buy calls too.The first one being Satyam right after the Maytas fiasco.What happened next was crazy to say the least and unprecedented in every which way .Either ways if you had bought Satyam then at about 130 you'd be sitting on a 25% loss,not too bad considering the series of events that followed.The ride from Rs.150 to Rs. 6 and back was something traders will cherish forever.

The next buy call was Hawkins cookers.This one worked out quite well with a 65% gain over a period of 6 months in a more or less flat market.I guess i was more lucky than smart to see that kind of a gain in such a short period of time.But then again,in the markets, between being smart and being lucky i'd always prefer to be lucky.

On that note,a very Happy New Year 2010 to everyone.Have a great year ahead.

Can i invest on my own?

2009-11-18T21:16:00.003+05:30

This is a question that a lot of people probably ask themselves every once in a while.After all its your hard earned money and you'd feel much more comfortable in investing it yourself after understanding the risks and rewards rather than handing it over to a mutual fund and hoping that it does well.

So can you invest your money on your own? Of course you can,although with a little effort.Perhaps two hours a week.And the rewards can be phenomenal.

Let me tell you at the outset that real investing has got almost nothing to do with complex mathematics or financial theory.All you need is high school algebra and an understanding of what parameters affect businesses.I know a number of investors who have had no formal finance education and yet have made millions investing their own money.And i also know a number of MBA graduates who are clueless about how to invest effectively.They need to unlearn almost all the theory that they've learnt to succeed at real investing.Peter Lynch,the world's most successful fund manager once said,"if a company's future could be predicted by reading balance sheets& profit-loss statements then accountants would have been the richest people in the world." But they are not.So the conclusion is that successful investment is only a little about all the financial jargon that scares you,what really matters is your emotional framework.Successful investing then is more art than science.

Now that we have the "i know nothing about finance" out of our way we can get on with our discussion.So how do you start?

1.First of all,resolve to have a 3-5 year view of your investments.The most important thing you could ever learn about investing is to ignore short term fluctuations in stock prices.We are not investing for a 10 or 20% gain.We are investing to generate wealth over a period of time and such 10-20% movements on the either side should not bother you much.

2.Decide how much money you want to invest in stocks and how much in other debt instruments like FDs et al.I have written about portfolio allocation here.

3.Next decide on the number of stocks you would like to own.50 is not acceptable.Choose only so many companies that you can afford to follow.If you ask me ten would be ample diversification.Research has proven that anything more than that affects your returns while not reducing your risk in a significant manner.Divide your capital(the amount you have decided to invest in stocks from step 2) equally among all the ten stocks.

4.Now is the interesting part.How do you go about choosing those ten companies?Another golden rule in investing,always invest in what you can see and understand.An example would be SBI(State Bank of India).You see this bank almost everywhere and you know its a profitable company and that it will probably remain profitable for many more years to come.Another criterion on deciding on these stocks should be,invest only in those companies that you are reasonably confident that they will be around for at least another 10 years.Another stock which you could probably add to your list is Bharti Airtel.Also pantaloon retail,may be.Just go to any Big Bazaar in Bangalore on a weekend and you'll know what i am talking about.These companies are doing well and they should probably continue to do well in the future.

Now these stocks will not make you a millionaire in 5 years( and that should not be your objective,unless you are willing to devote your complete time to analysing and understanding companies ) but if held for an extended period should give you 10-20%(may be more) annual returns and should make you a millionaire over 10-15 years.Rs. 1 lakh invested every year at an annual rate of 15% should give you half a crore after 15 years.So come up with a list of 10 companies that you can see are doing well and you think will be profitable for the next 10 years.Look around you and observe what companies you interact with you'll soon have your list.

5.Once this is done get back to your regular work.In the meantime make a watchlist of these 10 companies and keep watching it once a week.In a particular week if you think a stock has fallen considerably go ahead and buy it.Since you know the companies are good and successful any short term fluctuation should be used as an opportunity to buy.Dont try to do bottom fishing by waiting indefinitely.Keep buying in small lots whenever you see prices fall(whether it is because of one bad quarter or mayawati becoming the prime minister).Be happy when prices fall since you are going to be net buyer of stocks over your investing career and hence the lower the prices in the initial years the better.WARNING - Don't do this exercise with small and mid cap stocks that you don't know much about since sometimes prices in these companies fall for a reason and the don't have enough muscle power to get back on their feet.

6.Finally an important step.Every year in March-April the company will send you an annual report.Try to read it and see how your company has performed.Have all of them atleast made more money than they did last year?If yes,you're on track.Has some company suddenly posted a loss?Try to figure out whats the reason or if in doubt sell that company and try to replace it with something else.

If you keep buying a set of 10 large,successful and resilient companies whenever the market falls and hold them over an extended period you'll do reasonably well for yourself.Much better than the mutual fund that you'd randomly pick otherwise.

An indicative list:

1.SBI - Bank

2.Pantaloon Retail - Consumer retail

3.HDFC - Mortgage,Housing loans

4.Bharti Airtel - Telecom

5.Reliance Industries - Oil

6.Nestle - FMCG

7.L&T - Infrastucture

9.Infosys - IT

10.Asian Paints - Proxy Real Estate/Consumer Staple

11.Sun Pharma - Pharmaceuticals

...There are way too many good companies to choose from.Take your pick.Buy them whenever markets in general fall and hold them forever.

Happy Investing.

Result Update - Hawkins Cooker

2009-10-31T18:51:00.002+05:30

Hawkins declared its second quarter results today and they are nothing less than exemplary.Sales grew by 25%; Net Profit more than doubled with a 124% increase.The gross margin has jumped to about 13% from about 7%.

After today's results the stock is trading at about 7 times FY10E(expected) earnings and the price should be seriously re rated.

Cheers!

Investment Idea: Hawkins Cooker Ltd.

2009-09-06T11:07:00.004+05:30

CMP: Rs.419

Investment Rationale:

Hawkins is mainly into selling pressure cookers.They also sell some other cookware items under the brand Futura and Miss Mary.The pressure cooker market is a highly unorganized one,with a number of local players and only two major brands viz. Hawkins and Prestige.These two brands are on a spree to grab the share of the local brands by their aggressive marketing.After having penetrated the urban areas,Hawkins is making in roads into rural india which can prove to be a huge market for pressure cookers,since most people in vllages still dont own a cooker.Hawkins as a brand is almost synonymous with pressure cookers,one thinks of a cooker and the first name that comes to mind is Hawkins.This brand recall has been built over a number of years and its very difficult for a new comer to grab Hawkin's market share.Hawkins is basically a play on the nuclearisation of Indian families.Just imagine the number of marriages that place every year in India and you'll get an idea about the size of the market.Also with pressure cookers,people(women) generally prefer a good brand(like Hawkins or prestige) since they don't want to risk their family to freak accidents.

I like Hawkins better than prestige,since the management of Hawkins seems to have mantained a higher ROE and higher margins in a sustainable manner.Also TTK prestige management had tried to delist the business once.This attitude prevents the management from letting the market cap increase since they may have to buy back all the shares in the future.

Financials and other Numbers:

The company has grown its sales from 118 cr in 2005 to 242 cr in 2009(At an annual growth rate of about 20%).The resulting profits have grown from about 3 crores to 19 crores in the same period(At an annual growth rate of about 58%).The company enjoys a healthy net profit margin of 6-7 %.The Earnings per Share(EPS) has grown from Rs.5.63 to Rs.36 in this period from 05 to 09,at a stupendous annual growth rate of about 60%.The company has a total debt of about Rs. 9 cr which is half of its last year's net profit and hence negligible.

The company has maintained an high ROE of about 40-50% all through the last five years.This tells us that the underlying business economics is solid.The management is also quote proactive.They have:

1)Reduced expenses
2)Made a better product
3)Repaid debt
4)Put capital to better use.

The company has completed its capex and is actually running on about 30% of its peak capacity.So they have a lot of room to improve sales without spending more cash. Their installed capacity in cookers is about 3 times their current production (hence the low costs).All profit is free cash till 2012.

This business started performing amazing well since 2004,so I dug up the old annual reports to find out what exactly changed after 2003-04:

1)The company came up with a "New Sales Policy" in 2001 to recover sales and turn the company around.It was briefly making losses.

2)The company expanded the number of direct distributors.The number of unique dealers buying any of the
products directly from the company are given in the table below.

YEAR NUMBER OF DEALERS
2001-02 1589
2002-03 2487
2003-04 2654
2004-05 2944

Also, the Company continues its thrust towards the wider distribution of its products and has been expanding the number of direct dealers year after year.I couldn't get the latest numbers though.

3) A judicious control of costs.

4) Introduction of new and improved models.

Valuation:

The company is available at a PE of 10.The company gave out a dividend of Rs.20 last year and chances are that they will retain/increase such a payout next year too.If they do at CMP the dividend yield will be about 5%.Valuations look good for such a high sustainable ROE and a good growth rate.

That was about the past.What about the future?Frankly speaking i don't know,but i am optimistic.What i do know is that this is a good business with low debt that is earning good returns on the money it is investing in the business and importantly its available at a decent price.The untapped market for pressure cookers in India is huge and i think a good management should be able to get a decent share of that pie.

The last quarter's(Apr-Jun 09) results have been amazing.This is a buy,with a 2-3 year perspective.I dont plan to watch its price everyday,what i do plan to do is to watch its quarterly earnings and see how the business is doing.If there is a considerable change in its fundamentals anytime over this period of 3 years,i will proceed to sell.The take away being,sell on fundamentals not on the price.

Disclosure:

I own this stock.

Disclaimer: I don't do stock specific recommendations and i am writing this for my own reference.I reserve the right to be wrong.Please consult your financial advisor before investing.

Analyzing mutual funds

2009-08-01T18:05:00.003+05:30

A colleague at my office received the annual report of a mutual fund and asked me what to look for in such a report.It took us just 15-20 minutes to understand how the MF had performed and at the end of it my colleague had a much clearer picture of what he had bought. I made a mental note that what we discussed would make for an informative blog post and hence this post.

I have written about analyzing mutual funds using standard ratios like alpha,sharpe et al but what we'll talk about will make more practical sense to a lay investor in mutual funds.

So here goes.

1) If you've received an annual report,start reading from the last page and make your way to the front.Why? Because more often than not the initial pages and filled with useless banter that will just confuse you rather than inform you about how the fund has performed.

2) First thing,look at the expense ratio.The lower the better.Anything around 1% is good. 2-3% is average.Anything higher than that is a no-no.This ratio decides how much of your
money is paid to the mutual fund for the services that they are rendering.So the lower the expense the more money is actually invested.

3) Second,look at how much better than an ETF has your mutual fund performed.They call the ETFs a benchmark.Essentially you are paying them extra so that they can deliver better returns than an ETF,after considering the expenses.If your fund is not even beating the ETF returns you are better off investing in an ETF since there are no or minimal expenses in an ETF.After all why should you pay them extra if they are not beating the normal market returns.
And in case they are fetching you a better return than a benchmark ETF,check how much better are they doing.Generally these MFs will try to manipulate the numbers to show that they are beating the benchmarks.To avoid getting fooled by such manipulation insist on a comprehensive gap between your MF and the benchmark ETf's return.For eg. a differnce of 1-3% is not good enough.Be satisfied only if your MF is able to beat the ETF by around 5 or more percentage point difference.Such an attitude will save you from any intelligent accounting manipulations that the MF might do to show good numbers.

4) Check who your fund manager is.Google his name.Check if he has been with your MF for the past few years or is he a new guy.If he is a new person, then you will have to disregard all the historic performances of your MF since those performances were achieved by someone else and not your current fund manager.If he has worked at some other MF before try to find out how he had performed there.This might be one of the most critical steps to figure out how your MF might perform in the future.

5) See what stocks your MF owns.In my colleague's case his MF owned a huge percentage in two stocks,Cairn India and Infosys.Infosys is a more or less stable company which has performed well in the past(how it does going forward is anyone's guess) and something which every fund manager owns.The other big holding,Cairn India is a proxy play on oil prices.If crude oil goes up so will Cairn India and so will your MF's NAV.So you need to see what are the stocks that your fund manager is betting on.Try to gather information about these stocks and see if it makes sense to you.This step requires some work and not everybody can analyze individual stocks.So take help from people(plural!Ask more than one knowledgable person about their opinion) who know.The important point here is to make sure your MF is not investing heavily in 2/3 stocks and check if it is well diversified.

I think thats about it.If you ensure that you've looked at the above points you will do much better at selecting a Mutual Fund.The whole process should not take longer than a half an hour if you have the data ready(The MFs annual/bi-annual report).

An update on NPS(New Pension Scheme)

2009-07-18T10:44:00.004+05:30

I wrote about NPS here.

I wrote

"There’s another big disadvantage of the NPS, which is the gains will be treated as taxable. However, this is obviously a blunder on the government’s part and one expects it to be corrected if the NPS is to take off at all.Either NPS gains will be made tax-free or, if there’s a policy change in the offing then competing systems like the EPFO will also be made taxable."

The government in the recent budget has announced that NPS will be taxed in the E-E-T manner.

This means:

1) You money will get tax exemption while investing

2)You money will get tax exemption while your money is growing

2)You money will be taxed at withdrawal.

To give you an example of EET:

Let us assume that we invest Rs.10,000/- every year in a tax saving financial tools that gives a return of 10% over 10 years. Also let us assume that the investor is a male in the 10% tax bracket (Income in the range of Rs.1.5 to 3 L category).

The value of the investment at the end of the 10 years will be around Rs1.75 L.

In the EET regime, the Rs.1.75 L will be taxed at 10%. Thus the investor will lose Rs.17,500 to tax after 10 years. The effect is really that instead of paying tax every year at Rs.1,000/- the investor has paid it all in one lump sum at the end of he 10^th year.

The investor may comfort himself by saying “Ok, but at least I do not pay tax every year. And I can make use of the money for the 10 years before giving it back to the Government.” Guess what the value of the deferred tax of Rs.1,000/- every year for 10 years and 10% return will be? Bingo. Rs.17,500 - effectively negating the comforting thought!

Another point to be noted is,if you income tax bracket increases to 30% (which i hope it does)
,you will be taxed not at 10% but at 30%.So you will end up paying 52,500 as tax.

Other competing products like Employee provident fund,ELSS,80C mutual funds etc are EEE,which means they are not taxed at all throughout their life cycle.

After this legislation,NPS is not really an obvious choice(which it would've been if it were EEE) for your retirement planning.More Analysis is required.

Trading

2009-07-15T22:16:00.003+05:30

Stock trading is like junk food.It makes you feel really good but its harmful for your financial health.

Trading is nothing but "predicting" whether the stock price will go up or down today or tomorrow or in a week's time.There is nothing more to it.
It doesn't matter if the stock you are trading is that of Infosys or Reliance or Maruti,you only need to predict if the price(which is just a number for traders) is going to go up or down.You don't need to know anything about how the stock's business performed in the last quarter or the last year.

Its that easy and hence every thomas,richard and harry can take a shot at stock trading.And trust me,they do.

Beginner's Luck: When one starts trading,almost everyone,invariably makes some money on their first trade.I did too.Only to lose two times more later.When things go your way for a couple of trades,you start to somehow rationalize your new found money-making "skills".Not once do you stop and think, it could be random luck.This is especially true in a bull market where stock prices keep going northwards,so no matter which stock you pick,it will go higher today/tomorrow and the week after.People confuse this with some kind of "trading skill",continue to bet a lot more than what they bet on their first trade,only to lose it all in a matter of days.And this happens not because people made any mistake in their trading,its plain random chance.Just the way they were making money by chance,they lose money by chance.

There is no theory/study till date which can consistently predict stock prices.There is however a theory that proves that stock prices move in a random fashion.

So,if we know its random,why do people trade.Because its fun.It feels like you are minting money.Although most of it almost always remains on book.I have never seen anyone take out their weekly trading profits,if any,to buy a new iPhone.People almost invariably plough it back into trading and lose it all and some more, one fine day.

Now some of you may say,if trading is based on pure chance,then i have an equal probability of making and losing money on any given day and hence its not like the balance is tilted against me.

I would argue that on any given day even if the probablility of your making or losing money is the same,you would still definitely lose money at the end of the day.Don't you worry, my probability fundaes are intact.There is a hidden weapon that kills even the 50-50 successful traders.Brokerages.

Generally brokerage for intra day trading is about 1%.Assuming you do the following trades:

1) Buy Infosys for 1000.(Brokerage Rs. 10 for buying and Rs.10 for selling)
2) Buy Maruti for 1000.(Brokerage Rs. 10 for buying and Rs.10 for selling)

Now assume at the end of the day, one of your trades is succesful and other is not.Also assume for simplicity that the profit from infy trade = loss from maruti trade.
Ideally you should end the day with no profit/no loss.But in reality you will end it with a loss of Rs.40.Thats 2% of your capital gone just like that.

Now extrapolate this to an year.Assume you do 100 trades in a year and assume 50 trades are successful and the rest 50 are failures,you'll end the year with a loss because of the brokerages you pay for your trades.And trust me when i say that achieving a 50-50 success rate is not an easy job.If you want to try it,do so at your own risk.

This is not to say that,making money from trading is impossible.Only its very difficult.There are enough traders who've made good money out of it but the things to note are:

1. Trading is their full time job.(No you cant be a good trader,trading from your software company office,hiding from your boss,when your boss himself is busy trading and hiding it from you. )
2. They trade with sophisticated risk management in place.
3. They are very very disciplined about the whole process and follow certain loss aversion techniques very religiously.

And let me go on to say that,even for these professionals trading is a chance game.They can never be certain if they will end the year making or losing money.

So,my advice to everyone(including myself) is to not take this trading business/your trading "ability" very seriously.Which is to say that,don't commit serious money to it.Dont commit more than 5% of your portfolio.Do it because its fun.Period. If you end up lucky and do make some money,take it out and go buy that iphone.

Online Investment Classroom

2009-07-07T21:13:00.003+05:30

I found this amazing site called WiziQ that facilitates online classroom teaching.I think it would be a great idea to hold some investment sessions online if some of you are interested.I cant think of a topic right away but i guess if some of you can pitch in with some ideas we can go ahead with this.Once the topic is decided,we can schedule it(probably on a weekend) and i can send out the WiziQ classroom invites to whosoever is interested.

If the first session goes well we can schedule more in the future.This WiziQ idea seems quite powerful to me for anyone to share knowledge.

You can mail me your ideas/request at prabhakarkudvaATgmailDOTcom or leave a comment here.

Dont pay the entry loads.

2009-07-02T22:20:00.006+05:30

"There shall be no entry load for the schemes, existing or new, of a mutual fund. The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/mutual funds which they are distributing or advising the investors (on).”

The Securities and Exchange Board of India (Sebi), has now abolished the upfront agent commission (currently you pay up to Rs2.25 on every Rs100 invested in a mutual fund) on all mutual funds .Till now the entry load was absent only if you by-passed the distributor and bought mutual funds directly from the fund's office.Now there is no entry load at all.

Most mutual funds till now, were mis-sold by distributors,who worried more about their own incomes rather than client welfare.By taking away the incentive to push the fund that gives the most commission, Sebi’s decision will nudge the market to eventually split into two types of distributors. One will simply vend mutual fund schemes and offer no opinion on what you should buy. You will probably come to him for ease of transaction and for that, you will pay anything between 20 paise and 40 paise on every Rs100 of transaction.And the other?

What if you don’t want to do the homework and would rather have advice from a professional? To get this, you will have to go a knowledgeable and certified financial adviser. For this, you must be willing to pay an annual fee to the financial adviser, who may also vend the products himself or have tie-ups with pure vendors.
The adviser will be a tracked entity with a paper trail on the advice he gives, and will not be able to suggest a unit-linked insurance policy to a person seeking a pension product and get away with it. He will run the risk of his livelihood—his licence— being cancelled.

So now you decide how good the advice is and has been in the past,how much you trust a person and only then decide the commission.We are indeed going in the right direction.

Market Analysis

2009-06-26T00:38:00.007+05:30

I dug up the Nifty/Sensex data for the last 9 years to find out the frequency of under valuation and over valuation.

I collected the Nifty index data from 1st June 2000 to 24th June 2009 and found the following frequency distribution of PE (Price to Earnings ratio,a measure of valuation) :

There are two important lessons here.

1. We very rarely get opportunities when markets are severely undervalued.
2. Markets don't remain undervalued for long.

We need to understand this basic fact,keep market negativity at bay and invest as much as possible in equities when market as a whole trades at a low PE.

Very recently the markets gave us such an opportunity in Jan - March 2009,where markets were trading in that low PE range.If one had bought at those levels,the result would have been stupendous,that too in a very short duration(just the way our analysis pointed out).

So the next time,such an opportunity presents itself,we should be prepared.But that may not happen very soon,as the table indicates.

Building & Managing your investment portfolio.

2009-06-02T20:42:00.005+05:30

As promised in an earlier post,we will talk about how to go about creating your long term portfolio of investments.

Portfolio allocation is nothing but deciding,at any given point of time,how much stocks or debt or gold or any other asset class you should own,so as to diversify your risk and give you good returns.Generally financial planners will ask you what your "risk profile" is and then come up with an outdated formula which will look like:

High Risk:
Equity - 70%
Debt - 30%

Medium Risk:
Equity - 50%
Debt - 50%

Low Risk:
Equity - 30%
Debt - 70%

If you ask me,this method of portfolio allocation is nothing short of stupid.In all matters,eventually things should make some sense to me,but this does not.Let me explain.

First of all,how do i conclusively decide what my risk profile is?Warren buffett calls himself a no risk investor.He doesn't like to take even a small amount of risk and capital preservation is of utmost importance to him.Yet he is almost 100% invested in equities(stocks).

If on the other hand i am a high risk investor,does that mean i should never ever buy an FD,even if some bank is giving me an interest rate of 25% per annum.

Successful portfolio allocation is not a one time job,where you decide x % of your investment will go to asset class A and y% to asset class B,no matter what happens to the world.Your risk profile is not defined by how much you are willing to invest in stocks and how much in bonds.
According to me your investment risk profile is defined by how much time you are willing to spend on your investment decisions.If anyone of you has ever bought a stock,i am sure you'd have decided it in a matter of minutes.A tip or a news item or what not.How many of you have read an annual report before investing in a stock?So that makes most of you aggresive high investors who have no worries about preserving your capital.Also most of us invest in bank FDs yielding 7-8% without once trying to figure out what other options are available to us that might yield us more than that 8%.There are so many stocks like Tata Steel,HLL,Castrol etc that have,at one time or the other, given dividend yields of more than 8% with the added benefit of stock price appreciation.But we just would'nt look for them.

So its the time you spend on your investments that makes you a high/low risk investor and nothing else.

So the idea here is that one rigid portfolio allocation strategy will not work.The key here is to be flexible and dynamic.Lets now see how to build a portfolio that does make sense.

Before we embark on this lifelong journey,we need to come up with an investment philosophy or a motto that will guide our portfolio allocation.A good and simple motto to start off with is:

"I will sell what is expensive right now and using that money buy what is cheap. "

This one line if followed religiously will take us places.

So our portfolio is going to be dynamic and constantly changing with the times.We obviously wont change it everyday or every week but we'll need to keep an eye on the markets(both stock and debt) to see what is expensive and what is cheap.

Now we have some ground rules to be followed:

1)I will never be invested more than 75% in any one asset class.
2)I will never be invested less than 25% in any one asset class.

So lets do a case by case analysis of how our portfolio will be rebalanced at different sensex PE levels.(PE is a very common ratio that signifies how costly or cheap the markets are.Higher the PE,the more expensive the market and lower the PE,the cheaper the market).

Sensex at 8000,PE = 10(cheap)
=======================

Equity - 65-75%
Debt - 35-25%

Sensex at 14000,PE = 14(niether expensive nor cheap)
=======================

Equity - 55-65%
Debt - 45-35%

Sensex at 18000,PE = 18(getting into expensive territory)
=======================

Equity - 45-55%
Debt - 55-45%

Sensex at 25000,PE = 25(expensive,near overheating)
=======================

Equity - 35-25%
Debt - 65-75%

After this,if the sensex goes to 30,000 with a PE of 35 you dont change your allocation,you remain 25% in equity and reap the gains having clearly understood that market is overheating and can start crashing anyday now.

Remember however that the number 30000 doesnt matter to us,what matters is the PE ratio.If the sensex is at 30000 and PE is 10(thats cheap),you better be 75% into stocks.

This kind of a portfolio allocation will help to reap good rewards with relatively lesser risk.Thats the goal of portfolio allocation.Higher returns at lower risk.

Note - Actual Sensex PE in:

August - September 08 (Bull market high 21000) - 19 to 20
January - February 09 (Market low 8000) - 11 to 12
Now June (Sensex at 14000) - 20 :)

Are we ahead of valuations,who is to say?What should our portfolio allocation look like now?
Let me know in your comments.

New Pension Scheme - The Big daddy of all retirement funds

2009-05-01T11:39:00.003+05:30

The government of India has thrown open the New Pension Scheme(NPS) from today,1st May 2009.This is the closest you can get to the best retirement investment you can ever make.

The Old Pension Scheme(let me call it that) hardly had any exposure to the stock markets and hence,the investors were not able to reap the benefits of a growing economy like India.They still used to get the same 7-8% return no matter how much our companies progressed and prospered.This is all set to change now and we can actively participate and benefit from India's growth.

I have spoken a lot about how if you have a lot of investment years ahead of you,an equity bias makes a lot of sense,since over a period of 20-25 years no other asset class can beat equities,even after considering inflation.The financial advisers to the govt understand that very well and hence they have come up with the NPS.

Let me give you an overview of what this is,how do we invest in NPS,what are the advantages and what are the disadvantages.

Overview
=======

1)Its open to all Indian citizens.You can choose any amount to save every year.

2)Its simple.All you have to do is open an account at any Post office/SBI and get a PRAN(Permanent retirement number)

3)You can operate the account from anywhere in the country,even if you change your city,job etc

4)It is govt regulated and fund managers will be periodically reviewed.The funds will be managed by either SBI/ICICI/Kotak and three more,chosen after a lot of scrutiny.You can choose any one of the six.

5) Your money will be invested in either stocks,govt bonds or corporate bonds in whatever ratio you want albeit with a maximum cap of 50% on equity.(more on that later)There is also an Auto choice where depending on your age,the fund will decide the distribution.

Advantages
========

1. It is truly long term : Investors can plan their retirement with investments in the new Pension Fund. That's a clear 30-40 year time horizon for new entrants.

2. It is extremely low cost : Pension Fund Managers have been appointed at the lowest cost (less than 0.010% per annum as management fee). This is MUCH LESS than what Mutual Funds charge for managing even liquid funds and a small fraction of what insurance companies charge. NSDL, the CRA for the NPS, would charge Rs. 280 as annual maintenance fee per subscriber and Rs. 6 for every transaction. This is amazing cost-efficiency.And this is what is MOST important for me.

3. Equity Investments are restricted only to the NIFTY 50 index. This Passive Investment diktat makes sense, as this represents an adequately diversified portfolio and also keeps cost of fund management low.Like the ETFs i keep talking about.

4. It offers mobility : Investors can change their fund manager by choice.All subscribers will be issued a unique PRAN (Permanent Retirement Account Number), hopefully this number would make all record-keeping easy. Issue of PRAN will ensure portability across geographies as well as jobs.

5. Government Regulated.

6. Invested capital is tax exempt unless you take the money out too soon.

Disadvantages
==========
1.This really is a pension scheme, not an investment. You can’t withdraw the money till you are sixty years old, except for critical illnesses and for building or buying one house. Even at sixty, you can only withdraw as cash 60 per cent of the corpus, the rest must be used to buy an annuity.What that means is that the remaining 40% need to be invested with say LIC so that it earns you a monthly pension till you're 70,after which you can take all the money out.

2. There’s another big disadvantage of the NPS, which is the gains will be treated as taxable. However, this is obviously a blunder on the government’s part and one expects it to be corrected if the NPS is to take off at all.Either NPS gains will be made tax-free or, if there’s a policy change in the offing then competing systems like the EPFO will also be made taxable.

3. There is a cap on the maximum investment in stocks of 50%.This should be removed and flexibility should be provided to the investors to decide how much they want to invest in equity depending on their risk appetite.

Points 2 & 3 are under consideration and govt is expected to act on them.

All in all,my sense is that,this is the closest you can get to investment utopia(once points 2 & 3 are taken care of).So wait till these things get sorted out cos they can have a big effect on your investment returns.Otherwise i really appreciate the govt to have come up with this amazing scheme.
The rival retirement solution companies are going to face a lot of competition. NPS is so much better than whatever ‘solutions’ they are peddling that they just can’t afford a fair comparison.

Cheers!

ULIPS,have you been trapped yet?

2009-04-19T23:00:00.008+05:30

ULIPs(Unit linked insurance plans) have become quite popular of late and almost everyone who has an investible surplus invests in ULIPs nowadays,without really knowing how it works and how the sales guys take us for a ride.

ULIP is nothing but an instrument that sells you insurance+investment together.You are supposed to pay a premium every month/quarter/year for about 15-20 years and in case something unfortunate happens to you,you get a certain death benefit(like regular insurance) or otherwise the premium you have paid is invested in stocks/bonds and you get a return according to how the markets have performed in those 15-20 years.That sounds very reasonable,right?Its like your money is doing two jobs,providing you insurance in case something go wrong and if everything works out well,you get a decent return on your investment.But is so NOT reasonable in reality.This exotic mix of insurance + investment is a trap where you end up losing a lot of money compared to if you had bought a simple insurance separately and invested the remaning money in a equity/bond fund.

I will show you an illustration where in one case we'll invest our money in a ULIP and in the second case we'll buy insurance(with the same death benefit as ULIP) separately and invest the remaning in a mutual fund of our choice.Also we'll assume that the ULIP investment and the mutual fund investment give the same percentage returns over the whole period(To be fair to our ULIP sales guys),whereas in reality in most cases we can deploy our investments at much better returns than the ULIP guys can.

So lets start off.

Thanks to Deepak Shenoy for the illustrations i am using.

Lets take an example of ICICI prudential's Lifestage RP ULIP plan.Their brochure mentions the following:

So the above ilustration is what the ULIP promises.Lets assume that the ULIP will return 10% annually over a period of 20 years.

So on the one hand we would pay Rs. 50,000 premium to ICICI for 20 years,and on the other hand, we would buy pure insurance(what are known as term plans) now, and pay annual premiums to it from the Rs. 50,000. Whatever is remaining, we would invest in something that returns 10%.

Here's what we get,assuming for a 30-35 year old,the simple insurance premuim is around about 2400 per year.The remaning 47,600,we'll invest in a mutual fund and assume that it'll fetch us the same 10% per annum for 20 years.

Here's what we get. Click to enlarge.

Here's what the results of our little test are:

Term Plan+Investment yields 29.99 lakhs after 20 years, versus 25.62 lakhs for the ICICI plan.
Thats 4.37 lakhs off your returns,that's the price of ignorance.
Look at the total charges,a whopping 2.5 lakhs out of your capital goes to ICICI.That part of your investment capital will never grow.

So that is how ULIPs are conning people.Even with the same rate of return of 10% on investment for both ULIPs and our simple plan,we lose 4.4 lakhs on ULIPs.Does'nt that prove something is wrong somewhere.The major money that we lose is in the "charges" amouting to 2.5 lakhs.Yet most people never know whilst the ULIP guys make money for themselves by taking our ignorance for a ride.

So next time a ULIP salesman comes to you show him this calculation and ask him to explain the 4.37 lakhs.I am sure he'll never come back.

So the bottomline is,don't get tricked into the instruments you don't understand.Keep it simple. Dont go for mix and match of insurance,investments and god knows what not they'll come up with in the future.More often than not,these are clever ways to complicate things and confuse you.Keep your insurance and your investments separate and you will not be cheated off your hard earned money by clever marketeers.

A sucker's rally?

2009-04-10T19:19:00.003+05:30

Right now i am pessimistic about the broad market and i think this 20% odd rally is a sham.

Most stock markets around the world have rallied big time since the beginning of March. I think its a "dead cat bounce".A dead cat bounce is a term used to describe rallies in a bear market. It comes from the notion that even a dead cat bounces if its falls from a great height. Most bear markets are characterized by these dead cat bounces. Take the Great Crash of the stock market that happened in October 1929 and which ultimately led to the Great Depression. Between 1929 and 1932, Dow fell by around 90%. But during that period, there were six rallies in which the stock market gave a return of more than 20%. Every time there was a renewed sense of optimism among the investors, but each time the rally went kaput and the market touched new lows.

There seems to be a new hope in most people that the worst is over and we will go back to the good old days soon.People are telling themselves that the combined government stimulus will work.The G20 was a success and they are pumping in a massive 1.1 trillion dollars into the world economy.They don't realize that the financial meltdown has destroyed investment capital of around $50 trillion. So what difference is a little over a trillion dollars going to make?

What about the economy? Isn't that supposed to recover in the days to come?

Ultimately everything recovers; the question is --- when? That nobody really knows, and at best, the so-called experts are guessing. Let me give you the example of Japan. Exports for March are down 49% from the same time a year back. Exports to the US, Japan's largest trading partner, collapsed by 58.4%. Industrial production was down 9.4% in February and the economy contracted 12.1% in the first three months of the year. All this is forcing companies to cut jobs and salaries. Salaries have come down by 3.5% from a year back. Investors in Japan have ignored all the negative news and the Nikkei-225 index has rallied 17.8% since the beginning of March. They are betting on an export-led recovery in the second half of the year. The Japanese economy may be an extreme example, but the situation is no different in other parts of the world as well, with the economy contracting and massive job losses.

Also, a point to remember is that as more and more people lose their jobs all over the world, there will be more loan defaults, and a further slowdown in spending, which will impact corporate profits. This, in turn, will lead to more job losses and a further slowdown in spending. An important point to remember is that till now, the United States has the main source of demand for the world economy. And the American consumer is clearly not in a mood to buy either goods or services right now.

Stock markets like to predict the future.And that's what they are doing now.They are hoping a couple of trillion will make up for a massive 50 trillion loss.I don't know if it will but the probability seems to be very less.Better not take the risk of losing your capital at this stage for some 20-30% profit cos we are not going back to the boom levels in a hurry :)

Why is India affected by the meltdown?

2009-04-01T22:48:00.006+05:30

It seemed initially that India has 'decoupled' from the global economy and that this meltdown will be more or less temporary for us.I have reasons to believe otherwise.

The general argument is that,exports/trade is a considerably small percentage of our GDP and we are a domestic economy.The 'trade to GDP' ratio is about 0.33 which i agree is relatively small when compared to say China whose GDP is very dangerously dependent upon its exports.

But if you try to figure out how in the last 5-10 years our companies have shown phenomenal growth will you begin to understand the importance of foreign credit.Most of our biggest acquisitions,right from Tata's buyout of Corus and Hindalco's buy out of Novelis were funded by foreign capital. The ratio of 'trade+ capital inflows' to GDP had grown to more than 100% .It was s also this foreign money that took our stock markets to stratosperic heights.Almost all that money is gone now,back home to the US treasuries that are yielding a 0% interest.The FIIs now think India is too risky for them and they'd rather earn no returns than invest in India.This has hit our growth real bad.We wont grow because our companies wont have access to capital like they did when the times were good.We wont grow because people would rather save today than spend.

Now to fill this 'foreign credit void' and help our GDP grow at the famous 9% , our government is inducing banks to lend money to our industries and our people.To that effect the RBI has cut certain key rates(the repo,reverse repo and CRR,let me not go into the details here) that help banks to lend more money by reducing their costs.But even so, our banks have not cut the lending rates,which are still around 10-11%.The banks like their international counterparts(CitiBank,JPM etc) think its too risky to lend money when economy is suffering and people are losing jobs.So they are just sitting on their cash.This unnecessary caution(in these times of trouble) by our banks is stifling our economy even more.Add to that the high deposit rates(FDs) of 8-9%.People today have more incentive to save than spend.During the boom times the lending rate was 15% and inflation was 6% so effective interest rate was 9%.Today the lending rate is 11% and inflation is almost 0%.That makes the effective interest rate at 11%.This means in times of distress,when there is need to spur demand our effective interest rates are higher.This is ridiculous.

India will remain in this turmoil,unless of course everything gets back to normal in the rich nations and they are ready to loan us billions of dollars again.That seems quite unlikely for quite some years to come.Or the other way out is that the interest rates on loans in India come down drastically to spur the so very popular 'domestic demand'.

Deflation and what it means to us.

2009-03-19T21:30:00.002+05:30

Inflation for the week ending March 7th is 0.44%. Now that is bound to be big news.But i personally feel that inflation indices in India are a hogwash (both the WPI and the CPI).I was reading a little bit about it and it seems WPI doesn't give enough importance to the services sector that now contributes the most(about 50%) to our GDP.Its just crazy.Also the base year used is 93-94 which is ages ago.In case of CPI,what the rural population pays is not given enough importance.And there are different CPI indices for people in different strata of the society and hence it is not suitable for a heterogenous country like India.

Therefore,lets just forget about the hard numbers and instead focus on the trend and what it means to us.Whats important is prices are falling.Steel,cement,copper,aluminium and everything else.Some are also saying deflation is here.So lets me take this oppurtunity to talk a little bit about what deflation is and how can it affect our economy.

Deflation is,put simply,a consistent fall in the general price of goods.Theoritically it is when that 0.44% inflation turns negative.Deflations generally occur when the economy is depressed,like it is now.Prices fall because people stop spending in a depressed economy and the demand for things fall.What happens next is interesting.

Since in a deflationary phase the price of things,say a car,keeps falling,people postpone buying the car in the hope that price might fall even lower.So we end up in a situation where people hoard cash because they know that they can buy more if they wait.This further fall in demand for goods makes the prices go down even more and leads to what is known as the deflationary spiral.If a country falls into a deflationary spiral,people dont buy stuff and consequently the industries stop producing stuff.The economy comes to a standstill.There is no growth.The stock markets dont move at all.Investment returns are near zero.

Now the next question is,how do we get out of this deflationary spiral?To get out,we need to make people spend and not hoard cash.The govts do this by reducing the interest rates on loans,to as low as zero.The problem here is,you can rarely(it has happened though and is kind of happening now in USA and i think in Taiwan) have an interest rate below zero(that means the govt pays you money for borrowing,thats ridiculous.)Ironically it is exactly this kind of a rate cut that gives birth to the next boom or asset bubble.The rate cuts of 2001-2002 dot com boom for instance gave birth to the housing boom.

Its always better to not let such booms happen by keeping interest rates in check and consequently if there is no boom,there'll be no inflation, there'll be no bust and there'll be no deflation.But human greed is such that people always go to the extremes,and then repent, but never learn.

Now coming to whats happening in India.Prices are falling,demand is waning,production also is falling(IIP numbers are negative for the first time in years) and interest rates are still quite high(definitely not so low as to incite people to start spending).Perfect recipe for a deflationary spiral.Whether it will happen or not is anybody's guess.Economies are too complex for anyone to predict anything.One can just look at what happened in similar situations before and extrapolate trends.Things can change anytime and history might not repeat.Atleast i hope it doesnt.

Meltdown Explained

2009-03-12T23:10:00.002+05:30

Came across this little example doing the email rounds.Explains the sub prime crisis.Well almost.

Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.

* The net asset of the country now = 3 dollars.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.

*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.

* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.

* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.

* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."

(8) A also thought the same way.

(9) Nobody wanted to buy land anymore.

* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.

(10) So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.

(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.

* A owns the 2 coins; his net asset is 2 dollars.
* B is bankrupt; his net asset is 0 dollar. (He lost everything)
* C got no choice but end up with a land worth only 1 dollar

* the net asset of the country = 3 dollars.

************ **End of the story; BUT ************ ********* ******

There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -

(1) when a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land goes up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depends largely on psychology (or speculation).

Buy:Crude Oil

2009-03-08T15:50:00.002+05:30

Crude is today trading at around $40 largely because, with economies slowing down, the demand for crude is estimated to fall dramatically.Due to this low price of crude, all large producers of oil,primarily OPEC and others have cut supplies too.This is what we all know.

Now comes the part which interests me.The cost of production and other expenses related to producing oil have not fallen as much as the price of oil itself.Saudi Arabia, Kuwait, Algeria and Libya all need $50-60, and Russia needs $70, to break even on production and meet their budgetary needs.What this means is,in the current scenario all these oil producing nations have not only cut production but also billions of dollars of investment into building oil infrastructure is being held back.They apparently need oil at $75 to ensure future supply.Oil will probably have to remain above $100 for some time before oil companies are willing to commit enormous amounts of capital to the expensive, risky, and long projects that remain to be developed.Clearly, no one is going to step up to spend billions of dollars to develop new oil projects until oil is holding firmly above $60.
And without these projects,the supply is going to fall so dramatically that by 2013 we may have no ready oil to use.This is crazy when you realize how crucial crude oil is to essentially all economic activity.Also if the economy is doing well by 2013 and demand shoots up,just imagine what will happen to oil prices.Even though i hate "predicting ",i wont be surprised if oil breaks the previous high of $150 dollars and goes on to break all records in another 5 years.

I think the downside is limited and if there is any,there'll be more production cuts to stabilize the price whereas the upside is huge.So Buy Crude Oil.

A visual guide to financial crisis

2009-02-07T19:14:00.009+05:30

A very informative chart from Flowing Data that most of you would probably be looking for.

Evaluating mutual funds quantitatively

2009-01-28T22:27:00.002+05:30

Deciding on a mutual fund is probably a very frustrating exercise.There are all kinds of subjective and intangible ways to evaluate mutual funds.Most of us just look at the past three to five year performance and buy the one that has performed the best even though we all know "past performance is no guarantee of future success ". Some others like myself also look at expenses and decide an ETF is a safe and reasonable bet.But what if i am ready to take some risk and not happy with the average market returns that ETFs give me?

Here are some ways using which you can evaluate mutual funds and take an aggressive position

1) R squared value - This signifies what percentage of the fund's returns were because of the general market and how much because of fund manager's skill.For example an R square of 90%means that your fund manager is responsible for only 10% of your returns,the rest 90% return is just because the broad market went up.An ETF has a R squared value of around 100% since it exactly matches the index(broad market).R squared is basically the funds dependence on the average market performance.
A low R square means your fund manager is actually doing something different and really "earning" his fee.A high R square means you're better off with an ETF because why pay your fund manager when all he does is just match the average performance.

2)Alpha -This is the fund's return when the average market return is 0.This represents the funds performance compared to the average market.The higher the 'alpha' the better the manager.

3) Standard Deviation - This represents the volatility of funds performance over a period of time.Higher the value,higher is the volatility and less reliable are past results of the fund.

So what we should look for is a low R squared,a high alpha and a low standard deviation.Most of the popular "diversified" funds will have a high R squared and a low alpha and hence it makes sense to just go for an ETF.

The funds that do have a low R squared and a high alpha are the funds that are not diversified and where the fund manager actaully takes a call on a certain sector or a group of stocks.This means the fund is not diversified and takes some risks which if turn out to be right can give you really high returns.

These values are available in any mutual fund website like

http://www.valueresearchonline.com/

So stop paying high fees for average performance and if you really want to take that risk go ahead and actually take a call.

Why stock price is important to a company

2009-01-26T20:40:00.004+05:30

Once a company has borrowed money from the public(what is popularly known as an IPO) why should it care whether the stock price goes up or down.After all they have got the money they wanted,now why should they worry about fluctuations in their stock price.There are a number of reasons:

1.The owners(promoters) and the company management in most cases will have a lot of shares themselves.So if the share price goes up,they all become richer.Thats enough incentive to care about the stock price.

2. Shareholders can fire the management - In the short run the management might have no control over the stock price but if the stock is under performing for longer periods,the shareholder's returns will be affected and they can band together and fire the CEO.A similar event led to the resignation of YAHOO's CEO recently.So if the CEO's job is on the line then he has all the reasons to worry about his company's stock price.

3. Financing - If a company's stock is doing well then its a sign that the company itself is doing well and has good future prospects.So stock price is sometimes used as a barometer by lenders to decide on the credit worthiness of a company.A company with a consistently surging stock price might for example get a loan at a lower interest rate.

4. Prevent Takeovers - If a company's stock price falls susbtancially,then a number of other companies/competitors will try to buy a lot of stock from the open market and hence garner majority control and then may be demand a position on the board or in worst case demand the right to run the company.An recent example would be SATYAM.Ever since its stock has fallen to the ground,L&T is trying to buy up a lot of shares from the open market and is in talks with the goverment to assume management control.

So there is more to issuing stock then just borrowing money from the public.Once you have "done an IPO" you are supposed to be more responsible,very transparent and most importantly answerable to your shareholders.

Wordle!

2009-01-23T23:36:00.002+05:30

Ranga pointed me to wordle. Neat,isnt it.

Some comments on inflation

2009-01-21T22:33:00.001+05:30

I received a few questions on inflation that i have tried to answer.I will reproduce it here as a separate post for everyone's benefit.

Nakul Tirumalai said...: Any information about what steps the government would take to curb inflation apart from increasing rate of interest would be a good supplement to this article.
Nakul Tirumalai said...: Also, information about what the people can do from their side to control inflation like for e.g., not buying goods in bulk etc. would be informative. You can also write about how inflation can be self-stabilizing in the sense that people stop buying when the prices are too high and this leads to relative deflation. One more thing to mention would be about the value of money as a commodity during the time of inflation.. All this could come in the article "Inflation part 2".. what say?
kudva said...: @Nakul A fall in demand can certainly bring down inflation and this is what is happening now.About six months ago we were all crying hoarse about inflation and now thanks to the sluggish economy,the demand has waned and inflation is back to about 5% and is expected to further go down to about 3% or may be even less.

And as you can see falling demand is generally not a great antidote to inflation cos it signals a bad economic phase.Rather a sign of a vibrant economy is where people are ready to spend and the govt tightens money supply and is able to keep high inflation in check.

So to conclude as long as we stay clear of hyper inflation,a reasonable inflation is necessary and good.
Srirang (Brahmana) said...: Considering your first reason for inflation, this is how I look at inflation:

World population has been increasing at some rate and India's population at a much higher rate. But production of goods and services is not increasing at the same rate and is lagging. This is causing Demand-Supply mismatch and results in price increase.

If this is correct then it is clear that inflation is not good. Even in your post you have not substantiated how inflation is good. You have presented the idea that not anticipating inflation is a problem and hyper inflation is always a problem. So I take that you meant inflation in general is not as bad as it is portrayed when you said inflation is not bad.

If not then I am missing something and kindly correct me.

Considering the second reason of inflation, it looks to me like a cycle. People ask for higher wages to battle increasing costs, most if not all the time, and in turn increase the costs. Is this cycle desirable? Anyway to avoid this?
kudva said...: @srirang
Long term inflation is inevitable for a growing population like India,hence the point is to sustain it at reasonable levels.Having said that what i meant by a reasonable amount of inflation is good, is that any country should not risk getting into a deflation mode and consequently a deflationary spiral which generally leads to economic depression.A deflationary spiral is a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price(Exactly opposite to the inflationary spiral you mentioned in the last para of your comment).It is now being feared that world might go into a deflation mode,which as we can see is not so good compared to the boom days when inflation was high and everyone was happy.

So the conclusion is high inflation is bad,deflation can depress the economy whereas in a state of reasonable inflation everyone is more or less happy.

Inflation - Good or Bad?

2009-01-17T14:42:00.005+05:30

Inflation is nothing but a continuous increase in the price of goods and services.As inflation increases every rupee you own will buy you fewer goods/services.In other words inflation reduces your purchasing power.If you could buy one box of chocolates at 100 bucks today and you read that the prevalent rate of inflation is 5%,it means that you can expect the same box of chocolate to cost you 105 rupees after an year.
This is something most of you probably know already.

Let me tell you what are the various causes of inflation.There are basically two main reasons
1)The first is what is known as Demand-Pull inflation. This means that there is a lot of money floating in the market and the amount of goods/services are relatively fewer.The demand is outpacing the supply in this case.A simple example would be an antique which is being auctioned.There are a lot of people willing to pay for a single item,which means a lot of money is chasing just one good,the antique.This demand supply mismatch raises the price of the good.

2)The second and relatively unknown cause is what is known as Cost-Push Inflation. When a company's costs go up,they increase their prices to maintain their profit margins.For example if the employees of Hindustan Lever demand higher wages to keep producing goods,then the company's expenses increase and to maintain the same profit they increase the price of your shampoo.

Now if you go around asking everyone,most will tell you inflation is bad for the country's economy and its people.But actually inflation affects different people in different ways.It also matters if the inflation is anticipated or unanticipated.If it is anticipated,then our Reserve bank can increase interest rates so that it becomes difficult for people to borrow and spend money thereby reducing the demand and hence inflation.The workers can ask for a higher pay as the price level goes up and so on.

The real problem occurs when inflation is unanticipated.

Creditors lose and debtors gain if the lender does not anticipate inflation correctly. For those who borrow, this is similar to getting an interest-free loan.
Uncertainty about what will happen next makes corporations and consumers less likely to spend. This hurts economic output in the long run.
People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
The entire economy must absorb repricing costs ("menu costs") as price lists, labels, menus and more have to be updated.
If the inflation rate is greater than that of other countries, domestic products become less competitive.

So the better we anticipate and take into account how inflation is going to affect our retirement corpus,the better we can invest.For example if the average rate of inflation is 5% in India,and you invest your money in a FD that gives you a 8% return,the actual money you'll have after 10-15 years will be as if your FD's interest rate was 8% - 5% = just 3%.Most people ignore this and are shocked when they see their purchasing power become much less than what they anticipated. So inflation should be a very important parameter when you sit down to do your investment planning.

Finally,The question shouldn't be whether inflation is rising, but whether it's rising at a quicker pace than your salary. Inflation is a sign that an economy is growing. The lack of inflation may be an indication that the economy is weakening. It's not so easy to label inflation as either good or bad - it depends on the overall economy as well as your personal situation.

Developing countries maintain inflation at around 2-3%.India must try and get there soon.

ETFs-An Update

2009-01-13T21:33:00.004+05:30

I did not mention an important point,amidst all the explaining about what an ETF is, in my ETF post.

Transaction Costs.

Basically,there are two types of funds:
1)Actively Managed
2)Passively Managed

Most of the mutual funds are actively managed.As the name itself suggests,in these funds,the fund manager has all the liberty to buy/sell as many stocks he/she wants,as many number of times.They are even allowed to trade with your money.This results in a number of extra costs viz:

1)Brokerage -
2)Service Tax
3)Transaction Tax
4)Education cess,Stampduty,Exchange cess etc

All these come to about 1.5 to 2% of the capital every time your fund manager buys/sells.
And obviously these charges are paid by YOU.They are subtracted from your capital and this again makes a huge difference to your final return as demonstrated in an earlier post.

In an ETF on the other hand,which is generally managed by a computer the number of unnecessary trades are very minimal.Only if there is a change in the index do we need to buy/sell a stock.And changes in index happen only once in a quarter,if any.This passive management saves a lot of our capital which then compounds to give us better returns with lower risk.

Absence of transaction costs is one of the biggest reasons why ETFs are popular with prudent investors.

Satyam Paapam

2009-01-07T21:52:00.006+05:30

About a week or so ago i had posted about a contra buy in favor of Satyam. My rationale was three fold:
1) They had a very nice ERP business going for them that no one else in India did and there were companies like HP,CTS lining up to buy it out.

2)They had (not any more ;) ) a strong balance sheet and the business was making good profit.

3) Market had pulled the price down because of the infamous Maytas buyout attempt, which never really took place.

And happy i was,till today morning when the price was up about 7% and an overall trade profit of about 20%.

Then Mr.Ramalinga Raju wrote the following letter to its board:

--------------------------------------------------------------------------------------------------

To the Board of Directors
Satyam Computer Services Ltd. Dear Board Members, It is with deep regret, at tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:
The Balance Sheet carries as of September 30, 2008
Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)
An accrued interest of Rs. 376 crore which is non-existent
An understated liability of Rs. 1,230 crore on account of funds arranged by me
An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.] reflected in the books)

For the September quarter (02) we reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial, cash and bank balances going up by Rs. 588 crore in Q2 alone.
The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.
Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over; thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.
The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.
I would like the Board to know:
1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.
2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share[s] by the lenders on account of margin triggers.
3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results.
4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Han T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V. Sriram Papani, Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s immediate or extended family members has any idea about these issues.
Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:
1. A Task Force has been formed in the last few days to address the situation arising but of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam; Subu D, T.R. Anand, Keshab Panda and Virender Agarwal , representing business functions; and A.S. Murthy, Han T and Murali V representing support functions. I suggest that Ram Mynampàti be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.
2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities.
3. You may have a testatement of accounts’ prepared by the auditors in light of the facts that.I have placed before you.
I have promoted and have been associated with Satyam for well over twenty years now I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis.
In light of the above, I fervently appeal to the board to hold together to take some important steps Mr T R Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force arid the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.
Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.
I am now prepared to subject myself tothe laws of theland and lace consequences thereof.
(B. Ramalinga Raju)
Copies marked to:
1. Chairman SEBI
2. Stock Exchanges

---------------------------------------------------------------------------------------------------
Mr.Raju actually misrepresented about 7000 crores.The money on its balance sheet were just numbers,there was no asset backing them.They inflated their profits ten times over quarter after quarter after quarter.The auditors and tax consultants apparently were sleeping.

This is probably the biggest corporate fraud in the history of Indian capital markets.Its Shocking,Its Disgusting and i really have no words to express my concern.The markets were brutal, beating the stock price down by about 70%.

The company is almost broke now.And i personally feel they will go under.The stock price might go to single digits.

I feel really sorry for:

1)Their employees,who will probably have to look for other jobs for no fault of their own.

2)Their investors,Aberdeen,Fidelity and ICICI who together own about 50% of Satyam.They are more or less doomed and i don think they will stick with Satyam anymore.These guys own crores of Satyam shares and once they start offloading their shares the stock will plummet further.I had some people in my office trying to make a quick buck out of this fall but i think the bloodbath is not over yet.

3) Stock Analysts and myself who read balance sheets and PL statements like it was holy Bible. We feel like fools now.But having said that you really cant blame any analyst cos this kind of a scam is something no one can imagine in their wildest dreams.If all balance sheets are indeed fake then the multi billion dollar stock analysis industry will go broke before Satyam does.

4) The Investor who has no clue about what the hell is going on except his portfolio and his NAVs have taking a beating.Yes Satyam was owned by a number of mutual funds.

But having said this,lets not doubt every other Indian company now because this HOPEFULLY is a one off case.There may be more such companies but then again there is no way to know which ones.

So lets just keep our long term investments going,not panic and believe that India and our markets have a long way to go.

Cheers.

The evolution of Money

2009-01-05T21:02:00.007+05:30

This is one of the most misunderstood concepts and people often wonder how money is created.I will try to explain that.I will start off with a brief history of how money has evolved,something most of you already know and then move on to "fiat money" that is in existence today.

"Once upon a time" we had the barter system that we all studied about in our history books.The system simply meant that to buy something you needed to own something of a similar value. So if you wanted to buy a cow,you needed to have five goats to give it to the person who would sell you his cow.This system had obvious limitations that we know about and i wont get into the details and hence was scrapped in favor of gold and silver coins.

So now in order to buy that cow,you just had to own say 1000 gold coins and the cow was yours.
Now imagine that one fine day you decided to start your own milk booth and you need 100 cows from somebody out of town.That translates into 1000 x 100 = 1 lakh gold coins. I don't think anybody would take the pain of carrying around so much gold with him/her.So what you do is you go to a competent and trustworthy authority,say a bank and deposit your gold coins with them and ask them to write on a piece of paper that "this person has indeed deposited 1 lakh gold coins with the bank and hence i am issuing this paper.In case you need the gold coins,you can contact the bank,submit this paper and collect your gold coins". That piece of paper that the bank gave you in exchange for your gold coins is what we know as money.

So any money that the bank issued was always backed by a quantity of gold equal to the value of the money issued.This worked for a long time and then after Nixon Shock we moved to what is known as the "fiat currency".
I won't complicate it too much by getting into the historical events that lead to the current "fiat money" being introduced and i will just talk about how money is created today.

Today,the central banks(say the federal reserve of the US) has the right to print AS MUCH money as it wants without backing it with gold or any other commodity.The money printed is just plain paper except it is a mandated by law that it should be accepted as payment for any good or service.Whenever the government needs more money it asks the bank to print it for the goverment and in return issues a bond to the bank which says that the govemenment has borrowed money and is liable to pay interest on that money to the bank.Thats it.

This money then slowly flows from the government to people like me and you and to the market in general and adds to the already floating money.This means that there are now the same amount of goods in the market but much more money.This is what leads to inflation,too much money chasing too few goods.

This is what is happening in the US right now with the goverment printing unlimited amount of money to "bail out" private institutions.This will eventually lead to a lot of inflation in the US and if the flow of money continues unabated, the US dollar one day will be worth less than the paper it is printed on.

Why we lose money in stocks most of the time?

2009-01-01T17:25:00.012+05:30

To answer that question we just need to figure out what the good investors do, that we don't.Those who make the biggest money in stocks come out with superior long term results because they make fewer mistakes than us and not because they have any miraculous ability to keep finding the right stocks all the time.Mere mortals like me and you are fooled into making way too many mistakes in the stock market and end up disillusioned and with much less money left than what we started with.So it all boils down to the fact that the person making fewer mistakes while investing will end up richer.

So how do we remedy this? What are the common pitfalls that we keep repeating over and over again that good investors avoid? There are four broad categories of mistakes (that i once read about in one of Mr. Sanjay Bakshi's writings and have since agreed to):

1) Mistakes in Asset Allocation - We buy stocks when the markets are booming and start selling them when the markets start crashing.Its like buying a car when the car price is near its peak and selling it when the prices are most depressed.Any high school kid will tell you that its stupid to buy something at a very high price and then sell it at a very low price.You almost always will end up losing money.Yet we fall into this trap time and again.Consider the current market scenario and you will realize how true this is.Almost everybody is scared to buy stocks now when they are cheap and wants to invest in FDs and bonds.Compare this to September last year,when every tom,dick and harry wanted to own a demat account was ready to buy stocks at exhorbitant prices.

So lesson number one : Buy more stocks when the markets are most depressed and buy more debt(FDs,bonds etc) when the market is near its peak.More on how exactly to balance and re-balance your portfolio in a future post.

2)Mistakes in Market timing - We try to "time" the market.We try to predict whether the market will go up or down today or in a week or in a month.There is NOBODY who can do this consistently over a long period,because if there was then he/she could amass unimaginable amount of wealth.Yet there is a whole industry of stock/trading analysts who try to predict short term stock movements. And if you thought they got rich because they themselves invest in their own predictions then you are wrong.They got rich because of the money people like us pay them as "prediction fee".

Lesson number two : Forget about timing the market.Even the best investors have given up.Just invest in a SIP and stay away from frequent trading.

3)Mistakes in stock selection - Most investors simply buy overpriced stocks that are hyped up by sellers of stocks i.e. promoters and intermediaries such as brokers and merchant bankers. They end up chasing fashions and fads and eventually suffer heavy losses.A great deal of investors focus on factors that are completely irrelevant in evaluating the worth of the stock and fail to look at simple but vital things before committing money to stocks - things that they would have checked out if they were buying the entire business.

Moreover, stockmarket investors display impatience that they do not display in their real-estate transactions. If an investor buys a sound stock and nothing happens for a couple of years he is likely to get impatient and switch to something that is likely to "move". He will show no such impatience in a property transaction where the average holding period is well in excess of five years. That's why the very same people who make money in the property market lose in the stock market.

4) Temperamental mistakes - The biggest mistakes most investors make are temperamental in nature. For example, after having made a mistake, most investors compound it by refusing to sell at a loss thus blocking their capital in a lousy stock when other fantastic investments can be bought at bargain prices. Another temperamental mistake most investors make is their promptness in taking profits. This type of mistake alone keeps millions of investors from getting rich. If you doubt me, just ask any investor who bought Bajaj Auto, Colgate or Castrol shares in 1980 and sold at a profit in 1985.

Another common mistake is investors' inability to ignore market fluctuations.The market may ignore business success for a while but will eventually confirm it.

So steer clear of these mistakes and you will do much better with stocks.

PS : I would like to acknowledge Dr. Sanjay Bakshi whose writings(like the ideas mentioned here) have helped me learn a lot about the markets and i hope to learn a lot more and share the same.

Happy New Year 2009

2009-01-01T09:48:00.002+05:30

Here's wishing you a very happy,eventful and a financially aware new year :)

Contra Call : Satyam

2008-12-30T00:25:00.004+05:30

I had mentioned this on twitter ,Satyam is offering an arbitrage opportunity.Its ADR is at about $8.5(ADR:ADS ratio is 1:2,so that's $4.25 =Rs. 204 ) and its selling on the NSE around 140.
I had bought some at 160 odd levels and then again at around 130 levels.Expect this stock to do well if you can withstand all the negative news and views and hold on for an year or so.Accumulate on steep falls.This is largely a contra call.I just love them. The last one was orchid chemicals and the one before that was reliance power.Decent returns.

A good book to start off with

2008-12-22T22:08:00.002+05:30

Even though most of you will be just happy to invest in a mutual fund (i am hoping an ETF :) ) and concentrate on your day jobs,there are i guess a few who would be interested in learning about stock picking.Not professionally may be,but just as a hobby.

There is no better teacher than a good book,me thinks. I will not burden you with a big list of "must read investment books" that i find in most places,rather we'll start off with just one for now and as we keep learning i will post about other "must-reads".

Go and buy "One up on Wall Street" by Peter Lynch. You can actually buy it off the street, but i wouldn't want to encourage piracy on my blog :) Either way its a good investment.

One of the first books i read on investment and i loved it.The author "Peter Lynch" is one of the most successful fund managers of all time.

He talks a lot about how we can use our "common sense" to become better investors.He also explains a little bit about different types of stocks such as growth, cyclical, and potential turnaround situations etc with a special emphasis on discipline such as rechecking your stocks every few months and not panicking when everyone else is selling.

Read it and you'll be a much smarter investor.

Which mutual fund should i invest in?

2008-12-18T22:47:00.003+05:30

Another question constantly bothering investors is,which mutual fund to choose? Should we go for the one with the best record or the one that has a low NAV ? Should i buy two different mutual funds or five different ones? The answer is simple if you agree to my previous post and have decided to start a 25 year long monthly SIP.

Buy an ETF. An Exchange Traded Fund.

I wont be a bit surprised if you haven't heard of it because no stock broker will ever tell you about these funds.Why? Because it makes them no money.

An ETF is basically a fund that will invest in the Nifty(a collection of India's top 50 stocks) or the Sensex(A collection of India's top 30 stocks) in the same proportion as the index is constructed.Lets not get into the intricracies of how an index is constructed rather just remember that your money will go into all of India's top 50 or 30 stocks depending upon whether you choose the Nifty or the Sensex.What you choose among these two is immaterial over the long term since they generally move in tandem.I will assume you chose Nifty.Now these 50 stocks will be evaluated every quarter or so and if some company is not performing well it will be thrown out of the index and a better company will take its place.Your money will now go into the better company.

The ETF will generally give you returns very close to the broad market and over the long term is as good as any other mutual fund and much less risky since it sticks to investing in blue chip stocks.An ETF requires no stock research by any fund manager since all it does is just invests your money in the country's top 50 stocks.There for the fund expenses of an ETF are very low,of the order of about 0.5% of the money invested compared to other funds that charge about 3 % load.

Now the question is if no body does any stock specific research to choose stocks for you how is an ETF as good as any other mutual fund. The secret lies in the fund expenses.

Let me show you how.

Assume you are sticking to the SIP we spoke about.5000 bucks per month for 30 years at 15% per annum.Lets look at what happens now:

Your XYZ mutual fund
----------------------

Invested money - 5000 x 12 x 30 =18 lakhs
Fund expenses - 3 % every month
Actual invested money (approx) - 17.46 lakhs
After 30 years you have - 33997630

ETF
-----

Invested money - 2000 x 12 x 30 =18 lakhs
Fund expenses - 0.5 % every month
Actual invested money (approx) - 17.91 lakhs
After 30 years you have - 34873858

The difference =8.8 lakhs

The mutual fund is robbing you of 8.8 lakhs and you had no clue did you.And this is just a simplistic calculation.You lose a lot more money on brokerages due to the constant reshuffling of your portfolio by your fund manager.An ETF on the other hand if reshuffled only if there is a change in the composition of Nifty which happens only say one in six months or an year,that may be just a couple of stocks.

And the more you invest per month,the more you lose in the ABC Mutual fund.

This simple fact escapes almost all mutual fund marketing campaigns.No one will tell you this because if they do they'll have to shut down their business.A testimony to this is the fact that there is only one ETF in India to my knowledge :

http://www.benchmarkfunds.com/

So if you do want to go for that SIP make sure its an ETF.

Some of the world's greatest investors like Warren Buffett and John templeton have time and again spoken about ETFs and they are quite popular in the US but i guess India still has a long way to go before investors start making informed investments.

So be that informed investor you never were. Think mutual funds,think ETFs.Period.

How much should i invest in stocks?

2008-12-17T23:21:00.004+05:30

A lot of people i know are very confused about how to go about investing their money.Usually they end up investing in a very random manner.This can leave you feeling very disillusioned,especially if the investment has lost money in the short term.

A lot of people might be undergoing this feeling of disillusionment right now considering how the market has tanked and how people have lost half their wealth in a matter of months.

I wont go into the details of investment planning but will give you general rules of thumb.

1) Have objective short,medium and long term financial goals."I will buy a car in an year." , "I want to go around the world in about 6 years ", "I want to own a restuarant when i am 50" and so on.You will have a fair idea about much money you need to have when the time comes and what exactly are you going to do with it.Once you know how much money you need you can plan much better and achieve your goals far more easily.

2) This is how you should allocate money :

a) Short term goals - Here "Cash is king". Any money you might need within a year or 18 months better be there in your savings account.There is no way you can risk losing your money by investing it in equities and although short term FDs,bonds etc are available the returns over an year will be very nominal and you wont have liquidity.

b)Medium term goals - Invest in FDs,NSCs,government bonds et al. Basically you cant trust stocks over the medium term too and you would do well if you stick to sure shot returns.So if that world tour costs 5 lakhs,assuming a return of about 7% for your investments you would need to invest about 3 lakhs for a 6 year period.

c)Long term goals - Now the fun part begins. Nothing, just nothing beats equity over the long term.If you really want to make your investments work for you,stay invested in equities for a long long time and you'll end up a rich man.To give you an example,if you start investing Rs. 2000 in a monthly SIP exclusively for your retirement(say after 30 years) and you stick to this simple SIP all the way.Assume a return of about 15% per annum,which by the way is conservative considering India's growth story,when you retire you'll have,any guesses? :

Rs. 1,40,19,641

That's right,about 1.4 crores for an investment of 12 x 2000 x 30 = 7.2 lakhs.
That restaurant does'nt look that elusive now,does it.

That is the power of compounding and the power of equities.No other asset class can give you returns averaging around 15% for an extended period of time.

Moral of the story - Don't trust stocks with your money over the short/medium term.Invest in stocks only that money which you won't need for a long long time.And you won't be disappointed with the results.

About what the best funds are for long term equity investments,in another post.

Update Trade - Television 18

2008-12-17T22:54:00.003+05:30

The trade didn't work out as expected and would've hit our stop loss at 87.But i still think the stock is bullish and worth keeping a watch on. Will keep an eye on this one.

Satyam would've been a good buy today and may be still would be tomorrow considering its ADR jumped about 33% within minutes of opening at NYSE.The business remains intact now with the Maytas deal being called off so market should eventually revalue it back to saner levels.Satyam has lost investor's trust though and very understantably.

Trade - Television 18

2008-12-16T23:19:00.003+05:30

If the broad market is positive tomorrow,one can consider buying TV18 for a short term trading position.

CMP - 88

Buy above 89

Stop Loss - 87 (While trading, if you know you are wrong, get the hell out.Therefore a narrow stop)

Target - Ride the trade if its in your favor, but with trailing stop losses.

Hello

2008-12-16T19:57:00.005+05:30

Hello there,Welcome to my new blog. This blog will contain information on :

1. Investments
2. Learning
3. Trading

I will post about potential investment ideas,a little bit about personal finance and interesting stuff about money that i might read elsewhere.

I am no genius myself,still learning as much as i can about "good asset allocation for long term capital appreciation". That incidentally will also be the motto of this blog. :)

Free advice rarely benefits anyone, so please do your own research before acting upon any of my suggestions.

I hope to keep this blog going for a long time.