How must you plan your Investing

You could be investing, keeping in mind the different goals that you have . Your goals could be Short,Medium or Long term in nature depending on the time you have in hand to finally reach your goal

But, no matter what kind of goals you may have , your investment must be spread across different investments type or very simplistically must be spread across at least Debt and Equity.

• Short Term Investment Horizon ( 1 year )

            Debt : Bank Fixed Deposits and FMP and Balanced Funds

            Equity : Large cap Focused Diversified Equity Funds

• Medium Term Investment Horizon ( 3-5 year )

           Debt : Bank FDs, Corporate FDs , Debt Mutual Fund

           Equity : Large Cap and Mid Cap Focused Diversified Equity Funds

• Long Term Investment Horizon ( > 5 year )

         Debt : Bank/Corporate  FDs,PPF/PF,Long Tenure Bonds

         Equity : Large Cap Focused Diversified Equity Funds ,

                     Mid/Small Cap Focused Diversified Equity Funds

                     Direct Exposure to Equity.

You can add Gold to all of these for stability .

As the saying goes, "Failing to Plan is Planning to Fail" , so lets be prudent and plan

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Why is Investing important

If you have been able to save money and have been able to spend less than what you earn, that is great, you have taken a tiny step towards wealth creation, since you could never have hoped to create wealth by spending more than you earn.


The question that now begs to be answered is, is just saving enough.

Let me explain

I usually have Idlies for breakfast, about two years back my breakfast costed me Rs.10 and today the same breakfast costs me Rs.14.

Now If,

· I had saved Rs.10 as cash, I would have found after two years that my Rs.10 would no more be able to buy me the breakfast.

· I had kept this Rs.10 in a savings bank account that which gives me a interest of 3.5 % a year, I would have got Rs.0.35 the first year and another Rs.0.35 the next, so ideally I would have ended up having Rs.10.70, which would still not buy me my normal breakfast.

Which just shows that, saving thought extremely important is just not sufficient, it must be backed by a push to invest, else rise in Prices (Inflation) eats into our purchasing power, reducing the value of money.

If you see all great wealth creators, the one consistent thing you find is that, they have learnt to make their money work harder, they have learnt, left on its own money would start loosing value hence it is a far better proposition to convert money into Stocks, Bonds, Real Estate, Businesses, Gold, etc.

Do work hard , but also learn to make your money work harder .

Rupay

I had written in my article Indirect lesson from Wiki Leaks  about the risks involved on our over dependence on VISA and Master Card , to process our card transactions .

If you like to know more about, how VISA and Master Card work , please read this

National Payments Corporation of India , has finally woken up to this risk and has come out with a India specific card transaction gateway and has named it "RUPAY"

This is a good move, once formally launched , hope all our Nationalised and Private banks would enthusiastically adopt this , especially for the Debit Cards and Non international Credit Cards

This must see significant revenue saving for the banks , if NPCI , prices this service very conservatively .

Only risk involved is, will NPCI be able to stand up to the arm twisting that most of these MNCs resort to , using their government , when they find their dominance challenged in a foreign market .

So in this customer driven market . If we as customer demand that the Banks Issues us cards based on "RUPAY" , we may then give "RUPAY" a fighting chance to survive and thrive .

So watch out for the formal lauch of "RUPAY" .

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Warren Buffett in India

Warren Buffett the legendary Investor, one of the richest individuals on earth , philanthropist, the "Demi God" of value investing will be in India .

Having picked up a stake in Bajaj Insurance and the shrewd businessman that he is and knowing fully well that Indians buy a Insurance policy for all the wrong reasons , he has made an irresistible offer

"Buy a policy on BerkshireInsurance.com and get invited to meet Warren Buffett"

Want to meet this legend , go right ahead and buy a insurance policy at BerkshireInsurance.com

Business Magazines on the net

Reading is a inseparable part of investing .It is impossible that we can be good investors without reading. Reading may help us to spot investing opportunities , help us to learn from other investor's mistakes and help us to learn about new financial products like say ETF/DVR which did not exist may be about 5 years back .

Here is list of Business Magazines ,which focus of Personal Finance and Business and which are Online too

Forbes : http://business.in.com/

Outlook Money : http://money.outlookindia.com/

Money Life : http://www.moneylife.in/

Money Today : http://businesstoday.intoday.in

Outlook Profit : http://www.outlookprofit.com/

ET Wealth : http://economictimes.indiatimes.com/etwealth.cms

Business World : http://www.businessworld.in/

Are these your reasons too

I keeping speaking to lot of my friends and colleagues , about investing and i see a whole set of reasons for NOT investing , let me list a few

• I have no idea how to go about Investing. may be i will learn to invest and then start
• I would start investing , when my financial situation gets better
• I would start investing after i have saved , some X amount
• I have no time , work and family takes up all my time

 I would say all these are flimsy reason not to start investing .

Yes, you would need to know what you are investing in, you would need to be knowledgeable , but then it is something that you ought to do along your investment journey.

There would never a point in your life , when you would feel that i know enough , nor would you ever feel that i have enough money now and let me start investing .

So start off investing how little it may be , make adjustments and more knowledgeable investments as you go , it is important to build the momentum for investment and let it help you build knowledge and the mindset

Very Senior Citizens

This time around the Annual Budget had a interesting thing to offer , the Finance Minister (FM) has created a new category of citizens called "Very Senior Citizens" and the age limit for this, has been set as 80 years

In a country like ours where there are so few facilities provided by the government for the senior citizens,this is a welcome move by the FM

The FM has made sure that this category of citizens do not have to pay taxes for taxable income upto Rs.5 Lakhs , this limit was earlier half this figure at around Rs.2.5 Lakhs .

I'm not sure how many people really benefit from this , as the percentage of population above the age of 80 must be very small and a miniscule percentage of that, may probably be earning above Rs. 5 Lakhs a year but none the less a good move by the FM

The FM also reduced the qualifying age for senior citizens from 65 to 60 , so someday hope he will also reduce the qualifying age for Very Senior Citizens from 80 to 75 ,which may be a more appropriate qualifying age

In these times of high prices and uncertain interest rates , any change that helps our Senior Citizens is a welcome move

Rs. 150 Coins Will Be Here

On the occasion of  taxation in India being 150 years old , the finance ministry would be releasing a Rs.150 rupees coin .

This would be the first time that Rs.150 denominated coin would be released and only about 200 of such coins would be released

So in case you happen to lay your hands on one , make sure you do not spend it and hold on to it , as someday it may be worth a lot lot more.

As a tax payer not really sure if this is a occasion to celebrate , it could be,  if i could get hold of one of these new coins

MOAT

A MOAT is a deep, broad ditch, filled with water, that surrounds a castle and it would contain not just water , but there could be crocodiles and snakes in it too. The intent of having a moat was to keep away the enemy or to make sure that the enemy has to try really hard and has to encounter lot of casualty to reach the castle and wage a war against a empire.

In modern age there are no empires , just that , empires have been replaced by Business Empires .

Every modern day business dreams of creating a "MOAT" around it , so that

• It is not too easy for somebody else to start a similar business
• Even if somebody did start a similar business , they cannot price the product as profitably.

a MOAT can be any competitive advantage like

• A extremely well recognised and customer loyal Brand ( Nestle,TITAN )
• A Financially intensive business , which needs huge investments ( RIL )
• A massive distribution network ( ITC, HLL, GAIL )
• A High technology industry protected by Patents ( Bosch )

Look for companies like these ,because of the MOAT that they build around them , they can keep competitions away , and hence can have better profit margins.

And we have found that companies with MOAT do return phenomenal return , if investor has the patience and conviction to stay with them

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Chanakya ...On Governance

This is a amazing episode from Chanakya .Please do watch the entire episode .

Today were are confronted with very high levels of corruption in public life  and in this episode we see that a student of Political Science is asked question about governance

When asked "Whom should we protect wealth from ?"
The student answers "Wealth must be protected from Thieves and Nobel Men "  

Nobel men ...our current day politicians , ministers , chief ministers .

When the king, annoyed by his answers asks the student , "As per the scriptures , what is the position of a King ?" ... to the utter astonish of the king the student answers " King is nothing more than a salary drawing public servant "


These very same questions are something which current day people in power find it hard to come to terms with.

There is a saying "Power corrupts , and absolute power corrupts absolutely" to be in public life and maintain a high level of integrity is not a joke

I think another way for people in public life to be dispassionate , would be to be spiritual and keep reminding one self of these words from Adi Shankaracharya from his "Bhaja Govindham"

"maa kuru dhana jana yauvana garvam harathi nimEshaath kaala "

Meaning :
"Do not be proud of wealth, friends, relatives and youth,when your time( death ) comes you would lose all of this in a moment"

Our political would not have to look far to know this , death of AP chief minister Y.S.R is all that they would need to remember.

 In this age of greed , there is only one way to be happy ...
"Contentment is better than Riches"

The illusive wealth

In Hindusim , the benevolent goddess of wealth is "Goddess Lakshmi" and every picture of the goddess you would come across would picture the goddess either standing or sitting on a Lotus , a symbolism for how carefully she needs to be taken care of .

Have read a lot about people who win lottery or who have come to suddenly inherit a fortune and have found them self unable to handle this sudden wealth and let it slip through , We also find with lots of celebrities from world of sport and music , they find them self simply incapable of handling wealth.

This is just not only with individuals but also about companies and businesses . Here is a list of companies in BSE Sensex 1986,

ACC, Bombay Dyeing, Ballarpur Industries, Ceat Tyres, Century Spinning, Food Specialities (now Nestle), Great Eastern Shipping, GSFC, Glaxo,Gwalior Rayon (now Grasim), Hindustan Aluminium (now Hindalco), Hindustan Lever(now Hindustan Unilever), Hindustan Motors, Indian Hotels, Indian Rayon, ITC, Kirloskar Cummins, Larsen & Toubro, Mahindra & Mahindra, Mukand, Pieco Electronics (now Philips), Premier Automobile, Reliance Industries, Siemens, TELCO (now Tata Motors), Tata Power, TataSteel, Voltas, Zenith.
This list was from here

These were cream of the stock market in 1986 and we find that in 25 years , we find that only 15 of those companies are still considered to be good investments .

This means that in about a generation 50% of the companies have not been able to generate wealth in a manner they were expected to or have lost wealth.

It is not just about individual companies , we find entire sectors have fail to generate wealth, like textile and totally new sectors, like IT have generated phenomenal wealth.

So challenge in wealth creation ,is not just about creation but also about sustaining wealth . and only thing that can help you to sustain wealth is "Knowledge"

Are Market Crashes bad ?

The Indian stock market has been on a downward path for sometime now . Every time i switch on CNBC TV18 i see Udayan Mukherjee sitting there with a dud face saying "It has been a bad day for the markets"

Are Market Crashes really so bad ? ... think not .. for these reasons

i) Had the conviction to buy a stock at a higher prices , isn't it now available at a discount

ii) Lower your average purchase price by buying more at a lower price

iii) Dividend yield would be better if your average purchase price is lower

iv) Have a SIP ? , then you must be happy that , your SIP amount would now buy you more units

v) Did not buy a certain stock as it was pricey , now it should be available at lower price

vi) Buying for the long term , buy the crashed blue chips during a market crash

I would reiterate , what i said earlier , money is made when you buy , so buy at the right price .It is during the panic of a crash that you start seeing stock priced at a bargain . But to be able to buy during a crash, you would need to be prepared . Be prepared with the money , prepared with the list of stocks to pick and also prepared with, at what price to pick .

So start preparing for the crash that is impending

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Coinage and Cannibalization

As weird as these two words may sound , these are two terms from Consumer Goods Industry .

Coinage:
In India when a quick single bite chocolates are launched they are usually for Re.1 or Rs.2  or may be Rs.5 ,have you wondered why. Well this is more to do with Reserver Bank of India .

The reason is because we have currency coins of those denominations . That puts these companies in a fix, as they cannot change price from say Rs.2 to Rs.3 , as doing so would be disastrous and they would immediately lose market share. So either they would need to reduce size of the chocolate or try some other internal cost cutting mechanism

This constraint where the product price need to match the denomination of a currency coin is called Coinage

Cannibalization:
This term has nothing remotely violent about it . This term is used when a certain new product launched by a company starts eating into the market share of another product of the same company . Net result,company sees that sales of its new product has increased but it does not see any increase in its profits and later realises other product has lost market share to its new product

This is a nightmare for any company as the intent was that the new product was suppose to take the market share from its competitor not from its own product

Shariah index

Shariah is the religious law of the followers of Islam this guides their normal day to day life and also their investment decisions . Shariah prohibits "believers" from investing in companies dealing in alcohol, financial services as they earn by lend money and charging Interest , tobacco,entertainment (cinemas),pork,weapons.

This would mean , a whole range of companies are "Haram" for the believers , these includes companies like ITC,United Spirits,All our Banks , Housing Finance companies and lot of other companies.

So Shariah Index would be a index of companies listed on our stock exchange that conform to the tenets of Shariah Law

The Shariah Index would give a chance to the followers of Shariah law a chance to participate in the Indian stock market , if they so desire.

S&P CNX Nifty Shariah is a India based Shariah Index , know more about this Index and ETF based on this Index here

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CHITRA SANTHE

This is the annual road side painting and craft exhibition and sale organized in Bangalore .It is an amazing site to watch hundereds of artists from all over India , come to bangalore and setup stalls . Read more about this here

The road would be closed for traffic and it is wonderful to see people buzzing around watching the paintings , buying some , kids getting their face and arms painted and people also getting their portraits done . I joined in and got my portrait done , in flat 15 minutes ..

It was good to see so many young people willing to make career out of art . I'am always fascinated to see the astonishing sculptures in many of old Indian temples , but one thing that we miss to see is that , those temple were created during times of stable , prosperous and wealthy empires . Feel that , when the society is wealthy and prosperous enough to see beyound mere survival it starts to appreciate art and music .

So we as a society need to make sure that , as more bigger and stronger we grow economically , we also try and learn to appreciate our art and music . and also see to it that people can make a living following their passion in art and music .

ATM usage

We had heard of numerous instances , where the ATMs were misused by fraudsters. The modus operandi was to try and pull out cash when the card holder has left the ATM , after entering the the PIN, thinking the ATM was faulty .

RBI has now made it mandatory for banks to incorporate extra safeguards in ATMs , it has made it mandatory that the PIN has to be entered every time a transaction is done . Earlier it was possible that we would enter PIN once and could withdraw cash multiple times , now that is not possible. This is a good move by the RBI.

One of the best practices in ATM usage would be, once you have finished using the ATM and have been again brought back to the welcome screen or any out of order screen  ,make sure you press the Cancel button a couple of times this would prevent any misuse of already entered PIN.

ATMs could still be prone to other kind of frauds , so be cautious

Balance Sheet and P&L Statement

Balance Sheet and the Profit & Loss statement is suppose to describe the financial health of a organization . To put it very simplistically it is suppose to explain these

Income/Expenditure and Asset/Liabilities

• Explain how much did the company Earn and all sources of its Earnings
• Explain the Expenses incurred and all sources for its Expenditures
• Explain Assets that the company has created
• Explain Liabilities that the company would need to take care off.

Valuation
Explain how has the company valued it Assets, Intangible Assets and Liabilities

Disclosure
The risks that company sees to its business and hence to its earning prospects and any other problems and issues that the management foresees

As simple as this may sound , it is not , as we have seen in case of Satyam in India and may be Enron in US, the management is uncomfortable keeping its accounts as pain and simple and finds ways to distort facts, when all that is expected of them is to be unambiguously clear about the above mentioned three pieces of information

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Market Capitalization

We keep hearing the term "Market Capitalization" , also called Market-Cap , what really is this and how do we categories companies based on Market-Cap

Mathematically , Market Cap is the Price of a Single Share of the company multiplied by Total Number of shares issued by the company

                      ( Price of Single share ) x (Total Number of Share ) 

Well , in business sense , this can be constructed as , the price a person needs to pay , if he would like to buy the entire company or it can be constructed as the the price the market thinks in all its infinite wisdom , what the whole company is worth

Based on the total price that is reached , companies are classified as

• Large Cap
• Mid Cap
• Small Cap 

Any company with valuation in excess of Rs.1000 crore is labelled Large Cap and Any company with valuation of less than Rs.500 crore is labelled Small Cap , and all companies in between Rs.1000 - Rs.500 crores as the Mid Cap.


The Market Capitalization could also be used to see if a company has been undervalued. This could be done by something called "Replacement Cost Analysis". Suppose it would cost far greater to build a company of certain nature and scale compared to the  market cap of an existing similar company , then it is considered as under valued company and possible a candidate for further study with intend of investing

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Behavioral Finance

"Behavioral Finance" , is more of a science and art  then finance , it deal with the behavioural aspect of  humans, in the context of finance . it tries to explain things like

Why in a bull market investor is willing to sell  the winners in his portfolio , when he clinches on to the looser


Why is a investor in a bull market willing to buy when the valuations are high  , but is uncertain in a bearish market  , when the same stocks are available at attractive discounts.

Why do even knowledgeable fund managers get caught up in the herd mentality and take bets on already very pricey stocks

Fear and Greed are the emotions that makes the market what they are ,extremely unpredictable and highly irrational .

In the Indian context , i can say that the greed of few like Harshad Mehta, Ketan Parikh , have caused far more fear among the investor .

So stock markets end up being a function of human mind and emotions rather than financial fundamentals


In India, Parag Parikh is a proponent of Behavioral Finance, with a couple of books to his credit . you can watch and read more about Parag @ ppfas.com

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Inflection Point

Andy Grove of Intel in his book speaks of  the "Inflection Point" , Inflection Point is a point in time , when a company realises that it could no more survive profitably doing what it previously did and has to start thinking out of the box . And for "Intel" this realisation came very late , when it had already lost significant market share to cheaper and better Japanses products.

But there are companies , which have the forsight and vision to see this "Inflection Point" coming their way decades before it has actually arrived, one such company in India is ITC

ITC , as the name suggest "India Tobacco Company" started off as a one product company , it was all about cigarettes , they were , are and will be the indisputable leaders in this additive category .

But the management had/has vision , they saw problems coming from multiple directions , higher taxation , increasingly health conscious public , tighter government policy on smoking and started diversifying and today has a product portfolio that is staggering and awe inspiring.

Similarly 2010 was a year of  "Inflection Point" for the Mutual Fund Industry , when the SEBI removed the entry load , which was used to pay the MF agents , thus forcing the agents and industry to thing of more creative and innovative ways to do business .

2012 would be a year to watch out for, with DTC ( Direct Tax Code ), it could be a "Inflection Point" for individual investors.

It is said in times of great uncertainty , wealth is transfered from the unprepared to the prepared . So use 2011 to prepare for the "Inflection Point" that awaits you in 2012

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