rags2riches

C A N S L I M

2005-06-07T11:03:00.000-07:00

CANSLIM is a popular method of screening stocks for purchase developed by William O'Neil in his book "How To Make Money In Stocks".

Here are the highlights of the CANSLIM strategy:

C = Current quarterly earnings per share.

Buy companies with the largest increases in quarterly earnings compared to the same quarter last year.
Bigger is better!(quarterly earnings jumps of 70% or more.)
The minimum acceptable increase is 18%.
Avoid stocks with tiny year-ago earnings (huge increases don’t mean much if you're comparing to a miniscule year ago number.)

A = Annual earnings per share.

They should show meaningfull growth for the last 5 years.(Consistent annual growth rates of 25% or more.)
Make sure forecast earnings for next year are in line with the historical growth rate.

N = New.

Buy companies with new products, new management, or significant new changes in their industry conditions.
Buy stocks as they initially make new highs in price.
No cheap stocks -- they are usually cheap for a good reason.
Forget the natural tendency to buy stocks after they have gone down in price—Buy when they are at new highs.

S = Shares outstanding.

They should be small or of reasonable number, not large capitalization, older companies.
Stock prices move as a result of supply and demand for the company’s shares. If there’s not many shares in circulation, a small amount of buying could push prices up quickly.
Buy companies with 5 to 25 million shares outstanding.

L = Leaders.

Buy market leaders (in terms of stock prices), avoid laggards.
Buy stocks that have outperformed at least 80 percent of the rest of the market during the past year.
Buy the company with the best performing stock in its industry.

I = Institutional sponsorship.

Buy stocks with at least a few institutional sponsors with better than average recent performance records.
Institutions are mutual funds, corporate pension plans, insurance companies, etc.
Look for 5% to 25% institutional ownership.

M = The general market.

Watch the daily general market indexes (price and volume chages) and action of the individul market leaders to determine the overall market's current direction.
Very few stocks go up when the market is going down. Buy only when the market as a whole is going up.

Warning: Sell Fast if Stock Drops

For CANSLIM stocks that are going down instead of up, sell them immediately after they drop 8% below your purchase price.

Readers are invited to comment their views on this method.

PIT-IPOs - Reader's Choice :The Theory is Modified!!!

2005-04-11T21:57:00.000-07:00

Thanks to the readers who gave their comments for my previous article and got me seriously thinking. I have not written in vibe for the past weeks just to figure out how should I convince the readers or should I get convinced by them? Well, at the end, the market has taught me. It's finally the market that will drive all our decisions. Let's elaborate the same.

Currently, the Allahabad Bank I(S)PO is running and on the first day itself it got subscribed fully at the higher end of its price-band. This takes me back to December, 2002 when Allahabad Bank came with its original IPO. They came with a fixed price and that was at par. Can you believe this ? Within two and half years the price has gone up by NINE times. But here the price is not an issue, the issue is how the original IPO was, compared to this I(S)PO of the same Bank.

Well, as far as I remember in those days the market trend was bearish, and was just at the starting point of a bull phase. The government announced favourable recovery policies for the banks, and Canara Bank had already announced its IPO. Then came the Allhabad Bank IPO. The IPO was just subscribed fully hardly 2 times and you can understand that when an IPO is subscribed only 2 times overall, the retail segment must not have been subscribed fully. That suggests, all the retail investors got what they applied for. One of my friends applied for 200 shares(the minimum, total Rs. 2000 - can you believe this ? Today the same company's I(S)PO requires minimum application of Rs. 6000+, that in-turn suggests it is a bull market and the previous phase was the bear), and he got the firm allotment.

Consider if he applies today again with the minimum required no. of shares, will he get any? We all know the answer and that was the question raised by the readers too. I believe, the theory Portfolio Investing Through IPOs(PIT-IPOs) should have one important clause added:
It will work best during the bear market.

Now, I believe the readers will agree with me, and hopefully we shall be creating more wealth by applying for these PIT-IPOs during bear market. As this must have happened to all those who have invested in IPOs during 2002-2003. Now, the time has come when we should rest-atleast for the IPOs and wait for the bear again. This should give us great wealth creating opportunities. Well, few on the street have already started predicting the same - but we feel the bear is still a year or two away.

IPO's (contd...)

2005-03-09T00:03:00.000-08:00

After the last week's PC's gift, we are now back to our IPO adventure. We said that now we will only invest in IPOs (and that too only for the long term ) once we have taken full benefit of the new Section 80C, ie we will use Rs. 100 thousand for Tax Savings and what is left over will be put into IPOs/Equities.

All financial experts advise you to follow what is know as the "Portfolio Theory to Investing". We are not going to discuss the way they treat the Portfolio Theory, but it's a simplified "Vibe" version of Portfolio Investing Through IPOs. Well I should ask the ED to register this as it's a completely new Jargon for Personal Finance. So, what's this PIT-IPO Theory all about?

Well its simply about creating your own Equity Portfolio through IPOs over a long period - ie. over 5-15 Years. Yes, this theory will be applicable only for investment over these long horizons and you can only benefit from it, if you keep your investments till then.

So what's the theory ? I would put it like this:

Select the 5 sectors you love, or you feel has the potential to grow with you (As you grow older they will flourish). eg. if someone asks me which sectors I love the most, well my first two choices are straight forward- ( The reasons are more personal than logical for me, but you can also derive a logic out of it )- I love IT Services and Banking - the plain and simple reason being that I work for an IT firm and my father is in Banking! If someone asks me for another three sectors they would be Telecom, Retail and lastly Apparel (clothes, jwellery etc). Your list can differ with mine, but do have your own list with you. Ask yourself "if I were to leave my current Industry, then for which Industry would I like to work?" If my industry has to grow then which other industries have to grow or which other industries will grow ? Which industry excites me ? and so on..... I bet all the questions above fulfill my loved industries.

So you have selected your industries, now what ? Start looking inside those sectors and find out which specific companies you like the most ? For the moment forget the WHYs. Yes, that will come later but for the time being just identify atleast 5 companies in each sector. At the end of it, you will have a list of 25 companies which you love the most among your loved industries. I am damn sure that whatever companies you have found, the majority of them are already listed and perhaps none is planning to come up with IPOs very soon. In my case, I am lucky. Specifically for the Telecom Sector, as only three Telecom players are listed and the rest 3 will come out any time this year.

If you have selected 25 companies out of which 15 are already listed than what to do ? We would say "wait" for the other 10 to come to market with their IPOs. WAIT!!! Remember, what the Oracle from Omaha says ?

Whenever an IPO comes from any company which operates in your loved industry, look for the reports related to them, or mail a query to rags2riches (we may not publish it, but we may try to clarify and tell our views to YOU). This may help you to come to a decision. And once you decide to invest in an IPO, put the maximum you can. But what is this "maximum"? Well if you are following PIT-IPO then you will have to balance your portfolio among the Five Sectors you love the most. Put your money in such a way that in two years time you have your total PURE Equity investments spread across each sector at around 15-25%. Try to play within this band.

Another thing to keep in mind for PIT-IPO is you will be investing "only" in IPOs and in this portfolio you will not blend the Secondary Market. That's important for getting the best out of this model. Keep all your secondary market investments for a different model but DO NOT blend it with PIT-IPO.

I will not conclude today's article, as I have to verify my Theory first! And what better way than to ask Vibe readers to contradict the same. I would love it if few out there support or even contradict me about this Theory. Hoping to hear from you all.

-jk sherdiwala

After PC's Budget...

2005-03-03T01:18:00.000-08:00

I was planning to continue with our exploration of IPOs, but now with PC's budget proposal, I thought it better to put together things related to the Budget'05 for all of you out HERE in India. So, what if I have to stop a series and put this. We'll go ahead...

PC has really done a great help to India by allowing "Investment" for Tax-Saving and not just Savings for Tax-Saving. Yes, if you look at our Economic Survey, one thing we should take pride in is that our savings rate has gone up to 28%. It's a good sign but still we are lagging behind our dragon friends who save around 40%! But that is not the issue, the concern for many economists is that our savings rate is 28% but our investment rate is 26%. What's the big deal in that? Well, in simple terms we can put it as: the 2% gap is the money going outside India- "Our" savings are being used to invest "outside" our country. The important thing from the economist's point of view is, "investment" matters much more than pure savings.

After this grave economic theory, :-) let me come back to the main point of this issue and that is how your investment decisions shall change if PC's budget proposals are accepted by the Indian Parliament.

What are his proposals? Well, you all must have learnt by this time that your tax savings limit is now Rs. 100 thousand. There is nothing much on the face of it. Even at present we have tax savings limit at Rs. 110 thousand. Then, what is the excitement all about ? It's this; now you can save and invest "wherever you want" without any specific cap and the best part is, like every businessman who gets Tax Benefits for investing in his or her business you will also get the same benefit for your investment!

What this means is that simply put, any amount upto 100 thousand that you invest, will not be counted as your INCOME. ie if you fall under the highest tax bracket (30 %) then you can save 30 thousand from your TAX liability.

So what good is 30%. Well, here's the Vibe Challenge to you all: Show us "one" existing investment where you can get 30% with NIL risk! Impossible? Well that is what PC has given us and now its our DUTY to make maximum benefit out of it.

I believe we should work it out as follows:
First invest a 100 thousand for saving your taxes and after that if you have anything more put it in pure STOCKs and IPOs; but first, just invest to save your taxes.
A much better thing to do is to put it in pure STOCKs whatever you save in TAXES .

Here is my model portfolio to take full advantage of benefits given to us by PC. ( I am assuming that
> you are earning Rs. 400 thousand in all
> you can save a 100 thousand from that and
> you want to buy a Handy Cam by April, 2006)

1. Invest 20 thousand in your EPF account. (A safe bet for your retirement, which comes with NIL risks and till now ZERO taxes)

2. Buy a pure insurance product (in India it is known as a Term Plan) to secure your life for your dependents. Choose a plan for which you have to pay a premium of about 5 to 10 thousand. Remember this is pure cost and NIL investment. As these plans just cover risks and do not give any return, rather they eat up what you put in them. But it is very important to take these plans if you have dependents.

3. Here is my favourite: ELSS. In one of the previous issues I have talked about them. Now PC has allowed you to invest upto 100 thousand in them. Put around 4 thousand in them EVERY MONTH. A better thing is to take two seperate ELSS plans from two different mutual fund houses and join in their Systemetic Investment Plans (SIPs) and invest in both of them 2 thousands each. This shall earn you a return of 15% over 3 years (which is the lock-in period of ELSS) CAGR.

4. Now, what ever is left, put it wherever you can. I advice you to put it in debt but if you want better returns put left over money too in ELSS. Those who want to play safe should invest in any of these: NSS, NSC, PPF, Infrastructure Bonds, Bank Deposits (Yes, you can even invest in banks and claim Tax Relief), Company Deposits etc. Choose the investment by considering when you will need that money. The higher the period of investment the higher the return.

5. Buy a Handy Cam in April, 2006. But how ? Well you already have 30 thousand extra which you have saved from taxes. Use it either to INVEST in STOCKs or just buy that cute little Handy Cam. Well this is what experts call financial planning.

And dont forget to thank PC for your Handy Cam. :-)

ciao

-jk sherdiwala

2005: The year of the IPO

2005-02-27T20:43:00.000-08:00

India is booming..... Indian stock markets are booming.... our economy will grow by around 7% (higher than your Fixed Deposits).... and Indian companies will grow by 15% on an AVERAGE. Everything is on the positive and even the Congress is using BJP's slogan "Bharat Uday", only that they are caling it "Uday Bharat". So, many companies have chosen this time for their IPO (Initial Public Offering) and are looking at the Stock Market to help them in their UDAY (dawn).

As many companies have lined up to tap the PRIMARY MARKET (In stock market jargon, when you buy shares without intermediaries like stock exchanges and brokers, it is known as the Primary Market, and when you use them it is the Secondary Market). You can view the list of companies (http://www.sebi.gov.in/Index.jsp?contentDisp=RcIndex) who have already submitted their Draft Red-Herring Prospectus to the Regulators (for India its SEBI for the US its SEC) and you will surely be excited about investing in them.

But wait.... do you have enough money to put in ALL of them for "at least" a YEAR? Or are you just one of those who believes that there is easy money in IPOs? Well, whichever group you belong to you will have to face the question, " Do I have money to put in ALL of them ? Or will I be missing out on the better ones, later?"

Well, let’s take the example of those who are just interested in making easy money out of IPOs i.e. those who will sell their shares immediately after the listing of the company once they get the allotment. Now, take the case of my friend, who this week invested around Rs. 25,000/- in the JET IPO and Rs. 25,000/- in the UTV IPO. So, he has put a total of Rs. 50,000 in them. Now, we know that in 15 days, PNB is coming up with a second IPO and the buzz is that they will be offering shares at 15% discount! Similarly, perhaps JAYPEE group will also float their IPO soon. So the question now is, " Will my friend still have money left to put into these lucrative offers ?" I sincerely doubt... and whether or not he is allotted the shares, his money will be locked up for nearly a month.

So, what's in it for us? When there is a tsunami (well I was planning to use the word "flood", but tsunami is more fashionable these days) of IPOs, DO NOT put your money for listing gains but think of long-term investment gains. We have had many periods in the past when IPO floods came, many locked their money, and then it was difficult for them to get out of it! So, don’t miss a good business investment for not so good ones.

Decide on your investable money and time frame (Year/Half-Year/Quarter). Look up the SEBI site, to see who are in queue for IPOs. Listen to your heart... Listen to your brain… Listen to your stomach (that is what Peter Lynch says, "What is needed for investing is good stomach and not brain and heart" ). IPOs (as with any investment) are not about gains but about companies.... Do you like the company?... Do you like the business they are in?... Are you a possible consumer of their services/products?... and if yes, will you use their products/services?....Do you believe that they will grow?

Compare the RELATIVE (Not absolute price like Jet's 1125 or UTVs 130, but compare some financial ratios with competitors) prices; are they cheap or costly?.... and so on.... you will have many questions regarding them and you have to search the answers for them on your own....

We will try to take up a few of those questions in the coming weeks. I believe this year is the Year of IPOs..... and Vibe's readers must be prepared to reap maximum benefit at a minimum risk from this.

I will end this by remembering the Oracle of Omaha (search him up on msn/google), who says “Good Investing is all about saying NO more often”.

-jksherdiwala

New Year Resolutions

2005-01-08T04:31:00.000-08:00

After a long vacation at vibeindia, I was planning to get back to my article on shares , but as this is the month for resolutions, lets devote this article to new year (financial :-) )resolutions, which will allow all of us to start afresh on our investing.

So, here are a few resolutions we can take :

1. I will enroll for a Pension Plan this Year, which will cost("save") me Rs. 834 per month. ( Take up just a Unit Linked Plan with Zero Insurance Cover. )

2. I will put Rs. 900/- every month on an ELSS which will allow me a Tax Rebate. ( You can wait on this, as on 28th Feb, perhaps FM may change the section 88 )

3. I will open a PPF account and make sure to put Rs. 2000/- per month in it.

4. I will read the annual reports of all the companies whose shares I currently own ( or plan to buy/sell ).

5. I will spend less than 25% of my salary on my Credit Card.

6. I will not take a personal loan at interest higher than my investments returns.

7. I will invest 2% of my annual in-hand salary on Books.

I know SEVEN is a big number to deal with. So lets make it easier for you. Select any 3 out of 7 and follow them - religiously. That will allow you to track your progress better too. These resolutions are not only for better investing but for our better living and yes, creating value for us in the future.

I am keeping it short as, after a vacation its difficult to write and advice :-). So, folks see you next week when we shall venture into STOCKS a bit more.

By the way this is the right time to be in the stock market... no..... not for making a quick buck, but for learning!!!!

Wish you a Happy Investing Year 2005!!!!

- jksherdiwala

Intrinsic Value

2004-12-09T04:23:00.000-08:00

This is the first part of the article on Intrinsic Value and this is one field where a lot of research is to be done.

Intrinsic Value is quite an abstract concept but it is central to my philosophy of investing, which I have adopted from the investing genius Warren Buffet and his guru Benjamin Graham.
( If you are seriously interested in investing... I would highly recommend the book by Ben Graham - The Intelligent Investor. This is the book which took Mr. Buffet to his Guru.)

One of the most important publications in the world of investing is the Annual Report of Berkshire Hathaway. ( It's the company which Warren Buffet runs, and all the annual reports of this company are available to us on their site : www.berkshirehathaway.com ) Another interesting document on that site ( which every CEO/investor should read ) is the Owner's Manual.

Warren Buffet's definition of intrinsic value defined in one of these documents is : the intrinsic value of a stock is "the discounted value of the cash that can be taken out of a business during its remaining life."

Now that's a little too technical for "Techies" like us. We may have to keep space for further discussions on this in our next week's article too. But let us try to split which are the jargons stated by Mr. Buffet. They are :

1. the Discounted Value
2. the Cash
3. taking the cash Out of a Business
4. the remaining Life of the Business

It's very interesting to figure out the above four elements for the companies in which we are looking for investment opportunities. I would like readers of vibeindia to give names of companies in which they are looking for investment opportunities, so that we can put those companies to this test and figure out what do we mean by "Intrinsic Value" for those companies.

note : We may not tell if it is a good or bad investment, we will just try to understand the concept of "Intrinsic Value", which is core to Business like Investing.

to be continued next week.

"Mister Market "

2004-12-01T20:44:00.000-08:00

Yes, he is the Villain who made Warren Buffet the investing Hero of the 20th Century. Knowing Mr. Market answers the basics of Stock Market functioning. If one understands this concept of market and its madness, it will automatically increase your probability to succeed in investing. So, what's the story ???

The story(sorry the concept) of Mr. Market goes something like this:

Imagine you are a partner in a private business with a man named Mr. Market. Every day, he contacts you and offers either to buy out your stake in the company or sell you his; the choice being entirely yours.

The catch is, Mr. Market is an emotional wreck! At times, he is in excessive high spirits and at others, in a dangerous state of depression.

When he is on one of his manic highs, his offering price for the business is high as well, because everything in his world at the time has rosy tinge. His outlook for the company is expectant, so he is very eager to buy your stake and only willing to sell you his stake in the company at a premium.

On the other hand, when his mood is no good, all he sees is a dismal future for the company. In fact, he is so concerned, he is willing to sell you his part of the company for far less than it is worth. While in fact the real value of the company may not have changed - just Mr. Market's mood.

The best part is that you are always free to ignore him if you don't like his offer. It won't matter to him for the next day, he'll again show up with a new offer. For your interest, the more manic-depressive he is, the more opportunity you will have to take advantage of him [don't worry, he doesn't have feelings or mind being taken advantage of.] As long as you have a strong conviction of what the company is really worth, you will be able to judiciously reject or accept Mr. Market's offers ... the choice is yours.

This is exactly how an intelligent investor should look at the stock market - each security that is traded is merely a part of a business. Each morning, when you open up the newspaper or turn on CNBC-TV18, you can find Mr. Market's prices (the stock quotes). It is your choice whether or not to act on them and accordingly buy or sell. If you find a company that is being offered for less than it is worth, take advantage of him and "stock" up on it. Surely enough, as long as the company is fundamentally sound, one day the stock market will come back under the sway of a manic high and offer to buy the same company from you for a much higher price!

By thinking of stock prices in this way - as mere quotes from an emotionally unstable business partner - you are free from the emotional attachment most investors feel toward rising and falling stock prices. When you are looking to buy stock you will in fact welcome falling prices. The only time you want to invite high stock prices is when you are eager to sell your securities for some reason. Thankfully, in most cases, you are free to wait out Mr. Market's emotional roller coaster until he offers a price that you consider equal to or higher than its intrinsic value (what's that?...we will find the answer soon ).

This is perhaps your greatest advantage in your investments - Take the Advantage from Mr. Market.

Equity for Dummies

2004-11-24T04:16:00.000-08:00

Equity: the very sound of the word increases your heart beat with grand visions of wealth and fortune, because that's the easiest way to doing business on your own. Business??? Yes, if you come across the term 'holding equity' in a business, it suggests that you are taking some interest in a particular business and you are linking your fortune with that of the company.

So, what is EQUITY/STOCK/SHARE?

STOCK, as the name suggests, is a stock of something; in the case of investing, it's a stock of a particular business divided into smaller fragments so that a large number of limited income people ( like you and me ) can also buy ( part of ) a big business like Infosys or Zee or Reliance.

A SHARE is the smallest portion of stock, which gives you the right to a part of the company, without any liability.

And finally EQUITY; a term that has many hidden meanings. Let's first see what the Cambridge dictionary says : "equity: the value of a property after you have paid all charges associated with it". Now, that definition hides several meanings.

"The value of a property" : How does one identify it? In fact, this very act of "finding the value" drives the stock market. Every individual is trying to find his/her own value for a property(company) and that drives the price of the shares on the Market.

So broadly what EQUITY means is:

a: Equal parts of the company
b: Equal rights to the owner

In a nutshell, by holding a Equity in a company we are basically buying a small fragment of a company, in other words we are buying a BUSINESS with our money!

This concept of "owning" a company is very important for those who are SAVERS and INVESTORS,and those who think they fall under those categories should never forget that a particular share grants them the ownership of a company. So when we buy a share we should be extra careful about the nature of business and financial strengths/weaknesses of the company.

But there are some other important elements in the Market which have created a class of people called the SPECULATOR. These people really play a very important role in the functioning of the Market, they help the Market derive a fair ( usually??) value of the company. (The stock market is no different than a whole-sale market for vegetables, where traders decide the price based on demand and supply and we as individuals are conveyed those prices when we buy vegetables from the vendors).

Now, its really interesting to play the role of a SPECULATOR/TRADER (as against the INVESTOR) as you are in the driver's seat, actively participating in the pricing of the share through your trades, while an investor just takes the price and analyses it based on the company's value which sounds boring. But, the role that you should take depends on your psychology and appetite for risk. If you ask me, be a little bit of both. Use whatever money you do not want to lose for investing and use for speculations the amount whose loss won't bother you much (termed risk-capital). While INVESTING is anytime better than mere SPECULATION/TRADING, your gains could be higher and you can also live the feeling of being in the driver's seat if you do a little bit of trading.

A point to take home : A share gives you the ownership of a business.

Beginners' Problem

2004-11-23T05:29:00.000-08:00

We had rules from the last three weeks, and we all must be having questions; well rules are fine, but now what ??? Where shall I put my money ? Which STOCKS ? and what are the other stuff, small savings, mutual funds, gold and what not ?

The major problem currently for those who are starting to SAVE and a little bit of investing is which STOCK to buy ? And very few are looking at other avenues of parking the money. ( Yes parking is the better word to use for certain investments as they will keep them safe) And that's why all Investment Planners talk about these jargons like asset classes, asset allocations.....yes all those things are very important once you have a lac or two in savings...but when you start off, at that time it's better to stick to vibeindia.com's 3 rules and follow KISS (Keep It Simple Stupid!) for rest of the matters.

Simplest thing to do with your Rs. 3000 a month i.e. 10% of your salary is, to find whether all your TAX Rebate avenues which give you 8% returns or more are exhausted or not ? Oops!!! These again are jargons as something related to TAX came... right ??? So first lets look what all these means.

The person who is earning Rs. 400,000 may have a TAX Liability of around Rs. 60,000, so in turn now your After Tax Salary (ATS) is 340,000 only. Its every individual's duty to reduce his/her payout to the Government...else government will take it from you before you see that amount.

We have a good government, which provides quite some rebates to us. And we must take benefit of them. How ? We must match the returns too. And that's the simplest thing we can do.

Easiest Way, if you want to save for your later life i.e. after 15 years, open a PPF account and start putting your Rs. 3000 every month and forget the rest. It will earn you 8% returns and all are TAX FREE plus you can claim 15% rebate ie for 36000 you will be saving in the year you will reduce your TAX Liability by 5400 and that can buy you a smart gadget...

A fancy way is to put 10000 into an ELSS(Equity Linked Saving Schemes) - they are equity mutual fund by way of investing Rs. 1000 for ten months and put the rest 26000 in the PPF. Really at least these savings must be done by someone who wants to keep life simple and sweet...

But new age professionals do not prefer this plain vanilla... so for them... I presume this TAX Rebate and so called SMALL SAVINGs are not that much exciting for them we will venture into a tora-tora ride... concentrating only on EQUITY and EQUITY related instruments...

But if you love KISS, then at least do either of the things mentioned above...

The tortoise wins the race!

2004-11-23T05:28:00.000-08:00

Last October my parents became grandparents and their whole life seems to have changed. And yes, I too became "mama" (uncle) and my life too seems to have changed. During the course of last year I understood the meaning of "Muddal Karata Vyaj Vhaloo". Interest is lovelier than the Principal. And that's true for most of us.

I really bet, my parents will be happier after they become "grand"-grandparents; and so we arrive at the last basic LAW (after "Save 10% of what you earn" and "Ride on PoC") I would say is necessary for any person to do well in investing- Interest earns more Interest.

However, that wich matters more than the "laws" is Consistency...

Most of the times all of us start everything in a Big Bang style. Oops... for the last two weeks I have been reading articles on vibeindia and that guy(guess who? :-) ) who writes on investing says, "just save for FIVE years and in thirty-five years you will have a Crore Plus..."
Well, some of us may have already started saving something... That's great..... Now, what is important is to do the same for the next FIVE years!... or even more..., which will make you a crorepati, much earlier.... But remember its not just five years. It's SIXTY months! and even more.... To put aside 10% every month... there lies a real challenge... To be a millionaire we have to win this challenge....

I have a very recent example. Around June, one of my colleagues who is interested in Big Bang money asked me, "jigu bhai bataw main paisa kahan lagau? I have money and want to invest it in Mutual Funds; suggest some...". I said, if you want to invest money first tell me how much of the money you will need in Six Months, how much in Two Years and how much in Five Years. Based on that I adviced him to invest the amount in different CLASSes of mutual fund schemes. He expected his money to be in Five Figures.

Now, oops! Since then, he has not put "a single rupee" in the plan he had agreed upon! The reason- the job is tedious. Every month putting away FOUR Thousand bucks is a more difficult job than putting Rs. 48,000 in a single shot. If you see his investment, currently his equity fund investments are doing well but not the debt fund; they are negative( you can ask how a debt fund can give negative returns? those technicalities later on but they can give negative returns).

The point is he had a Plan, but he could not stick to it. Many reasons would be there and that will come to everyone who tries to follow the "consistent investment approach". It's difficult...it's boring...it doesn't have the charm of gambling...it's a slow process...but it's IMPERATIVE!

And that's why what matters is: Consistency.... Yes, Consistently save 10% of whatever you earn.... and that will bring you your first million.... Its a difficult job but that's why they say.. "To be a millionaire is not an easy task!"

If you really do something consistently then even mathematics supports you.... and here I will come to my favorite theory of STOCK markets....(Yeah!!! now its interesting stuff... STOCK Markets!) To succeed in STOCK Market, the best way for a lay man is to invest an equal sum "every month"... Forget about where the market is... forget what your uncle is saying... forget what your broker is saying.... Just follow this and I assure you.... in next five years or so you are a millionaire....(I will discuss the theory later, for now I just want to stress on Consistency!!!) Statistics call it.....the STRONG LAW OF LARGE NUMBERS.....

So, here we end with the last basic Law and that is: Consistency. No Matter what will happen, what I have kept aside as savings I will not use it... It is just for giving me my first Million.

Question:
In India, which money generating activity attracts nearly the same kind of Income Tax Rate as Farming ?
Check out the answer next week!

Who wants to be a Millionnaire!

2004-11-23T05:26:00.000-08:00

I should start from where we ended, the statement : 10% of what you earn before Tax is yours to keep.

Rules apart, lets dive straight into some figures to stress the point. Assuming your annual salary before Tax is 4 lacs and that you will have a salary hike of 10% per annum on an average, what do you have at the end? Oops!!!

But first decide upon a return (from investments) that you expect from the amount before you begin your calculations. I consider a return, well CAGR-Compounded Annual Growth Rate(for details ask me) of 12% is great. "Just" 12% ? Yes, my dear. The reason is quiet simple. The investing genius Warren Buffet when he started off, had a goal of 15% CAGR and he ended up at 23% CAGR in the past 35 years. So, as first time investors, our target of 12% is quiet "high" really!.

Now having selected a rate of return, assuming you save 10% of your Base Salary of Rs. 4 lacs (which increases 10% annually) and a return (from investments) of 12% CAGR, What will I have at the end of 5 years, if I just keep 10% of what I earn every month aside ? Good CAT question. Feel lazy to solve it ? Well let me solve it for you.

First year you will have saved Rs. 40,000 from your pocket and will have a final sum of Rs. 42,151. Doesn't sound too good... :-(

Now your salary has increased to 4.4 lacs and you will save 44,000 the second year and at the end of the year you will have Rs. 93,584. Hey! That's close enough to a lakh!

Third year... your salary is 4.84 lacs and you will save 48,000 that year and at the end of the year you will have Rs. 1,55,400

Fourth Year... your salary is 5.3 lacs and you will save 53,000 that year and at the end of the year you will have :Rs. 2,29,908 !

Fifth Year... Your Salary is 5.83 lacs and you will save 58,000 that year and at the end of the year you will have Rs. 318617

So, finally you would have saved Rs. 2,43,000 and your investment reached at 3,18,617.

So are the returns worth the saving and investing stuff? Well at this point of time maybe it doesn't look that good ... you can't even buy a decent car with the money, but wait... yes, wait... so we will wait for another 10 years and see, what happens to your "save and invest" method.

First thing. From the 5th year onwards you do not "do" anything and let your money work for you .... riches gets you more riches!..

After 15 Years from now you will have : Rs. 9,87,712

After 25 Years from now you will have : Rs. 30,61,907

After 35 Years from now you will have : Rs. 94,91,912

Want to live more??....

After 50 years from now you will have : Rs. 5,22,49,238

Now does THAT sound like something!!! :-)

And all you have had to save (SACRIFICE really by foregoing that extra pizza/jeans/...) is a meagre Rs. 2,43,000!

Can you believe it ? Well perhaps that's why Einstein had said "The Greatest power on earth is Power of Compounding"(PoC).

So, the second thumb rule Ride on PoC !

Dust to Dust ... Riches to Riches!

2004-11-23T05:05:00.000-08:00

Stocks!- sounds as lucrative as a Development Project does it?, Savings - thats as mundane as a maintenance Project(but as we all know it pays off well!). But as I have learned the hard way, you need to save some to gain some.

We software geeks were amused by a recent article posted on rediff.com citing that there are going to be around 30 overnight crorepatis among TCS employees through the recent IPO. But was that piece of news something to be laughed off? Look a bit more closely around you and you will find truth in the article.

There's your friend who,heeding his uncle's advice, invested in Divi's lab IPO in March 2003, the Ten Lakhs he had saved from his last trip to the US. Right now he must be having a cash holding of a crore rupees in his bank account(provided he had sold off the shares at their peak value)!

Take another example of my friend who had invested("speculated" really... you will get to know the difference as you follow this column) in a PSU named Indraprastha gas, last year. He was lucky enough to be alloted Rs. 1 lac worth of shares. And can you believe that a few DAYS after the listing of the shares on the market, he reaped in Rs. 5 lacs!!

Let me share MY story, and don't be jealous. My father being a banker, and expecting a above-average growth in the banking industry suggested in December of 2002 that I invest in banking stock. I followed;thought knowing zilch about either banking or stocks. Since I had an amount of Rs. 10,000 (too less really to seriously play the investing game!) I went ahead and invested in Bank of Baroda (the place where my dad works). You could have chosen any other PSU bank for that matter. And today that money has grown by four times! Joyous as I am, I also cant help regretting the puny amount I had invested. Only if I hadn't gone on a mindless shopping spree that month and had saved more! Moral of the story..... oops! no moral science lessons in my first article!

Enough of case studies (I am sure you would come up with more on your own). While you may not become a millionaire overnight, but given a few years of intelligent saving/investing you can get to your first million in 5 years and a first crore in 15 years!

So Whats the recipe? Nothing much; no on-site trips(well if it does come, you can reach your goal a year or two ahead of time!), no waiting for your rich uncle from Africa. Just forego that extra pair of jeans that you really don't need right now and invest the bucks saved!

Remember... 10% of what you earn before TAX is yours forever(minimum 5 years). Follow this space for more investment advice.