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Humor Investing

REACTIONS TO THE MARKET CRASH

THE STOCK market rollercoaster has left many people dazed and confused, if not broke. Hindustan Times decided to ask some of the finest

minds around about what they thought of the crash, boom, bang on the BSE.

MANEKA GANDHI: What did you expect! I have it from reliable sources that those stupid brokers had been running a bull market, alternating it with a bear market. Disgusting! Serves them right.

BAL THACKERAY: It’s providence. The government should have renamed the BSE the Chhatrapati Shivaji Stock Exchange. Fits in nicely in the area too, since it’s pretty close to the Chhatrapati Shivaji Vaastu Sangrahalaya [the museum, in case you didn’t know] and the Chhatrapati Shivaji Terminus.

MALIKA SHERAWAT: It’s the Sen-sex, after all. So it goes up and down, up and down, up and down…

ARJUN SINGH: The HRD Ministry is proposing a 27 per cent reservation on the 30-share index for penny stocks, since they may be considered backward. The current ‘correction’ is nothing but a manifestation of years of neglect of such shares.

SHAYAN MUNSHI: I saw nothing, I heard nothing, I don’t even speak Hindi.

ESHA DEOL: Sen? Sex? Isn’t that the story of my latest movie, Ankahee?

SALMAN KHAN: Let’s just shoot those damn bears!

LALU PRASAD YADAV: Kya bole? Bull bhaag gaye? Arre, hamaare paas bahut hai, ek do le jaaon. As it is, Nitish Kumar has taken over our bungalow and we have nowhere to keep them.

MANMOHAN SINGH: We’re introducing a bill making it illegal for the Sensex to fall below the 10,500-point mark. Brokerages are, after all, offices of profit.

BILL CLINTON: Sen-sex? I did not have sex-ual relations with that woman, Miss Sen.

GEORGE W. BUSH: Let’s bomb the BSE!

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Investing

How Interest rate changes effects your stocks.

How the Balance sheets of corporates are affected:
1) Take banks and financial institutions.
Calculating their impact is simple. They pay the depositors a particular interest rate and buy treasury bonds, or distribute it as loans. Many of the fixed deposit, bonds have fixed rates which need to be honored irrespective of the present conditions. So a fall in the interest rates causes higher profits and vice versa.

2) Leveraged industries
These are companies which have taken huge loans for their new plant, expansions etc. Any rise/fall in the interest rates has huge impacts in the interest outgo, hence the profitability.

3) Fall in the sales
The real estate is rising because the interest rates are low and it if often cheeper to pay an EMI then to pay a rent. A rise in interest rates greatly effects the spending of consumers and corporates, less houses, machinary and cars will be bought leading to a slowdown in the production and revenues of the corporates and hence lower profits.

Common sense says, most IT companies, and established Business houses have little or no debt, so their valuations should not be impacted much. But no:

1) Growth oriented companies:
They are traded at very high PE ratios, because their revenues are expected to increase by 30-40% each year and this expectation of future earnings beef up their stock prices.
100 rupees 5.5% interest grows by 1.7 over 10 years but will grow to 1.8 if interest rates is increased to 6%. So any change in interest rate changes the present value of the future earnings and hence changes the stock price.

2) Stable companies:
Their impact is also almost the same. If bond market gives 5.5%, you expect that your blue chip stock gives you at least 7% (1.5% risk premium) through dividends and stock price appreciation. Now if the interest rate increase to 6%, the only way you will get (6 + 1.5 = 7.5%) returns is that if the stock value dips from 100 to 99 ( .5% change in interest rate cause a 1% dip in the stock price)

 

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Investing

Mutual fund fraud

Today’s Sensex value: 9468

Let me continue my discussion over mutual funds

A few days ago there was advertisement of Mutual funds investing contrarily to the market, having hedging features so that you make money even during a downturn, and all sorts of promises. Last weeks crash gave me a golden opportunity to check the validity of these claims.

1) Market fell by 25% last couple of days and there were not even a single mutual fund that had shielded itself and fell by less than 15%. The only ones who survived seem to be the new funds who were sitting with stockpile of cash.
2) Even funds which advertised they had hedging features, or ones which boasted that they invest smartly and do not follow the herd mentality seems to have taken the hit. My question is that are all these promises just on paper or does the investment adviser actually practice what he preaches?
3) I agree that Mutual funds have restrictions on the amount of liquid cash they can carry, so even if they know that the market is overheated, they cannot exit. However, while mentioning that the Mutual fund forgets 3 things:
a) The mutual fund may not keep lot of money in the bank accounts, but nothing stops them from buying bonds/gold or maybe bullion from the cash. Common sense says that if the market is overheated, you invest in safe (low return instruments) and buy when the markets fall as it is been happening for past couple of days.
b) Most of Indian mutual funds do not significant holdings in privately listed companies or have too much stake in a company that they cannot reduce their exposure during boom time profitably.
4) When the market reached its peak, FII started profit booking. In other words doing the same thing which MF were expected to do. Divert the money from the volatile stock market to bonds till the market returns proper realizations. Indian mutual funds start blaming them for the fall rather than learning from them and protecting their subscribers from the downfall. (even tough the value of the stock the sold was trivial when compared to the money they had pumped in over past couple of months)

I might sound a lot abrasive towards stock market today, but I had sincerely hoped that at least a couple of funds would have done good and I would extend my exposure in them. But I was disappointed.

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Investing

Stocks to avoid

What stocks to avoid and what not is always a puzzling question, What do I think?

1) Businesses that risk all:
I have a certain disdain for companies that gamble all their worth. Best example would be Lakshmi Mital. In a cyclical industry like steel, he is buying one company after another. Initially this risk might pay, but ultimately one wrong decision and the company will be clean bowled.

2) Research oriented company:
There is never a guarantee that the company will be able to deliver a new technology after another. In fact the small companies are more likely to discover the next wonder-drug than the billion dollar behemoth. But there is one guarantee that their patents will eventually expire and the cutting edge they command will tarnish.

3) Debt burdened company:
Interest rates currently is very low. A slight change in interest rate will play a havoc on these companies. Also one more bad year and the management will be taken over by the bankers and the lenders. That is why I am sometimes scared when people talk about investing Jet Airways.

4) Questionable Management:
If you do not trust the management then stay away from the company. They are more likely to fill their coffers then pay you dividend.

5) Resurgence Package:
All the companies which require frequent doze of capital and bail out packages to survive make more money for the bankers, employees, govt, and the bailing body then they make for you.

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Investing

Mutual Funds

If there are 800 stocks in the BSE (and 30 blue chips which represent BSE, 50 which represent the Nifty and only 100 in the A category) there are more than a 1000 financial schemes which help me pick that one stock which will pay off for my child’s education.
Simple statistics tell me that I am many times more likely to pick the best stock rather the pick the best mutual fund/financial instrument.
Another thing I hate about mutual funds is that they are advertisement driven. Some of the best and undervalued instruments like Index Funds, closed ended Mutual funds (which trade at 20% discount) are never talked about because they do not pay the journalists.

3rdly I feel the entry/exit load (1.5%), the Asset Management fees (2.5% p.a.) are too high.
4thly All mutual funds advertise their fancy investment ideas, but ultimately boil down to a strong correlation with the sensex. When markets fall they bleed, when they rise they mint gold. I am yet to find even a single sectorial or niche fund (with an investment of >100cr) which has beated the Sensex consistently for over 5years.

Also there are some ridiculous concepts creeping up
1. Basket of Funds:
If your mutual fund is not doing good enough then pay to another manager who will manage him… Just like Inspector raj one inspector to oversee the working of another.
*-*-*-
Why Mutual fund:
1.Fund Manager for the poor:
Not everyone has the risk appetite or the knowledge or time to sit with charts projections and derive an investment strategy.
Minimizes the risks shock and the gambling tendency.
You just have to identify the sector which looks attractive and leave the micro-management to the experts.
Tax breaks:
Long term capital investment and dividends from MF is tax free.
ELSS (equity linked savings scheme) SIP (systematic investment plan) gives you good tax shield.

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Investing

PE RATIO

PE RATIO

I here briefly intend to discuss the significance of P/E (Price Earning) ratio.

Traditionally PE ratio means the division of the Profits (earning) of a company by its price. If you expect the rate of return of 10% then a stock with PE ratio of <10 should be a good buy.
Things that can alter the PE ratio calculation:

  1. Sunshine Industry:

People do not mind paying high premium to Industries like IT, Pharma, logistics which have high growth potential. Next year the revenue might be much higher and so will be the return prospectus.

  1. Change in Management.

The balance sheets of privatized companies, merged/acquired companies usually take some time before it gets reflected as profits.

  1. Other income.

Beware of the concept of other income. Which usually arises from one time sale of land/ machinery/assets or financial jugglery. It is a one time income and is no reflection of the strength of the company.

  1. Management.

A good promoter and management often command a premium because of the underlying track record and trust.

  1. Policy changes

Often changes in global scenario lead to opening on newer opportunities and companies can expect a boom.

  1. Interest Rates/ Taxation:

An interest rate of 6% means a PE of 16 is attractive, but a interest rate of 7% means PE has to be at most 14.

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Investing

Why invest in stock markets?

Well govt. of India is trying hard to woo people into investing in Indian stock market.

Reason:
1) They are the only long term viable way of beating the inflation.
2) Help raise funds for good investments and sunrise industry.
3) Investors are the best person to punish, reward and evaluate Management and promoters of the company.
4) A well developed stock market is a must for the much needed entrepreneur boom in the market.
5) Stock market valuation is considered the best guideline in case of takeover, mergers and acquisitions.
6) It promotes, transparency, ethics and sharing of wealth with the general public.

7) Lastly, since betting and gambling is not permitted in India, it provides a healthy avenue for the speculators and risk takers to contribute to the society.