Illusion of Safety

Posted on Leave a commentPosted in Investment

Do you think debt schemes/income schemes of Mutual Fund are 100% safe. The redemption is T+1 so, when ever you need money, its available for redemption.

Hold your answer for time being.

 

Let me put it differently, if you understand the risk associated with Mutual Fund Investment : Do you know, why few debt schemes have slightly better returns? or Even Treasury Schemes (Liquid Plans) are not 100% safe.  Normally, while investing, we look at only Fund House and do not care to read the finer points. Investment in AA papers is as good as AAA papers, and rating hardly matters. Right.

 

As we know, the return we get from any Investment is directly linked and in proportion to the risk we undertake. Its called the Risk Premium. Seldomly, in real life, we understand the actual risk. We only perceive the risk. Neither statisically, we understand the actual percentage of risk. And therefore, we agree on lower return in debt/income fund v/s equity fund, ( return of 8-9% – pre tax vs/ 12% – post tax ) assuming and naively believing that risk associated is very low as compared to equity funds. Thus, returns ought to be low.

How wrong, we are.

 

Just read this :  (embedded link, click to read, relevant information)

 

J P Morgan have invoked the rare tool available with Fund House. They have gated the redemption. Why? Because, due to Default by Amtek Auto Industry, huge fund is locked, and if there is run on Scheme, they may not be able to liquidate all investment at once and have cascading effect on all the schemes. Its like domino effect. Thats what happens, when there is run of money on Large Bank, like in the event of some bad news, all of sudden every one rush to withdrawn the deposit. When Bank puts ceiling on withdrawal or Government or RBI imposes restrictions, its called Capital Controls.  We do not believe the possibilities of such event, but just like Black Swan events, these situation does arise.

 

The investment is all about diversification. Wrong.

The investment is all about diversification of Risk.

 

This is fundamental mistake every one makes. The equity has 300% more risk than Bank FD. Intuitively, we associate Debt/Income/Liquid funds with Bank FD and does not provide additional risk premium. We are Wrong. The risk associated with Debt Fund is lower than equity but certainly much higher than Bank FD. Again, i am not advocating, equity over debt fund, all I am saying is, understand the underline risk.

So next time, do not believe that Debt/Income Fund are risk free and redemption is only a day away.

 

Best Investment, Ever.

Posted on Leave a commentPosted in Idea, Interesting Idea, Investment, Learning, Self Improvement, Uncategorized

Below is the best Investment Advice by Mr. Warren Buffet.

“Invest in as much of yourself as you can, you are your own biggest asset by far.” — Warren Buffett

Very True.

Sounds very cliched, heard many times. Some how, when we read quotes, watch inspiring video, read essay or some other inspiring materials, we know what it is or what should be Done. Intuitively, we connect to it, but that means, our automatic thinking, or system-1 as Mr. Daniel Kahneman succinctly puts into his brilliant book, Thinking Fast, Thinking Slow. To understand the meaning behind the words, we must engage – System – 2 or measured thinking. If you do not know about the two system of thinking,  read the book, I have referred or do some google search, its a first step towards, what I am writing hereinafter.

The difficult part of  reading all these life altering philosophy  is “How to do / How to Invest in One’ Self”.

Let us understand, How to Invest in Yourself.

I have no Idea about How, nor I gave serious consideration, so I am as much in game with you, as explorer and certainly not as sooth sayer. Most of us have completed 5, 10, 15 years or more of Employment Schooling after we obtained our “Graduation/Post Graduation or Degree”. Mostly, we have graduated in our Choosen Vocation/Profession. In school, we have grades, exams; In real life, we have challenges, promotion, earnings. In school, we are taught by teacher, whereas we are required to Learn by Self. So answer is simple, LEARN.

Thats where we could find Answer to HOW?

We can not take coaching, tuition or classes. If you are lucky, once in a while, you attend a conference. We do not have concept of Mentor. To me, its a primary step; looking forward to some one, who could guide us in taking right decision. Its an important but only Half of How to Learn.

Second half, depends upon; looking the work you are doing very objectively. Even if its mundane, automated, monotonous, you can still learn from it, Learn to improve your multiple skill sets.

The skills that comes immediately to mind;

@ Business Writing.

@ Basics of Finance, Accounts, Investment.

@ Comprehension.

@ Judgement and Decision Making.

@ Elementary Technology.

@ Elementary Economics.

@ Tenets of Management. Getting Things Done.

@ Sharpening Leadership.

@ Reading on diverse subject.

These all does not require any special attention or time. If one integrate all these in day to day Work Flow, learning is automated. I am sure, you are doing something or other thing to keep learning. Hence, question of How to Learn can be found in day to day work life. Iam not referring to  a structured learning, that does not mean, its not important or relevant. If you work demands constant updation of knowledge/skills it automatically forces you on the path of learning. Unfortunately, for most of us, including yours truly, it requires some effort. And thats where the Answer to HOW can be found. Doing everything with fresh perspective, trying to move beyond obvious, thinking why it is done and why can’t it be done differently, how to improve, can I draft a letter bit better? Am I using various mental tools available in my day to day decision making, can new techniques be learned, can I Improve on what I am doing… I am not giving lecture, its the natural question that popped into my conscious thinking, while drafting. So yes, its completely unedited version..In fact, it also opened up my thinking…

Thus, Mr Buffett’s Wisdom is clear: Learn as much as You can, thats best Investment you can make in Yourself.  Investment also to be done in Health, Relationship, Deep Habits, Financial Health…But thats topic for some other day.

Rule of 72

Posted on Leave a commentPosted in Economics, Investment

Only objective of Investment is to get a good return. However, we forget the rule of compounding. Even, if we remember, we certainly do not know, how to compute realistically the return, we will get by applying principles of Compounding. The basic benchmark is to know, how long will it take to double the money. The simple way to calculate is by applying ‘Rule of 72′

DEFINITION OF ‘RULE OF 72′

A rule stating that in order to find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.

The rule of 72 is a famous shortcut for calculating how long it will take for an investment to double if its growth compounds on itself. According to the rule of 72, you divide your expected annual rate of return into 72, and that tells you how many years it takes you to double your money.

Considering that large, blue-chip stocks have returned roughly 10% over the last 100 years and investment grade bonds have returned roughly 6%, a portfolio that is divided evenly between the two should return about 8%. Dividing that expected return (8%) into 72 gives a portfolio that should double every nine years. That’s not too shabby when you consider that it will quadruple after 18 years.

Is it right time to invest in Equity?

Posted on Leave a commentPosted in Equity, Investment

On 12th May, 2014, Just before election result, I had blogged about dilema of Individual Investor to Invest In Equity Markets and had referred to the article published in Quartz.com.

Since then Market is continuously outperforming and it seems we are almost in a structural bull run, as few Pundits would like to call. Nevertheless, we still have skepticism in the mind about investing into equity..Whether price is right or should I wait for correction or more aptly, Should I time the market.

While thinking too hard about investing, we fall prey to various behaviour and human fallacy, primary being forecasting in future. Try to estimate geo political and macro economic outcomes in coming months. While thinking about it, I have just read the article by Tim Harford on Forecasting, and how bad we are at it. If you have read the articles by/about Philip Tetlock, an eminent economist, you know that even most expert fail at predicting the events, and they are no better than Dart Throwing Monkeys.

Probably, as Individual we are prone to the similar error in our Thinking. We do not take decision based on fundamentals (economic conditions, management of the company, dividend yield or long term potential etc…) but depend upon our own set of forecasting…What are the chances of shares giving us higher return, whether market is in bull run, whether prices have gone up very high…so on and so forth.. and mostly thats where we make mistakes… We do not invest into Company but in favourable circumstances, while discounting uncomfortable factors. If you have read the article by Tim Harford, the mistake in investment style by Fisher and Keynes ( both the greatest economics of all times ) would come glaring to you, and thats where the lesson is for all of us. Just for better context, both FIsher & Keynes (John Maynard Keynes) great economist lost heavily in the First Recession, economic crash of 1930…Fisher died as poor man, whereas Keynes recovered and till today hailed as Father of Modern Macroeconomics…under the backdrop, its worth reading the whole article, still synopsis are for your reading..


 

Errors in Investment Philosophy of Fisher : 

“His optimism, overconfidence and stubbornness betrayed him.”

“Irving Fisher’s mistake was not that his forecasts were any worse than Keynes’s but that he depended on them to be right, and they weren’t. Fisher’s investments were leveraged by the use of borrowed money. This magnified his gains during the boom, his confidence, and then his losses in the crash.”

“Poor Fisher was trapped by his own logic, his unrelenting optimism and his repeated public declarations that stocks would recover. And he was bankrupted by an investment strategy in which he could not afford to be wrong.”

Errors and subsequent Correction in Investment Philosophy by Keynes :

This wasn’t because Keynes was a great economic forecaster. His original approach had been predicated on timing the business cycle, moving into and out of different investment classes depending on which way the economy itself was moving. This investment strategy was not a success, and after several years Keynes’s portfolio was almost 20 per cent behind the market as a whole.

The secret to Keynes’s eventual profits is that he changed his approach. He abandoned macroeconomic forecasting entirely. Instead, he sought out well-managed companies with strong dividend yields, and held on to them for the long term. This approach is now associated with Warren Buffett, who quotes Keynes’s investment maxims with approval. But the key insight is that the strategy does not require macroeconomic predictions. Keynes, the most influential macroeconomist in history, realised not only that such forecasts were beyond his skill but that they were unnecessary.

Perhaps even more famous is a remark often attributed to Keynes. “When my information changes, I alter my conclusions. What do you do, sir?”

If only he had taught that lesson to Irving Fisher.


End Note :

Lesson for all of us :

Instead of moving in and out of business cycle, sectors, events of geo-political events, or try to forecast the market, invest or remain invested for long run in good business. I have no idea whether market will continue to grow, but future economic outlook, policy implementation and governance looks good. Define investment strategy in which you can afford to be wrong. Equity as an Asset Class is important but no more than 25% of your portfolio…Invest over long run, diversify and understand the concept of averaging out.

 

Is it Right time to Invest in Equity? or Its too Late?

Posted on Leave a commentPosted in Equity, Investment

Its a million dollar question, with not straight forward answer…Going By a simple logic that FII’s are continuously investing in Indian equity, they nearly own 22% of top 1200 companies, where as all domestic investors are net seller…read very interesting articles published on quartz.com

Unfortunately events of last few years have shaken our confidence in indian equity markets, whereas FII’s seems to be very bullish, last I checked while writing the post, NIFT first time breached 7000 points.

Last 5 years have seen very sluggish or negative returns in the equity market, by any yardstick, it defies the long term investment logic, is the tide about turn? only future will tell us.

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In his expansive campaign ahead of this general election, Bharatiya Janata Party’s (BJP) high-profile prime ministerial candidate Narendra Modi has addressed 437 rallies and 5,827 public events (some using 3D holographic projection technology), and travelled 300,000 kilometres across 25 states. But as the campaign draws to a close, the talk now is about a different kind of rally—the so-called Narendra Modi rally in the stock markets.

On Monday, the key Indian equity indices—the Sensex and Nifty—both hit lifetime highs. Many analysts attribute the surge to the expectation that India will vote for a BJP-led coalition government headed by Modi, who is seen as a business-friendly leader supportive of economic reforms.

The rally is a bit more complicated than it seems. Since September, as the markets have risen, foreign and domestic institutional investors (FIIs and DIIs) have taken dramatically different positions. Starting in September, when Modi was declared the opposition BJP’s PM candidate, FIIs have been net buyers in Indian markets (except for January) and DIIs have been net sellers (except for February). For every single trading day so far in May, DIIs have been net sellers and FIIs have been net buyers.

Net-sales-purchase-FIIs-DIIs_chartbuilder

For three months prior to September, FIIs were net sellers in India, partly on fear of liquidity constraints stemming from a US Federal Reserve proposal to curb a stimulus program. In September, India’s central bank also got a new governor in the well-regarded economist Raghuram Rajan, who helped stem steady erosion in market sentiment and the value of the currency.

But as opinion polls started predicting a greater lead for a BJP-led coalition with each passing day, the improving market confidence came to be attributed to the expectation of a Modi victory, much to the annoyance of the government’s policymakers. In December, when Goldman Sachs upgraded its India rating, it called the report “Modi-fying Our View”.

Domestic institutional investors are largely made up of insurance companies and mutual funds. Dhananjay Sinha, who heads research at Mumbai brokerage Emkay Global, said there was “disproportionate enthusiasm” among FIIs. “DIIs have a more realistic perspective. They know how difficult it is for a new government to turn things around. And FIIs have liquidity, and DIIs got an opportunity to book profits. So they must be utilizing it,” he said.

Devangshu Datta, a New Delhi-based technical analyst, said the diverging behavior of FIIs and DIIs was puzzling but could be due to multiple factors. “Domestic institutions are far more skeptical about opinion polls. Net redemptions might be higher and mutual funds might be forced to sell,” he said. When mutual fund redemptions outpace investments, fund houses come under pressure to exit their equity positions.

FIIs now own 22.3% of the 1,200 companies listed in the National Stock Exchange. And despite the record run in India’s stock markets, the situation could very quickly change course. India’s equity markets have a history of rallying ahead of general elections, and sharply correcting if the country votes differently from their expectations. TV channels will broadcast exit polls results after 6pm today. So Tuesday could be another action-packed day: Analysts have warned that an ambiguous electoral verdict might spark off heavy selling, roiling the markets and the currency.

What is more Important; Return on Investment or Absolute Investment

Posted on 1 CommentPosted in Investment

Investment :

The time of the year, when every one at least looks at the Investment either mandatory under 80-C or future planning, child education or any other objective based investment. Secondly, the only thought comes to our mind, while choosing investment is return that we expect to earn.

My question : Do we really think amount how much should be saved, and thus invested?

The answer could be very simple, I know how much I need to invest, I have my personal financial goals, I am conscious of my Savings etc.

May be true….I think, our decision is mostly driven by surplus available with us or more aptly money available in Bank Account, else, why we do not swap the investment or shift the mutual fund scheme, since its also money available to us for reinvestment, mostly, money that is already invested is never considered as part of our formal kitty of investment and mostly all of us have Status quo bias, whereby we can not force ourselves to review our past decisions. In nut shell, we hardly think about Saving Rate.

Coming back, though, its difficult to anticipate returns on investment unless one is considering fixed maturity/tenure or government investment, still we grapple with all important idea of return. The return in my views, depends upon

Liquidity,

Taxation,

Risk,

Depending upon which order, you look at it. Still, the moot point of the post is not so much about how to maximise the return but is it really important?

All our investment decisions are purely based on rate of return, in the process, we forget the base rate of investment. Every one tries to maximise the wealth, you may also call the ROI or Savings or Net Worth..But, how could we do it…Its very simple.

Wealth = Saving X No of years of investment.

In the process, we forget the amount of Saving. Since, its not the return of investment alone that determines your future Wealth but, the Base Amount and Longevity. If you save additionally, say Rs. 50000/- a year, and assuming your return on investment is say lower by 2%, still in Long Run you would end up making far more substantial money.

Because,

(a) the power of compounding..

(b) Base rate i.e. amount of investment.

I strongly believe that though one must try and maximise return, and it is relevant, (no doubt about it)…but in all the clamour, one should also focus on amount of investment, even if you can increase your saving by say 5% additionally every year, in long run, it would turn out to be substantial amount…And since the actual return would only be known in future, little more focus on amount of investment/ surplus generated by additional saving is equally important, unfortunately, our mind is not trained to think this way…

Now how to increase savings by 5%…thats another question, and answer depends upon myriad factors from Life Style or Philosophy to Actually making that decision..

Real Estate Investment Lessons from Warren Buffet

Posted on Leave a commentPosted in Investment, Real Estate

All of us, desires of investing into Real Estate. There are far too many conflicted Idea’s floats in our mind preventing us from thinking rationally.

Should one Invest in Residence/Office/Farm House/Open land etc?

Whether price I am paying is correct?

What are the upside of the area?

We have set of rationals for each kind of investment. Mostly we desires to invest with a view to make huge gain in coming years.

Objective is very clear.

Confusion only starts when we steps into periphery benefits and ties each probable decision to cost/benefit of each sub set of real estate investment. Since, every one feels that in last Tezi…he/she lost out on golden opportunity, while assuming that in long run real estate pays best return, our mind becomes fuzzy.

But, when it comes to taking a final decision, market dynamics influence our thinking way beyond our imagination. We expect market to go down further, again, prospect of Modi becoming PM, and surge in Indian Economy from June Onwards, conflicts our view. Confusion multiplies, when we hear the stories of Builders in liquidity trap or discount available in the market. Variations to the above reasons, prevent us from thinking straight. At this juncture, I am not even referring, need for liquidity, legal cost, combination of cheque/C*sh required or how  asset is going to be used or would it generate regular income or would I be able to enjoy it..

There are plenty of reasons, alas, we freeze.

We all know Warren Buffet to be Wizard of Stock Market. But, in the upcoming issue of Fortune…he brilliantly outlines his investment philosophy based on his two Real Estate Investments.

Its Must Read…

Some other day, we can discuss the lessons in detail. Though, to achieve his level of clarity in thinking is extremely difficult, yet the article debunk far too many myth that we carry in our mind.