Archive for category Moneysights
*Am caught up in some personal engagements and hence haven’t been able to update the blog frequently. Hoping to get back to normal posting frequency in 15-20 days.
Doomsdayers are having a field day. The Business channels are having a gala time earning ad revenue and spouting useless crap like ‘Sensex will be range bound’ (oh yeah, the range is 10000-21000), ‘The market is jittery/nervous’ (I really don’t know what that means), ‘The market is cheap by FY13 estimates’ (so, we have already skipped 2012? The world was supposed to end, no?) and so on. I am actually surprised someone pays to advertise on these channels.
Anyway, I can go all day in this media bashing exercise. However, moving on to maybe what I think is an important concept to understand and practice (rather than just paying lip service), I write at moneysights on the importance of not paying attention to economic prediction but just focus on good businesses at good/bargain prices.
Full column here. Excerpt below –
How many times over the past few weeks have we heard these statements?
- Sensex is going down! You don’t know? The Indian story is over!
- Indian economy is tainted by corruption. This is turning off foreign investors in various sectors. Where do you expect the Sensex to go other than Southwards!
- High inflation means lesser consumption by consumers and hence lower sales for companies which means the stock of the companies & hence the Sensex will go down
- To control inflation, RBI has increased interest rates. This will turn off companies from investing in fixed assets and impact India’s growth.
- Do you know Greece will default? We are an interconnected, global economy now. The tremors will reach the Indian stock market and that’s the reason it’s going down.
I would take a bet that almost everybody would have heard one of these statements, if not all over the past few weeks.
Maybe all the bullet points above are true. Maybe they all aren’t. Who knows? Even if someone knows, why on earth will he be sitting in front of the camera and giving gyaan? He would be somewhere in Greece Golf island playing Golf. Oops did I say Greece? That’s a taboo these days, ok, change it to Canyon Islands, Oops again, Darn it 🙂 There are no safe heavens anymore!
Anyways, I don’t know if you have noticed this – Every time any business TV channel and its famed economists predict a downturn, the market surprises them. Once the market surprises them and moves up, they start blaring out upward targets like no other. Then the market once again surprises them. And the cycle continues! If you ask me, you need to turn off business channels and read a book. Or listen to music. Or just sleep. It is much better usage of your time.
Think of it, if everybody knows and predicts the Sensex will go down, then technically everybody should be selling, right? Why it is not happening, why are we still at 17500-18500 levels? Remember 2007, when even the vegetable vendor used to give stock tips? This time around is similar too. Just that this time there is Sell tips. Almost everybody is bearish.
What should be your take away from this mumbo-jumbo? Simply put – Nothing!
And how do you know a good business from a bad business? Or a good price from a bad price? Well, there are a lot of stock screening and stock valuation techniques for that. But at the end of the day, as Rakesh Jhunjhunwala says “The value of a stock and beauty of a girl lies in the eye of the beholder” 🙂
In the new moneysights column post, I yet again try to delve into mutual fund choices and the benefits of each. I reiterate – if you don’t have sufficient time to analyze and track stocks, invest your money in mutual funds. The barriers to investing are practically non-existent today (buy/sell a stock at a click of a button, and using your online banking account) and hence all the more care needs to be taken about hard earned money not thrown after bad investment choices.
At the end of the post, I also try to list out which mutual fund type would be suitable, depending on your time horizon and personal needs.
So, after reading this post, you become thoroughly convinced of investing in mutual funds for the long term. It also gave you an idea about some mutual funds which have had a safe track record in addition to generating superior returns. Let’s say you land up at one of the mutual fund offices/websites to buy a mutual fund.
After the customary, what is your first name, last name etc., the mutual fund agent asks you “Sir, which option would you like to go with – growth, divided payout or dividend re-investment?” and “Sir, would you like to go for a debt fund or a equity fund” and you go, “eh? Come again, what are those alien sounding options, and how do they differ from each other?”
This post will attempt to explain these options in brief (there is another option in mutual funds called ‘bonus’. This post will not talk about it except to say that none of the bonus funds are in the top ranking mutual funds and hence it is relatively safe to put them in the ‘hard to understand’ bucket and ignore this option). So, lets begin.
HOW DOES DIVIDEND PAYOUT OPTION WORK?
The mutual fund would declare dividends from time to time and pay out to the investors. For example, if HDFC Top 200 – Dividend payout option is selected, the face value of this fund is Rs. 10, while the NAV is Rs. 50. If the fund declares a dividend, say 10%, the dividend payout is Re.1 (10% of Rs. 10 face value – dividend is never a percentage of NAV, its always a percentage of face value and the face value of almost all mutual funds today is Rs. 10/-). The NAV falls by Re. 1 and becomes Rs. 49, while Re. 1 is paid out to you.
HOW DOES DIVIDEND RE-INVESTMENT OPTION WORK?
Taking the same example above, Re. 1 is not paid out to you. Rather, the same Re. 1 is used to purchase additional units of the same scheme. The NAV still falls by Re. 1 but the number of units you hold increases.
HOW DOES GROWTH OPTION WORK?
No dividends are paid in this option. Rather the gains by the mutual fund scheme are invested back into the same scheme and gain is reflected in the increased NAV.
At this point, you become frustrated with all the mumbo-jumbo and ask the mutual fund agent 1 simple question – “Which option is better for me?”
The answer, as with every financial matter is “It depends!” and it depends on 3 factors –
- Type of fund – Equity or Debt
- Holding period – Short term or Long term
- Type of income – Dividends or Capital gains
Let’s dig in a little deeper and find out which scheme suits you better.
Hope you enjoyed the post and more importantly, I hope I have not confused you with my jumbled up thoughts and information.
Feedback, as always, is welcome.
I continue to expose my follies shamelessly in the latest Moneysights column, exploring the subject of Psychology in Investing.
We’ve all heard about investing being 99% art and 1% science. And the 99% art is 80% psychology and 19% luck. And 80% psychology is…ok, I am just making up numbers now. I am like that investor who carefully sorts out his profit percentages and makes them up to sound magnificient but never bothers about losses. Given enough numbers, anybody can convince anybody, including himself.
Without further adieu, I cover three stocks in the latest column – Shriram Transport Finance (STPC) – I really like this stock, but am unable to convince myself to buy at any price; SKS Microfinance (SKS) – Inspite of a very steep correction, I still can’t understand the stock and Allied Digital (ADS) – which is in a very promising space but beaten down due to supposed audit irregularities.
Here’s an excerpt (full column here)
I have often gone through a situation where I like a stock but don’t like the price. Let me explain through an example. I liked Shriram Transport Finance (STFC) as a stock, but I didn’t like the price which was northwards of Rs. 800 in Feb-March time frame this year. I told myself, if STFC falls below Rs. 700, I am going to buy that stock. Well, STFC did fall below Rs. 700 due to a RBI action (Monetary policy announced on May 3rd, 2011 has a new guideline whereby all loans by banks to NBFCs will now not be considered under priority sector lending (PSL)). The market took offence to this monetary policy, reacted to it by punishing STFC. At one point, it touched Rs. 610 (the price chart below depicts it).
Did I buy the stock? Nope. I was waiting for the correction and the stock to bottom out. I told myself, the 52 week low is Rs. 542. If the stock goes below Rs. 575, I will buy the stock. As it turns out, only 20% of STFC’s funding comes from Banks (the rest being retail and institutional borrowing). The stock promptly went up and due to some anomaly touched Rs. 615 again. Did I buy the stock even after knowing this? Nope. You see, I was waiting for the market to correct, the stock to correct, everything to bottom out so that I can royally come in and buy that stock.
The stock began its north move once again. Rs. 625. Rs. 640. I was now anchored to the price of Rs. 610. I told myself, if the stock moves to Rs. 610 any time again soon, I am going to buy that stock. Unfortunately, the market hasn’t given me a chance yet and its quoting at Rs. 696 now.
I am not too sure if I’d buy STFC at this price. I am analyzing the business right now, all over again and it looks to me that the EPS for FY12 might be in the range of Rs. 55-Rs. 65. Assume a PE of around 13 (current PE), we are looking at Rs. 780 as the stock price. The current price is at a decent discount to the expected price. Will I buy it? You see, I am still waiting for that correction.
Hope you enjoy the column and please do send across your brickbats and comments on how you laughed on my follies over beer. Or maybe I should start writing a column on the different investing styles between North and South Indians. I might just attract the entire Rediff traffic here 😉