tag:blogger.com,1999:blog-80375659349310608732024-03-05T17:15:20.700-08:00Big on stocks and Investing<b>.Simple Thoughts Can Make You Happy and Rich.</b>
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Predicting the rain doesn't count,building arcs does- Warren E. BuffettAseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.comBlogger22125tag:blogger.com,1999:blog-8037565934931060873.post-64379452617448316702013-01-05T23:33:00.002-08:002013-01-14T17:16:17.837-08:00Decoding Income Statement - Part 1Income statement is often misunderstood .........on a general level intention is to record revenues generated and cost incurred in the process of generating those revenues.<br />
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Often the source of confusion is due to misunderstanding between Income and cash flow. Cash flow statement's purpose is to record actual movement of cash where as income statement follows defined conventions known as accrued accounting. Now the question is how to recognize 'revenue' when the cash received today and service is to be provided say over next year. Also if a machinery is sold can the cash raised be recognized as revenue?</div>
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Few examples on the income statement vs cash flow to help understand-<br />
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<li>Cost is recognized when the materials are consumed not when they are paid for. Thus if a business buys machinery, cash flows out ,its recognized as cash flow (not cost).Cost is recorded as depreciation over time. </li>
<li>Salary to be paid to the employees is recognized as cost even before its to be paid, thus no cash flow has taken place (until the end of month) but cost is recognized. </li>
<li>A loan repayment results in cash flow but from an income statement point of view is not a cost. The outstanding liability of loan is reduced by the amount of asset reduction. </li>
<li>Large one time gains/losses like selling a owned land is recognized a 'extraordinary income'. Such income is not to be mixed up with operating income. </li>
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More to come in later part so stay tuned ... </div>
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Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-61003806462318782702012-10-20T22:50:00.002-07:002013-01-05T22:07:00.133-08:00 Decoding Balance Sheet <br />
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Continuing our this financial statements quest, lets learn
more about the Balance sheet(see earlier post <a href="http://bigonstocks.blogspot.com/2011/11/financial-statements-basics.html">here</a>). We should first analyze
what is being reported and measured.
Basically there are four primary parameters which are being measured </div>
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<li class="MsoNormal">Networth
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<li class="MsoNormal">Total
Assets </li>
<li class="MsoNormal">Capital
tied up in the business (capital employed)</li>
<li class="MsoNormal">Working
Capital </li>
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The below diagram gives an overview about the balance sheet </div>
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Assets</div>
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Liabilities</div>
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Fixed
Assets(FA)</div>
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Owners
Funds(OF)</div>
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Long
term Liabilities (LTL)</div>
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Short
Term Assets (STA)</div>
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Short
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Based on the above its now easy to derive the above terms
being used .. </div>
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<b>Owners Funds (Networth)</b> is a measure of owners funds in the
business which includes both the initial seed capital and reserves accumulated
as a result of the business output </div>
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OF = FA + STA – (LTL +STL)</div>
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So basically it’s a difference between the assets and the
liabilities of a business. Its also referred as book value. </div>
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<b>Total Assets</b> is a measure of assets which help the business to succeed as a growing concern. It can be
represented either from the asset side or liability side </div>
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TA = FA + STA
- Based on asset side </div>
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TA = OF+LTL+STL - Based on liabilities</div>
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<b>Capital employed</b> is a measure of long term capital in play
in the business. Often the rate of return as a percentage of capital employed
to compare investment candidates.It can be represented as </div>
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CE = FA+STA- STL
-Based on asset side </div>
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Or </div>
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CE = OF + LTL - Based on liabilities</div>
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<b>Working Capital</b> is a measure of day to day liquidity
required for business to function. A real estate business may hold lot of
assets however it may not be as liquid as a retail business.</div>
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Its represented as</div>
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WC = STA – STL </div>
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Or </div>
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WC = OW+LTL – FA </div>
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These 4 values are key parameters which should be understood. We will be using these numbers to make sense of the business also these need to be converted into ratios to improve our analysis. </div>
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Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-85938610457066804092011-11-07T17:44:00.000-08:002011-11-12T17:30:13.812-08:00 Financial Statements BasicsThe world is shouting stock ideas back and forth, you don’t know who’s right who’s wrong – Bulls eye buy stock ‘x’ its cheap sell stock ‘y’ it’s expensive. Everyone is an ‘expert’ and has an opinion to offer. What to believe?<br /><br />I have been there myself, I didn’t understand who was right and who had lot of hope built into his numbers. Well in reality no one is going to come and tell you where the best or bad deals are.<br /><br />A stock picker should be able to think for himself, if you have the knowledge and are willing to put an effort into understanding what’s behind these numbers you can make the decision yourself. Because the numbers will tell the story about the business, the numbers themselves mean nothing we should be able to infer the reasons behind them– the jump or drop in profits, change in margins etc.<br /><br />As Graham said “while buying a stock you are buying part ownership in a business” you will do well if the business does well. The three basics reports we need to understand to be able to make a ownership judgement are<br /><br /><ul><li><b>Balance sheet</b></li><li><b>Income statement</b></li><li><b>Cash flow statement</b></li></ul>All the above three reports are connected to each other, the income statements usually report on progress between two balance sheet periods. For example Q1 2011 income statement will be generating income from assets reported as part of 2010 balance sheet and profits generated will be reported as part of 2011 balance sheet.<br />There is no magic metric or ratio which can help us understand the business, we need to look at it from multiple angles to be in a position to appraise it correctly. <div><br /><span style="font-weight:bold;">Balance sheet :</span> The simplest way to understand the balance sheet is to look at two parts - Source of funds (Liabilities) and Use of funds (Assets). Basically where the money comes from and where its applied.</div><div><br /></div><div><ul><li><i>Assets : </i>Are Current assets (short term like Cash, Inventory, Accounts receivables and others) and Fixed Assets (longer term like Net fixed assets,Investment, Intangibles etc). Usually all these assets are represented on 'cost value' not 'market value' although this is debatable.</li></ul></div><div><br /></div><div><ul><li><i>Liabilities : </i>Are Current liabilities (short term Account payable,Short term loans and others),Long term liabilities (Long term loans like mortgages, debentures etc)</li></ul></div><div><br /></div><div><ul><li><i>Owners Funds</i> :Share capital and Reserves&Surplus. Its interesting that the money that the owners funded( 'paid up share capital') to start the company is also part of liabilities because the company has a life independent of the owners now .</li></ul></div><div><br />Balance sheet can help an investor understand the nature of business of the company, some companies are ‘more liquid’ (means they have less fixed assets but higher cash example retail but others like heavy engineering usually have more of fixed assets ). So look at a balance sheet as a listing financial value of assets (of various forms) , these assets are used to generate the profits which makes the company running. Keep looking at the sheet over the years and you will notice the story of how assets are changing and shareholder equity growing as a result. </div><div><br /></div><div>The basis of balance sheet is the double entry book keeping system. It was designed many years ago to make sure accountant does not make a mistake, so for every transaction the accountant makes two entries and they balance (Assets = Owners Funds + Liability)<br /><br /><span style="font-weight:bold;">Income Statement (Profit and Loss)</span> :It lists what the business has earned vs. spent over a period of time . It shows the ‘Net Profit or Loss’ as the case may be, the key thing to remember is that income from one period cannot be mixed up with next and must stick to the accounting standards.<br /><br />‘Revenue’ gives importance of item being ‘sold’ does not always means that cash (receipts) has been received for example: If a consulting company performs a work it can report it as revenue even though the cash will be received later.Similarly ‘Expenses’ also give preference to being recognized than paid so its identified that cash is due but may be paid at a later date.<br /><br />Besides the some accounting twists like above income statement is like you family budget of income minus expenses.<br /><br /><br /><span style="font-weight:bold;">Cash Flow Statement :</span> Unlike the income statement Cash flow statement shows the actual movement of cash. Its usually categorized into Operating activities cashflow, Investing activities cashflow and Financing activities cashflow.<br /><br />Cashflow statement can tell us if the business requires heavy expenditure to generate returns or not. Some businesses will constantly need buckets of cash to generate earnings and may not be a good one to earn for this reason. <div>Cashflow statement also tells us how much actual cash is coming in and we need to compare it with revenues from the income statement to understand better.<br /><br />We will take an approach of looking at the most important metrics first so that it can understand the financial framework and then delve into details. Until next time happy investing !<br /></div></div>Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com1tag:blogger.com,1999:blog-8037565934931060873.post-13512216277352612422011-11-06T05:37:00.000-08:002011-11-06T06:25:28.289-08:00Learning the language of businessAccounting is the language of business and its an imperfect language. Unless you are willing to put in the effort to learn accounting (read financial statements) you should not be selecting stocks yourself.-Warren Buffett. <br /><br />I very often find lots of information on stock ideas floating around in the web and tv but hardly people talk about accounting and financial statements. This troubles me because if you cant understand them you should not be buying stocks. I have thus decided to elaborate and share information on this. <br /><br />Lets try to make learning financial statements lots of fun... stay tuned !!!Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-11789862921092256192011-01-08T19:45:00.000-08:002011-01-08T20:10:05.176-08:00How exactly is an IPO price decided? I received a query from my friend and reader Ranjit. He has seen lots of IPO coming into the market and is unsure which ones are good and wants to understand this process of fixing the price so as to be able to make an informed decision. <br /><br /><span style="font-weight:bold;font-size: 1.0em">Methodology</span><br />The process of deciding IPO price is generally done by what is known as ‘Book building process’. <br /><br />Firstly the number of shares to be issued is decided and merchant bankers with book running lead manager appointed.These guys manage the whole show until the company is listed. The lower price end is known as the floor price and investors are expected to at least meet that price in order to make a valid application. Floor price is decided based on various factors like comparison with industry peers, past financial statements, track record of promoters and market sentiment etc. It is in the interest of the company to keep this price rational because if it’s too high investors may not bid for the issue and book building process will fail. This happened to companies like Wockhardt Hospitals,Emmar MGF etc.. The higher end of the range is maximum about 1.2 times the floor price this gives us the price range. <br /><br />Investors now bid for number as well as price and the highest price(within the range) at which the complete book can be sold is decided as final issue price. For example <br />Assume that the range is Rs 100 – 120, and only 80% of book can be done at 120 then the price is lowered to the price at which 100% of the shares can be sold. Investors who bid at a higher price are sold at a decided price and refunded the difference and investors who bid lower than the decided price are not allotted any shares and refunded completely. <br /><br /> Reliance Power was an example of a well marketed IPO, the company sold shares without any earnings from operations at the price of about 5 digit P/E and this left a bad taste in the mouth of investors when shares dropped below issue price. The company was forced to give a rights issue to pacify investors since the promoter does not want his reputation to be hurt. Once investor sentiment is hurt it’s very difficult for the company to raise money from the market again.IPO listed when market sentiment was at its peak and people were willing to pay really high prices for stocks but ultimately the market will fall in line with value regardless of marketing gimmicks. <br /><br />Coal India IPO was an example of well priced IPO this generated lot of interest and made money for the investors. Market respects good companies offered at fair prices. As a investor we must always try to read the ‘red-herring’ prospectus. This contains info about rational for deciding the price and describes the business of the company etc. We should carefully do an evaluation based on quantitative and qualitative factors. <br /><br /><span style="font-weight:bold;font-size: 0.5em;font-size: 1.0em">So why do IPO’s fail sometimes?</span><br /><br />Promoter’s short term greed is usually the key factor. If a new company comes into the market its price has to be rationally comparable to other listed companies in the same space. If an issue list during situation when market sentiment is driving risk aversion among investors even good issues may not get the attention they deserve. <br /><br />However once a company lists and begins to perform more people will line up to buy at higher prices thus pushing the price up and making the promoter rich in the process (assuming he is the majority share holder) however we live in a world dominated with fast –foods but junk food does come back to bite you and so will the mis priced IPO.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-4955018165584543362010-07-28T17:27:00.000-07:002010-07-28T17:33:16.146-07:00SKS IPOWhile investing in a IPO always try to go through the red-herring to understand the financials and risks.Usually IPO's are dressed up for sale so I avoid them unless the logic is compelling. Had a look at SKS, its india's biggest micro- finance company as per its current loan book.(about 3000 crore loans outstanding)<br /><span style="font-weight:bold;">Positives</span><br />1. Expertise in micro finance.<br />2. Company seems to be sound and growing fast, over 100% CAGR<br />3. Business logic is strong (rural growth) and high asset quality(low NPA.)<br />4. Backed by savvy personalities like Soros and Narayana morthy (Infy)<br /><br /><span style="font-weight:bold;">Negatives</span><br />1. High valuations. Over 5 to 6 times BV<br />2. Business will be debt heavy and will need capital infusion periodically (dilute returns)<br />3. The company will need to charge high interest rate from borrowers because it does not issue long term loans.<br /><br />Opinion:<br />I would avoid it unless playing for listing gains which are likely because there is no other listed NBFC in micro-finance space. The valuations are high( its being offered at 3 times the cost to pre-ipo investors) but market loves novelty and ‘x’ factor is boosted by high profile names attached to the companyAseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-14070363887037764432010-06-15T08:42:00.000-07:002011-11-06T06:30:27.564-08:00India's oil price confusion I have been reading up and trying better understand oil and gas sector. I found this good article on <a href="http://valuestocklplus2.googlepages.com/AGuidetoAnalyzingMacroSensitivitytoOilPrices.pdf">' Macro sensitivity of oil prices'</a> by Morgan Stanley on india's oil price confusion.Its interesting to see that multiple taxes are linked to the oil price so actually India's oil price confusion is actually a tax problem.Enjoy the read !Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-72664911861475196832010-06-08T15:06:00.000-07:002010-06-08T22:03:48.993-07:00Portfolio health check We all periodically go to a dentist/general practitioner to validate our well being, also check our credit card statement to make sure they make sense- why should investing be any different ?!<br /><br />As an investor we need to periodically do a 'health check' for the stocks we hold. If the health has got better we have an excuse to hold/add, If the patient needs medication -are the management up to it? .I mean that just holding the stock without any reason for doing so will not help your portfolio, also helps us to look back at our decisions and review the factors which made us to invest in first place.<br /><br /><span style="font-weight:bold;">Few points to check:</span><br />• Is the original investment logic still valid. <br />• Is the company generating adequate cash flow. <br />• Is the company is getting into areas which are unrelated diversification and reducing focus.<br />• Are the managers allocating capital rationally. <br />• Debt and tax levels. <br />• Profitability (ROE,ROIC) is it reducing/improving.<br />• Is the stock is valued much more that the business is worth..<br /><br />You may have your own checklist but it has to based on price vs. value equation in mind. As Warren says -In investing, just as in baseball, to put runs on the scoreboard, one must watch the playing field, not the scoreboard.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-70269712828705883892010-06-02T12:45:00.000-07:002010-06-02T12:51:23.729-07:00Investment Idea: Zen Technologies <span style="font-weight:bold;">Business</span>: Zen is 16 yr old company, primarily into simulation space for Police, Army, Navy so its sort of defense sector play. They like to call themselves as a ‘System Engineering’ company having skills in mechanical, software and electronics.<br /><br /> It’s important not to confuse them with other companies who work on off shoring model, Zen invests heavily in R&D and skills so that they can be at the cutting edge of innovation They are setting up a subsidiary for making games for platforms like PS/3 etc, will be launching their first game by end of 2010. . <br /><br /><span style="font-weight:bold;">Moat:</span> Low cost producer and familiarly with Indian procurement cycle and customer behavior. Any foreign company investing in defense sector needs have an offset cost. Not a great moat but building a brand takes time. <br /> <br /><span style="font-weight:bold;">Competition:</span> BEL (Bharat electronics) is partially into similar space however Zen is in niche sector. <br /><br /><span style="font-weight:bold;">Financials:</span> The results reflect that the company has graduated to a higher sales and growth path last couple of years (prior years the sales growth was flat) they seem to have gained a critical mass to at least remain at this level. FY10 sales is about 52 crore, profits 16 crore, the results are flat to marginally lower as compared to last year. Debt is minimal and margins are high. <br /><br /><span style="font-weight:bold;">Risks:</span> Threat from competition and due to over dependence on govt. orders earnings will be lumpy (fourth quarter bias) <br /><br /><span style="font-weight:bold;">So should you buy ?<span style="font-weight:bold;"></span></span><br /><br />This is a kind of stock you want to track and buy as the business improves, its hard to ‘load the truck’ considering lumpy results and evolving nature of the business. At Rs 190 and mcap of 180 crores is value for money as a small exposure.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com2tag:blogger.com,1999:blog-8037565934931060873.post-51534363399446662010-05-02T17:01:00.000-07:002010-05-09T06:04:36.153-07:00Are you scared ?Are you scared of adding money into the market fearing that you will lose it? Are you thinking of buying XYZ because its a hot stock ? <br /> <br />As Peter Lynch says - The key to making money in stocks, is not be scared of them. This point cannot be emphasized enough. He is right,its important to understand this while investing into the market. <br /><br />Think of yourself to be a part owner of a business and monitor the progress of the business periodically.Stock market is a strange place, as the price goes up more buyers will show-up to buy your share but if the business is doing good you would not like to sell your ownership. <br /> <br />I would not say its easy to figure out the value of a company before the market discovers it but then we all work is some industry which we know a lot about. Try to start buying undervalued stocks in the industry you know and understand much better that any analyst who is trying to make predictions sitting in his office. As you get more confident about your decisions you will feel better. <br /><br />Just like all other fears,'fear of stocks' too needs to be overcome by doing(not just dreaming or thinking)Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com2tag:blogger.com,1999:blog-8037565934931060873.post-29665426699009537632010-01-16T23:53:00.000-08:002010-01-18T10:12:36.584-08:00Dont worry be Happy :) <BR><br />As an employed person we have few limitations – <br /><br />1.You don’t have time to plan investments. <br />2.Typically you run from pillar to post during Jan to March period so that you can somehow achieve 1 lack saving allowed under 80 c. <br />3. You do manage to save at least 20% of our salary monthly but don’t know what to do with the money. It keeps your bank happy. <br /><br />There is a better way –<br /><br />Happiness is not a function of the money you make; you can happy today and now. So choose to be happy make sure you buy some peace of mind as you go along enjoying life.what can you do to steer clear from these limitations and allow yourself to be happy. <br /><br />1.<span style="font-weight:bold;">Buy Term Life Insurance:</span> Term insurance is the cheapest form of life insurance. If you the primary earner for your family you would want to secure your family in case the un-thinkable happens. This policy will protect them from this low probability but high impact event. <br />Typically for a 30 to 32 yr male it will cost about 25 to 27K for a 50-60 lack policy. SBI Life and Aviva have few policies whose sum insured keeps growing at 5% to 10% every year while the premium remains constant. <br /><br />2.<span style="font-weight:bold;">Buy a house : </span>Housing is a basic need while people keep arguing that renting is better showing “cash flow” calculations. The current tax laws give you rebate under 80c for principal repayment of hosing loan and 80d gives rebate for interest repayment. This basically means you do not have to worry about the tax saving until the tenor of your house loan. You can rather invest that money saved into equity funds /shares which will give you a decent return in the long term. <br /><br />Having a house of your own also works like an insurance policy since your family does not have to worry about accommodation or rent if the unthinkable happens. <br />(provided you have repaid the loan or your term insurance takes care of repaying the balance pending ). Keep the EMI in mind while deciding- <a href="http://groups.google.co.in/group/myindiastocks?hl=en">use this sheet to determine yours.</a><br /> <br />3.<span style="font-weight:bold;"> Buy a index fund/ETF:</span> I have discussed about <a href="http://bigonstocks.blogspot.com/search/label/ETF">ETF’s earlier</a>. If you don’t have time to evaluate business and determine which is better than other then it’s prudent to buy a ETF or index fund. This basically means that you a buying a slice of India so you will at least keep pace with market returns.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-62245257090365533062009-09-10T13:12:00.000-07:002009-09-10T13:16:59.557-07:00How to be a better Investor part IWhen you learn do drive a car there are some thing you have to know – like steering wheel, brake, clutch and how to use them. Why should investing be any different?<br /><br />Having a firm grip on fundamentals will help you when in doubt. Let’s look at the following, one post at a time. <br /><br />• Time value and Compound interest<br />• Asset allocation <br />• Industry dynamics <br />• Reading Financial Statements <br />• Valuation and Market capitalization<br /><br /><span style="font-weight:bold;">Time value of money </span><br />In an inflationary environment -Money is hand today is better than tommorow.Inflation as you know reduces the purchasing power of money. It’s happening all the time just that we tend to forget it and don’t adjust our returns for inflation. Some people buy gold as hedge against inflation, China is buying base metals.anyways.<br /><br />There are lot of concepts and formulas to calculate the future and present value of money but I will spare you the punishment!<br /><br /><span style="font-weight:bold;"><br />Compound Interest</span><br />Understanding compound interest is at the basis of understanding investing.<br />Let me ask you this - If I gave you the choice to buy Manhattan Island,NY for $24 would you do it ? <br />And a guy called Peter Minuit actually did just that. Sounds like a great deal! but the catch is that the year was 1626. Now suppose he had put this $24 bucks it in a saving account giving 8% compound interest - it would be worth $ 151 trillion today. That’s compound interest for you.<br /><br />A company estimated to compounding its earnings by 21% over 10 yrs is better than a company doing the same@ 20% for 10 yrs. Simple huh!. Point to remember is -Effect of compounding is small for a small number of periods, but increases as the number of period increases.<br /><br />Estimates cuts both ways though – at times the rate of growth can be fast so that the risks one take takes while buying the stock may not be risks at all if the growth forecasts are approximately correct. On the other hand if the rates are precisely wrong one can loose a lot of money – very quickly too. <br /><br />As an investor you must look at what a company has done in the past because as in life, stocks need to be understood backwards but lived forward. You can use a scientific calculator or FVIV tables to make these compound interest calculations simple. One easy way is the rule of 70 or 72 (which ever is divisible)<br /><br /><span style="font-weight:bold;">Rule of 72</span><br />I use this approach to eliminate lot of investment candidates, you can use it too!<br /><br />This is not accurate but handy tool to guesstimate – about how soon the money will be doubled. Let’s say Infosys declared an EPS of Rs 100 this year and expects to earn 200 in year 2018 - At what rate is it compounding? <br /> <br />The answer is 72 divided by 9(no of yrs to double) = 8% so if this is true I may be better of investing in savings accounts giving me 8% annually since its risk free. However the opposite is true if the company is able to do it in say 4 yrs (18%). Seems farley obvious but this is often forgotten by investors and institutions alike especially when they try to chase the latest fad. <br /><br />I will discuss about asset allocation in the next post – although volumes of books have been written on each of these topics but you can better off from the completion by this knowledge, if you are still awake that is! <br /><br />What do you think, would love to know your thoughts.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com2tag:blogger.com,1999:blog-8037565934931060873.post-83374375625555875662009-08-30T14:51:00.001-07:002009-09-10T13:21:03.593-07:00Oil India - Should you apply ?Oil India is coming out with an IPO to raise up to Rs 2,777 offering 2.4 crore equity shares. The price band is Rs 950-1,050.- should you apply ? <br /><br /><span style="font-weight:bold;">Business </span><br />The company is into E&P space and business model is similar to its bigger peer ONGC. <br />Company has primary assets in eastern India (assam, arunachal) and is more focused on being a onshore player rather than offshore. It has also selectively diversified across the oil and gas value chain by taking minority stakes in downstream businesses like refining, marketing and distribution. The oil gas mix is 60:40 compared to 90:10 for ONGC.<br /><br /><span style="font-weight:bold;">Financial and Valuation</span> <br />Mcap = 20,333 crore to 22,470 crore<br />Mcap to sales =2.80 to 3.10<br />PE(based on FY09 EPS) = 9.13 to 10.07<br />PE (based on half yearly nos FY10) = 6.87 to 7.5 <br />Cash on books = 6,100 crore<br />EV/2P = 3.6 to 4.1<br /><br /><span style="font-weight:bold;">Peer Comparison </span><br />OIL would trade at 3.6 to 4.1 x EV/2p which is at a discount to ONGC which is trading at 5.2x EV/2p. ONGC trades at 16 PE whereas OIL is at 10,the gap seems to be larger than justified. <br /><br /><span style="font-weight:bold;">Risks</span><br />1.E&P is the most risky business in the oil value chain however oil does not have a substitute till date and near future. <br />2. The price of crude is an unknown factor – if the price drops below $60 per barrel the business becomes nonviable (as told by ONGC chairman). <br />3. The subsidy policy of GOI is not yet clear and documented.Thus upside is capped until this policy continues. <br />4. Company is focused in one area – geographic risk.<br /><br /><span style="font-weight:bold;">Should you apply ?</span><br />Yes, I am convinced.The valuations are not cheap but not expensive either. Go for it at upper band, you may get modest listing gains but definitely it’s a business to be in for long term investors. We do not have many companies in this space and overtime GOI subsidy policy may be changed since oil bonds are not working out.The company is debt free and likely to have steady growth based on its reserves.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-44736341529231480252009-08-13T21:08:00.001-07:002009-08-14T05:42:59.500-07:00Six common mistakes<a href="http://www.flickr.com/photos/khadenikhil/3236992516/" title="photo sharing"><img src="http://farm4.static.flickr.com/3373/3236992516_293505cc35_m.jpg" alt="" style="border: solid 2px #000000;" /></a><br /><span style="font-size: 0.9em; margin-top: 0px;">Photo:<a href="http://www.flickr.com/people/khadenikhil/">Nikhil Khade</a></span><br clear="all" /><p><strong>Two golden rule of investing as told by Warren Buffet –<br /> 1. Don’t make mistakes<br /> 2. Don’t forget rule no1. <br /></strong><br />Let’s see some of the common mistakes -<br /><br /><span style="font-weight:bold;">1.Ask the wrong guy:</span> More than half the people who give you advice on CNBC or similar channels are technical analyst. He is a guy who cares nothing about the stock but its price.Would you go to a doctor who gives the same medicine regardless of your ailment?<br /><br /><strong>2.Regret </strong>- I wish I bought when Sensex was 7000 it’s moved up so I can’t buy now. Sensex is a small sample of few stocks.why would you not buy something which will have much more value than what the stock price is reflecting?<br /><br /><strong>3.Lack of Patience</strong> – My stock are “stuck in a range”, let me buy something that “moves”. Would you be more comfortable about owning a asset which dances to the tunes of the market by the minute, does liquidity guarantee returns?<br /><br /><strong>4.Book profits and don’t book losses:</strong> Oh I am great, my stock moved up,let me sell and “book profits”. Money is the same, it may be better to book losses elsewhere, if things are not going as planned. Once it’s clear that you are fighting a loosing battle would you keep rolling downhill?<br /><br /><strong>5.Flavor of the season:</strong> DLF and Unitech must be great companies, they talk about them all the time, let me buy. Always be logical, don’t do something because of any other reason besides your conviction. Lots of folks get their head shaven in Thirupati, would you do just because they did it?<br /><br /><strong>6.Blame the world:</strong> Everybody is ganging against me; “they” are the reason for my losses. If you don’t take responsibility for your actions, stocks are not a great place for you. <br /><br /><em><span style="font-style:italic;"><strong>Always remember – we have a market because people disagree.</strong></em></p><span style="font-style:italic;"><span style="font-style:italic;"></span></span></span>Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-41877968731255201642009-08-11T11:54:00.000-07:002009-08-20T12:13:06.661-07:00Update on Godrej Industries I have written earlier about<a href="http://bigonstocks.blogspot.com/search/label/Godrej%20Industries"> Godrej Industries</a>,it has delivered 100% returns. As expected, recent development is that the company is planning to come out with an IPO for Godrej Properties (GPL).Preliminary news indicate that GPL will be valued at 6000 crore. The current valuation of Godrej Industries is about 4700 crore, which holds over 80% of GPL and multiple other businesses. <br /><span style="font-weight:bold;">Whats the Idea ?</span><br />If you see Godrej Industries trade anywhere around Rs 120 to 130 mark, it’s a great buy, even on current levels (at Rs 145) it’s a good buy if you want to factor in the growth of GPL in couple of years.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-71006916020299894322009-08-06T07:04:00.001-07:002009-08-07T23:26:53.653-07:00Should you keep ridin'g the IT bus ?<a href="http://www.flickr.com/photos/khadenikhil/3082681774/" title="photo sharing"><img src="http://farm4.static.flickr.com/3109/3082681774_89ed647eb9_m.jpg" alt="" style="border: solid 2px #000000;" /></a><br /><span style="font-size: 0.8em; margin-top: 0px;"><a href="http://www.flickr.com/photos/khadenikhil/3082681774/"></a>photo:<a href="http://www.flickr.com/people/khadenikhil/">Nikhil Khade</a></span><br /><br /><strong>Should you cash out ?</strong><br />IT offshore companies have delivered about 50 to 80 % returns last couple of months. Particularly frontline IT stocks like TCS,Infosys have delivered good numbers and stocks have run up in a jiffy. The obvious question is -should you continue to ride or get off the IT bus? <br /><br/><span style="font-size: 1.0em"><strong>Bullish case </strong></span>– IT is a play on global recovery as the markets are stabilizing the worst is behind us. As the economy improves more work will be offshored by companies looking to reduce cost. IT companies are zero or low debt and make for a good long term investment.<br /><br/><strong>Bearish case</strong> – The recovery will be long and companies may not be able to deliver better results going forward. Customers will be demanding price reductions and volume pickup will be slow due to protracted global recovery. The stocks are already pricing in 20 to 30% growth so valuation look stretched. <strong><br /><br />So what’s the simple idea for you to make money?</strong><br />The revenue growth delivered is in the range of 10 to 12% and profit growth is around 17 to 19%. Companies have delivered better majorly on basis of reducing expenses which if reduced beyond a threshold may have a negative impact.Althow i dont see that happening but the point is cost cannot be reduced beyond a limit.<br /><br />At 20 to 22 times current year earnings the risk reward is in favor of bearish case, you may already be in final leg of the IT rally. The stocks may not sell off a lot but major part of stock price rise is over and done for 2009 I guess.Its prudent to look for better bargains rather than waiting for the stock to reach a particular price point.<br /><br /> <br />You can use this rally to get out of these expensive frontline stocks into midcap trading at a discount. However the catch there is you need to be choosy here.( earnings are more volatile for these stocks). I would prefer to move into some financial or consumer oriented stocks at reasonable valuations.<br /><br />What are your thoughts ? I would love to hear from you? !! lemme knowAseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com2tag:blogger.com,1999:blog-8037565934931060873.post-19400989342020739352009-08-01T06:22:00.000-07:002009-08-07T11:41:01.087-07:003 points about NHPC IPO- should you apply ?<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaCejSeDFHGQnO1yC2lVyma-dNUfAH5V_ZAmBD5YhfdeN10-Qs0cT-jACqqpMv8VEa9_4N7iJVpifqeL2g0evNdNwM0Mn_P4Kb7UQzqqoijzv8Bk_SZHktWunFzg8AefCNfk34sEtpz_g/s1600-h/nhpc.JPG"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 146px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaCejSeDFHGQnO1yC2lVyma-dNUfAH5V_ZAmBD5YhfdeN10-Qs0cT-jACqqpMv8VEa9_4N7iJVpifqeL2g0evNdNwM0Mn_P4Kb7UQzqqoijzv8Bk_SZHktWunFzg8AefCNfk34sEtpz_g/s320/nhpc.JPG" border="0" alt=""id="BLOGGER_PHOTO_ID_5365055217542276130" /></a><br /><br />NHPC is coming out with an IPO of 15% of its share capital (167 crores) at a price band of Rs 30 to 36. One third of issue proceeds will go to the government (about 2000 core) and rest to the company (4000 core). ICRA has rated the issue as “average”, 3 marks out of 5. <br /><br />You either have to play this for listing gains or for a long term horizon(at least 4 yrs).While the issue looks expensive but may have some listing gains for a couple of days due to trading interest– market conditions permitting. This issue is more expensive than recently concluded Adani power(coal based power generation)<br /><br /><strong><strong>#1 Company’s Business </strong></strong><br />NHPC has 13 hydroelectric power stations operational (making power from water) with total installed capacity of 5,175MW. The company is engaged in the construction of 11 projects with installed capacity of 4,622 megawatts. Thus if all goes well the company will have about 10,000 MW capacity by 2012. Seven projects have been identified to receive the benefits from this IPO. <br /><br /> While during the project planning itself the company gets into contracts with its customers these contracts are called Power purchase agreements (“PPA”).In the current year the company sold power at price of Rs 2.03 per unit and the company & its subsidiary generated about 17,000 MU in total..Being a PSU, i dont think they<br />can raise prices easily.<br /><br /><br /><strong><strong>#2 Valuation </strong></strong><br />Market Cap basis <br />1. Market cap = 40,225 crore (upper band) to 33,546 (lower band) <br />Mcap/ mw (2009) = 7.77 to 6.48.<br />Mcap/ mw (2012) = 4.0 to 3.35 – if all goes as planned. <br />2. PE based on 2009 EPS = 36.7 to 30.61<br /><br />I dont have enough info to do a "Sum of parts" valuation.However if the company is able to generate 17,000 mu from 5175 mw @ Rs 2. We can do guesstimation on the sales once 10,000 mw is achieved.<br /><span style="font-weight:bold;"><br />Peer group valuation</span> <br />The only other major player in exactly the same space is JP Hydro which is trading at about 30 PE but they seem to operating a project of 300 MW.NTPC is at about 22 to 23 and Tata power about 30 PE( as on 01-aug-09). All these players have mcap/mw of about 3 or less. Having said that,the operating margins may be slightly better for NHPC and it is insulated from fluctuation in coal prices.<br /><br /><strong><strong>#3 Risks</strong></strong><br />1. The gestation period in hydro power projects is much longer since there is need to acquire land , get clearances and then construct the plant etc. Thus its may be more risky compared to coal based plants. <br /><br />2. Unavailability of water and lack of rainfall may impact the output. <br /><br /><strong><strong>So whats the simple idea? - Should you apply ?</strong></strong><br />If you are risk averse investor <span style="font-weight:bold;">avoid</span> the issue at this price.Although the barrier to entry are high,the business is capital intensive and company may need to dilute equity periodically. If you want to play the trading bounce and have guts - go for it, but do exit once you get the bounce.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-4151480863633297372009-07-29T13:26:00.000-07:002009-08-05T20:43:13.858-07:003 Points to understand ETF<strong>#1 Why you should care about ETF’s</strong><br />Investors expect mutual fund mangers to outperform the markets since they are paying them for it.However in the recent crash most MF did worse than the index and when the markets picked up steam most MF managers were holding huge amount of cash.<br /><br /><strong> So you may ask- is paying money to loose money a smart thing to do? </strong><br />Let’s look at an alternative Mr. ETF. ETF allows us to diversify into a basket of multiple stocks and yet trade just like a single stock. ETFs trade at prices that closely match their underlying assets, so for example a Gold ETF like “GoldBees” is based on domestic gold prices similarly another one based on prices of basket of index stocks - "NiftyBees" or bank stocks etc. <br /><br /><strong>#2 How does ETF compare with an diversified mutual fund ?</strong><br /> <br />Mutual funds are not listed on the exchanges. When you purchase shares in an open-ended mutual fund, new shares are created . However ETF are traded between investors, you can do everything with an ETF unit which you can with a stock. example- market order,stop-loss and write put or call options. <br /><br /> Mutual funds are actively managed- frequent buying and selling by fund manger whereas ETF’s are passive investment. If the index changes then the ETF fund manager sells the security which has been moved out of the index and buys the one which has been included. Which basically means you will be paying less taxes and fees for ETF,<br />Although you will pay a brokerage commission and STT (for securities ETF) to buy or sell them.<br /> <br />Its better to buy stock ETF when markets are trading at lower PE something like 12 to 14.5 is good.If you are planning to do a SIP (systematic investment plan) then a good mutual fund may turnout to be a better than investing in an ETF. Basically the point is buying ETF as an SIP does not appeal to me. <br /><br />ETF are easier to trade and can be bought at current NAV where as mutual funds are always bought at previous days closing NAV.<br /><br />Need to maintain a DEMAT account to buy ETF, don’t need one for mutual fund.<br /><br /><strong>#3 What about Gold ETF ?</strong><br /><br /> Gold ETF are a good idea, its a way to own gold in electronic form traded on the exchange. You don’t have to worry about storing, purity and chase multiple jewelers to find the best price to buy / sell. <br />Gold ETF are based on corresponding movement between gold prices. Tax wise also it makes sense - STT is not charged for since GOLD is not “securities”. Long-term capital gains tax is applicable after 12 months from the date of purchase where as its three years in the case of physical gold. Also, unlike physical gold, investments in Gold ETFs are exempt from wealth tax.<br /> <br />So whats the simple idea?-So should I buy an ETF?<br />Multiple options are available in the market so do your research before making a firm decision.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-2849030098403846612009-07-19T04:43:00.000-07:002009-07-27T08:05:04.964-07:00If you cant beat Mr. Market.. join himI am not sure, how many market pundits predicted that markets will rise 60% in such a short time.In Jan 2008, when markets hit 21k, we heard predictions like 30k or 40k but we all know what happened.<br /><br />My point is that its very very hard to predict the market. A lot of self styled "experts" try to make predictions, even if they do get it right its impossible to be consistently right. I would not like to give my hard earned money to these guys.It has also been proven over the years, that even the best fund managers under perform the index over long term.<br /><br />Given the above problem, how can we benefit from this -why not choose a strategy whict at least guarantees you returns which mirrors markets returns.<br /><br /> Index funds and ETF allow you to do just that.Refer this <a href="http://www.investopedia.com/articles/mutualfund/05/ETFIndexFund.asp">link for differences</a>. Will discuss more about ETF in next post.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0tag:blogger.com,1999:blog-8037565934931060873.post-48642820877664295122009-06-22T23:13:00.000-07:002009-08-05T10:39:31.177-07:00Analysis Godrej IndustriesI have been analysing and buying godrej industries.<a href="http://groups.google.co.in/group/myindiastocks/files?hl=en&upload=1">You can download the number analysis here.</a>The company is a kind of holding company for multiple business that godrej operates. The businesses include from agro retailing to soaps, hair dyes to food and beverage,home insecticides to industrial surfactants.<br /><br />The rationale for investing is the furure market for Affordable Housing.This business is going to have great economics in downturn -construction costs have come down, steel, cement prices are down, plan costs and mortgage rates are down and people have disposable income.Government is also planning for some policy action - this will act as tailwind. Management seems to have woken up and is doing a buy back worth 100 crore.<br /><br /><br /><strong>Good Businesses </strong><br /><strong>Godrej Properties (GPL)</strong> GIL holds 80.3 % in GPL.<br />The most attractive piece of this conglomerate is Godrej properties. GPL has been focusing on its developing residential townships and commercial in tier 1&2 cities like Mumbai, Pune,Kolkata , Hyderabad ,Chandigarh,Chennai and Kochi. In any development, it does not allow land price to exceed 30 per cent of the selling price of the developed property (the average is only about 10 per cent). This protects the company from fluctuations in land prices.<br /><br />Management is increasing capital allocation and focus to GPL and hopes to be one of the prime player in this fast growing space. Godrej Properties' land reserves currently stands at 78.87 million square feet as of May 15, 2008, it has completed a total of 19 projects consisting 13 residential and six commercial projects, aggregating to approximately 3.62 million square feet of area.<br /><br />A company called Godrej & Boyce also owns about 3000 acres of prime land in Mumbai, they will lease the land to GIL and GPL will develop it. This land bank can be conservatively valued at 40,000 to 50,000 crore (@ Rs 3500 per sq feet). GPL will have rights to develop this land ,this will give steady revenues and margin of safety to GIL stock since it owns more that 80% of GPL.<br /><br />GPL is also going to come with an IPO, considering the land under development the issue expected to value the company at about 3000 to 4000 crore.<br /><br /><strong>Godrej agrovet </strong><br />GIL holds 75.2 % in Agrovet<br />Agrovet is into Animal Feed,Integrated Poultry and Retail business. These are high ROCE business with a huge potential. Current turnover is about 1500 crore.Agrovet also has 100 acres in bangalore which can be roughtly valued at 100 to 150 crore.<br /><br /><strong>Godrej hershey</strong><br />GIL holds 43% in Godrej hershey<br />This business too will have great market as india is becoming a younger country and confectionery is at a nascent stage.Godrej has a jv with hershey to manufacture and distribute confectionery, snacks and beverages across India.Company acquired a 100% stake in Nutrine Confectionery Company Private Limited, the largest player in the Indian confectionery market. The acquisition gives an ownership of the Nutrine brand. Current turnover is about 400 crore.<br /><br /> <strong>Godrej Saralee</strong><br />GIL holds 20% in Godrej Saralee<br /> Is into home insectiside, hair care and aerosols business - "Good Night", "HIT" , "Brylcreem" and "Ambipur" are leading brands.Current turnover is about 800 crore and its high ROCE business.<br /><br /><strong>Godrej Consumer </strong><br />GIL holds 21.6% in Godrej Consumer.FMCG business has brands like "Cinthol","Fairglow" and "Ezee".Soaps depends on veg oils and competes with HUL they seems to be screwing up.<br /><br /><br /><strong>Bad businesses and Negatives </strong><br />The oil and chemical business is not good it eats up capital and is basically a commodity business. The structure of the company is complex and leads to unallocation expenses which impact value.It becomes difficult to value the company because the change in stake across so previous results are not easily comparable. Such multiple business companies always trade at a discount to fair valueAseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com1tag:blogger.com,1999:blog-8037565934931060873.post-82476969313307251662009-06-14T00:27:00.000-07:002009-06-22T08:01:49.242-07:00Analysis - Federal BankI did an analysis on federal bank of India after FY09 results . <a href="http://groups.google.co.in/group/myindiastocks?hl=en">You can download from here</a>, @Rs 230 to 240 i found it to be trading at least about 30 to 35% below being reasonably valued.<br /><br /><strong><em>Positives</em> </strong><br />A private sector bank trading at a discount to BV,PE =8,Div=40%.CRAR-tier 1 is healthy at 17.42 % and provision coverage is one of the best.Good NIM @ 4.28 and steady NII.Low Gross and Net NPA at 2.63% and 0.3% respectively.Bank is growing its business in gulf - source of deposits for kerala.Has over 600 branches and growing, it helps to have a good network.<br /><br /><br /><strong><em>Negatives </em></strong><br />The bank did a 1:1 rights issue about 16 to 18 months back @ rs 240. RONW in short term may not grow very fast due to this excess equity.RONW is expected to be in range of 13 to 14% for next year or so.Tax as a % of profit is increasing.<br /><br />Other private banks like ICICI and HDFC are trading at PE's in range of 20'es and two times p/b. I am more comfortable with Fedral banks valuation it does not seem to be a sexy stock.I own the stock.Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com1tag:blogger.com,1999:blog-8037565934931060873.post-24785151200389353922009-06-07T07:43:00.000-07:002009-06-14T00:45:13.574-07:00Lessons from GrahamAs an investor we have do focus on few things and do them correctly. Learning from experts like Ben Graham and Warren buffet is one of the "must do"- here are a few points from Ben Graham which i try to remind myself every morning <br /><br />Investment is most intelligent when its most business like <br /><br />1. Know your business -Know what you are doing, know the value of securities. <br /><br />2.Do not let anyone else run your business - decide what has to be done with your money. <br /><br />3. Do not enter a business unless reliable calculation shows that you will make money.Base your decision on arithmetic not optimism.<br /><br />4. Have courage on your knowledge and intelligence.Act on your judgement.Courage becomes supreme virtue once judgement is at hand.<br /><br />5. The secret of being being financially independent is inside yourself.<br /> If you become a critical thinker and let not the noise of the market drive your opinion you can take advantage of even the worst bear markets. Make your own discipline and let not mood swings of people drive your financial future<br /><br />6. You are neither right or wrong because people agree with you.<strong><br />To be a investor you should be a believer in better tomorrow - stocks are not about the past </strong>Aseem Kapoorhttp://www.blogger.com/profile/03100705464735756251noreply@blogger.com0