Dont worry be Happy :)

As an employed person we have few limitations –

1.You don’t have time to plan investments.
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.
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.

There is a better way –

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.

1.Buy Term Life Insurance: 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.
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.

2.Buy a house : 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.

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.
(provided you have repaid the loan or your term insurance takes care of repaying the balance pending ). Keep the EMI in mind while deciding- use this sheet to determine yours.

3. Buy a index fund/ETF: I have discussed about ETF’s earlier. 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.

How to be a better Investor part I

When 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?

Having a firm grip on fundamentals will help you when in doubt. Let’s look at the following, one post at a time.

• Time value and Compound interest
• Asset allocation
• Industry dynamics
• Reading Financial Statements
• Valuation and Market capitalization

Time value of money
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.

There are lot of concepts and formulas to calculate the future and present value of money but I will spare you the punishment!


Compound Interest
Understanding compound interest is at the basis of understanding investing.
Let me ask you this - If I gave you the choice to buy Manhattan Island,NY for $24 would you do it ?
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.

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.

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.

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)

Rule of 72
I use this approach to eliminate lot of investment candidates, you can use it too!

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?

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.

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! 

What do you think, would love to know your thoughts.

Oil 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 ?

Business
The company is into E&P space and business model is similar to its bigger peer ONGC.
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.

Financial and Valuation
Mcap = 20,333 crore to 22,470 crore
Mcap to sales =2.80 to 3.10
PE(based on FY09 EPS) = 9.13 to 10.07
PE (based on half yearly nos FY10) = 6.87 to 7.5
Cash on books = 6,100 crore
EV/2P = 3.6 to 4.1

Peer Comparison
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.

Risks
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.
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).
3. The subsidy policy of GOI is not yet clear and documented.Thus upside is capped until this policy continues.
4. Company is focused in one area – geographic risk.

Should you apply ?
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.

Six common mistakes

Photo:Nikhil Khade

Two golden rule of investing as told by Warren Buffet –
1. Don’t make mistakes
2. Don’t forget rule no1.

Let’s see some of the common mistakes -

1.Ask the wrong guy: 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?

2.Regret - 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?

3.Lack of Patience – 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?

4.Book profits and don’t book losses: 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?

5.Flavor of the season: 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?

6.Blame the world: 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.

Always remember – we have a market because people disagree.

Update on Godrej Industries

I have written earlier about Godrej Industries,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.
Whats the Idea ?
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.