Source : CNBC-TV18
Ispat Industries has a debt of about Rs 6500 crore. However, the company has plans for expansion, for which it wants to take the equity route. Speaking to CNBC-TV18, Anil Sureka, ED Finance said that they expect debt to come down by close to Rs 800 crore over the next four quarters. He added that they will finance their capex plans via promoters, internal accruals and convertible instruments.
Talking about the company’s expansion plans, Sureka said they will up their HR coil capacity to 3.6 mt and will also add a blast furnace. A 4.5 mt pellet plant and a one mt coke over battery has also been planned. They will also be setting up a 1200 MW power plant costing about Rs 5000-5500 crore in Chhatisgarh
Sureka clarified that LN Mittal has showed no interest in Ispat Industries. According to him, steel prices will improve further on raw material pressures.
Excerpts of CNBC-TV18’s exclusive interview with Anil Sureka:
Q: Before we talk about your expansions, just talk to us a little bit about what you are doing on the capital side. You’ve got nearly Rs 7,000 crores of debt. How much of that are you in a position to repay over the next four quarters? Would you need to raise any equity to finance some of these expansion plans? Just give us a layout.
A: Today you must have seen that our company has given a notice to the stock exchange for giving a warrant to the sponsors and that meeting will be taking place on December 22. This is basically to raise the equity side and the expansion scheme which of which we are now are in the implementation process, most of the money will be raised through the equity rated instrument only. That is also the way we are going to correct our debt equity ratio.
Q: Could you throw some numbers here? How much money would be pumped in by the promoters specifically, what their stake would go up to, whether you would issue any equity to non-promoter shareholders and what the debt will come down to in the next four quarters?
A: In the next four quarters the debt will come down by close to Rs 800 crore. How much equity we allot to sponsors will be decided in the board meeting only. Normally in a year we can give 5% equity voting rights to the sponsors. So it will be within that range.
Q: Where does your total debt stand at right now?
A: It is actually Rs 6500 crore.
Q: There are all kinds of rumours circling the market and you would be the best person to address them. Is it true that the Mittal family is showing any kind of interest in Ispat and you are in any sort of talks with them for some kind of stake sale?
A: This company belongs to the Mittal family only, Pramod and Vinod own the company.
Q: We are talking about Lakshmi Mittal’s family out here?
A: No I don’t thinkso, there is no such thing.
Q: Along with the debt reduction, what kind of capacity addition plan is it that Ispat has over the next four-six quarters?
A: We have planned that we’ll increase the HR coil capacity to 3-3.6 million tonne and we are also adding a blast furnace to support the capacity. We have also planned a pellet plant of roughly 4.5 million tonne. These are the major capex plan we have launched.
In addition to these, we have also launched a coke oven battery of 1 million tonne capacity. That will be in a separate SPV and it will be in a joint venture. All other projects will be in Ispat Industry.
Q: Could you give us a timeline of when this coke oven and the pellet plant would be up and running? What is the total investment that is required for all these expansions that you are talking about?
A: The coke oven will cost roughly Rs 900 crore and the pellet plant and the 3.6 million tonne blast furnace it will cost roughly Rs 1600 crore. The timeline for the pellet plant is roughly 27-months, coke oven is about 24-months and the other project between 12-16 months time.
Q: What kind of pricing do you see steel holding over the next four-six months as you go through the process of cleaning out debt and expanding capacity as well?
A: The steel prices will further improve, that is the industrial view because there is a lot of pressure on raw materials also. Raw material prices are going up and everybody knows that next year, the way things are happening in the iron ore business, industrially also the prices will go up.
Everybody is expecting that there will be a bit of upward movement in the raw material and that it should be the same in the HR finish goods also.
Q: Give us some details on the power project in Chhattisgarh. What kind of investment it would entail, by when you expect to commence work out there and what the capital investment structure is out there?
A: First I would like to address the 110-megawatt power plant which is already in the construction. This will be commissioned by November 2008. This is based on the blast furnace gases at Dolvy and it will meet roughly 30% of the requirement of the steel plant. So that will bring down the cost of power substantially.
Now coming to Chhattisgarh, we have signed an MoU with the government of Chhattisgarh for setting up a power plant of 1200 megawatt. It should cost around Rs 5000-5500 crore. Presently we are in the process of tying up the fuel, once that is tied up, then we will do the other activities too like the environmental clearances of the sector, etc parallel to that. But this will all be in a separate company, not in Ispat Industry.
Q: Just to ask that question again, since it keeps cropping up, are you sure that Lakshmi Mittal and Vinod Mittal have had no discussions about any kind of a joint development plan or expansion plan under the Ispat umbrella in India?
A: To my knowledge I am 100% sure.
Q: One word as well on what exactly you might look at in this equity route to raise finances?
A: One, we are talking to the sponsors. This week we will have a meeting for the allotment of warrant to them and the Board will decide. The other is we are raising finances for this Rs 1600 capex that we have planned. This will be mostly support by the sponsors, it will be a combination - sponsors, intellectuals or maybe some convertible instruments.
Q: But no more debt will be loaded on balance sheet, right?
A: The debt burden will not be much, we are trying to bring down the debt.
Monday, December 17, 2007
Ispat to fund expansion plans via equity route
Tuesday, September 25, 2007
Federal Reserve (USA) Credit Crunch
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Friday, August 31, 2007
Subprime's New Song: The Worst Is Yet To Come
| By Susan C. Walker, Elliott Wave International August 28, 2007 Remember that catchy love song that Frank Sinatra made popular in the 1960s, "The Best Is Yet To Come"?
At the risk of mixing musical metaphors and styles, it looks more like the sun has deserted us right now in the financial markets, and we're about to see "The Dark Side of the Moon," the title of Pink Floyd's 1973 smash album. With the subprime mortgage problems reaching farther and farther out to touch hedge funds, U.S. and European banks, mortgage companies and money-market funds, what we're going to experience sounds more like "The Worst is Yet To Come." That's because the financial markets must contend not only with the credit crunch brought on by rising foreclosures now; they must also deal with the repercussions from more foreclosures over the next 18 months as more adjustable-rate mortgages (whether subprime or not) reset from low teaser rates to higher interest-rate levels. How bad can it get? Investment adviser John Mauldin recently published a month-by-month account of the dollar amount of mortgages that will be reset through 2008, and the largest reset amounts pop up in the first six months of next year. In fact, as he points out, the $197 billion of mortgage resets so far this year is "less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007, or $521 billion." So, we haven't even begun to feel the pain yet. It's bad enough for the folks who will find that they can't keep up with the higher mortgage payments and will have to move out of their homes. But the financial markets won't be catching a break either. The antiseptic phrase used to describe the situation is "repricing risk." That means that investors have woken up to the fact that the AAA-rated mortgage-backed securities and derivatives they invested in look more like junk bonds now. This eye-opener causes them to want higher yields from what they now see as riskier vehicles. That new investor caution plays out this way: investment banks, hedge funds and any other entity that bought securities backed by subprime loans now find it hard to sell the darn things. It's almost the same as homeowners trying to find buyers for their homes – nearly impossible in a market where home prices are falling. In the financial markets, it's nearly The Fed can try to calm such fears all it wants by lowering the discount rate and giving banks more time to pay back loans (from overnight to 30 days), but the real problem can't be fixed with more access to credit. The fact is nobody wants any more of that. What they really want is cash to pay off their debts, be it a mortgage or an unwinding of a securities bet. Wall Street's denizens are in the dark about how much their schemes depend on the ocean of liquidity created by the bull market, say Elliott Wave International's analysts, Steve Hochberg and Pete Kendall. They are particularly struck by the image of the Grim Reaper that Business Week magazine put on its cover recently with the headline, "Death Bonds:"
And the bad news just keeps accumulating: * Housing prices dropped 3.2% percent in the second quarter compared with last year, the largest drop since Standard & Poor's started tracking home prices in 1987. *CIT Group closed its mortgage unit this week, while Lehman Brothers closed its own last week. Mortgage companies that specialize in low-quality mortgages are either going out of business (London-based HSBC) or struggling (California-based *The Wall Street Journal lists the number of fired employees at seven mortgage companies, including First Magnus (6,000), Capitol One's Greenpoint (1,900), Associated Home Lenders (1,600) and Lehman (1,200), which totals more To top it off, Bloomberg reports that the subprime mess may lead to lower bonuses for the first time in five years on Wall Street, according to Options Group, a company that's been tracking this kind of information for a decade. Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com. For more information on the housing market and the credit crisis, access the free report, “The Real State of Real Estate,” from Elliott Wave International. |
Monday, August 20, 2007
Do fundamentals—or emotions—drive the stock market?
There's never been a better time to be a behaviorist. During four decades, the academic theory that financial markets accurately reflect a stock's underlying value was all but unassailable. But lately, the view that investors can fundamentally change a market's course through irrational decisions has been moving into the mainstream.
With the exuberance of the high-tech stock bubble and the crash of the late 1990s still fresh in investors' memories, adherents of the behaviorist school are finding it easier than ever to spread the belief that markets can be something less than efficient in immediately distilling new information and that investors, driven by emotion, can indeed lead markets awry. Some behaviorists would even assert that stock markets lead lives of their own, detached from economic growth and business profitability. A number of finance scholars and practitioners have argued that stock markets are not efficient—that is, that they don't necessarily reflect economic fundamentals.1 According to this point of view, significant and lasting deviations from the intrinsic value of a company's share price occur in market valuations.
The argument is more than academic. In the 1980s the rise of stock market index funds, which now hold some $1 trillion in assets, was caused in large part by the conviction among investors that efficient-market theories were valuable. And current debates in the United States and elsewhere about privatizing Social Security and other retirement systems may hinge on assumptions about how investors are likely to handle their retirement options.
We agree that behavioral finance offers some valuable insights—chief among them the idea that markets are not always right, since rational investors can't always correct for mispricing by irrational ones. But for managers, the critical question is how often these deviations arise and whether they are so frequent and significant that they should affect the process of financial decision making. In fact, significant deviations from intrinsic value are rare, and markets usually revert rapidly to share prices commensurate with economic fundamentals. Therefore, managers should continue to use the tried-and-true analysis of a company's discounted cash flow to make their valuation decisions.
When markets deviate
Behavioral-finance theory holds that markets might fail to reflect economic fundamentals under three conditions. When all three apply, the theory predicts that pricing biases in financial markets can be both significant and persistent.
Irrational behavior. Investors behave irrationally when they don't correctly process all the available information while forming their expectations of a company's future performance. Some investors, for example, attach too much importance to recent events and results, an error that leads them to overprice companies with strong recent performance. Others are excessively conservative and underprice stocks of companies that have released positive news.
Systematic patterns of behavior. Even if individual investors decided to buy or sell without consulting economic fundamentals, the impact on share prices would still be limited. Only when their irrational behavior is also systematic (that is, when large groups of investors share particular patterns of behavior) should persistent price deviations occur. Hence behavioral-finance theory argues that patterns of overconfidence, overreaction, and overrepresentation are common to many investors and that such groups can be large enough to prevent a company's share price from reflecting underlying economic fundamentals—at least for some stocks, some of the time.
Limits to arbitrage in financial markets. When investors assume that a company's recent strong performance alone is an indication of future performance, they may start bidding for shares and drive up the price. Some investors might expect a company that surprises the market in one quarter to go on exceeding expectations. As long as enough other investors notice this myopic overpricing and respond by taking short positions, the share price will fall in line with its underlying indicators.
This sort of arbitrage doesn't always occur, however. In practice, the costs, complexity, and risks involved in setting up a short position can be too high for individual investors. If, for example, the share price doesn't return to its fundamental value while they can still hold on to a short position—the so-called noise-trader risk—they may have to sell their holdings at a loss.
Momentum and other matters
Two well-known patterns of stock market deviations have received considerable attention in academic studies during the past decade: long-term reversals in share prices and short-term momentum.
First, consider the phenomenon of reversal—high-performing stocks of the past few years typically become low-performing stocks of the next few. Behavioral finance argues that this effect is caused by an overreaction on the part of investors: when they put too much weight on a company's recent performance, the share price becomes inflated. As additional information becomes available, investors adjust their expectations and a reversal occurs. The same behavior could explain low returns after an initial public offering (IPO), seasoned offerings, a new listing, and so on. Presumably, such companies had a history of strong performance, which was why they went public in the first place.
Momentum, on the other hand, occurs when positive returns for stocks over the past few months are followed by several more months of positive returns. Behavioral-finance theory suggests that this trend results from systematic underreaction: overconservative investors underestimate the true impact of earnings, divestitures, and share repurchases, for example, so stock prices don't instantaneously react to good or bad news.
But academics are still debating whether irrational investors alone can be blamed for the long-term-reversal and short-term-momentum patterns in returns. Some believe that long-term reversals result merely from incorrect measurements of a stock's risk premium, because investors ignore the risks associated with a company's size and market-to-capital ratio.2 These statistics could be a proxy for liquidity and distress risk.
Similarly, irrational investors don't necessarily drive short-term momentum in share price returns. Profits from these patterns are relatively limited after transaction costs have been deducted. Thus, small momentum biases could exist even if all investors were rational.
Furthermore, behavioral finance still cannot explain why investors overreact under some conditions (such as IPOs) and underreact in others (such as earnings announcements). Since there is no systematic way to predict how markets will respond, some have concluded that this is a further indication of their accuracy.3
Persistent mispricing in carve-outs and dual-listed companies
Two well-documented types of market deviation—the mispricing of carve-outs and of dual-listed companies—are used to support behavioral-finance theory. The classic example is the pricing of 3Com and Palm after the latter's carve-out in March 2000.
Two types of market deviation—the mispricing of carve-outs and of dual-listed companies—are used to support behavioral-finance theory
In anticipation of a full spin-off within nine months, 3Com floated 5 percent of its Palm subsidiary. Almost immediately, Palm's market capitalization was higher than the entire market value of 3Com, implying that 3Com's other businesses had a negative value. Given the size and profitability of the rest of 3Com's businesses, this result would clearly indicate mispricing. Why did rational investors fail to exploit the anomaly by going short on Palm's shares and long on 3Com's? The reason was that the number of available Palm shares was extremely small after the carve-out: 3Com still held 95 percent of them. As a result, it was extremely difficult to establish a short position, which would have required borrowing shares from a Palm shareholder.
During the months following the carve-out, the mispricing gradually became less pronounced as the supply of shares through short sales increased steadily. Yet while many investors and analysts knew about the price difference, it persisted for two months—until the Internal Revenue Service formally approved the carve-out's tax-free status in early May 2002. At that point, a significant part of the uncertainty around the spin-off was removed and the price discrepancy disappeared. This correction suggests that at least part of the mispricing was caused by the risk that the spin-off wouldn't occur.
Additional cases of mispricing between parent companies and their carved-out subsidiaries are well documented.4 In general, these cases involve difficulties setting up short positions to exploit the price differences, which persist until the spin-off takes place or is abandoned. In all cases, the mispricing was corrected within several months.
A second classic example of investors deviating from fundamentals is the price disparity between the shares of the same company traded on two different exchanges. Consider the case of Royal Dutch Petroleum and "Shell" Transport and Trading, which are traded on the Amsterdam and London stock markets, respectively. Since these twin shares are entitled to a fixed 60-40 portion of the dividends of Royal Dutch/Shell, you would expect their share prices to remain in this fixed ratio.
Over long periods, however, they have not. In fact, prolonged periods of mispricing can be found for several similar twin-share structures, such as Unilever (Exhibit 1). This phenomenon occurs because large groups of investors prefer (and are prepared to pay a premium for) one of the twin shares
Thus in the case of Royal Dutch/Shell, a price differential of as much as 30 percent has persisted at times. Why? The opportunity to arbitrage dual-listed stocks is actually quite unpredictable and potentially costly. Because of noise-trader risk, even a large gap between share prices is no guarantee that those prices will converge in the near term.
Does this indict the market for mispricing? We don't think so. In recent years, the price differences for Royal Dutch/Shell and other twin-share stocks have all become smaller. Furthermore, some of these share structures (and price differences) disappeared because the corporations formally merged, a development that underlines the significance of noise-trader risk: as soon as a formal date was set for definitive price convergence, arbitrageurs stepped in to correct any discrepancy. This pattern provides additional evidence that mispricing occurs only under special circumstances—and is by no means a common or long-lasting phenomenon.
Markets and fundamentals: The bubble of the 1990s
Do markets reflect economic fundamentals? We believe so. Long-term returns on capital and growth have been remarkably consistent for the past 35 years, in spite of some deep recessions and periods of very strong economic growth. The median return on equity for all US companies has been a very stable 12 to 15 percent, and long-term GDP growth for the US economy in real terms has been about 3 percent a year since 1945.5 We also estimate that the inflation-adjusted cost of equity since 1965 has been fairly stable, at about 7 percent.6
We used this information to estimate the intrinsic P/E ratios for the US and UK stock markets and then compared them with the actual values.7 This analysis has led us to three important conclusions. The first is that US and UK stock markets, by and large, have been fairly priced, hovering near their intrinsic P/E ratios. This figure was typically around 15, with the exception of the high-inflation years of the late 1970s and early 1980s, when it was closer to 10 (Exhibit 2).
Second, the late 1970s and late 1990s produced significant deviations from intrinsic valuations. In the late 1970s, when investors were obsessed with high short-term inflation rates, the market was probably undervalued; long-term real GDP growth and returns on equity indicate that it shouldn't have bottomed out at P/E levels of around 7. The other well-known deviation occurred in the late 1990s, when the market reached a P/E ratio of around 30—a level that couldn't be justified by 3 percent long-term real GDP growth or by 13 percent returns on book equity.
Third, when such deviations occurred, the stock market returned to its intrinsic-valuation level within about three years. Thus, although valuations have been wrong from time to time—even for the stock market as a whole—eventually they have fallen back in line with economic fundamentals.
Focus on intrinsic value
What are the implications for corporate managers? Paradoxically, we believe that such market deviations make it even more important for the executives of a company to understand the intrinsic value of its shares. This knowledge allows it to exploit any deviations, if and when they occur, to time the implementation of strategic decisions more successfully. Here are some examples of how corporate managers can take advantage of market deviations.
•Issuing additional share capital when the stock market attaches too high a value to the company's shares relative to their intrinsic value
•Repurchasing shares when the market under-prices them relative to their intrinsic value
•Paying for acquisitions with shares instead of cash when the market overprices them relative to their intrinsic value
•Divesting particular businesses at times when trading and transaction multiples are higher than can be justified by underlying fundamentals
Bear two things in mind. First, we don't recommend that companies base decisions to issue or repurchase their shares, to divest or acquire businesses, or to settle transactions with cash or shares solely on an assumed difference between the market and intrinsic value of their shares. Instead, these decisions must be grounded in a strong business strategy driven by the goal of creating shareholder value. Market deviations are more relevant as tactical considerations when companies time and execute such decisions—for example, when to issue additional capital or how to pay for a particular transaction.
Second, managers should be wary of analyses claiming to highlight market deviations. Most of the alleged cases that we have come across in our client experience proved to be insignificant or even nonexistent, so the evidence should be compelling. Furthermore, the deviations should be significant in both size and duration, given the capital and time needed to take advantage of the types of opportunities listed previously.
Source: Mckinsey
Sunday, August 19, 2007
Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression
The Burst Bubble: Precursor to Economic Depression
Stock prices have not regained their January 2000 peak, but talk of the so-called "new economy" continues to percolate among economists and the media. Few believe that a longterm downtrend is even possible, simply because they have never experienced one. Despite this widespread mindset, stock market crashes do occur, and a big one is on the way.
To understand why, you must know a little about Wave Theory. First, the stock market is a very good barometer for the mood of the public (euphoria breeds rising stock prices, and worry produces a bear market). Contrary to popular belief, economic contraction and expansion are not reasons for a bear or bull market; they are caused by market activity.
Wave theory recognizes that the market as a whole acts somewhat like a living system, one with predictable patterns of behavior. Furthermore, the graph of stock prices is a fractal — it takes on the same shape no matter the length of the time period studied. So, by carefully examining stock prices graphed over time, it is possible to predict future market activity by figuring out where we are in the predictable pattern.
The bull market that reigned from the early 1980s to 2000 was the fifth wave of a rising wave cycle. Rising wave cycles are always followed by declining wave cycles. Expanding the time scale, it is also clear that the overall rising trend in stock prices from the 1930s to 2000 is the fifth wave in a much larger-scale rising wave cycle, one that has lasted since the birth of America. So, the coming downturn will definitely be the worst since the Great Depression of the 1930s, and possibly the worst in American history.
Monetary Defl ation: A Mythical Beast Made Real
Most people equate infl ation with rising prices, and therefore assume that defl ation means falling prices. Price fl uctuations, however, are only symptoms of the fluctuating volume of money and credit. The price of goods rises when the supply of credit and money increases, making each unit of money worth less. Conversely, prices fall when the money and credit supply shrinks, making each unit of money worth comparatively more.
Historically, depressions in the U.S. have been preceded by an expansion of available credit in the banking system. During the recent bull market, the U.S. experienced an unprecedented expansion of this type. Banks are willing to loan to almost anyone, and nearly everyone feels confident enough to take out large loans to satisfy their consumer desires. Buyer optimism abounds.
At some point this huge mass of debt will be unable to sustain its own weight. When that tipping point is reached, once again, psychological trends will create economic trends. Lenders will suddenly become unwilling to lend to anyone but the most creditworthy borrowers, and people who are currently struggling under a large debt load will either rush to pay off their debts or default on their loans. These two reactions will feed each other in a downward spiral, and the result will be a defl ationary crash as the volume of available credit contracts rapidly and the public mood changes to conservatism and pessimism.
Most economists, if not all, are more concerned about infl ation than defl ation. The U.S. Federal Reserve Bank has recently decreased its interest rates to historically low levels, purportedly to reduce the risk of runaway infl ation. Of course, the Fed cannot decrease interest rates below zero, which is where rates are headed. Unfortunately, almost no one is taking precautions against defl ation, simply because they don't believe it can ever happen.
U.S. bank depositors have been lulled into a false sense of security by the existence of federal deposit insurance. But this insurance, which is paid for by the banks themselves, will not protect depositors when the defl ationary crash arrives. And worldwide, global central banking has also made the worldwide supply of credit topheavy and ready for collapse.
Safe and Unsafe Investments in Preparation for the Crash
Remember two things when arranging your financial affairs: first, even in times of great financial crisis such as the Great Depression, the majority of the population is not reduced to destitution. Second, those who prepare for bad times during good times are bound to be ridiculed. Be patient and you will be rewarded. For this reason, be skeptical of conventional investment wisdom, because it was formed during a spectacular bull market and is not at all appropriate for investing in a defl ationary depression. Avoid these investment ideas:
• Bond investing — This is a prime example of conventional wisdom that will go wrong during a recession. Graphs that appear to illustrate the safety of high-grade bonds during bear markets actually refl ect only the bonds that maintained their high ratings; the vast majority of bonds are downgraded during a depression, and many default, resulting in total loss of investment principal. Government bonds, though they may be tax-exempt, are also risky, because governments often default on their obligations during a crisis.
• Real estate — This is risky because real estate is highly illiquid. American consumers are over-leveraged and have tapped out their homes' equity. In a crash, banks will foreclose on thousands of mortgages. If you're tempted to take out that home equity loan to pay for something else, ask if it is worth losing your house — that may be the ultimate price.
• Collectibles — Invest in collectibles for pleasure, not for profit. In a defl ationary depression, no one will have enough money to buy Beanie Babies at infl ated prices.
• Stocks — Investors should have learned about the perils of the stock market from the bursting of the Internet bubble. However, many believe that the Fed will manage the economy well enough to prevent further market declines; that simply isn't true. Therefore, holding long positions in stocks is extremely risky. Experienced investors can consider short-selling stocks or perhaps investing in mutual funds that specialize in short selling. Remember, though, that during a marketwide panic, the trading system may break down or be suspended, affecting shortsellers as well as other investors.
• Commodities — Graphs of commodity prices during the Great Depression illustrate that commodities are as risky as stocks. Unless you actually own an oil company or a cotton plantation, you don't own something physical when you buy commodities, but rather a futures contract, which is nothing more than a paper promise to deliver.
Here, on the other hand, are essential items for a secure investment portfolio:
• Cash — Currency on hand is the only asset that doesn't suffer price declines during defl ation. With interest rates at historical lows, no one wants to put large amounts of money away into savings accounts or CDs today. But during a defl ationary crisis such as the one experienced by Japan, cash actually appreciates in value as all other asset values plummet. If you don't want the 2% annual interest gain on your CD, you can take a 30% loss instead by investing in stocks, bonds or commodities.
• Precious metals — You can physically own this hard asset. Even if the price of gold and silver drops, it will never drop to zero, as stock prices may. Therefore, precious metals (in hard form, not futures contracts, ownership certificates or asset-backed bonds) are a crucial part of a survival-oriented investment strategy.
• Safe cash equivalents — Most people consider money market funds to be the same as cash, but not all money market funds are the same. The safest funds hold only shortterm U.S. Treasury debt. You can skip the middleman (the fund) and simply purchase Treasury bills. Direct ownership takes more time but may offer more safety.
Finding Companies You Can Trust with Your Money
Whatever investment vehicles you choose, be confident in the professional advice you are getting and in the ability of the companies you're working with to continue to operate in the worst economic times. Most importantly, choose a safe bank, investment company and insurance company. This is more difficult than it sounds — big-name companies aren't necessarily the safest.
Because banks are no longer required to keep deposits on reserve for withdrawal, it won't take very much to precipitate a major bank run, because the banks will quickly run out of money to satisfy depositors if just a few more than expected wish to withdraw their money. Many banks have unwisely invested in derivatives. In addition, recently banks have been lending money to anyone with a pulse and thus loan portfolios are weaker than they might appear. Seek banks that keep large cash reserves on hand.
Many large banks in the U.S. satisfy this requirement, and the safest banks in the rest of the world are in Switzerland and Singapore (not coincidentally, these countries' government-backed debt is the safest).
Investigate the possibility of cashing out your retirement plans. The possible tax penalties may be a bargain compared to the cost of letting the government seize all pension assets (as happened in Argentina recently). Take a hard look at your insurance policies. Is the insurer sound? Is it over-leveraged by unwise investments in speculative securities and derivatives? Find out before the insurance company goes bankrupt so you can move your policies.
Social unrest always increases in economic hard times. When people are confused and scared, crime rates go up, riots occur and society becomes polarized along many different axes (social class, gender, race and religion, to name but a few). For example, the September 11 terrorist attacks were actually symptoms of a global economic downturn, not the cause of the recession in the U.S., contrary to widespread popular belief. One major repercussion of these facts is that elected officials nearly always lose their jobs, even though they have little or no control over the economic trends in their countries.
Elected leaders set themselves up for their own ousters by acting as if they have power over the markets (through institutions like the Fed, which, as we have seen, is powerless to control social mood and, therefore, economic mood).
In the worst case, a government may experience a coup d'etat, so keep an eye on the political situation in your country as the depression worsens. Conversely, leaders who are elected during the downward slide or at the bottom automatically get the credit when the economy inevitably ameliorates — though, once again, they usually have little to do with the recovery.This political instability, which reveals the lack of economic power governments actually wield, should be enough to convince you not to trust any government to protect your assets, job, bank deposits or even your physical safety during times of economic distress.
Buying Low, Selling High
Consider how your strategy should change as the depression bottoms out and the economy eventually recovers. If you have cash or cash equivalents, you can buy hard assets when their prices drop. Massive foreclosures will result in a glut of real estate being sold at bargain prices, as happened during the Great Depression. Many kinds of assets will go on sale as desperate investors seek cash. Having prepared, you can cash in on these deals.
If you own a business or have an entrepreneurial bent, positioning your company properly at the bottom of a depression will virtually ensure prosperity for years to come. Similarly, if you have political aspirations, run for office at the bottom of the depression and ride a surge of popularity on the way back up .
Some Good Quotes From Book
“What would you say if you discovered that we have not had anything near a New Economy, that all that talk is a lie?"
“People are often prepared for the past but rarely for the future."
“Wake up now, while there is still time, and actively take charge of your personal finances."
“Given the evidence, I think it would be financially suicidal to bet on an extension of the bull market and a requirement of even moderate prudence to prepare for a major reversal."
“Those of us dedicated to objective financial analysis aren't always right. But those who rely on extra-large helpings of trust, faith, hope and 'gut instinct' always regret it."
“For many people, the single biggest financial shock and surprise over the next decade will be the revelation that the Fed has never really known what on earth it was doing."
“In a bear market, both international and domestic tensions increase, and the resulting social actions can be devastating."
“Economists as a group have an unbroken record of failing to predict economic contraction."
“Most of the time, you could divide stock prices by the price of pickles and have a more reliable indicator [than the price/ earnings ratio]."
“If the issuers of your tax-exempt bonds default, you will have the ultimate tax haven:”
“Currencies today are utter fictions, but few realize it. Sometime this century, people will question the validity of the fiat money system."
“For the Fed, the mass of credit that it has nursed into the world is like having raised King Kong from babyhood as a pet. He might behave, but only if you can figure out what he wants and keep him satisfied”
Thursday, August 16, 2007
A Synopsis : Rich Dad Poor Dad by Robert Kiyosaki
FINANCIAL LITERACY = FINANCIAL INDEPENDENCE
The Big Idea
FINANCIAL LITERACY = FINANCIAL INDEPENDENCE
A true tale of two dads— one a highly educated professor, the other, an eighth grade dropout. Educated dad left his family with nothing, except maybe some unpaid bills. The dropout later became one of Hawaii’s richest men and left his son an empire. One dad would say, “I can’t afford it” while the other, asked, “How can I afford it?” Rich dad teaches two boys priceless lessons on money, by making them learn through experience. The most important lesson of all is How to Use Your Mind and Time to create personal wealth. Free yourself from the proverbial “rat race”.
Learn to spot opportunities, create solutions and “mind your own business”. Learn to make money work for you, and not be its slave.
Rich Dad’s Words of Wisdom:
•You are what you Think.
•A job is a short-term solution to a long-term problem.
•A highly paid slave is still a slave.
•Why climb the corporate ladder when you can own the ladder?
Good Thinking:
Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.
Robert Frost, from ‘The Road Not Taken’
Overview
There is a Need.
The rationale for teaching people financial literacy comes from the fact there is no real job security these days. Even after years of toil, the poor and middle class may find they do not have sufficient funds for their children’s college education, or their own retirement. Why work for a corporation, the government, and the bank all your life? Awaken your financial genius and gain financial independence and freedom!
Lesson 1: The Rich Don’t Work For Money
At age 9, Robert Kiyosaki and his best friend Mike asked Mike’s father (Rich Dad) to teach them how to make money. After 3 weeks of dusting cans in one of Rich Dad’s convenience stores at 10 cents a week, Kiyosaki was ready to quit.
Rich Dad pointed out this is exactly what his employees sounded like. Some people quit a job because it doesn’t pay well. Others see it as an opportunity to learn something new.
WORK TO LEARN
Next Rich Dad put the two boys to work, this time for nothing. Doing this forced them to think up a source of income, a business scheme. The opportunity came to them upon noticing discarded comic books in the store. The first business plan was hatched. The boys opened a comic book library and employed Mike’s sister at 1$ a week to mind it. Soon they were earning $9.50 a week without having to physically run the library, while kids read as much comics as they could in two hours after school for only a few cents.
Lesson 2: Why Teach Financial Literacy?
They don’t teach this at school.
The growing gap between rich and poor is rooted in the antiquated educational system. The system trains people to be good employees, and not employers. The obsolete school system also fails to provide young people with basic financial skills rich people use to grow their wealth.
Know your options and use this knowledge to build a formidable asset column.
In an age of instant millionaires it really isn’t about how much money you make, it’s about how much you keep, and how many generations you can keep it.
Steps to get out of the proverbial rat race:
1. First, understand the difference between an asset and a liability.
Assets
•Real Estate
•Stocks
•Bonds
•Notes
•Intellectual Property
Liabilities
•Mortgages
•Consumer Loans
•Credit Cards
The poor have day-to-day expenses, the middle class purchase liabilities that they think are assets (i.e., a home or a car), and the rich build a solid base of income-generating assets.
The middle class finds itself in a constant state of financial struggle. Their primary income is wages, as wages increase, so do their taxes. Expenses increase as wages increase. Hence the phrase “the rat race.” They treat their home as their primary asset instead of investing in incomegenerating assets.
The rich get richer because they keep acquiring more assets and investments to generate more income, which far exceeds their expenses.
Reasons why the home is not an asset but a liability:
1. People work almost all their lives to pay off a home (30-year loans)
2. Maintenance and utilities expenses.
3. Property tax
4. House values can depreciate.
5. Instead of investing in income-earning assets, your money goes out to payments for the house.
Your losses:
1. Time that could have been used to grow value in other assets.
2. Capital which could have been invested rather than paying home-related expenses
3. Education that makes you a Sophisticated investor
If you want to buy a house, first generate the cash flow by acquiring assets, which bring income to pay for it.
Examples of real assets are:
•Apartments for rent
•Real estate
•Businesses that do not require your physical presence. You hire managers.
Average time of holding on to an asset before selling it for a higher value:
1 year
•Stocks (Startups and small companies are good investments)
•Bonds
•Mutual funds
7 years
•Real estate
•Notes (IOUs)
•Royalties on intellectual property
•Valuables that produce income or appreciate
In summary, the key steps to getting out of the rat race are the ff:
1. Understand the difference between an asset and a liability.
2. Concentrate your efforts on buying income-earning assets.
3. Focus on keeping liabilities and expenses at a minimum.
4. Mind your own business.
Lesson 3: Mind Your Own Business
KEEP YOUR DAY JOB BUT START MINDING YOUR OWN BUSINESS.
Kiyosaki sold photocopiers on commission at Xerox. With his earnings he purchased real estate. In 3 years’ time his real estate income was far greater than his earnings at Xerox. He then left the company to mind his own business full time. He knew that in order to get out of the rat race fast, he needed to work harder, sell more copiers and mind his own business.
Don’t spend all your wages. Build a good portfolio of assets and you can spend later when these assets bring you greater income.
Lesson 4: The History of Taxes and the Power of Corporations
Income tax has been levied on citizens in England since 1874. In the United States it was introduced in 1913. Since then what was initially a plan to tax only the rich eventually “trickled down” to the middle class and the poor.
The rich have a secret weapon to shelter themselves from heavy taxation. It’s called the Corporation. It isn’t a building with the company name and logo in brass signage out front. A corporation is simply a legal document in your attorney’s file cabinet duly registered under a government state agency. Corporations offer great tax advantages and protection from lawsuits. It’s the legal way to protect your wealth, and the rich have been using it for generations. Do your own research and find out what tax laws will bring you the best advantages.
The Golden Rule: PAY YOURSELF FIRST.
Rich dad says paying yourself first forces you to create more sources of income to cover your expenses. It’s a simple rule that works like this:
The Rich with Corporations People who work for corporations:
Rich : Earn Spend Pay Taxes
Poor: Earn Pay Taxes Spend
Key Financial IQ Components:
It helps to take some courses to gain financial literacy; rich dad stresses the importance of learning –
1. Accounting. It pays to know how to read financial statements. When acquiring businesses or assets you need to quickly see the financial standing of the company you are acquiring. Many grown adults do not know how to balance a balance sheet. In the long term, this knowledge will pay off for you and your business.
2. Investment Strategy. This skill will sharpen with experience. Talk to investors and observe how they play the game. Kiyosaki and Mike spent many boyhood hours sitting in on Rich Dad’s meetings with brokers, accountants, and attorneys.
3. Market Behavior. Know the laws of Supply and Demand. No business owner can do without understanding these basic principles of the market. Bill Gates saw what people needed. Open your eyes to opportunities. Look at what sells and who buys.
4. Law Kiyosaki recommends doing everything you can to grow your business within legal boundaries. Know your corporate, state, and accounting laws.
Lesson 5: The Rich Invent Money
Self-confidence coupled with high financial IQ can certainly earn more for you than merely saving a little bit every month.
Make good use of your time and find the best deals.
An example: In the early 90’s the Phoenix economy was bad. Homes once valued at $100,000 sold for $75,000. Kiyosaki shopped at bankruptcy courts and bought the same houses at only $20,000. He resold these properties for $60,000 making a cool $40,000 profit. After six more transactions of the same manner he made a total $190,000 in profit and it only took 30 hours of work time. Rich Dad explains there are Two Types of Investors:
1. Buyers of Packaged Investments.
This is when you call a retail outlet, real estate company, stockbroker or financial planner and put your money in ready-made investments. It’s a simple, clean way of investing.
2. The Professional Investor
Design your own investment. Assemble a deal and put together different components of an opportunity. Rich dad encourages this type. You need to develop three main skills to be this type of investor, namely how to:
o Identify an opportunity everyone else has missed.
o Raise capital
o Organize smart people
Identify an opportunity everyone else has missed.
Learn to identify hidden Freebies in business deals. For example: The real business of McDonald’s isn’t hamburgers. It’s the free real estate underneath each franchise, on every important intersection, in cities all over the world that is the real wealth of its owners.
THERE IS ALWAYS RISK. You need to learn how to manage risk and not avoid it.
Lesson 6: Work to Learn –Don’t Work for Money
The Author’s Odyssey
After college graduation Robert Kiyosaki joined the Marine Corps. He learned to fly for the love of it. He also learned to lead troops, an important part of management training. His next move was to join Xerox where he learned to overcome his fear of rejection. The thought of knocking on doors and selling copiers terrified him. Soon he was among the top 5 salespeople at the company.
For a couple of years he was No.1. Having achieved his objective – overcoming his shyness and fear—he quit and began minding his own business. Learn skills like PR, marketing, and advertising. Take a second job if it means learning more.
A Difference in Education
Schools train professionals. Professionals become so specialized they cannot apply themselves in other fields and need to form unions to protect their jobs. Remember you can have a profession, say, learn to be a pilot if you want to learn how to fly, but at the same time mind your own business.
The rich “groom” the next generation by training the heir in all aspects of running the business. They move him from department to department so he learns how each one relates to the other. Specialization is not the key here, but picking up important lessons from each area and seeing the business as a whole. Rich Dad groomed Kiyosaki and Mike in the same manner. Mike would later take over Rich Dad’s empire, which included restaurants, convenience stores, and a construction company. Kiyosaki created his own empire with real estate, new
products and educational materials.
Three Main Management Skills
1. Management of Cash Flow
2. Management of Systems (Includes Time with family and time for your self)
3. Management of People
Five Obstacles to Financial Independence
1. Fear. Don’t play it safe and cling to what you think is secure. If you don’t go for it and think big you won’t be able to earn big.
2. Cynicism. Don’t listen to advice of others who are not doing what you intend to do. Listen to your self and those who are doing what you aim to do.
3. Laziness. Greed is good and fights laziness. Think about the freedom and money you’ll have and you will put in those extra work hours. Change your thinking. Instead of saying “I can’t afford it.” Ask yourself “How can I afford it?” Challenge your mind to create solutions.
4. Bad Habits. Spending habits should turn into saving and investing habits.
5. Arrogance. Don’t think you know everything there is to know about money. Listen to others. Enroll in useful seminars.
Ten Steps to Awaken Your Financial Genius:
1. Find a reason greater than reality, a big dream. Think of the freedom, the lifestyle wherein you control your own time. Think of what you don’t want, i.e. “I don’t like being an employee”.
2. Use the power of choice, daily. You can choose to watch MTV, or watch CNBC. It’s how you choose to use your time and energy everyday that brings financial success in the long run.
3. Choose your friends carefully. It pays to have friends who are focused and achieving their goals. Surround yourself with friends you can learn from.
4. Master a formula. Learn a new one, and learn fast.
5. Pay yourself first. Practice self-discipline by keeping expenses low. Tenants can pay for your expenses if you rent out apartments or ministorage, for instance. Savings are used for investing and creating more money, not for paying bills.
6. Pay your broker well. Attorneys, accountants, stockbrokers, and real estate brokers will have more incentive to work harder for you. If they make more money, it means you make more money as well. 3 -7% is a good incentive.
7. Be an Indian giver. It’s the concept behind ROI. (Return on investment) Invest and then take the initial money out after a time when the investment has earned for you.
8. Buy luxuries last. Let the income from your growing assets afford you the new car. Wait for your asset base to grow first. Middle class people buy luxuries first, on credit.
9. Find yourself a hero. When you play golf you can imagine you are Tiger Woods. When you do business, you can ask yourself, “What would George Soros have done if he was in my place right now?”
10. Teach and you shall receive. As in money, love, or friendship. If you give without expecting anything in return, you receive more.
According to Kiyosaki, the Japanese have a belief in three great powers:
1. The Sword (weapons)
2. The Jewel (money)
3. The Mirror (self-awareness)
The most valuable of the three is the mirror, or knowing your self. Without this knowledge of self you will have no direction in life and in your business.
To-Do List
1. Stop what you’re doing. Take a step back to assess your situation. Stop doing what is not working and look for a new option.
2. Look for new ideas.
3. Take action. Find someone who has done what you want to do. Take them to lunch. Ask for tips.
4. Take classes and buy tapes.
5. Make lots of offers. Finding a good business deal is a lot like dating. You must go to the market and talk to a lot of people, make offers, counteroffers, negotiate, accept and reject. Many single people sit at home waiting for the phone to ring instead of going out and hitting the dating scene.
6. Take a walk through your neighborhood and look for bargain real estate deals.
7. Buy the pie and cut it into pieces. People buy only what they can afford so they think small. Think big. This goes for land and other investments.
8. Learn from history. Colonel Sanders lost everything in his 60’s and started from scratch with a fried chicken recipe. Bill Gates became rich before he was 30.
KEY : Action Always Beats Inaction
The Cashflow Game by Robert Kiyosaki
Tuesday, August 14, 2007
Happy Financial Independence
Phenomenologically, financial independence is a state of mind where a financial entity (such as an individual, a family, or a business) can direct its own course without feeling constrained by financial considerations.
In an absolute sense, the financially independent entity no longer experiences financial greed or fear (i.e. cannot be bought at any price, nor be deterred by any price), as its decision-making process will consistently ommit the financial variables (costs & benefits) when weighing between alternatives.
In a pragmatic sense, the financially independent entity may still be sensitive to financial incentives and risks, especially if a cost or a risk of loss is great enough that it may jeopardize the very assets required to sustain the state of financial independence, or if a benefit or a risk of gain is great enough that it may offer the possibility to rise to a greater level of financial independence, thus allowing an increase in baseline consumption. However, if financial independence is understood as being a single absolute state (as described in the previous paragraph), layered levels of financial independence are then a contradiction in terms.
Mathematically, financial independence is a state of wealth where a financial entity (such as an individual, a family, or a business) can self-finance, usually because it possesses assets that either (a) generate a stream of income that sufficiently satiates the entity's consumption needs and/or (b) are sufficiently large that they cannot entirely be depleted by future consumption. Because consumption needs are subjective and vary greatly between entities, the level of income-generating assets required for financial independence will also vary accordingly. Also, because satiation is another subjective metric, some entities may only include their basic survival needs in that definition, while others may also include less important needs, and possibly some of their wants, or even all of their wants.
In any case, the requirement for a satiation point indicates that financial independence is a finite goal state and may be incompatible with the never-ending pursuit of additional wealth. Indeed, the value of income-generating assets required to reach a state of financial independence can be expressed as a precise dollar figure, even though this figure may depend on the entity and its desired future consumption stream.
Financial independence is frequently cited as a financial goal, which, once achieved, becomes the means to another end; usually the pursuit of activities that need not be contingent upon financial rewards.
Financial independence is also referred to as financial freedom.
Retrieved from "http://en.wikipedia.org/wiki/Financial_Independence"
Huawei upbeat on Indian telecom market
BANGALORE: China-based telecom equipment supplier Huawei Technologies, which has bagged a $200 million contract from Reliance Communications, is upbeat on India and expects to clinch other multi-million dollar outsourcing deals in the country.
"At this point, we are quite bullish on the opportunities here (India). Telecom market in India is becoming increasingly vibrant," Huawei spokesperson Ross Gan told the media here.
"As you have seen in the Reliance deal, there is a lot of momentum for us in the market," he said. The Shenzen- headquartered vendor bagged the network expansion contract from Reliance Communications last month.
Gan, who was on a visit to Delhi and Bangalore, confirmed that his company is in dialogue with BSNL, MTNL, Bharti Airtel and Vodafone-Essar for similar deals.
Asked if the company is confident of bagging some of these deals, he said: "Most definitely...as a company that has been in India for such a long-time, we are constantly in dialogue with all the operators."
"We expect to make some announcements over the next couple of months," he added.
He, however, declined to discuss size of prospective deals, saying deal size would vary and it is premature to talk about them now.
About the company's previous announcement to set up USD 100 million manufacturing plant in India, he said: "The intention is still there," but added that there was no time- frame for setting up the unit.
Gan said the timing of establishing a plant in India depends on "market opportunities."
Courtesy: Economic Times
The anatomy of bull market corrections
The market may be coming to the end of its four-year-long bull run, but until the evidence appears, we have to assume that this is just another correction in the bull market. Over the past four years, the market (measured using the BSE Sensex) has risen 410% on a cumulative basis. There have been eight corrections of 5% or more from peak to trough. The recent correction is the ninth one.
We have analysed past corrections to help investors to predict what’s in store during and after this correction, if it indeed is another correction. Five points need to be noted with regard to the past eight corrections. First, each of these dips lasted for less than 30 days. Six of the eight produced double-digit corrections — the sharpest one being in May ’04, followed by May ’06. The swiftest decline was in December ’06, which lasted just four days and caused the market to fall 9% from its top. The average fall lasted 15 days, causing 15% damage to the market top.
Secondly, seven of the eight corrections have been V-shaped, with May ’04 being the only exception. The market on that occasion peaked on January 9, ’04, and then moved sideways for four months with a net fall of 4% (from January 9 to April 23). The real dip took place between April 23 and May 17, when the market fell 29%.
The third observation is that the rise, subsequent to the fall, averaged 36%. Only on two occasions was the rise less than 20%. These two coincide with the rise coming after the single-digit corrections in January ’05 and December ’06.
Fourthly, the realised inter-day volatility has usually increased during the descents. January ’05 was the only exception, when the inter-day realised volatility remained unchanged during the six-day correction. The average increase in volatility over the preceding period of rise was about 65%.
Finally, India has always underperformed emerging markets in terms of corrections. Average underperformance has been 7 percentage points. The telecom, metals and consumer discretionary sectors have been the worst stocks to own during a market dip. Conversely, technology, energy and consumer staples have been the best sectors to own. Incidentally, financials and telecom were the best sectors in the rally following the fall over the past four years. Healthcare and consumer staples have been consistent underperformers during these rallies. India has outperformed emerging markets in six of the eight rallies following market corrections
What is unique about the recent decline? This is the first time in a bull market correction that India has outperformed emerging markets. We are not surprised. We argue there were four factors in India’s favour if the market was going through a mild fall in global risk appetite. Firstly, the central bank, through some aggressive tightening since the end of ’06, has built ammunition to counter a crisis in domestic liquidity.
Secondly, the trailing correlation of returns on Indian equities versus emerging markets was lower than in recent corrections. Thirdly, valuations were off their highs and at two-year lows relative to emerging markets. Finally, our proprietary sentiment indicator suggests that market participants were not as bullish as they were at the start of May ’06 or in February ’07. Things can change if the correction in global markets gets more aggressive.
If August 6, ’07 was indeed the bottom of this bull market dip, then it will end up being the smallest correction (of just 7%) in the four-year bull market. At nine days, it will be only the third time that a correction has lasted for less than 10 days, as is the case with the quantum of the fall, which is also only the third occasion of a single-digit correction. The spike in inter-day realised volatility has been sharper than usual. With inter-day volatility doubling from the preceding rally, this spike matches the one that the market underwent in May ’06 (when realised volatility tripled from the preceding period of rise).
At the sector level, the key differences in this dip compared with the past have been outperformance of the utilities sector and underperformance of the technology sector. During the past corrections, the utilities sector had underperformed, while the technology had outperformed. Hence, from a trading perspective, it makes sense to sell utility stocks and buy technology scrips.
Courtesy: Economic Times
Sunday, August 12, 2007
Warren Buffet : Investment Philosophy
Buffett's philosophy on business investing is a modification of the value investing approach of his mentor Benjamin Graham. Graham bought companies because they were cheap compared to their intrinsic value. He was of the belief that as long as the market undervalued them relative to their intrinsic value he was making a solid investment. He reasoned that the market will eventually realize it has undervalued the company and will correct its course regardless of what type of business the company was in. In addition he believes that the business has to have solid economics behind it. Buffett's investment style is also heavily influenced by Phil Fisher.
The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:
* Is the company in an industry with good economics, i.e., not an industry competing on price. Does the company have a consumer monopoly or brand name that commands loyalty? Can any company with an abundance of resources compete successfully with the company?
* Are the Owner Earnings on an upward trend with good and consistent margins?
* Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings are lower than average?
* Does the company have high and consistent Returns on Invested Capital?
* Does the company retain earnings for growth?
* The business should not have high maintenance cost of operations, high capital expenditure or investment cash outflow. This is not the same as investing to expand capacity.
* Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
* Is the company free to adjust prices for inflation?
Buffett also concentrates when to buy. He does not want to invest in businesses with indiscernible value. He will wait for market corrections or downturns to buy solid businesses at reasonable prices, since stock market downturns present buying opportunities.
He is known for being conservative when speculation is rampant in the market and being aggressive when others are fearing for their capital. This contrarian strategy is what led Buffett's company through the Internet boom and bust without significant damage, although critics have also noted that it may have led Berkshire to miss out on potential opportunities during the same period.
He also asks at what price is the business a bargain, and his answer typically is when it provides a higher rate of compounded return relative to other available investment opportunities.
Buffett has coined the term "economic moat," preferring to acquire companies that possess sustainable competitive advantages over their competitors.
Warren Buffett's letters to shareholders are a valuable source in understanding his investment style and outlook.
Saturday, August 11, 2007
Agri Sector Investment
Agriculture contributes about 20% of the GDP and as of now the capital market exposure is fairly insignificant.But the agri sector is set go gain dominance in the coming years.The government is just starting to take major initiatives to boost this sector.Moreover private players are entering this sector in a big way.
One of the best ways to contorl inflation is having a good growth in the agriculture sector.So now with the problem of inflation still looming over the head this is the right time to prop up this sector.This will benefit all the listed stocks in this sector.
So which are the companies to watch out for in this sector which is yet to unlock its real value..Presenting a list of these companies which are related to agriculture in some way or the other.
1)Agri-Commodities(sugar,rice,tea)-:REI Agro,Bajaj Hindustan,Balrampur Chini,Usher Agro.
2)Agri-Inputs(seeds,fertilizer,agro-chemical)-:Monsanto,EID Parry,Advanta India,Tata Chemicals.
3)Infrastructure(irrigation system,pipes,pumps)-:Jain Irrigation,KSB pumps,Kirloskar Bros,Patel Engineering.
4)Food Processing(fruit pulp,soya oil)-:Dabur,Jain Irrigation,Ruchi Soya,Heritage Food.
5)Rural Consumption(generic products,services)-:ITC,HLL,M&M,Yes Bank,M&M Financials.
courtesy: INDIAN STOCK INVESTMENT TIPS!!!
CANSLIM : A simple stock picking strategy that WORKS
by V Hansraj
Like most people, I was looking for a stock selection system that would help me identify multi-bagger stocks. That is, stocks that can double in price in a short period of time.
After a lot of research and browsing on the web, I finally found a system that has given me very good returns. Of course, this system is not unbeatable. I am also sure finance experts have come up with better strategies than the one I follow.
What I needed, though, was an easy and simple to understand method of stock picking.
This is what I follow:
The strategy is known as CANSLIM.
CANSLIM is a stock investment strategy based on a study of 500 of the stock market winners. It dates back to 1953 and is described in the book How to Make Money In Stocks: A Winning System In Good Times or Bad by William J O'Neil.
What is CANSILM?
Each letter in CANSLIM stands for common characteristics that are found in the greatest stock market leaders over the past 50 years.
C: Current earnings per share
This figure can be found on rediff stock quotes. It tells you how much profit the company has made for each share given to its shareholders. As per this strategy, earnings per share should at least increase by 15-18 per cent every year.
A: Annual earnings
That is, the net profit made by a company. This should have increased by 20-25 per cent or more consistently for the last three years. Annual earnings can be found in the stock quotes in rediff and after a look at the P&L account section.
N: New management
The company should either be under new management, have a new product or have a new service.
S: Shares of common stock outstanding
As far as possible, this figure should remain small. It tells you how many shares a company has issued to investors like you. If this figure is small, the earnings per share discussed above increases. One can get this number after a look at the equity capital in the balance sheet.
L: Leadership
The company should be a leader in its industry, or atleast in the top three positions in the sector/ industry/ segment it operates in.
I: Institutional sponsorship
Look at the mutual funds that are buying this particular stock or holding this stock for a sufficiently longer period. This information is also available on rediff on the right hand side of the stocks quotes. If well performing mutual funds are holding your stock/s, then your chances of making money are good.
M: Market trend.
In a falling market, even the best stock will not be able to perform. Try and enter a upward market. That is, buy a particular stock when the share market is moving up. It is a simple to do this today as the Indian markets are on a bullish phase currently.
However, care must be the watchword when the share markets don't do too well.
CANSLIM or not, always tread with caution. The strategy is one that strongly encourages cutting all losses at no more than 8 per cent or 10 per cent below the buy point, with no exceptions. This will help you minimise losses and preserve gains.
The book says buying stocks from solid blue chip companies should generally lessen chances of having to cut losses, since a strong company will usually shoot up in a bull market (when the stock market .
CANSLIM strategy is not momentum investing; the system identifies companies with strong fundamentals, big sales and earnings increases which is a result of unique new products or services.
This strategy for me has worked very well. I have been able to beat the BSE Sensex and the NSE Nifty consistently.
Hope it makes your investing experience much more easier. With all the important information required to succeed using the CANSLIM method very easily available on the Net, I don't need any sophisticated system to find good stocks.
Courtesy: Rediff
Friday, August 10, 2007
How investing in stocks can make you rich
If there's something big that you want -- from a comfortable retirement to a house on the beach -- and you can't afford it today, you need to save and make your money work for you.
When you have lots of time, but not lots of money in a lump sum, the best way to build wealth is by investing in stocks.
Stocks are volatile, which is another way of saying they're likely to experience wide swings in value. However, over long periods of time, there's good reason to believe stocks also will appreciate dramatically faster than any other type of asset. That makes it easier to attain your long-term wealth goals.
When you buy a share of stock, you are buying a piece of the issuing company. Admittedly, it's probably a small piece, but that share you purchased gives you the right to participate in the company's wealth (or fiscal decline) and vote on matters of some importance -- directors, company auditors, and some shifts in corporate policy.
In some cases, you are also entitled to dividends -- payments of cash or stock to shareholders. Some companies also provide their shareholders with perquisites, such as tickets to the company's theme parks or discounts on its merchandise.
Why share prices go up
Because companies tend to grow and prosper over time -- and because a share of stock allows you to participate in the prosperity -- stock prices, in the aggregate, tend to appreciate over long periods of time.
However, individually, some companies prosper; others fail. If you buy a share in a loser, you could lose all, or a significant portion, of your initial investment. In other words, when you invest in stocks, you risk losing your initial investment, but because you are taking a bigger risk, you get the opportunity to earn far bigger rewards.
How big a reward? In the case of the United States, for example, the Chicago-based research company Ibbotson Associates has tracked the performance of U.S. stocks from 1926 to the present. That period includes the Great Depression, the New Deal, World War II, the Korean conflict, the Vietnam War, the Kennedy assassination, Reaganomics, and the Gulf War, not to mention the lunar landing, the break-up of Ma Bell, the Watergate scandal, and the dismantling of the Iron Curtain.
In other words, it is a fairly diverse period that has had its share of ups and downs, just like any period in history. During that time, the average annual return on small-company US stocks was about 12.4 per cent.
The average annual return on big-company stocks was 11.2 per cent. Over the same period, inflation rose 3.1 per cent per year, and the return on U.S. Treasury bills was 3.77 per cent.
To put it another way: If you had a diversified portfolio of large-company stocks during that period, the value of your investment portfolio rose 8.1 percentage points faster than the rate of inflation.
For every $100 you put in the market, you hiked your buying power by $8.10 each year. At the end of twenty years, your real (inflation-adjusted) buying power increased fivefold, to $503 from $100, without any additional payments from you.
Although investing is as much an art as a science, it's reasonable to expect that future investment returns will mirror historic returns over long periods.
In other words, it's reasonable to assume that stocks will continue to appreciate faster than the rate of inflation and other types of traditional investments.
The downside: It is also reasonable to assume that stocks could repeat their short-term historic performance over shorter periods, too. And that's been far less illustrious than the long-term performance.
To be specific: The market crash of 1929 so depressed stock prices that investors who put $100 in the market then saw the value of their securities fall to less than $20 at the market's nadir in 1932. It took roughly eight years before securities prices rose back to ground zero, where $ 100 invested in 1929 was worth $100 again.
And then the market took another sickening slide, from which it didn't recover until after World War II had ended. From start to finish, it was a full fifteen years of pain for stock market investors.
The market also took a sharp, decade-long dive in 1969. And it experienced short-term "crashes" in 1987, 1989, and 1990. But its performance in 1995 was enough to make an investor beam. Stock values as measured by the Standard and Poor's 500 index were up more than 37 per cent.
The years following have been almost as impressive. Big-company stocks posted a 23 per cent gain in 1996, a 33 per cent gain in 1997, a 28 per cent gain in 1998, and a 21 per cent gain in 1999.
Incidentally, although investors in small companies have done better than investors in large companies over the long haul (average annual returns of 12.4 per cent versus 11.2 per cent, respectively), at various points in time, small-company stocks do worse than big-company stocks. They fall farther and faster, and they stay depressed longer.
How to deal with price yo-yos
These heady climbs and sickening slumps are called volatility. When an investment is as volatile as the stock market, it is unwise to invest unless you have a fairly long time horizon that allows you to wait out the price swings and go for the long-term price appreciation.
How long is a 'fairly long' time horizon? That depends on you and why you are investing. Let's say you want to buy a house in five years, and you're trying to determine where to invest the down-payment money.
The stock market would be a good place for all or part of that money if you wouldn't be crushed if your home-buying plans had to be put off because of a market slump that depressed the value of your investment portfolio and thus reduced the amount you had saved for the down payment.
What if you would be crushed if you couldn't buy the home as planned? Then put the down payment money in bonds that mature (or pay back their principal) at the same time as your plans do.
Stocks are also ideal to have in your retirement portfolio. The younger and farther from retirement you are, the more stocks you can handle. And they're a good choice for college funds for young children.
However, if you are investing in individual stocks rather than mutual funds, you must diversify your portfolio by buying stocks in several different companies that do business in several different industries. That ensures that your net worth won't crash if one industry, whether it's oil, technology, or retailing, hits a slump. Experts suggest you own shares in at least eight to ten different companies. Ideally, those companies should be operating in substantially different industries.
Do it the equity mutual fund way
Mutual funds are investment companies that pool the money of many investors and buy securities in bulk. The securities that a fund buys are determined by the fund's investment objectives. These investment objectives are spelled out in the prospectus and by the fund manager, who makes the investment decisions.
So-called equity funds -- also known as growth or aggressive growth funds -- buy stock in companies. When you buy a share in an equity fund, you're actually buying an interest in all of the different stocks held by that fund.
That gives you the benefit of broad diversification, which reduces the risk that your investment portfolio will be savaged by a single bad stock. In essence, if you buy the right mutual fund, you may not need to diversify the stock portion of your portfolio further. One fund could do it all.
There are lots of other benefits and tricks to buying mutual funds. However, let it suffice to say that investing in equity mutual funds is an alternative to investing in individual stocks.
It is a particularly good alternative for those who don't want to spend a lot of time picking individual shares or for those who are starting out and don't have a lot of money.
Excerpt from:
Investing for Beginners
by Kathy Kristof
Thursday, August 9, 2007
Subprime Meltdown
Subprime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited or blemished credit history. These loans have a much higher rate of default than prime mortgage loans and are priced based on the risk assumed by the lender.
There are many different kinds of subprime mortgages, but the most popular form is “Initial fixed rate mortgages that quickly convert to variable rates”. For example, a "2-28" loan, which offers a low initial interest rate that stays fixed for two years after which the loan resets to a higher adjustable rate for the remaining life of the loan, in this case 28 years. The new interest rate is typically set at some margin over an index, for example, 5% over a 12-month LIBOR.
The root of the trouble actually stretches back to 2004. In a battle for market share, the subprime lenders began cutting rates. These low rates weren't very profitable, especially because the Federal Reserve was increasing the lenders' cost of funds at the same time. Their interestrate spread—the key to their profitability—shrank from nearly 6 percentage points in 2003 to just over 3 percentage points by the end of 2005. (Source: Businessweek, March 2, 2007)To resuscitate profits, the subprime lenders started raising their lending rates. Naturally, though, that chased away customers. To keep volumes up the lenders started relaxing their credit criteria. Wall Street encouraged this behavior, too, by bundling the loans into securities that were sold to pension funds and other institutional investors seeking higher returns.
It took a while for the problems to surface because many of the subprime mortgages carried artificially low interest rates during the first few years of the loan. The delinquency rate on subprime mortgages eventually went up Some of this trouble might have been avoided if home prices had continued to climb like they did between 2000 and 2005. In such a scenario, even borrowers who weren't paying the principal loan amount would have built up more equity. That in turn would have made it easier for subprime borrowers to refinance into a new loan with a low interest rate. Since home prices weakened in many parts of US and lenders started becoming more vigilant, such borrowers were not left with much refinancing options.
The impact of the subprime mortgages has been magnified as they started being packaged with innovative financial structures like Collateralized debt obligations (CDOs). CDOs are a type of asset-backed security which gain exposure to the credit of a basket of fixed income assets. These instruments slice the credit risk in different tranches with varying risk and return profiles which in turn are issued as separate intruments. From 2003 to 2006, new issues of CDOs backed by assetbacked and mortgage-backed securities increased exposure to subprime mortgage bonds. The CDO packaging enabled institutions to mix good risk and bad risk debt all in one pot and label it as good risk. Therefore the financial institutions earned a higher rate of return on what seemed like a relatively low risk CDO package that was priced in the market price as low risk debt upon which hedge funds such as Bear Stearns leveraged to the hilt.
Hedge funds deploy leverage to enhance their exposure to markets. When things are moving in the right direction this results in phenomenal profits. However if they are caught in the wrong direction, they may end up eroding their entire capital. The LTCM collapse in 1997 was fallout of the excessive leverage taken by the fund. This is what happened with Two of Bear Stearns Hedge funds recently, which placed highly leveraged bets on packages of subprime mortgage derivative products. When the value and credit worthiness of these bond packages was cut due to the subprime defaults, these funds started received calls from the banks which had provided them funds to leverage their bets in the subprime market. In order to meet their commitment towards these banks, they sold a part of their portfolio in an illiquid market. The illiquidity ate into their portfolio as their own selling led to a further fall in prices. The effect of this was it virtually wiped out the total value of the funds that had previously been rated as low risk.
Meanwhile, the $11 billion Raptor Global Fund posted a one-month loss of 9%, while two hedge funds run by Australia's Macquarie Bank were off 25% this year (Source: Businessweek, August 13, 2007). And Sowood Capital Management has already started bleeding.
Subprime woes have moved far beyond the mortgage industry. Already, at least five hedge funds have blown up. The latest worry is that a recent slump in the markets for corporate loans and junk bonds will deepen, jeopardizing the financing of leveraged buyouts, a big profit driver for investment banks. What's more, fears are growing that banks may be on the hook for some of the $300 billion in loan commitments they've made for buyouts already in the pipeline.
Impact on the equity markets
As the subprime woes continue, the stocks of the banks, funds and other financial institutions having exposures to such assets plummet leading to a fall in the broad markets. Also, as the subprime markets go down, the hedge funds receive calls by the banks to meet their margin commitments forcing the hedge funds to liquidate their portfolio. This derivative ripple affect results in selling off emerging market equity portfolios. As liquidity moves out to safer assets, riskier assets like emerging markets start tumbling down.
Outlook on the Indian Markets
In the short term, the markets may correct if liquidity flows out and may consolidate between 14000 – 14500 levels. The markets valuations have been stretched for sometime and a correction is expected. We remain cautious, as the following factors remain a cause of concern
* Stretched equity market valuations - ahead of fundamentals
* High leverage in the market
* Increase in input costs as demand exceeds supply
* Appreciation in INR – concern for exporters of goods and services
* Rising crude oil prices
* CRR hike – cost for the banks
However, the fundamentals of the economy remain strong as evidenced by:
* 30% Q1 profitability growth (Source: Internal Analysis)
* Interest rates seems to have peaked out
* Inflation has come down below 4.5% (Source: Office of economic Advisor, Ministry of Commenrce & Industry, GOI)
* Satisfactory monsoons
The Indian stock markets remain exposed to the global liquidity pressures but fundamentally, being an economy fuelled by internal consumption demand, the economy is less vulnerable to the global economic situation. Also, in terms of valuations, the Indian markets, which were trading at a significant premium to its South East Asian counterparts, has come back to parity. The long term strength of the market is intact and a further correction from these levels would be a good opportunity to accumulate for the long term.
Source: ICICI Prudential Asset Management
