Saturday, March 27, 2010

Is the investment in your house an Asset or a Liability?

Let us debate if you consider the investments made in buying your flat as an asset or is it a liability? I am not expecting consensus on this as a Home is a very emotional subject. But emotion generally degrades Financial Wisdom. There is a stark difference in investing in real-estate and investing in a house. I had invested in a house in 2002 and today if I look at the returns it generated, it might have doubled or a little more. If I analyse a bit further, I need to take into account the interest paid to the bank over the last many years, the society maintenance paid to maintain the complex, my own house maintenance, property taxes etc.
The asset has only lost more money than having made any returns. An asset that generates returns is what an asset is. Now I know of other friends who live in a better and bigger house. So I have decided to buy a new home that costs 3 times more. How do I make it happen now? Well I am going to look out for a better pay job, I should get at least a 50% Hike. I have got a Job. So what has happened? I have increased my Income to meet with higher expenditure, out flows and EMIs. What have I exactly done? Have I invested in an asset? Is it going to generate more income for me or is it going to deplete the Income from my new Job for which I am going to work harder? I realise now that I am stuck in a Rat race. We are in a race, a race of which most of us are a part of. More money is definitely not the solution to Money Problems. The solution is to consciously reduce expenditure, avoid investing in liability because that causes more expenditure like interest payments, maintenance etc., and instead invest in assets which generate income. That’s the secret of the turning wealthier.

Many investors with a strong equity portfolio in early 2008 remained spectators when the portfolio took a hit due to the events that unfolded during the year. They had then exited at lows. The portfolios eroded by almost 60-80 percent. As the markets turned the tide and rallied, many of these investors did not buy any stocks with the belief that the rally will be a short-lived one. The rally, however, was not a short-lived one and is still going strong nearly a year after it began.

The US Fed's decision to keep the interest rates low for an extended period indicates that the higher liquidity will probably extend the rally by a few more months. In that case, what should investors do? How should they get back into the stock markets to start earning returns? Let me know your thoughts.

Best Regards,

Thursday, March 18, 2010

Road to the Future

The road to the future was contemplated to be written in the back drop of the major investments our government is planning to incur to spearhead a one of its kind project in the world. The minister for Roads & Highways has set a huge task, a task to put India in the fore front of International Road Infrastructure. A project that can transform the way we live and travel. The Program plans to create 50,000 Km of highways across the country in the next 5 years.

I would like to share what it means in terms of change. The entire industry that gains from this is gearing to meet business. It entails a spending of 100,000 crores every year. And the entire gamut if industry like the cement, project concreters, real estate developers, entertainment, food & hospitality are all having a stake in this project. The economic potential is for all, jobs, entrepreneurs, direct & indirect employment and for investors like us. As I discussed in the previous post, there is an imminent consumerism wave breaking out with per capita income exceeding USD 1000.

I am excited about the times ahead. Knowledge about it, is what we need to invest wisely. The US economy has seen such unprecedented growth in the 1860 and many entrepreneurs who stood those waves have made it.

We are going to witness in the next few years a similar growth and let us not miss this opportunity. There are a dozen of companies listed in the exchanges which are going to make it Big in this wave. Let us have Patience and develop Knowledge, two skills required to create wealth. If there is one show stopper, that could be the mounting levels of debt which is currently at 80% of GDP. Unfortunately the current budget has done little to address fiscal deficit, which is widening with every passing year.

Every investor in the market fears a correction. The years 2009 has seen a sharp rise in stock prices, and a correction this year should be expected. I know of wise investors who are holding on to their cash. I am in cash majorly and invested in 20% and I have set my eyes on some valuable companies that are not available cheap as of now. But if you can find some wonderful long term opportunities trading at attractive valuations even in a volatile market like this, nothing should stop you to go ahead. Keep your War Chest filled with cash and very soon we are going to have the opportunities come our way.

Happy Investing.


Sunday, February 28, 2010

What has budget to do with investing

I was recently talking to an investor who said he is waiting for the budgets to enter markets. Previously he was waiting for the RBI Monetary policy to be announced to enter the markets. I am sure he would have been waiting for some other event to have occurred for investing. This is a sure shot case of doubting what you are doing or simply having no clarity. As many fund managers say, they are investing in a 100 Companies to diversify risk. Diversification is done by people who are not sure of what they are doing. The answer to this is business perspective investing as the Great Warren does. Budgets or otherwise, investments are made when you find the right kind of businesses that generate cash and increases earnings year and offer superior Return on Equity. These are those companies that are run by very sound management, more so they are business where they have a very unique value to offer or stickiness. Such companies rarely come under pricing pressure because of competition or economic vagaries, except in the very short sense. Finding such companies only need common sense. Wise investors invest when the prospects of the business seems the bleakest. There are short term setbacks that can not affect the underlying business model or services it offers.

Since the market is mostly full with speculators, they offer premium in analysing present results. If the company in question had bad results, the markets beat them down even if the company has history of doing well and rewarding high earnings. The market then believes the future is bad which not the case is. To the intelligent investor, these provide the rare and great opportunity to invest with a long term perspective. This sounds astoundingly simple, the trouble is for the ones who monitor the sensex on a regular basis. Instead monitor the quarterly results of the company in question. How many of us do that? Unfortunately there is no formal education available in business perspective investing. But think about it.

The great Graham believed markets comprised of 2 components. One is long term investment oriented, which means over a period of time markets will price the stocks based on its business earnings. The other component is like a casino; investors gamble based on the short term fluctuation of prices based on news and events. They speculate based on the impact daily information would have on the price movement of the stock. The long-term investment nature of the market will surely and always hike up the prices of company’s stock, if it is the right business adding to the company’s net worth and demonstrated continuous growth in its EPS.

I wish you a very eventful and happy week ahead.

Naresh Pisharody

Sunday, February 14, 2010

Is it a right time to invest?

The markets have turned volatile and have corrected a bit, this is something that we always expected. The question now is, is that all or should I wait for more corrections before I invest. It is impossible to time the market. As someone who has been investing for many years now would realise, it is nerve wrecking to follow the index on a daily basis. I had given it up many years ago after my initial brush with trading. A trader’s life is full of highs and lows and is more like an addiction. There investment life is also relatively shorter. Thankfully I had given up this limited career long ago and entered the beautiful world of investing like a true and intelligent investor. It is about investing in a company as if you are buying its business story. If you investing in say an infrastructure company, you are doing so since you believe in the infrastructure prospects of the business. You do so because you believe there is a lot more of roads and bridges that need to be built and your company can profit from it. This is called Business perspective investing. This is relatively relaxing experience though it needs a lot of mental discipline and understanding. For such an investor, the interim losses are not a cause for worry but would be an opportunity to invest further. We follow the company financials regularly and see if the earnings and other parameters grow regularly. Look at earnings as the return from an investment made in the company.

For a long terms investor, it would make sense to invest regularly irrespective of the way index moves. Invest regularly and similar amounts. Subject to of course valuations of the price and the company identification parameters. Not everything is reflected in balance sheet. We need to deepen our contacts and get a insider view of companies. It will pay well to look for low PE companies that conform to select criteria and hold them for a period of 2 to 3 years. The next decade will see multi baggers from sectors like infrastructure and capital goods. There are also value picks emerging in education sectors. The markets have corrected quite a bit and more of this I am expecting as more bad news emerge. The European crisis is already being spoken about. Next would be Japan and US which are in deep red. Lets us prepare for action by investing in small amounts and continuing to do it as the market gets into more buying zone as I would like to call it. Beware of the real estate mafia still as a lot of illegal and launder money is lying there. I would avoid companies where customers buy purely based on price and have nothing else to offer like say a brand, or an innovation, a secret formula or IP. Recently I was looking at a company and was amazed to see the kind of innovative products they offer. Infact they do not restrict their manufacturing to any specific sector but specialise in innovation and making products that simplify our lives in multiple ways. They make products from automotive supplies to stationery to electronics to healthcare. These are the kind of companies I look to invest in as they have as warren calls them Consumer Monopoly. They have the power to price their products and also retain their earnings. But then it makes sense only to buy it at the right price. One parameter I look at it is the earnings yield.

The next event market looks forward is the budget. There is pressure on government to pull the plug on easy money and remove stimulus over time. Easy money will have to stop soon as the debt burden across all governments by dolling out such subsidies will become insurmountable. These will be action packed days and we are going to see prolonged times before a convincing recovery. Time to invest. And Investors seeking Knowledge will reap huge profits.

With Best regards,

Wednesday, January 13, 2010

The New Decade heralds

The term dead cat bounce is derived from the idea that even a dead cat will bounce if it falls from a great height. This phrase has been used in Stock Markets to describe a downward move followed by a significant price increase. The price fails to continue upward and instead falls again downwards, and exceeds the prior low. A very secretive investor whom I met recently used this phrase to describe the current recovery of the stock markets. He was speaking about an impending correction which many pundits believe is in the offing. Like all great investors believe, it is not wise to time the market and wait. At the same time it may be worthwhile to study independent companies with in a sector and research thoroughly before investing. It would be advisable to invest gradually in small proportions over 4 to 6 months to take advantage of cost averaging. Infrastructure as many know is an area where the government is spending. Infrastructure bottlenecks, have long been a drag on Asia's third-largest economy, knocking an estimated 2 percentage points off its growth. The country requires $500 billion investments in infrastructure till 2012. The bulk of the government spending, 85 per cent to be precise is in power, water and urban infrastructure. Companies that operate in this area are very well poised to return value to investors.

Most stock investors do not get better than average results and are in a way not entitled to it as they base their investments on hot tips and general news in the media. They are not being provided by a specialist who charges for his service. I know a lot of people have the anxiety of waiting for a correction, specially the ones who are sitting on cash. Market tests the patience and as Warren Buffet termed it, markets can be irrational longer than man can remain solvent. That summarizes everything aptly. For a long term fundamental investor, stock indices are incidental and stock prices can be best ignored. As Warren states it, the period for holding a good company is lifelong. There is a lot of meaning in this which needs to be elaborated. The human mind is wired in a manner that we react to the market sentiments. The brain is fused to buy high and sell low. An intelligent investor is the one who can get out of this psyche. If your horizon is 20 years, the most practical thing would be to invest in well researched company every month automatically. For a life long holding, the best choice would be to buy into total stock market index funds. What keeps people from succeeding in the markets is the attention that they pay to what market is doing currently. We have to exercise our right to ignore the markets and the value of our shares on a continual basis to succeed.

This decade is significant. At the turn of last decade, India per capita income crossed USD 500 and we saw the way economy and markets moved in the last decade. At the turn of this decade. India has crossed another significant mark, per capita income of USD 1000 and there is going to be a new wave of consumption and consumerism. Many companies are focusing on the emerging trends to ensure they don't miss this wave. For us as intelligent investors, it is of paramount importance to identify those growth areas and be invested.

Wishing you a very happy Makara Sankranthi.