Know the 4 Dimensions of Investing

Investing and analysing investment options can seem burdensome, tiring, boring, confusing, hair-splitting to know everything about it before committing your money to it. Irrespective of what the brokers, sales guys, agents try to push to you as an excellent opportunity for you and your loved ones, it is important to know that they have an inbuilt interest in selling things to you and you have to do your own due diligence. Doing your own due diligence is often spoke about, but some of you may wonder what does this mean and how do you do it.

There are essentially 4 dimensions to understand any investment:

1. Return/Potential Return

I say return/ potential return and not just return so that you are not overly swayed by the superb past returns of an investment, but realise that not all investments will repeat their super duper track record time and again. There may have been a time and environment where something really made great returns, but this time and environment may well be very different. 

A plot in a far away village may not give you a great return on your investment without nothing new happening. But, once it is known that an international airport will be coming in the area, the investment may have great returns. And once all the development is done, the return on investment may not follow the run you saw during the days when the news of the airport was coming. Similarly with stocks. There are good times and great times for companies depending upon a myriad of factors such as demand for the product/service, cost of making things, saturation of product usage, etc.

2. Risk & Return

Each investment has a certain risk to it. Even Govt. owned companies and their shares/bonds have some risk in it. Nothing is risk free. Sometimes the risk is on the return, while on some others, the risk is on the capital deployed itself. One has be aware of the risks and consider the return on the investment proportionately to the risk involved. Derivatives are more riskier than Stocks which is more riskier than fixed deposits/bonds/gold.

Do remember that sometimes even a less risky investment can cause a major loss compared to a higher risk investment.

3. Liquidity

This involves multiple things and is very important but unfortunately not given much importance by many people. Liquidity refers to how fast can you to convert the investment to cash whenever you need it. Another related aspect to liquidity is whether the investment can be used as a collateral against which you can get a loan. Certain investments cannot be given as collateral and no loan can be obtained against them. E.g. Bonds, Fixed deposits in some NBFC (Non Banking Financial Company)s. Some investments may have a lock in period which will limit the ability to sell the investment. Certain bonds have a lock in period before which you cannot trade it in the market. Sometimes, holding a stock/bond that is not widely traded also brings about liquidity problems while trying to sell it.

4.  Tenor

The length of the investment period. At the end of the day, you will need to match the investment tenures to the life's various goals. No point in investing in a 20 year investment that is locked if you don't have money for your other urgent goals.

All investment avenues would have the above mentioned 4 characteristics. You should know these 4 aspects of your investment and competing investments before you make a decision to invest in one based on your life's goals and risk apetite.

How to find the truth behind what your (financial) agent tells you?

Here's a list of things that are mentioned here to detect lies by an agent.
How to tell when an agent (insurance, loan) is lying to you
Beyond this, there is one true test because at the end of the day, because actual "Numbers don't lie"*

Many agents typically sell you an investment product saying you pay x amount yearly for y years and the end of it, you get z amount. Plus, there is a bonus amount paid at the end of m years and every n years later. The agent says it as if the bonus is something free, something over and above what the company generally gives/supposed to give. This is just 'playing into' the customer's mind. Since, there are a number of different products, each with its own different flavour and rules, it is very difficult to comprehend what is the real returns expected out of the product. To decipher the real return expected out of the product, do the steps below. If you are not familiar with xls, take help of someone to follow the steps mentioned below:
Ask your agent to give you year wise, the ouflows (investment made, premiums paid, basically money going out of your pocket) and the inflows for every year (typically, a single or multiple bulk amounts at end of a number of years).
Open a new xls and enter the dates, the amount going out of your bank accounts as negative, the expected amounts as positive (in forms of bonus, returns, dividends, etc.) in three different rows.
Add these two amounts (outgo and inflow) in the next row (Row 4). (Click the pic below to zoom)

Then use the XIRR function with the net amounts as the first parameter and the dates as the second parameter to get the real compounded annual growth rate(CAGR).
CAGR describes the rate at which an investment would have grown if it grew at a steady rate. You can think of CAGR as a way to smooth out the returns.
Read more on CAGR

* Numbers don't lie, but reading the numbers in a false context/background/with bias, interpretation of numbers could lead to lies. e.g.: The Indian stock market had gone up by leaps and bounds between the period 2003 and 2008 and those numbers do not lie. But expecting that same kind of growth at any other point in time (as the environment would be different wrt to interest rates, policies, inflation, currency rates, oil prices, global liquidity, attractiveness of Indian stock market vis-a-vis the other global stock markets, investor sentiment, etc.) could be equivalent to lies. If an agent shows you the best period of growth and tells you that this can be expected in the future also, do ask for the worst period of returns and ask him/her why that the worst could not repeat.

Things to check before buying land

http://economictimes.indiatimes.com/markets/real-estate/realty-trends/planning-to-invest-in-land-heres-a-checklist/articleshow/14706132.cms

Difference between Khata and Title deed
http://www.parasgroup.in/faq/what-difference-between-khata-and-title-deed

Reduce tax on short term profits

Transactions work in a funny way when taxes are involved. Here's a demonstration:
Here's how to lower your average buy price of a share with tax benefits:
Assume you have bought a share of scrip A @ 700. Now the share has fallen to 600 within a week/month. Assume you buy 1 more share, this time @600 and also sell one share at the same price.
Looking from a layman's/superficial perspective, these 2 transactions are wasteful and costs are involved (brokerage and taxes on the transaction) as no useful purpose has been solved.

Now lets look at this from the tax perspective:
As shares sold is always in FIFO (First in first out) in India, your would have effectively sold the first share at a loss of 100(sell@600- buy@700). This gives rise to a short term loss of 100 which is adjustable against other short term profits. Assume you have made a 100 short term profits in some other transactions. Then, your net tax payable is 15% * (100-100) = 0. So you have effectively saved 15% taxes on the amount of losses if you have profits elsewhere in other transactions. Now, your effective by price of A is also 600 (the price of the second share you bought). The lower buy price will help you break even and make profit faster.

Lets extend the case. Assume that after a year of buying the second share, the price has reached to 630. If the 2 seemingly dummy transactions had been done, then you would have saved 15 in short term taxes by adjusting against other short term profits and when you sell this at 630, you make a long term profit of 30 (Sell@630 - Buy@600). And since long term equity capital gains is taxed at 0%, the total profit/loss you would have made is -100+15+30 = -55.
If these two dummy transactions had not taken place, your buy price would have been 700 and sell price would be 630, meaning a loss of 70. Note that long term losses are not adjustable against anything.
So, you can effectively reduce your losses or taxes and also make more profits by taking an immediate short term loss and entering into a counter transaction by buying an equivalent amount at the same price(assuming you have short term profits).
This is not only applicable for buying and selling at the same price, it is also very much applicable if you bought the second share at at a rate less than the selling of the first share.

Gold & Investment poker

There is a nice game in town called "Predict the price of gold and win a jackpot". It is well known that a lot of cheap money has gone into commodities over the last few years (perhaps 2 years or so). And that means a lot of speculation has also gone into it. One of them is Gold. There are many theories floating around why Gold is rising and the theories predicting the immediate future of this shining metal. The most traditional theory says "Gold hedges inflation". Meaning, it can store the same value and you can get the same goods worth in gold irrespective of the depreciation of a currency which happens with high inflation. The second and a consequential theory says "Gold is an alternative currency in itself when other major currencies are as volatile as Molotov cocktails". The third theory says "When the world is headed for deflation, gold is a better investment as it will atleast hold value rather than depreciate". Another theory says "Gold is usually measured in USD and as Gold and USD are usually always negatively co-related to each other, hence, Gold prices can be predicted by the prediction in the USD strengthening/weakening against other currencies". The fifth and sixth reasons are speculating based on one of these theories and buying based on hearing the blind calls of others respectively. There is no one clear and present reason for putting money in Gold.
Now, coming to the poker side of things, it gets more interesting/confusing based on how you see it. It is a fact that Gold has run up so much because many people/institutions have bought/speculated loads and loads of it. Some of them have been satisfied with the returns and thought it was in an overbought region/overpriced at around USD 1800+ per troy ounce and had started selling it and realising profits. Now at around USD 1600+, when an organisation/person says it will reach higher, one has to understand if he is saying so to protect his own interest. He can make others buy by saying so while he himself is selling it to you. Without your invaluable buying support, it is very possible that more people would be selling and his realisation of profits would be that much lower. Now, considering all the talk about Gold, are you willing to buy Gold at this highest level? Arent the retail investors falling into the same trap of investing at the very highs and again burning their fingers for the sake of a best case 5 or 10% returns and the worse case of a huge downside? Now, thats a call you have to take. The answer looks simple enough to me, I hope it is for you too.

How to save more by using Credit Cards

I know how the heading sounds. Like a typical debit/credit card issuing bank. But trust me, this isn't what it seems. I am talking about exploiting your bank/credit card to the limit, the same way the Banks squeeze you off your money. Tit for tat.

The idea of a credit card is that you dont have to pay for the purchase immediately, but after a 'credit' period which is usually 45-50 days at the maximum and 18/20 days at the minimum. This means that you have a minimum of 18/20 days to pay your credit card bill after the purchase (if this purchase happens to be on the billing date of the credit card). And if you make the purchase the very next day of your billing date, your credit period is maximum.

If we assume that you dont really time your purchase and it can occur on any given day of the month, your credit period would vary between 18 to 50 days. The average credit period is (18+50)/2 = 34 days.

For safety measures, I always recommend you to pay your credit card bill 2 days in advance of your last payment date (in case internet is not working, bank holidays, computer maintenance at the bank, etc.; Be careful not to delay the credit card payment even by one day as this will make you pay huge late payment charges and a high interest rate of 24-36% per annum is used for paying the pending amount and the whole idea of bank's trying to exploit you will occur.)

So your average credit period is 34-2= 32 days, approximately a month of free credit.

If you spend around 10,000 per month on your credit card bill (groceries, provisions, eating out, air tickets,etc) instead of your debit card or other cash methods, you save around (10,000* 4% p.a/ 12) = Rs.33.33 per month or Rs.400 annually. It may not seem much initially, but that 4% per annum is what you are/were getting on your savings bank account without paying for the purchases immediately using a debit card/cash/netbanking. You would obviously save more if you had more expenditure on your credit card or time your flexible purchase to the day(s) immediately after your billing date.

With RBI deregulating savings bank accounts, and Yes Bank already upping the interest rate on the savings accounts by 2%, it is in the near future that other banks will also increase the rates. In this scenario, your savings from usage of credit cards is going to only increase. 

Usually this savings is far more than the reward points one can earn from the credit card company. The reward points are usually some 1.33% for some premium card and the rewards redemption is so calculated that for every 3 or more reward points, you get Rs.1 worth of stuff. So the maximum benefit you can expect is  1.33%/3 or around 0.44%. This is next to nothing compared to the nearly ten times more 4% per annum (or greater) you can get on all the purchases made with the cash lying in the savings bank account and paying the credit card bill just before the last date.
P.S: I have been using this strategy for over 5 years and have faced no problems at all. Financial discipline is necessary to get more out of your money.
Paraphrasing the line in the book "Rich Dad, Poor Dad": Don't work for money, Make the money work for you.

Reinvestment opportunities

Suppose you have made an investment three years ago at a cost of 100. Today, say the investment is worth 160. Your rate of return for 3 years is 60% and your compounded annual rate of return is (160/100)^(1/3) =16.96% per annum.

Suppose you expect the investment to go upto 165 in another quarter but under some risk that it may also go down, what do you do and what should you do? 

At the rate of 165, your profits would be 65 instead of the previous 60, at a new annualised rate of return of 18.16% from the previous ~17%. Should you now go for it?

It sure looks tempting to get a rate of return of 18.16% with a little risk, but this is identical to driving a car looking at the rear mirror. Let me explain. There are two ways to look at the rate of return. One rate of return based on the investment done 3 years ago and one assuming you are investing today. With the old investment, yes, your calculation comes to an attractive 18.16%. But assuming you are investing 160 today, you are expecting a rate of return of a mere 5/160= 3.125%. The truth is that you have already made most of your money till now and your marginal rate of return is only some 3 odd %. 

By keeping the investment, the truth is that you are actually wanting to make an investment giving a rate of return of ~3 % in a quarter with the risk of a downside too and not the 18.16% per annum that the calculation shows. The question to be asked is "Is this what you really want when you could have other more worthwhile investments to make which can give you better returns?". 

The comfort of previous returns makes people biased to calculating from a historical perspective and make them feel that the investment is good. By doing so, you are indifferent to reinvestment opportunities and are  missing real opportunities that will make you more money.

Doing the unthinkable

A Swedish newspaper gave $1,250 each to five stock analysts and a chimpanzee named Ola, to test who could make the most money on the market in a one-month period. Ola the chimp, who made his choice of purchases by throwing darts at the names of companies listed on the Stockholm exchange, won the competition.

A fluke? Maybe, maybe not.

-- For years, the Wall Street Journal did this every month, enlisting four Wall Street stock experts to pick one stock apiece, and then having someone throw darts four times at the paper's stock listings. After six months they'd compare the average returns on the four stocks the experts picked versus the four stocks the darts hit. Very often, the "dartboard portfolio" won; almost always it beat at least one or two of the pros' picks.

These kinds of studies are often conducted and reviewed by economists, too. Mishkin's textbook has a section on them, titled, "Should you hire an ape as your investment adviser?" Or maybe you don't need an investment adviser...

http://www.oswego.edu/~dighe/340ch7.htm

In another experiment, a four yeard old girl Tia Laverne beat an experienced analyst and a financial astrologer. http://www.thefreelibrary.com/Girl+of+five+beats+the+stockmarket+experts+(again).-a083771523

Now why don't the stock market books teach us this technique of investing? The closest the formal books have come to is passive investment strategies involving buying index funds.

After reading such scientific researches, I am having a thought of choosing stocks the chimp way to beat my fund manager...

15 good podcasts

http://www.businesspundit.com/15-podcasts-that-will-make-you-richer/

Invest in wine

http://economictimes.indiatimes.com/features/the-sunday-et/money-you/Wine-is-now-fine-for-investment-too/articleshow/5111199.cms

Munger quotes

Quotes from Charlie Munger, Warren Buffet's right hand man and vice-president of Berkshire Hathaway, apart from being a hero himself....

http://www.gongol.com/quotes/munger/

Investment tips

"Due diligence is the art of asking good questions. It's also the art of not taking answers on faith."

Who dares wins

So why is the stock market one of the riskiest places to invest? There are quite some risks that stretch beyond the risk of losing money. They include psychological risks - the risk of losing one's ego and self esteem, risk of losing your peace of mind and your sleep. This in turn will risk everything else in your life. If you are incapable or uncomfortable taking this psychological risk head on, don't get into the stock markets!!!

Hi, you suckers!!!

Hi, you suckers!!! Yes, those of you who only have ULIPs(Unit linked plans) as their insurance. Have you calculated the total worth of how much your nominee will receive in case of the event of your death tomorrow(God forbid). Under the present scenario, where are the markets are in bad shape, it will be hardly anything worthwhile to take care of your family's needs for the decades to come. (And ya, didn't the agent promise you a lot of money in case of death? WHAT IF you pass away this month? What do you think the nominee will get? Do calculate.) If you are going for a ULIP, be sure to pass away when the market is at a high, else, it is going to be harder on your family.

Sorry for that tone, but it is meant for all those educated stupid people who will buy insurance for cars which are worth more than a few lakhs and value themselves far less than the cost of their vehicles. Sorry, I don't have any regards for people who value their lives less than that of the vehicles they drive. There are so worthless. Coming to my point, ULIP is/was the hottest-est newest-est product in the financial markets in India and the agents get huge commisions on selling these compared to other products and hence they will push you to buy it so much. The truth is the output of the pay in case of death is the maximum of either the assured amount or the cost of your units accumulated. I believe that everyone would like to see their families not suffer financially after the passing away of a loved one(the bread winner). Now for that you need to calculate the amount of money that would be safe enough to keep your family in good financial health. This amount is kind of known per se. How can anyone be so stupid to not secure money for the family and allow the vagarities of the world directly affect your financial position of tomorrow? It is never too late to get a term plan life insurance as they have many benefits:

1. They are the cheapest form of insurance. (For every rupee insured).

2. They pay back the full assured amount.

3. This is just like your vehicle insurance. You pay a certain sum of money every year that you don't get back. If the insured loses his/her life, the insurance company pays the money assured(If the vehicle is lost, the insurance company pays the insured amount).

If you are ok with this form of insurance for the vehicle, then why not for life.

A small comparison: A 24 year old pays around Rs.2800 for one year for a term policy of an insured amount of around Rs.14 lakhs, but I am sure if you own a new car worth far less, your insurance premium will be much more than this(Rs.2800). So if you don't have a term plan, then get yourself one asap.

Investment advice

Check out this video about investment advice. I am not trying to say that all the investment managers out there are trying to rip you off, but there are quite a few of them out there. Most of the insurance and mutual fund agents who always tell you to buy the latest products from them without explaining or comparing all the characteristics of the products are the ones trying to rip you off. After they are done with you, you will R.I.P(rest in peace)
http://financialrounds.blogspot.com/2008/06/investment-advice.html