In my previous blog I had touched upon the importance of savings.
There is a saying in one of our Indian languages which says “Money attracts Money”. If you have the money and you invest it properly you will see your money growing.
If you read carefully, I have mentioned, INVEST, and not saving as a tool. Infact if you just save your money you will end up being poorer. The devil being INFLATION. One can figure it out oneself, the value of money depreciates with time, for e.g. what one could buy for RS 1000 in year 2004 and what one can buy for RS 1000 in the year 2006 is not the same. The prices of the things have increased or in other words the value of RS 1000 has decreased.
Hence proper investment of the money is critical.
Coming back to “money attracts money”, if we see the Indian stock markets right now, the overall sentiment is upbeat; the sensex is scaling a new high every day. The BSE sensex has reached from 10000 to 14000 in a year*. On the face of it, this means that the average or the common man has made money or grown richer in this year.
However, if you analyze or dig further, you realize that the rich have become richer and the poor well maybe not poorer, but the status quo is maintained.
Just to quote a small incident. On a vacation back home, I happened to talk to my maid, I just asked her, do you save/invest money, her answer was yes, I have fixed deposits in the bank. And it just struck me, that here she was earning a measly 5-6% interest on her hard earned money and I was making 20-30% returns on my investments in the shares.
There are some key qualities/attributes an individual investor should have:
Patience
Holding power
Risk taking ability
Patience: Patience is a virtue whose importance can’t be stressed any more. Once you have done the required analysis and decided to invest, you should be patient and not get bogged down by the day to day price movements. A common example quoted against this habit of constantly checking the share prices is, once you purchase a house, one doesn’t keep checking the price daily, nor do the fortunes of the companies change daily by the minute. Hence PATIENCE PATIENCE :)
Holding Power: As an investor, when one buys a share which is trading at much below its intrinsic value, we hope/assume that sooner or later the markets and the general investors will realize the true value of the share and sooner than later the share prices will be in sync with the intrinsic share price. Now when the markets and the general investors realize the true value is a good guess. Hence an investor needs to have a holding power; he should be willing to stay invested in the markets for long term and not a speculator.
Risk taking ability: The risk taking ability is clubbed or related to the holding power of an individual. One needs to be able to take risks or rather have the wherewithal or the capital to take risks. To explain further, inspite of one’s complete calculations/analysis, the share price of the company may still lag behind for lot of reasons and in such situations if one needs the money immediately, one may end up with a loss instead of an appreciation in the capital.
Inspite of elaborating on the importance of holding power and risk taking ability, I strongly believe that there are some sectors or companies which are virtually risk free**. For e.g. in the Information Technology companies like Infosys and TCS are my favorites. All one needs to do is put some money in the Infosys /TCS shares and just relax or forget them. A minimum of 30-40% pre-tax appreciation is almost guaranteed. I don’t think there are other avenues apart from say real estate and commodities which can promise such huge returns year on year.
With the multiple developments in the stock markets, most of the stocks are now within the reach of the common man, and one can even buy a single share of Infosys /TCS. Hence the reasoning that one needs huge amounts of money to invest in shares doesn’t hold good. And I believe drop by drop the ocean is build. Hence no money or investment money is too small to invest.
So I think its time that one does plan to invest in the shares (as an intelligent investor and not a speculator).
* My article couldn’t have had a worse timing, the Indian markets are reeling under the CRR increase and now there is a free fall, we are right now below 13000 in a matter of 3 trading sessions.
** I have mentioned virtually risk free, some of my colleagues may say that if something happens in the US markets, it might impact Infosys/TCS shares. All I can say is that , if you consider all the remote possibilities, nothing is risk free in this world, but then there are no free lunches and some risks are called for.
Tuesday, December 12, 2006
Saturday, December 2, 2006
Speculation or Investing
Money cannot buy you happiness. But it surely makes it easy.
With the advent of the call center culture, the young generation has easy access to the money. Even a twenty year old is making 20 grand a month. However the entire money is spent immediately. Infact people spend more than their earnings thanks to the advent of the credit cards.
To come to the point...I believe that earning money is not enuf..People need to be able to make money by intelligent investing.
Coming to my favourite investment avenue, the share market. Lot of my friends say that investing in the shares is like gambling. I beg to differ. If we take into account the developments in India in the key sectors such as Infrastructure, Construction, IT, Telecom...all have been
capital intensive industries. Infact most of the sectors are capital intensive. Hence you need capital to develop/build any sector. And we are talking of huge capital investment to the tune of billions of dollars. To top it the sectors have a long gestation period, ie these industries take years to break even forget a return on the capital.
Consequently, long gestation periods and huge amounts entail a risk
in these investments. Now from where do we get this capital ? Here comes the concept of public limited companies. The shares/interest of the company are publicly traded in the stock exchanges of the country. The public trading of the shares provides liquidity of the
shares.
There are a lot of advantages of this concept of public traded companies :
1. The companies are able to raise the required amount of capital.
2. The individual is able to participate in the growth of the company. As a reward for the risk that the individual bears, he is rewarded with capital appreciation.
3. Due to the fact that the shares are publicly traded, the individual gets the liquidity. There is a ready market available for the individuals to sell of his holdings for cash.
To further explain,
An investor invests in the shares of the companies if he foresees
that the company has an opportunity to grow in the future.
Each share issued by the company has a face value, which is generally Rs 10/-. However, the shares normally trade at a premium on the face value.
There are two different returns that the individual can expect from the shares.
1. A dividend on the shares
2. Capital appreciation
The companies generally declare a dividend on the shares every year. However this return is not fixed and many a times the companies dont declare a dividend every year.
The other benefit, the capital appreciation is what the individual
investors look for.
Let me explain
The book value of the share can be derived from the balance sheet of the company. However the shares may trade at a different price in the market. This is the current price of the shares.
The earning per share is the Net Profit/ Total Number of Shares
The company doesnt declare/distribute the profits every year, however
the EPS can be used as a measure to understand the profitability of
the individual company.
The company can be valued at the growth rate of the EPS every year.
For eg. Year 2005 Year 2006
EPS 20 25
Share Price 120 ??
Price Earning Ratio 120/20 = 6 ??
The %age growth in the EPS is (25-20)*100/20=25 times.
This shows that the EPS grows at 25 times.
There is another term one should know, the price earning ratio of a share, ie a PE
ratio.. It is derived by dividing the current share price by the EPS.
The general thumb rule to derive the future price is based on the growth in the EPS
Continuing the above example, the EPS is expected to be 25 for year 2006. Hence the EPS is expected to grow by 25% or 25 times.
The future price for 2006 can be 25*6(PE)=150.
Hence if the current market price is 125 or so, the investor can purchase the share @ the market price and hold on to the investment till the market price appreciates.
I dont see any element of speculation in the above concept.
The investor needs to analyse the financial results of the company and the future prospects of the company to decide whether or not to invest.
If you dont have the share market, you will not have the capital required to develop the country.
I agree that there is speculation in the investment.. A lot of tips float around in the markets and people tend to go by hear say and make the investment in the shares.
Investing in shares requires a lot of discipline and patience from the investor. One should not get swayed by the daily ups/downs in the share markets.
A general tip is "Be greedy when the market is scared and be scaredwhen the market is greedy"
PS: The above views might have been inspired by my two idols Peter Lynch and Warren Buffett. I have been reading books written by/about them. Hence some of the views might appear to have been lifted from these books. This is not intentional, just that I have been inspired by both these icons and I aspire to be like them..maybe in small repsect.
With the advent of the call center culture, the young generation has easy access to the money. Even a twenty year old is making 20 grand a month. However the entire money is spent immediately. Infact people spend more than their earnings thanks to the advent of the credit cards.
To come to the point...I believe that earning money is not enuf..People need to be able to make money by intelligent investing.
Coming to my favourite investment avenue, the share market. Lot of my friends say that investing in the shares is like gambling. I beg to differ. If we take into account the developments in India in the key sectors such as Infrastructure, Construction, IT, Telecom...all have been
capital intensive industries. Infact most of the sectors are capital intensive. Hence you need capital to develop/build any sector. And we are talking of huge capital investment to the tune of billions of dollars. To top it the sectors have a long gestation period, ie these industries take years to break even forget a return on the capital.
Consequently, long gestation periods and huge amounts entail a risk
in these investments. Now from where do we get this capital ? Here comes the concept of public limited companies. The shares/interest of the company are publicly traded in the stock exchanges of the country. The public trading of the shares provides liquidity of the
shares.
There are a lot of advantages of this concept of public traded companies :
1. The companies are able to raise the required amount of capital.
2. The individual is able to participate in the growth of the company. As a reward for the risk that the individual bears, he is rewarded with capital appreciation.
3. Due to the fact that the shares are publicly traded, the individual gets the liquidity. There is a ready market available for the individuals to sell of his holdings for cash.
To further explain,
An investor invests in the shares of the companies if he foresees
that the company has an opportunity to grow in the future.
Each share issued by the company has a face value, which is generally Rs 10/-. However, the shares normally trade at a premium on the face value.
There are two different returns that the individual can expect from the shares.
1. A dividend on the shares
2. Capital appreciation
The companies generally declare a dividend on the shares every year. However this return is not fixed and many a times the companies dont declare a dividend every year.
The other benefit, the capital appreciation is what the individual
investors look for.
Let me explain
The book value of the share can be derived from the balance sheet of the company. However the shares may trade at a different price in the market. This is the current price of the shares.
The earning per share is the Net Profit/ Total Number of Shares
The company doesnt declare/distribute the profits every year, however
the EPS can be used as a measure to understand the profitability of
the individual company.
The company can be valued at the growth rate of the EPS every year.
For eg. Year 2005 Year 2006
EPS 20 25
Share Price 120 ??
Price Earning Ratio 120/20 = 6 ??
The %age growth in the EPS is (25-20)*100/20=25 times.
This shows that the EPS grows at 25 times.
There is another term one should know, the price earning ratio of a share, ie a PE
ratio.. It is derived by dividing the current share price by the EPS.
The general thumb rule to derive the future price is based on the growth in the EPS
Continuing the above example, the EPS is expected to be 25 for year 2006. Hence the EPS is expected to grow by 25% or 25 times.
The future price for 2006 can be 25*6(PE)=150.
Hence if the current market price is 125 or so, the investor can purchase the share @ the market price and hold on to the investment till the market price appreciates.
I dont see any element of speculation in the above concept.
The investor needs to analyse the financial results of the company and the future prospects of the company to decide whether or not to invest.
If you dont have the share market, you will not have the capital required to develop the country.
I agree that there is speculation in the investment.. A lot of tips float around in the markets and people tend to go by hear say and make the investment in the shares.
Investing in shares requires a lot of discipline and patience from the investor. One should not get swayed by the daily ups/downs in the share markets.
A general tip is "Be greedy when the market is scared and be scaredwhen the market is greedy"
PS: The above views might have been inspired by my two idols Peter Lynch and Warren Buffett. I have been reading books written by/about them. Hence some of the views might appear to have been lifted from these books. This is not intentional, just that I have been inspired by both these icons and I aspire to be like them..maybe in small repsect.
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