Indian Finance: Mistakes commonly made by equity investors

Everybody makes mistakes in the equity market, so one cannot blame retail investors for making many mistakes. Even acclaimed mutual fund and hedge fund investors have made mistakes over the years, but that does not excuse the retail investors from trying to learn about the mistakes that they keep on making so that they reduce the number of mistakes they make in the future. At the minimum, investors should learn about these mistakes so that they can try and learn from these mistakes. Some of these mistakes are:
1. Investors typically join the herd. So, when the stock market crashes, people run to liquidate their holdings, even at a loss. For example, when the market was really down in October, companies that were fundamentally sound were picked up by people who believed in the long term.
2. People look at tips, and even do investment based on tips even if they know nothing about the company or stock.
3. People do not read about the fundamentals of the companies that they are investing in. Typically, company valuations follow the projections of the sectors that these companies belong to, and after that, the company performance also plays a role. However, people do not bother finding out these facts.
4. People invest and forget. There are a number of people who invest in companies or mutual funds and do not re-evaluate the nature of their investments and the performance over a regular period, say every 6 months or every year
5. Diversify your portfolio: Do not invest everything you have in the stock market. Invest in mutual funds, some in debt funds, some in PPF, some in realty, and so on. Make sure that you are properly diversifying your investments, at the same time, make sure that you invest only where are you comfortable in your level of knowledge. Even consider things such as investments in gold and art.
6. Don't get caught up in greed. When people lost out in January 2008 after markets had climbed to record highs, people were not willing to consider that the market could go down. People were not willing to take some of their investments out of the market, and lock that money in safer investments.
7. Invest for the long term. Don't get scared by short term movements. Even while tracking them, make sure that if you have invested based on fundamentals, and for the long term, you don't lose patience.
8. Don't get tricked by other people. You will always hear people say that they made incredible amounts of money in investing in the stock market, and there is a feeling of being left behind. Remember, you only hear the stories that are positive, and you should never let such stories guide your actions.

Indian finance: Safety vs. risk in terms of investments

One typically hears of cases where people have invested money in dubious investment schemes run by scheming and smooth investment gurus who actually end up duping people of their hard-earned money. These smooth operators typically get caught, but this is no consolation for those people who lose their money in these schemes. Similarly, people end up losing their money when they invest in stocks and mutual funds, either if the entire market collapses or if they invest in very risky stocks. So does this mean that people should invest in risk free investments ? No, because there is a ratio between risk and return. It is for every individual to decide their risk - return paradigm based on their comfort levels, and their ability to take risks. Read this article to learn more:

The rating scale starts with AAA (lowest credit risk) and ends at D (default grade, highest credit risk). Going by the normal yardstick, one should always go for the best. So, should all the investors invest only in AAA rated issues? To fathom this paradigm, we have to understand the riskreturn relationship. Risk-return & risk aversion. It is because of the relationship between risk and return — higher the risk, greater has to be the expected return on that investment and vice versa. An investor hoping for higher returns has to embrace the risks that are attached to it.
But how does an investor decide how much risk to be taken? In reality, there is nothing like optimal risk-return trade off. It is often a derivative of various factors like time horizon, liquidity, and some investor specific circumstances. The risk-return trade off is extendable to equities as an asset class also. The relative safety of investing in blue chips may not result in highest returns. In case of IPOs also, the IPO grading is an opinion on the relative fundamentals of the company. The investor decision is guided to a large extent by the valuation and risk tolerance.

So, as they say, the ability of a person to take some risk in their investment is guided by multiple factors. The only thing one should do is to ensure that one has thought through the investment carefully.

India: Obtaining duplicate copy of documents

People encounter this problem once in a while. You have invested money in a Fixed Deposit, or in Mutual Funds, or some other such investment method (including investing in a private company). Suddenly you find that you cannot locate the proof of such an investment (you could have lost it, it could have got destroyed in a fire or similar accident, or any other such reason). Panic sets in, after all, what do you do now ? Visions of losing your money come to mind.
The best method to prevent such an occurrence from happening is to make a copy of all your important finance documents and keep them in a safe location so that you have a backup. However, what happens when you have not taken this precaution ? Read this article to learn more (link to article):

To make sure you don’t have to dig deep in such a situation, here’s a guide on the process you can follow to get a duplicate copy of key documents such as NSC, FD, Form 16, Pan Card, mutual fund scheme, insurance policy and home loan papers. “If the papers, however, cannot be traced after reasonable efforts and you suspect they may have been stolen, a report at the nearest police station must be filed immediately,” advises Amitabh Singh, partner — tax & regulatory services at Ernst & Young.
To ensure there is no misuse, instantly inform the respective departments about the loss of original papers/document/policy. The next procedure should be to apply for a duplicate. As a policy, most financial schemes allow for issuance of duplicates on payment of a nominal fee. According to post office regulations, you can get a duplicate certificate issued if loss of the certificate has arisen out of theft, mutilation, defacement. You would be required to send an application to the post office where the NSC was issued.

As recommended, make sure that you keep a duplicate copy beforehand. To get a copy later takes more effort and running around multiple locations, but it is possible and something you should work through.

India consumer: Bank charged penalty for charging older customer more than newer customers

It is an established business fact that when banks give loans to their customers, they normally treat newer customers more attractively than they treat older customers. The terms and conditions of the loan specify for floating rate loan that banks can charge customers more (either by increasing the EMI amount, or the loan duration) if the interest rate regime changes. Similarly, even in the case of fixed rate loans, the bank retains the right (if you read the complete legalese of the loan terms, you can confirm) to change the fixed rate loans if the rate of interest changes by a certain amount. This changing of fixed interest rate has not been challenged, however, somebody challenged the fact that they were being charged more than new customers, treating that as a unlawful practice. This was accepted by the consumer forum which fined the bank (link to article):

Imposing a penalty of Rs one lakh, which the bank will pay to Goyal, the forum said, ‘The bank is directed to overhaul accounts of all its loanees and bring the rate of interest at par with those at which the loan (home) is advanced to new customers from time to time, so that all its customers, whether old or new, who have opted for adjustable rate of interest pay the same rate of interest during any particular period.’
Arguing before the forum, Goyal’s counsel stated that the finance company and bank adopted unfair trade practice by increasing rate of interest for old customers at a higher rate, whereas the prevailing rate of interest was much lower, which was depicted through their announcements and advertisements in the newspaper to attract new customers. After hearing the pleas, the forum held that the interest rate of any old loanee would be lowered to bring it at par with the interest rate at which the loan is advanced by the bank to its new customers.

One is not sure whether this practice is still ongoing, but one suspects that banks do continue doing this. Not too many people are aware that this has been ruled unfair by a consumer forum, and that they can challenge this practice. Most people continue to accept that whatever a bank does is acceptable.

Joke: Understanding Investments

STOCK: A magical piece of paper that is worth $33.75 until the
moment you buy it. It will then be worth $8.50.

BOND: What you had with your spouse until you pawned his/her
golf clubs to invest in Amazon.com.

BROKER: The person you trust to help you make major financial
decisions. Please note the first five letters of this word
spell "Broke".

BEAR: What your trade account and wallet will be when you take
a flyer on that hot stock tip your secretary gave you.

BULL: What your broker uses to explain why your mutual funds
tanked during the last quarter.

MARGIN: Where you scribble the latest quotes when you're supposed
to be listening to your manager's presentation.

SHORT POSITION: A type of trade where, in theory, a person sells
stocks he doesn't actually own. Since this also only ever works
in theory, a short position is what a person usually ends up being
in (i.e. "The rent, sir? Hahaha, well, I'm a little short this
month.").

COMMISSION: The only reliable way to make money on the stock
market, which is why your broker charges you one.

YAK: What you do into a pail when you discover your stocks have
plunged and your broker is making a margin call.

THE BEST OF FINANCIAL MELTDOWN JOKES

1. How do you define optimism? A banker who irons 5 shirts on a Sunday

2. What do you call 12 investment bankers at the bottom of the ocean?
A good start

3. Resolving to surprise her husband, an investment banker's wife pops by his office. She finds him in an unorthodox position, with his secretary sitting in his lap. Without hesitation, he starts dictating, "...and in conclusion, gentlemen, credit crunch or no credit crunch, I cannot continue to operate this office with just one chair!"

4. Masked man holding a bank cashier up with a gun. Says: 'I don't want any money - I just want you to start lending to each other...

5. What's the difference between Investment Bankers and London Pigeons?
The Pigeons are still capable of making deposits on new BMW's

6. What's the difference between an investment banker and a large pizza?
A large pizza can feed a family of four

7. What have Icelandic banks and an Icelandic streaker got in common?
They both have frozen assets

8. Money talks. Trouble is, mine only knows one word - goodbye.

9. What is a banker's favourite chocolate bar? A credit crunchie!

10. For Geography students Only: What's the capital of Iceland?
Answer: About Three Pounds Fifty...

11. Quote of the day (from a trader): "This is worse than a divorce. I've lost half my net worth and I still have a wife."

and finally the Best

12. If you had purchased $1000.00 of Nortel stock one year ago, it would now be worth $49.00. With Enron, you would have $16.50 left of the original $1000. With WorldCom, you would have less than $5.00 left. If you had purchased $1000.00 of Delta Air Lines stock you would have $49.00 left. If you had purchased United Airlines, you would have nothing left. But, if you had purchased $1000.00 worth of beer one year ago, drank all the beer, and then turned in the cans for recycling, you would have $214.00.

Based on the above, the best current investment advice is to drink heavily and recycle. This is called the 401-Keg Plan.

Article on using GNUCashnu

There is this great article on Linux.com about using GnuCash 2.0. As the author says, it's not a review or a list of new features, but more of a explanation on the usage of GnuCash 2.0. Read the article (link).

From the article:
Getting over the barrier
Start by reading the section called "The Basics" in the GnuCash Tutorial and Concepts Guide that you can find under Help. You really need to understand what double-entry accounting is all about before you can ever be comfortable using GnuCash, even to balance your checkbook.
In The Basics, the Guide explains not only the five basic types of accounts, but why it takes a minimum of two entries -- thus the name "double-entry" -- to keep the accounts in balance. It takes you just far enough past the fundamental "Assets - Liabilities = Equity" equation to show how Income and Expenses, the last two of the five account types, fit into the equation. It's easy, really.
Assets include things like the money in your checking account. Liabilities are the things that you owe, like rent or car payments. Equity is nothing more than the difference between the two. Told you it wasn't hard. Now, speaking of checking accounts, let's set up GnuCash to track one.

GnuCash

GnuCash is personal and small-business financial-accounting software, freely licensed under the GNU GPL and available for GNU/Linux, BSD, Solaris, Mac OS X and Microsoft Windows.

Designed to be easy to use, yet powerful and flexible, GnuCash allows you to track bank accounts, stocks, income and expenses. As quick and intuitive to use as a checkbook register, it is based on professional accounting principles to ensure balanced books and accurate reports.

Feature Highlights

* QIF/OFX/HBCI Import, Transaction Matching
* Reports, Graphs
* Scheduled Transactions
* Financial Calculations

* Double-Entry Accounting
* Stock/Bond/Mutual Fund Accounts
* Small-Business Accounting
* Customers, Vendors, Jobs, Invoices, A/P, A/R

Read more and download (link)

Moving Average

Overview
A Moving Average is an indicator that shows the average value of a security's price over a period of time. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes, its average price moves up or down.

There are several popular ways to calcuate a moving average.
MetaStock for Java calculates a "simple" moving average--meaning that equal weight is given to each price over the calculation period.


Interpretation
The most popular method of interpreting a moving average is to compare the relationship between a moving average of the security's price with the security's price itself. A buy signal is generated when the security's price rises above its moving average and a sell signal is generated when the security's price falls below its moving average.

This type of moving average trading system is not intended to get you in at the exact bottom nor out at the exact top. Rather, it is designed to keep you in line with the security's price trend by buying shortly after the security's price bottoms and selling shortly after it tops.

The critical element in a moving average is the number of time periods used in calculating the average. When using hindsight, you can always find a moving average that would have been profitable. The key is to find a moving average that will be consistently profitable. The most popular moving average is the 39-week (or 200-day) moving average. This moving average has an excellent track record in timing the major
(long-term) market cycles.

IQ level of an economist

Einstein dies and goes to heaven only to be informed that his room is not yet ready. "I hope you will not mind waiting in a dormitory. We are very sorry, but it's the best we can do and you will have to share the room with others" he is told by the doorman.
Einstein says that this is no problem at all and that there is no need to make such a great fuss. So the doorman leads him to the dorm. They enter and Albert is introduced to all of the present inhabitants. "See, Here is your first room mate. He has an IQ of 180!"
"That's wonderful!" says Albert. "We can discuss mathematics!"
"And here is your second room mate. His IQ is 150!"
"That's wonderful!" says Albert. "We can discuss physics!"
"And here is your third room mate. His IQ is 100!"
"That's wonderful! We can discuss the latest plays at the theater!"
Just then another man moves out to capture Albert's hand and shake it. "I'm your last room mate and I'm sorry, but my IQ is only 80."
Albert smiles back at him and says, "So, where do you think interest rates are headed?"

Mint - Handling your personal finances

Mint is a website that claims to be able to handle your personal finances, however you have to be able to trust your person finance information with an external site (even if it does have a write up from Forbes). Read more from this article:

Aaron Patzer will track your finances and suggest ways to save money--all at no charge. But first you have to get comfortable letting strangers ogle your accounts. Mint is, in fact, a gold mine for those looking to take the tedium out of budgeting. Users need only key in log-ins for financial institutions--of which the average American uses 11. From there, Mint deciphers the vendors used from the jumbled code on credit card statements. Then it assembles colorful pie charts so users can see cash balances and debts and spot if they're over budget on their pub tab. It's a dramatic streamlining compared with Quicken, the budgeting software giant, which offers the peace of mind of having data reside on the user's computer but can require lots of cross-checking against paper statements and receipts.
Mint e-mails users when bank balances get low, bills are due and suspicious card charges appear. It analyzes spending habits and lists financial-service options, as Orbitz does with flights. Patzer boasts that Mint's recommendations save the average user $1,000 the first year. That may sound highball until you consider that banks pulled in $39 billion from often poorly disclosed "account maintenance" and other fees in 2007.

Budget Tracker software

Budget Tracker is an easy to use program that will help you track and understand your monthly expenses. Each month you can enter in a number of specific monthly expenses including Rent/Mortgage, Utilities, Grocery, Entertainment, Phone, Medical, Clothing, and more. Each of these is tracked per month, but also a running average is kept for each expense over time. So you can see just how much you spend on average for specific items.
Budget Tracker is designed to be easy to enter all your expense data. All the averages and monthly totals are on the main screen so you can get a quick view of your personal finances. Other data that is tracked includes an overall monthly average expenditure as well as the highest month and the lowest month. In the end, Budget Tracker’s goal is to help you get a grip on where your money is going allowing you to better manage your finances.

Read more and download from this location.

8 financial ratios for share pricing

The following 8 financial ratios offer terrific insights into the financial health of a company -- and the prospects for a rise in its share price.

1. Ploughback and reserves

After deduction of all expenses, including taxes, the net profits of a company are split into two parts -- dividends and ploughback. Dividend is that portion of a company's profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.

The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account. Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.

Companies that have no intention of expanding are unlikely to plough back a large portion of their profits. Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company's reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.

As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue. Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders' funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.

The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.

2. Book value per share

You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company's books of accounts.

The company's books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders' funds. If you divide shareholders' funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.

Book Value per share = Shareholders' funds / Total number of equity shares issued

The figure for shareholders' funds can also be obtained by adding the equity capital and reserves of the company. Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn't reflect the current market value of the company's assets.

Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company's shares. It can, at best, give you a rough idea of what a company's shares should at least be worth. The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.

3. Earnings per share (EPS)

EPS is a well-known and widely used investment ratio. It is calculated as:

Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued

This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of $10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is $6 per share and the dividend declared by it is 20 per cent, or $2 per share. This means that each share of XYZ Ltd. earns $6 every year, even though you receive only $2 out of it as dividend.

The remaining amount, $4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback. This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from $10 to $14 per share.

This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.

Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at $20 per share. Then an EPS of $6 per share would mean a 30 per cent return on your investment, of which 10 per cent ($2 per share) is dividend, and 20 per cent ($4 per share) the ploughback.

Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from $20 to 24 per share. Therefore, irrespective of what price you buy a particular company's shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.

4. Price earnings ratio (P/E)

The price earnings ratio (P/E) expresses the relationship between the market price of a company's share and its earnings per share:

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company's EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.

P/E ratio is a reflection of the market's opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios. For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.

On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios. Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.

To a great extent, the present price of a share, discounts, i.e. anticipates, its future earnings. All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?

The answer lies in utilising the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company's future prospects. If it is low compared to the future prospects of a company, then the company's shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 don't summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth. On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company's future indicates sharply declining sales and large losses.

5. Dividend and yield

There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends -- capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.

It is illogical to draw a distinction between capital appreciation and dividends. Money is money -- it doesn't really matter whether it comes from capital appreciation or from dividends.

A wise investor is primarily concerned with the total returns on his investment -- he doesn't really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.

Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.

On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.

On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends. In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.

Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company's shares. This relationship is best expressed by the ratio called yield or dividend yield:

Yield = (Dividend per share / market price per share) x 100

Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.

Let us suppose you have invested $2,000 in buying 100 shares of XYZ Ltd at $20 per share with a face value of $10 each.

If XYZ announces a dividend of 20 per cent ($2 per share), then you stand to get a total dividend of $200. Since you bought these shares at $20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.

The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares. Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.

6. Return on Capital Employed (ROCE), and

7. Return on Net Worth (RONW)

While analysing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders' funds plus borrowed funds) entrusted to it.

While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:

1. Return on Capital Employed (ROCE), and

2. Return on Net Worth (RONW).

Return on Capital Employed and Return on Net Worth (shareholders funds) are valuable financial ratios for evaluating a company's efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.

Return on capital employed

Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).

The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.

The operating profit of a company is a better indicator of the profits earned by it than is the net profit.

ROCE thus reflects the overall earnings performance and operational efficiency of a company's business. It is an important basic ratio that permits an investor to make inter-company comparisons.

Return on net worth

Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.

ROCE is a better measure to get an idea of the overall profitability of the company's operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.

The use of both these ratios will give you a broad picture of a company's efficiency, financial viability and its ability to earn returns on shareholders' funds and capital employed.

8. PEG ratio

PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.

For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company's share commands in the market.

The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company's future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.

As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.

The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.

What's the difference between TOPLINE & BOTTOMLINE Growth?

Topline = Sales, Revenue or Turnover

Bottomline = EPS, PAT, Net-Income

Growth of either numbers is a comparison to previous quarter numbers, previous year numbers or previous half numbers to the current equivalent comparisons......

Q1 Topline vs Q1 Topline (prev fy year)

A stock market strategy

While investing in stocks or mutual funds, investors use several strategies. Aggressive selling on a downturn, buying on hints of an upward movement and even investing on hot tips from friends are some of them. However, a very successful approach that a lot of people seldom use is inaction. This method, if effectively used, can cure a lot of financial headaches.
Basically, when you take a call on selling or buying an investment product, you are giving the signal that this product has completed its shelf-life or will add value to your portfolio. Holding an investment for long periods of time indicates that this investment product is good for your portfolio. There are several situations in which you can use this strategy.
Lack of options: There could be time periods when you do not have a worthy option. Any investment decision is based on expectations about the future performance of the asset class. If there are no such products, then it is best to sit tight with the existing investments.
In such a situation, though it may appear that you are not taking any action, the inaction, itself will help you prevent erosion of wealth. For example, if you believe that all the asset classes such as equities, real estate and commodities are overvalued, then not churning your portfolio at this stage may be a great idea.
Cash in hand: Sometimes, you could have an investible surplus but no opportunities. During such times, it might not make great sense to immediately deploy the funds because the present conditions may not help you to earn good returns.
Yes, keeping idle cash is not a great idea. But then, investment products capable of giving good returns should be available as well. If the expectation is that the investment avenue is good but the time is not right to invest, then some waiting helps. This also implies that there are expectations of a possible fall in the value of that asset. A good example of this situation is when an equity investor has cash and is waiting for the market to stabilise before deploying it.
Short-term volatility: As all investment advisors will say, it is always important to be in the equities market for the long-term for good returns. However, it is noticed that investors exit the market in panic or enter when the market has already peaked. It is important that when you are in it for the long-term, you ignore short-term movements.
Obviously, this means having more patience, a firm belief in your choices and not getting ulcers when the market moves against you. This especially applies when you are following a systematic approach towards investment such as a systematic investment plan (SIP) in mutual funds. A tanking market could really unnerve you. But it is best to just quietly and keep investing.
Remember, falling prices of shares mean more units of the fund. And all those units count in the long run. Also, there could be times when you have particular financial goals and disciplined investment is the only way to achieve them. In such a situation, irrespective of the market conditions, you will need to keep on investing. Following a plan is absolutely necessary to achieve your goals. Inaction, in reality, could actually mean affirmative action in such cases

Budget101.com - Lots of good stuff

Thousands of Make your own Mix Recipes, Jar & Kitchen Gifts, credit repair, Coupons, Budgeting Articles, Inexpensive Gift Ideas, Gag Gifts, Money Saving Recipes, & Free Debt Reduction Resource!
Such information is very useful for families who are looking to reduce the amount of money spent on groceries, regular household stuff, and other such expenses so that they can reduce their chances of slipping into debt.
From the website: Our goal is help you dig yourself out of debt using the resources you already have. . . Did you know the average family of 4 in the USA spends over $600 a month in groceries? If you cut your grocery bill to $200 a month, you could apply that $400 savings to back bills and dig yourself out of Debt in no time!
Ideas include gift ideas, freebies, coupons, bath and beauty recipes, mixes, etc.

Get more details at the Budget101 website.

Points for small investors - How retail investors lose money

How retail investors lose money

The reason is simple - a retail investor is driven by greed or fear. Never logic.
• Retail investors are always the last to enter a bull run
• "Smart money" enters markets long time back when markets are at its bottoms, there is frustration all around and no one wants to discuss markets
• When markets start booming and indices make new peaks, the retail investor "wakes" up. At this stage, he is still not sure and is a fence sitter.
• Lastly, there is optimism all around. Every one is bullish and talking markets. Stocks which were never traded in a year, suddenly start moving and start reaching "new highs"
• At this time, the retail investor starts buying as he does not want to miss out the "action"
• The retail investor will display a marked preference for "low priced" stocks because these are "cheap". He will stay clear of index stocks as these are "expensive"
• This is also the time when "smart money" starts moving out
• When a correction happens, it is usually quite severe
• The retail investor does one of two things. He either decides to wait (the optimism is still there) or he starts "averaging" his costs. Averaging is nothing but trying to " catch a falling knife"
• At some time or the other, panic sets in. The retail investor will then sell off all holdings as a distress sale.
• Sometimes the retail investor will do nothing but wait for the markets to rise
• When the markets do rise, he will sell off all his holdings at the first available opportunity and thus miss out on the new bull run

Other facts
• In a bull run, the retail investor is usually the first to sell off his holding. This investor seldom waits for the bull run to continue
• Those who have never participated when the rally started will invariably jump in towards the end of the bull run
• Retail investors rarely follow stoplosses. Circumstances eventually force them to take a bigger loss
• Lastly, retail investors spend an insignificant amount of time researching an investment as compared to buying a mobile or fridge.

Some investing principles

• Investing
• Ben graham says you don't have to do extraordinary things to do get extraordinary results. Keep it simple.
• Give the kid a hammer n everything starts looking like a nail.
• Don't own a stock that would cause you to panic and dump your shares if the price falls by 50%
• Think 10 yrs rather than 10 minutes, if you cant hold the stock for a decade, don't buy it in the first place
• Investing is where you find a few great companies and sit on your ass
• Don't be contrarian for the sake of it
• Better to hit singles n doubles regularly than to strike out swinging for the fences
• Make a list of your top companies n the max prices u will be willing to pay for them. Wait on the sidelines for opportunities
• Shun the ticker. Turn off the noise. Study the playing field n not the scoreboard. Ben graham says, "in the short run, mkt is a voting machine, but in the long run it is a weighting machine"
• Don't swing at every pitch
• Mistakes of commission are worse than mistakes of omission
• Omission - missing a multibagger - discipline in action
• Commission - investing in losers - reflects breakdown of discipline
• Don't get distracted by macro issues, focus on what you know ie the workings of the business
• Stay within ur circle of competence
• Volatility - Mr market's dramatic mood swings creates opportunities .. look for those with significant margin of safety
• Be greedy when others r fearful; be fearful when others r greedy
• Read a lot

• What to look for
• If you don't understand a business don't buy it
• Differentiate between a volatile stock and volatile business
• Mkt caps r a measure of co's clout n borrowing power but cash in the door qtr after qtr matters more
• Look for companies with favourable long term prospects run by honest n competent mgt
• Look for a business that has been doing the same thing that it was doing a decade ago. Why
• It had plenty of time to figure out how to get things right
• Co. has likely found a niche
• Look for economic franchises - cos which provide products
• Needed or desired
• Not overly capital intensive
• Seen by its customers to have no close substitutes
• No price regulation
• Look for companies with moats - sustainable competitive advantages
• Look for absence of change..old economy ..boring n mundane businesses
• Concentrate - too much of a good thing is wonderful
• If you are on the right flower, stay there. Avoid the temptations of hyperactivity
• Evaluate the mgt
• Frugal or spendthrift
• Repurchases shares/ avoids dilution
• Candid annual report
• If the mgt claims to know the future, earnings projections n growth expectations - bad sign
• If they hit the targets repeatedly - something is being manipulated

Currency converter

If you are looking for a currency converter, this web site is a good location (Yahoo finance). You can get the conversion factor for many different currencies at this location, say you want to convert the Belarus Ruble to the Belize Pound, it is going to be mighty hard to get this information easily, but the currency converter at Yahoo Finance will help you get that information, as well as show you a graph of how the currency has moved over a period of time.

A primer about the sub-prime crisis in the stock market

First, what is sub-prime?

When banks lend money to people, they broadly classify them into prime and sub-prime debtors, where the former are people who are considered creditworthy and the latter, less so.

Normally banks don't lend to those who are not creditworthy, do they?

While it will be prudent not to lend to anyone other than the creditworthy, banks do lend to sub-prime debtors. However, since these debtors are considered less creditworthy for reasons such as low income, banks usually lend to them at higher rates of interest.

Sub-prime borrowers pay a risk premium, may we say?

Yes. And in some cases, risks were high: loans were given to NINJA borrowers (that is, No Income, Job or Assets). This is the genesis of the 'sub-prime crisis' that is playing itself out currently on global markets.

How is sub-prime crisis defined?

Firstly, one must understand that though the word 'sub-prime crisis' is being used as a generic term, it actually refers to a credit problem among sub-prime borrowers (they account for 8 per cent of total mortgages in the US) in the residential market in the US. Like borrowers anywhere in the world, the interest paid on residential mortgages in the US is linked to the central bank's benchmark and in this case, the US Federal Reserve's Fed Funds Rates.

Can we trace back the problem to find out when things began to turn messy?

Between 2004 and 2006, because of incipient inflation in the US economy, the Federal Reserve or Fed increased its Fed Funds rate (the overnight rate at which banks lend to each other) from 1 per cent all that way to 5.25 per cent and the discount rate (the rate at which the Fed lends to banks) from 2 to 6.25 per cent. Because of this, holders of residential mortgages too saw their payments on their house loans rise. This rise in rates was a disaster in the making for the banks that gave loans to subprime borrowers. (However, the Fed, in an unusual move, decreased the discount rate by 50 basis points to 5.75 per cent on August 17 to increase liquidity in markets.)

Defaults would have increased when interest rates, and therefore the repayments, rose?

True, because the first issue with subprime borrowers is that they are likely to be low-income people. When faced with higher mortgage payments, they fell behind on their payments and in cases, some also became delinquent and banks started repossessing houses.

The banks would have sold the repossessed houses to recover the dues?

In the normal course, yes. However, because of higher interest rates, people became more cautious in borrowing to buy houses and there was a general slowdown in demand in the housing market, causing these banks to hold assets that people weren't just willing to buy.

Did no one see the crisis coming?

The so-called sub-prime crisis started unfolding when people started defaulting on their housing mortgages. Initially, it was thought that the problem was only limited to a few lenders and people didn't give it much thought. A testimonial to the fact that people didn't give it much thought is best highlighted when one looks at the level of the Dow Jones Industrial Index. The news of the sub-prime defaults was highlighted earlier in the year itself but the Dow actually closed at its highest level ever of 14,000 on July 19. Then things started unravelling.

The lenders take the hit when borrowers default, but we find the crisis spreading far and wide. How so?

That is because mortgages held by banks are typically bundled and sold to other institutions. These institutions will then slice these mortgages into residential mortgage backed securities (RMBS) or in other words, securities that are backed by collateral; the collateral here being the mortgages held by sub-prime borrowers.

And then?

These RMBS are then rated by rating institutions such as Moody's and Standard & Poor's based on various parameters...

Which is why the wrath has now turned on the rating agencies?

That's right. These RMBS are then divided further and sold as collateralised debt obligations or CDOs to various investors; and investors will buy these CDOs based on their appetite for debt.

Risky appetite?

Obviously. The people who hold the riskiest debt also get paid the highest when times are good, and get hit first when times are bad.

When did the issue surface?

The CDO issue first arose in June when a Bear Stearns hedge fund borrowed money from Merrill Lynch and gave their CDOs as collateral. Merrill Lynch decided to sell the collateral but soon realised that there was something wrong when they were unable to sell because their sale was driving down prices.

'Painful lesson in sub-prime', as the media reports?

And a costly one, too. Soon the market realised that there was a serious issue with the CDOs that went just beyond the Bear Stearns debacle. Essentially since these CDOs are part of RMBS, people realised that there was little or no solid collateral backing the RMBS because of the defaults by sub-prime borrowers.

An 'asset' that turned out to be hollow?

Exactly. And then two issues arose. One, no one knew how much of these CDOs banks and financial institutions were holding; and two, banks and financial institutions didn't know how much their CDOs were worth because the market for the CDOs had practically collapsed. Because of this, the markets started punishing the banks that held these CDOs and that is cause behind the volatility that one is currently seeing in global equity markets. It also emerged that there were more lenders caught in this sub-prime mess than was initially thought...

Do we know how many are affected by the problem on hand?

As of now, it has been estimated that 127 lenders have been caught in this. On August 15, the shares of Countrywide, the largest mortgage lender in the US, fell by 13 per cent after they issued warning about the potential hit on their balance sheet. One of the biggest concerns of this debacle is that instruments that were rated at AA have now started defaulting.

Have the rating agencies woken up?

Jolted from slumber, one may say. Rating agencies have now started to downgrade all RMBS backed by sub-prime mortgages and that will force banks to sell them because of capital norms and this will only cause a further plunge in prices.

Now, what are the lessons from the crisis?

This sub-prime mess raises two very important issues. One, the way banks lend money willy-nilly to people without properly checking their credentials; and two, the absolutely pathetic rating process used by the rating agencies. While both are hazardous to the system, the latter raises issues of moral hazard because the rating agencies profited massively from rating these RMBS.

Can we say that the worst is safely behind us?

Doubtful. It looks very likely that we are merely at the tip of the proverbial iceberg as far as the sub-prime crisis is concerned and that there is much more below the surface.