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The Long- Short strategy involves taking simultaneous long and short positions on two related stocks. When we say related stocks, it means that both the stocks belong to the same sector and there is an evident correlation in the price movement of the two stocks observed over a period of time. An adequate period of time would be a year or more while determining the correlation. The stock prices of two companies might reflect a correlation for a reason. For instance the share prices of two companies belonging to the same industry might trade in the proportion of their book values, which is quite likely in case of ‘value’ stocks. There are other relevant reasons for share prices of two companies to have a correlation. 

Let’s take an example for a clearer understanding of the concept. Our research team recently (1^st July’08) gave a long- short strategy based recommendation to investors involving Bank of India and Axis Bank. The details of the strategy are mentioned in table below

The above strategy entails going long on Bank of India futures (3 lots) and going short on Axis Bank futures (4 lots). It leads to an almost equivalent exposure on long and short futures positions, which is Rs 547200 and Rs 531000 respectively.  

Figure 2 above reflects the ratio between the share prices of Bank of India and Axis bank over a one year period. It can be observed that the ratio has been in the range of 2.5 and 3.  There has been a retracement every time the ratio breached the mark of 3 times on the upward side.

In the above example, the ratio of prices of the two stocks as indicated in figure 1 has moved to 3.07. This means that if one is to follow the past trend, the ratio is likely to once again come down below the 3 times mark assuming that there hasn’t been any material change in the fundamentals of both the companies. If this is to happen, then the spread between the share prices of the two stocks would reduce implying that the price of Axis Bank would fall and that of Bank of India would rise. The target ratio is 2.90. When the spread reduces to an extent that the price ratio becomes 2.90, then the investor would earn a sum of more than Rs 30,000 from the strategy.

The above strategy was actually recommended on 1^st July’08. On tracking the prices as on 15^th July’08, the strategy has reaped handsome returns for investors with the ratio between the prices of the two stocks well below 2.7 times, in the process even meeting profit target 2 mentioned in the strategy. Axis Bank and Bank of India closed at Rs 598 and Rs 231 on the NSE as on 15^th July’08.  

Risk involved

It is assumed that the historical relationship will hold good in future. However, any significant fundamental changes could lead to adverse results.  

The strategy should preferably be initiated at extreme levels of the spread. In spite of this, if there is any further increase in spread in the short term, it may result in marked to market losses.

Interesting links that caught my attention in the personal finance space are as under:

1. Can we have a Short Fund in India
2. FMP v/s FD: The complete details
3. Glossary of Insurance terms
4. Overview of Indian Markets

As always, feedback is welcome.

Unit linked Insurance Plans (ULIP) provide the twin benefit of providing the benefits of investing in the stock market and covering your risks. It is important to understand that a Unit Linked Life Insurance product is different from the traditional insurance products and are subject to the risk factors.

The premium paid in Unit Linked Life Insurance policies are subject to investment risks associated with capital markets and the NAVs of the units may go up or down based on the performance of fund and factors influencing the capital market and the insured is responsible for his/her decisions.

Other than the fact that the investment risk in investment portfolio is borne by the policyholder, let us take a look at the different charges in a ULIP.

There are a few parameters like the flexibility of premium paying term, the amount of cover available for disability, illness and accident which has a wider variation among the Insurers.

I dislike the heavy premium allocation being charged. Out of the Rs 100 you pay to your Insurer, only Rs 70 odd goes to your investments (Rs30 in case of HDFC!!) 

Compared to 5-7% return on conventional products, ULIP looks attractive. But is it for real?

I did some number crunching assuming the stock market growing by 20% and found that in three years the return on principal fund is less than 5%. This is because huge part of the policyholder money is adjusted towards allocation charges.

Maybe with a longer run, the ULIPs will harvest a better return!

Moneyoga is live with Stock Market analytics and investment strategies. Moneyoga will develop a systematic & disciplined approach to investing and trading in the Indian stock market. They also plan to decipher a slew of investment products: Stocks, Futures, Options, Rights issues, IPOs, ETFs, develop advanced analytics, create system-based investment strategies, and demonstrate proper money management, using techniques and implement overall portfolio risk management, using Futures & Options strategies.

I emailed Deepak Shenoy with a set of questions and despite his busy schedule, he gave some very succinct answers. Thanks Deepak and all the best.

1) Where did the idea come from?

We like fool.com but this one isn’t from there, it’s just a site useful to us.

2) Is there a research that you have done on the business model?

Business model - all the research points out that our model is flawed well, let’s see.

3) Tell us how you go about constructing a  website like this once you have the idea?

We wrote the code. Kaushik and I coded in C# and ASP.NET (just two of us, no one else)

4) How did you actually build Moneyoga? (how much did it cost, where do you host, what did you need to do in terms of paperwork, coding, finding people, etc)?

Hosting wise: www.webhost4life.com, all I needed was a credit card.No people and all, just the two of us.

5) Capital is important for a venture like this, I feel. What are your Capex plans?

Capex - we put in our money and time, not much money - just a year’s hosting costs actually.

6) What are your goals with Moneyoga? I mean the number of page views and the revenue targets.

Goals wise, we’d probably like a 100,000 page views a month to begin with, going to a million in a year.

7) Are you building something like a portfolio manager in your site? Other than analytics, why should a investor come to your site?

Yes, there are ideas for portfolio manager, analytics and strategies. They will get done over the next few months.

Are you thinking of building a community of disciplined investors within your site? If yes, how would you keep spammers away?

Community : yes, forums: no. We don’t intend to have a forum style discussion anywhere in our site. So no spammer problems.

9) How do you market Moneyoga?

WE don’t market moneyoga. It markets itself.

10) What would you say to a young person who wants to do something entrepreneurial?

Go for it. Don’t think too much about when and how. keep about 6 months to a year’s kharcha in the bank, and try and get as much done as possible. You’ll find your way out!

11) How enjoyable, frustrating has been the journey so far?

Oh I love the journey. It’s incredible and the market’s been great as well, so as some of our strategies started to work, we made money on the trades. Fabulous stuff.

Ajay Shah has uploaded this article by John Echeverri-Gent on the Politics of market microstructure [pdf] about the reforms of the Indian equity market. It is forthcoming in a book: India’s Economic Transition: The Politics of Reform, edited by Rahul Mukherji, Oxford, 2007.

Some excerpts out of the 30 odd pages:

• He examines the politics of equity market microstructure in India. It argues that officials in the Ministry of Finance generated much of the impetus for reform. Three factors motivated these officials to become agents of change. First, their experience made them acutely aware that public sector resources were inadequate to meet India’s developmental needs. Second, as the 1990s progressed they were increasingly aware of the global best practices that developedin the wake of technological change. Finally, the legal infrastructure that regulated Indian equity markets provided them tremendous authority over the exchanges. Under the Securities Contracts (Regulation Act) 1956, the Ministry of Finance enjoyed the power to grant or withdraw recognition to any stock exchange. It also had the power to direct the exchanges to make or amend their rules, supersede the governing body of any exchange, and suspend the business of an exchange.

• By 2001, reforms brought India up to par with the global standards for virtually every aspect of its equity market microstructure. The ‘open outcry’system that restricted trading to the floors of stock exchanges in India’s metropolises was replaced by screen-based, electronic order-book systems that instantaneously linked traders across the country through the world’s first satellite trading system. Virtually all trading took place on a dematerialized basis through a central depository. The deeply flawed account period settlement system was replaced by a T+2 rolling settlement that is one of the most efficient systems in the world, and badla or carry-forward trading gave way to a rapidly developing derivatives market. As a consequence of these changes, the total value of transactions in securities has grown dramatically over the last ten years from Rs 1.7 billion in 1994–5 to Rs 50.8 billion in 2003–4.

• All this is not to suggest that no problems remain. The micromarket structure of the primary market (despite its revival since 2003–4, in part because of the introduction of a screen-based book-building system) is still in need of reform. The share of household savings invested in securities is small and has declined since the early 1990s. The mutual fund industry remains underdeveloped, and the regulatory capacity of SEBI needs enhancement.

• Nonetheless, the transformation of Indian equity markets is a remarkably successful chapter in the story of India’s economic reform.Three factors help to explain this success. First, technological change in the form of electronic trading systems and the development of new financialproducts created substantial opportunity costs to maintaining the status quo. Second, in the context of India’s balance of payments crisis in 1991, officials in the Ministry of Finance were motivated by their growing awareness of global best practices to use their authority to modernize India’s capital market. Finally,India’s politicians and reformers in the Ministry of Finance had a relatively low ‘political cost-benefit ratio’ for reforming equity markets.

Go read the entire article here

Since June 18(Phi day) – or 6.18 as math junkies know it — perfectly represents the Fibonacci number or the golden ratio, it is a good time to take alook at what this is all about.
 

Even though the Fibonacci numbers are named after Leonardo of Pisa, known as Fibonacci, they had been described earlier in India

Fibonacci techniques can identify market turns and senior analysts use charts and explanations to educate you on Fibonacci Retracements, Fibonacci Extensions, Fibonacci Circles, Fibonacci Fans and Fibonacci Time.

I found a site which can teach you how to apply Fibonacci math to real-world trading. Click Here

Did you read The Da Vinci Code? Does math, history, science or technology really get you going? Or in case you are just curious about Fibonacci, head on to this page or to this Wikipedia page

Fibonacci sequences appear in biological settings such as branching in trees, the spiral of shells, the curve of waves.

Interesting, no!!

 Found this sensible piece in a group by Vivek Karwa. Thanks Vivek for permitting me to quote you here on my blog.
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I hope everyone of you know that all kinds of activities pick up in a Bull Market. This happens since each person starts thinking that Money Making in Stock Market is a child’s play! And thus people fall to any extent to earn the fast buck. India has been witnessing a Bull run past 3-4 yrs and such activities are bound to happen.

You may not believe that there were around 35 Analysts (I call them Budding Analysts) sending at least 25 recommendations each on my yahoo messenger daily a year back. They started thinking that what ever they recommend goes up hence they have mastered stock picking. Then came the May crash.

I now have just three people on messenger sending calls! And none of them is from the May list. They lost their money, became analysts and then lost peoples money!

In a Bull market , some of the activities which increase are:-

1.. Boom in stock brokers and sub-brokers offices since more and more people want to trade.
2.. People luring others to trade and invest in various financial products including Mutual Funds to earn higher commissions.
3.. Fund houses coming up with NFO’s every next day.
4.. Sharp increase in Analysts/Advisors
5.. And why to miss our topic. Boom in Technical Analysis Software Sellers!!

I would like to caution every one on this!!

Before buying any software and spending Lakhs on it think once:-

1. Do people start earning money just because of buying a software? If yes then why cant each one of us buy and make big money.

2. Do people owning software Never Loose Money? They only make??

3. If your main activity of earning money is a different profession then can u utilize the software to its full value?

4. Does it not make sense to subscribe for calls for a portion of the money and concentrate on your main acivity? (Iam not trying to promote myself here or seeking subscription - but there’s sense in my words)

So think twice before investing in softwares, may be the same money can be utilized in a better manner.

Rgds

Vivek Karwa
Mob: +91-98405-40575

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I’ve hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it’s too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it’s time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation’s economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it’s true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it’s very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it’s total fund under ULIP is approx 40000 crore which is more than UTI’s AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children’s education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.

Any suggestions. And if you are interested why don’t you subscribe to my RSS feed or by email. And tell your friends too. I’ll cover them one at a time. [ I need to learn them and then only I can share it with you ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I’ll tell you my secret. It’s for the website I dream of every day and night!! The site launches in August’07.

As an asset class, Equity stocks offer the best returns. But so many of us have burnt our fingers in the process?

How is it that very few investors can make real profits, grow their networth and consistently beat the market? That’s because it often takes one or more of the following rare traits…

The vision to identify breakthrough products, leaders, and brands
The knowledge to spot an undervalued gem in a sea of glass
The courage to buy and hold when others are running scared

Occasionally, you’ll come across an investor with one of these valuable characteristics. And it’s likely that person does quite well. But I can’t imagine a person who can offer all three.

That would take two very different and even contradictory approaches…

Sounds scary? But fortune favors the brave only!!

One of the questions to my earler post was how to pick stocks? It is allright to say that, ” You can start with identifying a list of 10-15 companies out of 3-5 sectors which you know or which interests you. You can keep a tab on their management team, financials and future outlook and over a period of time, you will be able to take a call on them.”
But I guess, it’s good in theory. How about doing an analysis of a sector and then take a look at some stocks of that sector. Let’s take a look at the Real Estate/Infrastructure sector which is so much in the news.
So when we do an industry analysis, what are the things we look at? Companies producing similar products are subset of an Industry/Sector. For example, National Hydroelectric Power Company (NHPC) Ltd., National Thermal Power Company (NTPC) Ltd., Tata Power Company (TPC) Ltd. etc. belong to the Power Sector/Industry of India. It is very important to see how the industry to which the company belongs is faring. Specifics like effect of Government policy, future demand of its products etc. need to be checked. At times prospects of an industry may change drastically by any alterations in business environment. For instance, devaluation of rupee may brighten prospects of all export oriented companies. Investment analysts call this as Industry Analysis.
To start with, let’s look at some macro facts and observations about the industry.
The Tenth Five Year Plan has estimated a shortfall of 22.4 million dwelling units in the country. According to one estimate, over the next 10 to 15 years 80 to 90 million housing units will have to be constructed.
The investment required for constructing these dwelling units and for providing related infrastructure during this period will be of the order of $666 billion to $ 888 billion at roughly $33 billion to $44 billion per year ($ 1 billion = Rs 4,400 crore).
There is a steady growth in Housing Finance sector of approx.30 % over last four years.
The rate of interest for housing finance has become reasonable and affordable which has resulted into more credit offtake and subsequent maturing of the housing industry. Even though there is an increase, the rates are still reasonable to my mind after factoring in the tax benefits.
Fiscal benefits provided by the Government of India have encouraged the end users and investors alike.
Income of the urban buyer has grown substantially.
There is tremendous scope and growth in the Infrastructure Development.
Foreign investment by way of FDI has been approved.
Emergence of professional builders in the market with proper accounting standards.Emergence of rating systems for building projects.
The high growth of the real estate sector has led a lager financial institution to launch a dedicated real estate fund. These funds are simultaneously enticing large institutional investors as well as High Net worth Individual (HNIs) to expand their portfolio.
The award of ultra mega power projects and privatisation of airports demonstrates a committment at the highest level. So the momentum to build up roads, ports and urban infrastructure is building up for sure.
The JawaharLal Nehru Mational Urban Renewal Mission (JNNURM) initiative in 63 cities and urban transport projects will also drive up Investments in Infrastructure. Water Supply projects and sewerage projects would be part of the JNNURM.
So what do you think about the future of Infrastructure stocks in India? Ready to take a call?

There are three major stocks in the Infrastructure sector which is worth talking about. 1. Nagarjuna Construction (NJCC) 2. IVRCL and 3. HCC

Remember, do not go by the order book size alone, which is what many people do without understanding the intricacies. We need to understand the execution period of the order book, and the kind of margins that the company would make, given the kind of raw material prices at which it has booked these orders.

Even though it may look daunting, a lil bit of research helps you in understanding the stocks as well as improving your general knowledge.