Personal Finance 2.01

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Yes, it’s for Dummies and by a dummy on Derivatives. So here’s what lil’ bit of Derivatives I understand(or pretend to..). Read on….

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices.

In India, BSE created history on June 9, 2000 by launching the first Exchange traded Index Derivative Contract i.e. futures on the capital market benchmark index - the BSE Sensex. The exchange commenced trading in Index Options on Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and single stock futures were launched on November 9, 2002. September 13, 2004 marked another milestone in the history of Indian Capital Markets, the day on which the Bombay Stock Exchange launched Weekly Options.

Types of Derivatives:
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index.

Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price.

Facts: The daily trade of commodities futures market is expected to rise by another Rs 5000 crores from the Rs 15000 crores being traded currently.

With increasing interest from investors, the basket of 120 commodities currently being traded is likely to touch 250 by 2007-08.

Options offer three significant benefits: Versatility; High Leverage and Risk Management. (I bet I didn’t understand this, but I’ll pretend I did)

Last Word: Warren Buffet sees derivatives as “time bombs” and a weapon of mass destruction!!

Personal Finance, Stocks

I don’t remember the source, but here they are:

1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Forget your College degree and trust your instincts.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Continually strive for patience, perseverance, determination, and rational action.
9. Limit your losses - use stops!
10. Never cancel a stop loss order after you have placed it!
11. Place the stop at the time you make your trade.
12. Never get into the market because you are anxious because of waiting.
13. Avoid getting in or out of the market too often.
14. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
15. Always discipline yourself by following a pre-determined set of rules.
16. Remember that a bear market will give back in one month what a bull market has taken three months to build.
17. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
18. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
19. Split your profits right down the middle and never risk more than 50% of them again in the market.
20. The key to successful trading is knowing yourself and your stress point.
21. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes.
22. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
23. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
24. Accept failure as a step towards victory.
25. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker!

Too much to follow or remember? Don’t get into stocks then.

Investing, Personal Finance, Stocks

Gaurav’s post on the 30 things he wanted to do before he’s 30 was a brave one. I wondered at his bravery and wished him all the best only to land up in trouble myself He wants a way to build a Networth of 1 Crore before he’s 30 and now wants me to find it.
Gaurav’s target of becoming a crorepati is brave but also bordering on being foolhardy, I think. To top it, he wants to start with a seed capital of only Rs 2 lacs and a monthly infusion of Rs 20000! This way he will need to grow his money at an outstanding rate of 200% annually!!

Impossible. Or could be there some way? Legal, ofcourse.

Very recently I read a book, The Big Idea, which ends with the following Goethe’s couplet: Whatever you can do, or dream you can, begin it. Boldness has genius, power and magic in it.

Here in this blog I have been talking about Mutual Funds, Real estate, Bonds, ULIPs and ETFs. All of them do not pass muster when it comes to giving a return Gaurav wants. What about stocks? Yes, there are stocks that have given that kind of return in the past. But how to identify those stocks who would do the same in the next 30 months? Nobody knows those stocks. So is there still a way?

Now Gaurav says that he has avery high risk appetite. That should essentially mean that when he has invested in shares that he expects will zoom and those share prices drop 30% soon after he buys them, he will average his cost by buying more. Letus assume that he is willing to take the volatility for the desired growth and he is confident of his decisions.

Moving on that assumption, Stocks can give you that growth. But since we cannot identify the 5-6 stocks that will give a growth of 150-200% over a period of 30 months, we need to ride the waves on the stock market.

The first magic happened today morning when I looked at a blog/site that I had been avoiding (Because I understood little of that). It’s EagleEyeTrade by Rajeev Mundra.

Talking to Rajeev who runs a Technical Trading seminar too, I did some number crunching. Assuming a challenging but realistic goal of 10% growth every month, a starting amount of Rs 6,25,000 will become Rs 1.09 crore after 30 months. Vow!!!

Atleast, theoretically it’s possible. Ofcourse it will take a lot of guts (time & energy too). It depends on Gaurav’s risk appetite. And Rajeev’s expert guidance. If you ask me, the guys can do it. I wish them Good Luck.

For the first time I’m putting a disclaimer. Here it is: Ideas posted on the blog are educative in nature and must not in any way be construed as advice or recommendations. Investing/Trading in financial instruments is risky. This blog cannot be held liable in anyway for losses incurred.

Asset Allocation, Budgeting, ETF, Index Funds, Investing, Personal Finance, Stocks

I have been following the EagleEyeTrade blog and even though I don’t understand technical analysis, I find this blog very credible. I am delighted that Rajiv found time to answer some of my doubts/questions which have been reproduced below:

Technical analysis is the study of the trading history to attempt to predict future prices. What qualifications make you confident of doing that?

Do you have a detailed training kit for beginners. Tell us more about that.

What is Elliott wave analysis? What benefits it brings?

Critics of technical analysis include well known fundamental analysts. Warren Buffett has exclaimed, “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” What do you say?

.
The time and energy required is very high. Dou you agree/disagree? Why

You provide the knowledge/information/calls. How much time do you expect your clients to put in?

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

Unless you’re working full-time in the financial world, you don’t have the skills, tools, information, time or interest in playing the market. Comment.

What is the average monthly return an investor can expect from your trade calls?

I found the answers insightful and reassuring. What do you say? Check out EagleEyeTrade

Asset Allocation, Investing, Personal Finance, Stocks

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price: Warren Buffett

During the period from 1980 to 2003, the stock portfolio of Berkshire Hathaway beat the S&P 500 index in 20 out of 24 years. During that same period, Berkshire Hathaway’s average annual return from its stock portfolio outperformed the index by 12.24 percentage points. The efficient market theory predicts this is impossible, but the theory is clearly wrong in this case.

The genius of Warren Buffett lies in his simplicity. See this article in Fool.com

You can also have an insight into his mind by reading his letters he writes every year to his shareholders. Go to this wonderful investment advice minefield

But it is easy to intellectualize about his wisdom. Hard to follow them even though they look so simple. The trouble is that we consider investment to be rocket science. Which, it is not.

Asset Allocation, Investing, Planning, Stocks

Slideshare is a wonderful way of sharing your slides and powerpoint presentations. It is a place to share and discover slideshows. You can embed the slideshows in your blog, tag, comment and have fun.

I have embedded a presentation I have made on “Taking responsibility for your finances”

Click here for the slides

What do you have to say? Please subscribe by Email or Feeds

Asset Allocation, Budgeting, ETF, Index Funds, Insurance, Investing, Mutual Funds, Personal Finance, Planning, Stocks

When you buy a share of a company you become a shareholder in that company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides your portfolio with the growth necessary to reach your long term investment goals. Research studies have proved that the equities have outperformed most other forms of investments in the long term

This may be illustrated with the help of following examples:
a) Over a 15 year period between 1990 to 2005, Nifty has given an annualised return of 17%.

b) Mr. Raj invests in Nifty on January 1, 2000 (index value 1592.90).The Nifty value as of end December 2005 was 2836.55. Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of 78.07%. Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%

Therefore, Equities are considered the most challenging and the rewarding, when compared to other investment options. Research studies have proved that investments in some shares with a longer tenure of investment have yielded far superior returns than any other investment.

What precautions must one take before investing in the stock markets? Here are some useful pointers to bear in mind before you invest in the markets:

Though direct stocks have the ability to give the best returns, please see the time and effort required to be able to get the best out of it.

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Asset Allocation, Investing, Personal Finance, Stocks

Investing in the equity market directly is exciting and sexy. You are in the thick of things and are able to take responsibility for yourself. Though the volatility and the information overload makes it a daunting task.

How about investing through Mutual finds? Doesn’t it have its own loading and administrative charges and the fund managers making merry on your hard earned money? And can’t we see the best performing mutual funds and follow their portfolio?

Here are some points to ponder:

We should allocate our time to investment decisions in proportion to our income generation goals.

Convenience and hassle free investing should be a major factor.

Fund managers are into it full time. If we able to identify fund managers who have consistently performed over last 3-5 years, nothing like it.

The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially.

MFs continuosly churn their portfolio. When MFs buy and sell stocks, they don’t have to pay capital gains as you do when you churn.

We are likely to panic over market crashes. MFs can take advantage of a crash!
With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month.

There is another financial product called ETF: Exchange Traded Funds. They are the least expensive and manage themselves on their own.

Take your call.

Asset Allocation, ETF, Index Funds, Investing, Mutual Funds, Stocks

Visit my blog Weblog on Finance and Business. It is a storehouse of info on finance and business.

Asset Allocation, Budgeting, ETF, Index Funds, India, Insurance, Investing, Mutual Funds, Personal Finance, Planning, Stocks

I have always been smug with my assumption that a sophisticated finance professional will take care of all my wealth creation needs. But the day my over friendly and over smart advisor came, I was more confused when he left than when he had entered!! He talked about sophisticated jargons, terms, options, technology, software, analysis and at the end of it asked me to decide on my own risk appetite. Damn it, if I have to do my own analysis what the heck was he doing, sitting smugly on my sofa while I looked like a sheep in my own house.

To be fair to my financial advisor, he helped me understand that one must take responsibility for oneself. And he logged me on to the fascinating world of finance and investing. As part of the learning process I have built this e-scratch pad and have really enjoyed the process.

My initial findings - investing is no rocket science and can be easily understood by a layman.

There are very interesting tools and calculators available which even a child can use and play with.

It’s easy to be overwhelmed with the investment options. 650 odd Mutual Funds, More than 2000 scrips to choose from, options, futures, commodities, real estate, deposits, insurance, tax saving schemes and bonds like PF, NSC, KVP, Infrastructure bonds, et al……. At times I feel the importance of the proverb: ” Ignorance is bliss”

Apart from the overwhelming options, you are faced with finance jargon, terminologies, irrational behaviour of the stock markets and smug finance professionals.

Wait a minute. It’s critical to be responsible for your wealth and as I said in the beginning, it’s pretty interesting too! Here’s a indicative list of what you should know for a start and I promise I’ll take them one at a time.

1. Why to Invest, Golden rules of investing, Your Financial planning steps.
2. Introduction to stocks, derivatives, options.
3. Introduction to Mutual Funds
4. Introduction to Insurance
5. Product review.
6. Sensex review.
7. Asset allocation, Time, Value of money, etc….

More in the next post!

Asset Allocation, Budgeting, ETF, Index Funds, Insurance, Investing, Mutual Funds, Personal Finance, Planning, Stocks