Learning to invest vs Investing to learn

Learning to Drive You’re on a fairly empty side-street, your cousin, an experienced driver next to you, in the passenger seat. It is her 8-year-old Fiat Punto, but the make or model doesn’t matter to you, just that it’s a functioning car. You don’t know if you will enjoy driving, but you want to be able to. You don’t know if your cousin is the “best” driver around, but you know she’s been driving for a few years and you trust her. She instructs you step-by-step to first push the brake, turn the key in the ignition, press down on

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The difference between Financial Planning, Asset Allocation and Security Selection

I get a few emails every week asking for stock recommendations. So I ask a few questions to form the context of the person’s experience with various investment vehicles, track record, their ability and willingness to take risk. In many cases, at this point, I realize the person asking for advice on stocks has little idea of their current financial situation beyond how much they make each month. This short post will clarify and differentiate between three interlinked but distinct elements of the wealth-building process: Financial Planning and Investment Management (Asset Allocation and Security Selection). Financial Planning: “The Where” and

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Investing and Life, Balance Sheets matter over Income Statements

How do you follow your investments? If you’re like a lot of people, you keenly await quarterly earnings announcements to track projected versus actual growth in Sales, EBITDA, Net Profit, EPS (Earnings per Share). Positive surprises mean high fives for the minor bump up in stock price. Negative surprises are explained with a range of reasons including “delayed project approval”, “rural distress”, “rising raw material prices” and so on. If the reason for the miss makes sense i.e. they seem significant enough that the company couldn’t have done much, you shrug and move on. The problem with Salient-Recency We use a

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Difference between ROCE and ROIC and does it matter

Financial metrics and investment quality Deciphering financial ratios can be daunting for investors looking to differentiate potential investments on quality. But if you’re set on picking your own investments, then you need to be able to understand and interpret them. If there are better ways you could be spending your time, then leave it a mutual fund manager in spite of its drawbacks or even just buy a low-cost index tracker, which tends to beat most active investors anyway. When it comes to financial metrics, it’s important to understand the spirit more than the letter of the metric, i.e. what the

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The simple question you should ask your advisor

An introduction to incentives:  A true short-story It was the year 2001, I was a few months into my first job out of college, just getting used to the idea of being able to make discretionary purchases with a magical piece of plastic. Hoping to address my obvious lack of awareness of concepts like compounding and investing for the future, my dad introduced me to an old friend of his, ‘S Uncle’. With his salt and pepper hair, ramrod posture and polished leather briefcase, ‘S’ uncle was a successful agent for India’s only life insurance company at the time and

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The difference between Possibility and Probability

Investor Cognitive Biases: Neglect of Probability In a classic experiment in 1972, participants were divided into two groups. Members of group 1 were told they would receive a small electric shock. Members of group 2 were told there was a 50% probability that they would receive a small electric shock. After this information was provided, researchers measured physical anxiety (heart rate, nervousness, sweating) shortly before starting. The result: Absolutely no difference in the anxiety levels of the two groups. Puzzling. Next, researchers announced a series of reduction in the probability of getting shocked to group 2, from 50% down to

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The difference between Stock Splits and Bonus Issues

Earlier this month, Yes Bank shares climbed 1% on news that they would consider a stock split in their next board meeting. On July 21st, Reliance Industries Limited announced a 1:1 bonus issue in it’s 40th AGM. If you’ve been investing in stocks for any length of time, you’ve probably come across such announcements from time to time. Both of these result in existing shareholders of the company getting additional shares. So, what is the difference between stock splits and bonus issues? First, let’s look at what’s NOT different between the two: Number of Shares Outstanding: Both stock splits and

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The financial metric that matters more than profits | Difference between Earnings and Free Cash Flow

Our ‘Earnings’ Obsession They are called “Earnings Calls” Defined by Investopedia as “A conference call between the management of a public company, analysts, investors and the media to discuss the financial results during a given reporting period such as a quarter or a fiscal year. An earnings call is usually preceded by an earnings report, which contains summary information on financial performance for the period.” The financial media has it front and centre as the metric to watch and report. No wonder then that we seek out “Earnings per Share” more than other investment metrics. So what’s wrong with Earnings

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