Three questions that could determine your financial future

Try this quick quiz: Question 1: Suppose you had ₹100 in your savings account today and the interest rate is 8% per year. After five years, how much do you think you would have in the account if you left the money untouched? A] More than ₹108                    B] Exactly ₹108                  C] Less than ₹108 Question 2: Imagine that the interest rate on your savings account was 8% per year and inflation was 9% per year. After one year, how much would you be able to buy with the

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Decoding the PE ratio of a stock

At a glance Price-Earnings or PE is the most widely valuation metric by equity market investors However, arbitrarily shifting PE levels and differences across industry groups mean it’s hard for an investor to utilize it in his decision-making The conservative interpretation of PE should be “the number of years of earnings it will take to pay back your cost of buying a share” Additionally, PE is an indicator of the market’s expectations of earnings growth over a sustained period of time. Working out that expected growth number provides an investor additional information on the suitability of a purchase Ask a

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Which type of investor are you?

At a glance We’re swayed much more by good stories than by factual evidence – In investing, a compelling story backed by anecdotal evidence is much more likely to get us to act than graphs or numbers – There are hundreds of stories about what works in the stock markets – While some are mere flash-in-the-pan, others are more resilient and bear scrutiny – As investors, we should first identify the kind of stories that appeal to us and then examine them closely to determine their validity before clicking ‘Buy’   Missed opportunity or Distraction I saw this tweet on my

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Markets this quarter and a game of dominoes

At a glance Indian markets have just ended their best quarter in five years – Valuation metrics tell differing stories – Nifty P/E say “expensive” but P/B say “fairly priced” – History suggests the interplay between the two reveal prevailing themes of investor expectations – Current expectations count on a bunch of interconnected things going right – Overly optimistic short-term investors might be rudely shocked – “Watchfully optimistic” should be the theme for calm investors After the frothy action in May, June 2014 saw some semblance of normality return even though the direction of the overall index remained the same, UP.

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IPO: Imaginary Profits Only?

At a glance IPOs or Initial Public Offerings occur when a company “goes public” by raising money from the broader market in exchange for a percentage of ownership Higher the price at which they offer each share of their enterprise, higher is the overall valuation of the firm and in turn the business promoter’s networth Historical data suggests that the number of IPOs increases as markets approach historical peaks A large percentage of companies see significant corrections from their IPO prices which makes it extremely difficult for an investor to make positive returns while investing in IPOs The calm investor

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The trouble with mutual funds

At a glance Equity mutual funds offer a convenient avenue to get professional management of your money to be deployed into stocks Diversification by exposure to a large number of companies and liquidity are also key advantages of mutual funds But the inherent disadvantages are expenses and investor behaviour in lock-step leading to large scale purchases and redemptions For the investor, the huge number of fund options offer a problem not unlike having to pick the right stocks In addition, the past variability in fund performance and unlikelihood of superior performance staying that way make choices difficult Exchange-Traded Funds (ETFs)

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What to buy in a bull market?

May Market Mayhem The last few weeks have been heady for the Indian stock markets. Since the first set of leaked exit poll results, stocks have surged on new-found confidence that the new government will banish all that has ailed the Indian economy. Within a fortnight, analysts have gone from recommending the staple stocks for the last 2-3 years to ones they hadn’t mentioned in a long while. The transition from “cautious optimism” to “full-blown confidence” has been dramatic. Three charts summarize this turnaround since the beginning of May 2014. Chart shows the performance by market cap. After a sedate start to

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Election fever and deciding when to buy

In the fire hydrant post, I mentioned how every potential investor is inundated with a barrage of news / opinions / techniques to do his investing. It doesn’t help that financial news editors like using words like “surge” and “plunge” for routine market movements in their headlines. In addition, the investor has to contend with the enemy within – Mr. Market who exhorts him to jump in with both feet when markets rise and to dump everything when they drop. The Calm Investor doesn’t let the noise or his own biases stampede him into thinking of the stock market as a casino in Las

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S.I.P, don’t guzzle investments

At a glance An ability to time the market, or to be able to anticipate when to be fully invested and when to be out of the market would offer opportunities for huge gains in relatively short periods For instance, over a 20 year period, just being able to avoid every trading day that saw a decline of over 5% would enable 8x the returns that staying fully invested in the NIFTY would bring But past record of market forecasts made by even the largest investment banks and asset management companies suggests an accuracy not unlike that of astrology In

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Diagnosing Mr. Market

At a glance The market’s movements often belie rational value parameters. These idiosyncrasies were famously captured as Mr. Market by Ben Graham in his seminal book ‘The Intelligent Investor’ Mr. Market is manic-depressive, offering unreasonably high and low prices during times of optimism and pessimism respectively These extremes are explained by behavioral biases inherent in investor behaviour, ranging from overconfidence to trend-chasing We’re all susceptible to these biases but being aware of them helps reduce their impact on our wealth-building goals In the post on why stock prices move in the long-term, I mentioned how the opportunities for the calm

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