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 investment strategy that beats the average investor – II

In Part I of this two-part post, I made the case for low cost passive indexing as an effective means of long-term wealth building. So much so that even Buffett has recommended it to his heirs in his 2013 letter to shareholders: “My advice to the trustee couldn’t be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee

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Predicting stock market returns

At a glance While predicting market performance is nearly impossible, there are lessons to be learnt from looking at past performance We take the predictive power of three popular valuation metrics; Price-to-Earnings, Price-to-Book and Dividend Yield P/E as a valuation metric performs better than P/B and yield as a lead indicator of annual returns As of early Jan 2015, the Nifty is trading at 21.2x earnings, more expensive than 80% of all trading days in the last 16 years Higher the P/E at the time of purchase, lower the returns achieved for the Nifty Current P/E levels indicate marginally negative

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3 charts that sum up Indian equities in 2014

1. An “exuberant” 2014 Both key benchmark indices up by 30% December so far has seen the only significant correction in 2014 2. A “can’t go wrong” 2014 Every sub-index provided positive returns, some more than others with returns ranging between 10% and 70% Metals, Oil & Gas, IT, FMCG and Power under-performed the broader index Small caps, Consumer Durables, Mid caps, Auto & Capital Goods offered 50%+ returns 3. An “Expectations ahead of Earnings” 2014 Indian markets currently trade just above 21x earnings (For every ₹1 in earnings, you pay ₹21) Unless earnings show significant growth in the next quarter or two, historical data over 15 years suggests you’re more

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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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Insuring is not Investing

At a glance Most of us own atleast one cash-back life insurance policy bought early in our careers for the 80C tax deduction Insurance is a means of managing risk, meant to compensate your dependents in the event of a catastrophic event while an investment is meant to help grow your savings at an acceptable rate. Confusing insurance with investment is one of the most wide-spread mistakes The most prevalent insurance product, Cash-back policies that offer a lumpsum on maturity are the worst of both insurance and investing since they offer low death benefit to premiums paid and also sub-optimal

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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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