Right Mental Models - Investors greatest asset

A study in their investment pattern shows that Mutual Fund investors generally increase inflows after observing periods of strong performance. They buy at high prices when future expected returns are lower, and they sell after observing periods of poor performance when future expected returns are now higher.
This results in what author Carl Richards called the “Behavior Gap,” in which investor returns are well below the returns of the funds in which they invest. 

Perhaps with this observation in mind, Warren Buffett once remarked, “The most important quality for an investor is temperament, not intellect.” 

In his wonderful book “The Behavior Gap,” Richards recommends asking three questions before you make investment decisions based on your own or someone else’s forecast:

1. If I make this change and I am right, what impact will it have on my life?

2. What impact will it have if I am wrong?

3. Have I been wrong before?

Asking and honestly answering those questions should have you acting more like Buffett (who recommends against trying to time the market, but tells those who do it to buy when others are panicked sellers) and less like the majority of investors who are engaging in behavior, destructive to their portfolios.

When Carl talks about the behavior gap what he is referring to is the difference between Investment returns and Investor returns. The difference between these two is where our actions, behaviour and emotions come into play.

In fact, according to Vanguard founder John Bogle, the average equity mutual fund investment gained 173% from 1997 to 2011, but the average equity mutual fund investor earned only 110%. This is because we let our emotions control our investment decisions. This is our Behavior Gap.

Few lessons mentioned below would be helpful for anyone who wishes to deal with this 'Behaviour Aspect' in case of making Investment.

Lesson 1: Be honest with yourself.

We must be able to admit which emotion we succumb to more often, fear or greed. If you are nervous anytime the stock market corrects, it’s fear. If you can’t stand to sit out of a rising market and you are an aggressive investor, it’s greed. Make sure you know which one affects you more and develop an investment plan accordingly because using them both can cause you to sell at the bottom when you are scared and buy at the top when you are greedy.You also need to understand that there are countless unknowns in the markets and economies you invest in. Knowing that factors are out of your control will help you make corrections to your process and adapt when your circumstances change.

We also must admit that there is no perfect investment out there. Coming to this realization can relieve a lot of stress from trying to be right all of the time. One of the reasons Money Managers constantly try to beat the market through active investing is the fact that they cannot be honest with themselves 
about the alternatives. This is even though countless studies show that over the long-term the majority of active managers don’t beat simple index funds.


Lesson 2: The beauty of simplicity.

We’ve all heard the phrase that less is more. But no one likes to use the simple choice. We assume that the complex investment strategy will work over the simple one because the really smart investment managers must have a good reason for charging such high fees for their investment ideas. Try not to over-think your finances. Simple is better for your long-term results and much easier to understand.

Here are some great lines from the book about keeping things simple:

“Being slow and steady means you’re willing to exchange the opportunity of making a killing for the assurance of never getting killed.”

“Slow and steady capital is short-term boring.  But it’s long-term exciting.”

“We often resist simple solutions because they require us to change our behavior.”

Most people look for the complex investments or solutions to their problems because it is easier than making meaningful behavioral choices. That’s why there are new fad diets and infomercial exercise equipment every year that offer to solve our health problems without mentioning that eating right and consistent exercise is the simple way to go about losing weight.


Lesson 3: Happiness is the key emotion.

We often talk about fear and greed being the investor’s two biggest enemies when investing. They cause you to buy high and sell low. But how do you combat these two irrational decision-makers? After reading this book it would seem to be happiness.

The book discusses a study that shows that having a good family life leads to more personal happiness than professional success does. Another study shows that money has a diminishing return on happiness up to around $75,000 a year in salary. So while money can buy some happiness, it only does so up to a certain point.

Carl goes on to discuss how most financial decisions are really just life decisions. Thinking in those terms could really change the way you view your money and your life. It helps to decide what it is that you really want to accomplish to make you happy by setting goals and focusing on why you would like to achieve them.


Lesson 4: We all make mistakes.

When dealing with complex investments and markets we are bound to make mistakes. Even the best investors do so on a regular basis. One of the most refreshing lessons I have picked up from reading Warren Buffett books and annual shareholder letters over the years is the fact that he admits to his mistakes and doesn’t shy away from them. He tries to learn from them.

Carl admits to some of his biggest financial mistakes in this book. He talks about having the discipline of staying out of technology stocks in the late- 1990s tech bubble right up until 1999 when he finally capitulated. The stock he bought shot up immediately but within months came back down to Earth and he 
suffered a large loss. But he learned from the experience and uses it as a teaching point to this day.

Don’t trust advisors that never admit their mistakes and are always blaming others either. It’s not investments that make mistakes but investors. It feels good to take credit for good investments but blame someone else when they go bad. Admit that mistakes happen and move on.


But What About Tactics?

You will eventually need the correct tactics to actually implement your process so I don’t want you to think I am downplaying that part of your investment plan. You need to open the correct accounts, set your asset allocation based on a number of factors, choose funds or securities to invest in and monitor your performance along the way.

But without the correct perspective on your finances and emotions it will be much harder to implement any of those tactics without committing mistakes that the majority of investors make on a regular basis (letting fear and greed take over, making decisions based on those emotions and not having a plan in place to aid in the decision-making process).

The Behavior Gap tells us that financial plans are worthless but the process of financial planning is extremely important. A plan assumes you know what’s going to happen in the future. Which we all know is next to impossible. But consistent planning assumes you admit things will be unpredictable and act accordingly.

A financial crisis can be hard to predict, let alone prevent. Just ask the Federal Reserve. Yet we all spend countless hours worrying about the next economic or stock market meltdown. We don’t spend quite as much time preparing for a personal financial crisis that you have much more control over.

Focus on the slow and steady long-term and avoid making decisions based on short-term emotions. Specific financial advice could be obsolete in a matter of hours, days or weeks while the correct perspective can last you a lifetime.

Here are some other questions you should ask yourself if you believe that you’re best served by being your own advisor.

1. Do I have the temperament and the emotional discipline needed to adhere to a plan in the face of the many crises I will almost certainly face?

2. Am I confident that I have the fortitude to withstand a severe drop in the value of my portfolio without panicking?

3. Will I be able to re-balance back to my target allocations (keeping my head while most others are losing theirs), buying more stocks when the light at the end of the tunnel seems to be a truck coming the other way?


As you consider these questions, think back to how you felt and acted after the events of Sept. 11, 2001, and during the financial crisis that began in 2007. 

Experience demonstrates that fear often leads to paralysis, or even worse, panicked selling and the abandonment of well-developed plans. When subjected to the pain of a bear market, even knowledgeable investors fail to do the right thing because they allow emotions to take over, overriding the brain.

P.S - Acknowledge the various websites from where I have collected this Information and represented it.

How to download Employee Provident Fund Passbook (EPFO)

Please refer to this link to download your EPFO (Employee Provident Fund) passbook to check whether your organization is doing it as expected.

http://members.epfoservices.in/index.php

You have to register and then you can download the passbook. All links work well.

Please spread the word too.. 

Statuatory Reporting - Dodd-Frank Reporting

Dodd-Frank Reporting

Dodd-Frank Trade Reporting is used to ensure transparency, accuracy and accountability in reporting.


While Dodd-Frank is a U.S. regulation under the supervision of the Commodities Futures Trading Commission (CFTC), any financial institution doing business with a U.S. bank will need to comply.

Hot on the heels of Dodd-Frank is a regulation in Europe called EMIR, the European Market Infrastructure Regulation, which applies to members of the European Union. EMIR is phasing in during the latter half of 2014 and like Dodd-Frank will require trade reporting for Over the Counter (OTC) Derivatives. Although U.S. requirements specify same day reporting, the European version will be a T+1 implementation.

Regulation is being specified across many parts of the world by the countries that are members of the Group of 20 (G20) global economic and financial initiative.


There are four main themes associated with this regulation:
a. Market transparency
b. Systemic risk
c. Regulatory complexity
d. Straight-through processing.


Each of these four themes will have an impact on business and will require changes in technology to support them.

Market transparency improvements will be stressed by the expected migration of OTC trading relationships to electronic venues and increasing trade volumes. It will have a capacity planning challenge as it plans to handle vast data volumes at the same time as delivering the transparency required by the business.

Systemic risk reduction will require greater connectivity and aggregation of data from multiple locations by IT in order to support the business’ requirements for increased capital, clearing and margin.

Regulatory complexity will grow as more jurisdictions come into play and the onus will be on IT to implement a rule-based approach to ensure that the right dealers are cleared with the appropriate regulator.

Straight through processing will demand more efficiency from the business as IT handles the movement from batch to real-time at the same time the reporting windows continue to shrink.


It’s back to the three “R”s. 

The first “R” corresponds to real-time monitoring of trading activities. You will need to ensure that your firm complies with regulatory obligations and be able to follow up on all reporting errors and false positives, as fast as technologically possible. 

The second “R” is about reconciling positions across all legal entities. This means reporting and preventing problems such as over, under and misreporting.

The final “R” handles responding to requests for information from regulators about issues that impair operations, trading or other critical functions. This necessitates a real-time and historical query function for the business to search for swaps that meet certain criteria.

Swap dealers are required to report all Swaps to a Swap Data Repository (SDR) within 30 minutes of execution and when trades are rejected, they must be corrected and resubmitted within that same time span. The challenge for these organizations is to ensure compliance and detect potential breaches in responsibility before they happen. The situation increases in complexity as EMIR goes live. Multinational banks will need to comply with both sets of regulations. These banks will need real-time visibility in order to overcome these continuously evolving challenges.

As more jurisdictions come online such as the Depository Trust Clearing Corp. (DTCC), CME and international regulators, the trade reporting process will increase in complexity. When there are multiple Swap Data Repositories (SDRs) there will need to be logic to be sure the correct SWAP was sent to the appropriate SDR. And, then there is the issue of time zones and calendaring necessary to handle multiple reporting windows. You will need both time and event-based service level agreements (SLAs) along with understanding of country-specific holiday calendars in order to be sure reporting occurs within the required window

Anyone who believes they have completed their monitoring implementation for Dodd-Frank Trade Reporting must be mistaken as the rules are lacking in clarity and in flux. But, what is clear is the need for improved visibility and the capability to correlate in real-time each activity in the lifecycle of a reportable trade. Taking this approach will help ensure compliance and enable you to take the appropriate action to maintain it.

PS- This article has been reproduced from the various articles available.

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Impact of Rupee Depreciation (INR)

Its all over the news - the Indian Rupee has touched an all-time low against the US Dollar. The Indian rupee on Thursday, 20th June 2013, weakened to touch the 60-mark against the US Dollar, its all-time low. Since January 2013, it has declined 7.4 percent against the dollar since the start of May, 2013.

What does this rapid, unchecked depreciation of rupee mean? Well, rupee depreciation means that rupee has become less valuable with respect to the US Dollar. Which in turn means that Americans can afford to buy more from India spending the same amount of dollars, which means our exports are that much more ‘lucrative’ to the US.

What causes the rupee to depreciate?

Reasons which cause the rupee to fall in comparison to dollar are:

• Demand Supply Rule: The value of rupee follows the simple demand and supply rule of economics. If the demand for the dollar in India is more than its supply, dollar appreciates and rupee depreciates. Similarly, when the supply of dollars in India increases its demand, the value of dollar decreases in terms of rupees. Demand for dollars may be created by importers requiring more dollars to pay for their imports or by FII’s withdrawing their investments and taking the dollars outside India, thus creating a shortage of dollar supply, which in turn can also increase the demand for dollar. On the other hand, supply can be created by exporters bringing in more dollars from their revenues or FIIs bringing more dollars in India to spur their investments.

• Dollar gaining strength against the other currencies: The central banks of Eurozone and Japan are printing excessive money due to which their currency is devalued. On the other hand, US Fed has shown signs to end their stimulus. Hence, making the US dollar stronger against the other currencies including the Indian rupee, at least in the short term. One doesn’t really know when Helicopter Ben will shut the door and stop the printing of money, though one doubts whether the door will be shut anytime soon.

• Oil prices: Oil price is one of the most important factors that puts stress on the Indian Rupee. India is in the unhappy situation where it has to import a bulk of its oil requirements to satisfy local demand, which is rising year-on-year. In International markets, prices of oil are quoted in dollars. Therefore, as the domestic demand for oil increases or the price of oil increases in the international market, the demand for dollars also increases to pay our suppliers from whom we import oil. This, increase in demand for dollar weakens the rupee further.

• Volatile domestic equity market: Our equity market has been volatile for some time now. So, the FII’s are in a dilemma whether to invest in India or not. Even though they have brought in record inflows to the country in this year chances are they may be thinking of taking their money out of the equity market which might again results in less inflow of dollars in India. Therefore, decrease in supply and increase in demand of dollars results in the weakening of the rupee against the dollar.

Now, let’s understand the mechanism of the impact of this currency depreciation. How, for some people it helps to make huge earnings and for some it incurs huge losses. Following are the points which tries to explain the advantages and disadvantages of a falling currency:

• Some Pundits also claim that the coming elections in 2014 may be a chief reason for INR depreciation since black money parked abroad are coming back to be illegally spent for the elections. Even the main opposition party has demanded an inquiry in to who all have remitted money during this time and how much money was remitted.

Benefits of Rupee Depreciation

• Advantage to Exporters: Weakening of rupee gives up a huge advantage to the exporters. You might be thinking how this can happen. Let’s take up an example to understand this point. Suppose, an exporter exported goods to US and his receivable payment is 100 USD. Let’s take the value of 1 USD = Rs. 55 at the time of trade. So, his net receivable will be Rs. 5500. Suddenly, at the time of payment if the rupee declines sharply in terms of dollar and let’s take 1USD at that time becomes Rs. 57. So, at the time of payment the exporter will get Rupees 5700 of the same trade due to the currency fluctuation. Therefore, his net profit due to depreciation of rupee becomes Rs. 200. This is how the exporters are benefited when rupee declines in terms of dollar.

• Boom to tourism industry: Travel and tourism is a sector which will benefit from the depreciation of the rupee. Let’s take up an example again to understand how this industry will benefit. Suppose, if a trip to India costs Rs. 1,00,000 to a foreigner and the dollar is quoting 1USD = Rs.50 at that time. So, the trip would cost the foreigner 2000 USD. If the rupee declines in front of dollar and suppose it quotes at 1USD = Rs. 60. Then the same trip would cost the foreigner approx. 1666 USD. This will entice foreigners to visit India and help increase revenues through the travel and tourism industry.

Disadvantages of Rupee Depreciation

• Imports become extremely expensive: A depreciating rupee would mean that the importers would have to pay more for their imports as every dollar will constitute more rupees. So, this means that price of the goods or commodity which is being imported to India increases substantially.

• Reduction in Purchasing Power Parity: One of the outcomes of a depreciating rupee will be the rise in inflation in the economy. When the inflation rises, prices of goods and commodities shoots up. Therefore, the purchasing power of the rupee falls down.

Seeing the global economic outlook and quantitative easing by the central bankers around the world, it is very much possible that Indian rupee may decline further against the USD. The Indian government is stuck in a dicey situation as they have to decide whether they should intervene in the monetary policies and counter the fall in rupee or do nothing and let the rupee find its own level as a falling rupee helps to improve the current account deficit but decreases the purchasing power.

• Reduction in people who want to go for foreign vacation.


PS - Thanks to Quantum AMC for sharing this insightful article.

Dodd-Frank Rule - Impact

Energy Swaps Migrating to Futures as Dodd-Frank Rules Take Hold

Highlights of this article

11.     More than half of the $18 trillion in notional daily trading of energy swaps has moved to futures exchanges from the over-the-counter market in response to the U.S. regulatory overhaul aimed at increasing transparency following the 2008 financial crisis.

22.   ICE said 52 percent of its energy futures volumes during the first half of January came from contracts that prior to Oct. 15 were traded as swaps. CME said about 90 percent of energy trades on its ClearPort system are executed as futures, compared with 10 percent before the switch.

33.   Volumes have soared at the two largest U.S. futures exchanges as oil and gas companies seek to avoid higher costs that come from being designated a swaps dealer under the Dodd- Frank Act, which the Commodity Futures Trading Commission (CFTC) said is any firm that does more than $8 billion of the transactions annually. The shift also helps ICE and CME  to maintain their dominant clearing businesses.

44.   Interest-rate or credit swaps are less likely to follow the path of energy swaps into futures because it’s harder for banks and other financial firms to stay below the $8 billion threshold as recommended by Dodd-Frank Act.

Source : - http://www.bloomberg.com/news/2013-01-25/energy-swaps-migrating-to-futures-as-dodd-frank-rules-take-hold.html

Exchange News

Swiss exchange signals interest in Euronext

1. Swiss stock exchange operator SIX Group would consider bidding for its larger European competitor Euronext if the exchange were to come up for sale, SIX's chief executive said.

2. "Should ICE put Euronext up for sale, we would certainly take a look," CEO Urs Rueegsegger said at the Swiss exchange's annual media conference in Zurich, adding Euronext's equity and derivatives business were particularly of interest.

3. Euronext's clearing and settlement business and its financial information services could also be attractive for the Swiss firm, Rueegsegger said.

4. Euronext is currently owned by Intercontinental Exchange which said last December it planned to float Euronext after it completes its $8.2 billion acquisition of NYSE Euronext in the second half of this year.

5. Sources have told Reuters that ICE would consider selling Euronext as an alternative to floating it if bids were to emerge.

6. Global stock exchanges have been in a merger frenzy as aggressive, upstart trading platforms have eaten into the market shares of traditional players such as Deutsche Boerse and NYSE Euronext, putting pressure on them to consolidate and to cut costs.

7. Rueegsegger said he expected a lot of interest in Euronext which operates exchanges in Paris, Amsterdam, Brussels and Lisbon. According to analysts the company could be worth between one billion euros and two billion euros ($1.28-$2.56 billion).

8. Euronext is considerably bigger than SIX. Size plays an important role in the exchange business because of the relatively high fixed costs.


Source - http://www.reuters.com/article/2013/03/27/six-euronext-idUSL5N0CJ3XL20130327

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ICE revises structure of NYSE Euronext deal

1. Intercontinental Exchange is revising the structure (currently under regulatory review) of its $8.2 billion proposed acquisition of NYSE Euronext.

2. ICE said in a Securities and Exchange Commission filing that it will buy NYSE Euronext under a newly formed company, ICE Group, which will own both ICE and NYSE Euronext. Each share of ICE common stock will be converted into the right to one share of the new holding company.

3. According to the filing, all other terms of the deal remain substantially the same.

4. The new company's stock would be listed on the New York Stock Exchange under ICE's current stock symbol "ICE."

Source - http://www.cbsnews.com/8301-505123_162-57575235/ice-revises-structure-of-nyse-euronext-deal/

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Singapore Exchange (SGX) tightens grip on Asian derivatives market

1. Singapore Exchange Ltd has announced two new tie-ups with other Asian bourses and disclosed plans for a number of new trading products as it tries to strengthen its position as the region's top exchange for derivatives.

2. Southeast Asia's largest exchange said it has signed a deal with Korea Exchange to explore how they can collaborate on derivative clearing services, a move that comes as Asian countries grapple with how to bring in global reforms to the over-the-counter swaps markets. The two bourses said they were looking at possible ways their users could take advantage of each other’s facilities for over-the-counter derivatives clearing.

3. Regulatory reforms around the world are trying to push the trillions of dollars in over-the-counter derivatives that are traded every day to be centrally cleared to try to reduce the level of risk they pose to the financial system. Half a dozen Asian exchanges have launched, or are launching, clearing houses, leading to concerns there will be too many such facilities in the region. While the region has some of the world's fastest growing economies, its derivatives markets are still a fraction of the size of those in Europe and London.

4. The move by Singapore and South Korea could ease banks' concerns that they will either have to invest significantly in becoming members of all of the regions' clearing houses or else withdraw from certain markets. The release was one of a number of announcements Singapore Exchange made at a derivatives industry conference in Boca Raton in Florida.

5. It also said it has signed an agreement with the Philippine Stock Exchange to develop derivative products together. Singapore is planning to launch a Philippines index futures contract, based on the MSCI Philippines index, by the fourth quarter of this year. The Philippines has the best performing stock market so far in Southeast Asia this year, rising nearly 17 percent. Additionally, Singapore is going to start offering foreign exchange futures in the third quarter of this year, provided it gets the nod from the regulators.

6. The exchange is planning to offer trading and clearing of futures in four currency pairs: Australian dollar/U.S. dollar, Australian dollar/Japanese yen, Indian rupee/U.S. dollar and U.S. dollar/Singapore dollar. "The introduction of FX futures for trading and clearing is SGX's response to strong client demand for currency management tools to complement its suite of highly liquid Asian equity derivatives," the exchange said in a statement.

7. The bourse has also extended a licensing agreement with index provider MSCI so investors can now trade 14 additional indices including ones linked to Thailand and the Philippines.

Source - http://www.reuters.com/article/2013/03/13/sgx-expansion-idUSL3N0C508320130313

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CME Group launches interest rate swap clearing in London

Highlights

* Financial Services Authority approves launch

* Venture challenges LCH. Clearnet

* Major firms already trading

Details

1. CME Group Inc has launched a clearing service for interest rate swaps in London, just one week after U.S. regulators began to phase in long anticipated mandates for rate swap clearing on CME's home turf, the exchange operator said on Monday.

2. The U.S. exchange operator's London-based CME Clearing Europe won approval from the U.K.'s Financial Services Authority for its first foray into clearing over-the-counter (OTC) financial derivatives. It has been clearing energy swaps in London for about two years.

3. The venture challenges LCH.Clearnet, which clears 90 percent of bank-to-bank interest rate swaps and has been expanding in the United States. The London Stock Exchange is buying LCH.

4. BNP Paribas, Credit Suisse, Goldman Sachs , HSBC, JP Morgan Securities, Nomura International and The Royal Bank of Scotland have traded CME's interest rate swaps so far, CME said. Citibank, Morgan Stanley and UBS will begin trading "in the coming weeks," according to the exchange operator.

5. CME's launch offers dealers an "increased choice of venues at which to clear their OTC positions in line with regulatory requirements," said Paul Twohey, European head of OTC clearing for Credit Suisse.

6. CME launched OTC interest rate swaps for seven currencies.

7. It comes a week after U.S. regulators began phasing in mandates for rate swap clearing, rules that result from the 2010 Dodd-Frank legislative overhaul of Wall Street.

8. Starting on March 11, 2013, hedge funds and other large investors had to start guiding their trading in derivatives through clearinghouses.

9. "The expansion into IRS clearing deepens our offering, providing access to financial derivative clearing through our European platform, accommodating a broad base of international customers," said Andrew Lamb, chief executive officer of CME Clearing Europe.

10. CME said it plans to launch over-the-counter foreign exchange and credit default swaps in London later this year.

Source - http://www.reuters.com/article/2013/03/18/cme-brief-idUSL3N0CA4WQ20130318

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ICE to Launch Index CDS Futures in May 2013

1. Intercontinental Exchange Inc. said it will launch credit-default swap futures in May, potentially opening up the clubby corner of the derivatives markets to retail and other new investors.

2. The creation of a successful CDS futures index could help revive parts of the credit-derivatives market, where outstanding volumes have fallen to $26.9 trillion as of last year, less than half of their peak of $58 trillion in 2007.

3. Credit-default swaps, or CDS, function like insurance for nonpayment on bonds and loans. The exchange operator last year transitioned the bulk of its energy swaps to more-standardized futures.

Source :- http://online.wsj.com/article/SB10001424127887324582804578349011462609782.html

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SGX in talks to buy stake in LCH.Clearnet

11.    Singapore Exchange Ltd (SGX), Asia's second-largest bourse operator by market capitalization, is in talks to buy a stake in transatlantic clearing house LCH.Clearnet, betting on an increase in trading volumes for derivatives

22.   SGX may participate in the London Stock Exchange Group's  bid for a 60 percent holding in LCH or buy a separate stake.

33.   Exchanges are trying to expand into central clearing following a regulatory overhaul of the over-the-counter derivatives market by the Group of 20 leading economies (G20).

44.   Regulators want trades in derivatives, such as interest rate swaps, to be put through a clearing house in order to reduce the level of systemic risk posed by the market and make it more make transparent.

55.   SGX already has its own clearing service, AsiaClear, which handles trades in commodities and financial derivatives, including interest rate swaps and foreign exchange forwards.

Source - http://www.reuters.com/article/2013/02/05/us-singaporestockexchange-lch-idUSBRE91400D20130205

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High Quality Stocks Selection Filter

1. ROE (Return of Equity) is the most important metric. The ROE approach helps us filter and identify high-quality stocks. 7%-8% of ROE represents a fair price that equals one-time book value. If a company earns 24% ROE, do not mind paying three times its book value.

2. Price at which the stock is trading is another important parameter. A quality stock may be a very good buy at price X which it may not be an appropriate buy at price 2X. (from the perspective of Returns)

3. Timing is difficult, especially when it comes to purchasing high-quality stocks. In a bearish market, there is a flight to quality which pushes the prices higher; whereas in a bull market such stocks are mostly neglected.

4. Growth, generally, has two components: inflation and volume. Even if a company is not growing by volumes, it can still show some growth on account of inflation. In nominal terms, the ‘average’ growth in sales and profits should equal the growth in GDP plus inflation.

5. A track record that is at least 10 years old. preferable 15 years

6. As far as possible, no issuance of new equity or convertibles

7. Tax payout at the highest corporate rate of taxation applicable

8. Consistent dividend payout

9. Promoter holding of at least 30% is ideal

10. No pledge of promoter holdings

11. Low debt. I prefer total debt to be less than half of shareholders’ funds

12. As few subsidiaries as possible

13. Not more than one acquisition of another company in a 10-year span. If there are more than that, examine each, on a case by case basis

14. No merger of wholly-owned promoter companies

15. Increase in year-on-year turnover should exceed the increase in fixed assets

16. A stable business should not demand much capital expenditure on an ongoing basis

17. No change in auditors

18. If the Annual reports of the last 10-15 years are read chronologically, validate whether the company's thought process has been coherent or not. Also, whether the management keeps the promises it makes in the previous years or not

19. It is very important to observe as to how the company is reacting the to changes in the Macro environment and how smoothly it is adapting itself to the change without compromising with its value

20. Business are run by Men and Women and ultimately it is their character which manifest itself as the Character of the Business. Hence, important to assess the character of the people running the business

Understanding of fundamental, market technical and patience are required as well, to invest successfully. Stocks should not be bought simply because one has money to invest. Keep the money in a liquid fund until you spot opportunities.
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Here are 10 Reasons on Why you Should be Investing in Stock :

1.) Market Positioning :- Company is the No:2 Player in its Area of Operations along with a Strong Market share. The company is also the Fastest growing amongst its Peers, outperforming its competitors in a big way. Company Brand Name is consistently improving and closing on the Market Leader.  

2.) Strong Business Model :- The company has a very strong Business Model where there is very little CAPEX involved and there is regular growth. The Business also works on Relationships and Credibility which gives the companies an Edge over new players.

3.) Long Term Opportunity :- Company is tapping into a huge Opportunity and the Management has just scratched the Tip of an Iceberg. India's Long term Structural story gives this company's Business a big boost and the Growth of its Target Market is a necessity for India to become a Large Economy.

4.) Financial Parameters :- C**Z**E has very strong Financial Parameters where the company has very Strong Margins upwards of 50% which is there in very few Businesses. Also the company has a Clean Balance Sheet with Zero debt which will help it in tough times.

5.) Consistent Track Record :- Company has a strong Track Record of Performance. The company's revenues has grown at over 35% CAGR for the last many years and the Margin performance has been very stable during this period highlighting its Performance.

6.) Growth Prospects :- Company has recently diversified into attractive Sub-Niches of the area it operates in and we believe these would emerge as Big Revenues generators going forward. Company also has gone into Acquisition route to boost its growth Inorganically.

7.) Business Moats :- The Market has a limited set of players as this Business inherently has a lot of Moats in the form of Client Relationships and Credibility which is hard to Build. Also the Knowledge base which it has accumulated over a period of time is difficult to replicate, thus acting as a good Moat.   

8.) Cash Flows :- Company generates very strong Cash Flows from its Operations regularly. The Free Cash flow component is high as there is very little Investments required. This allows the company to consistently target Niche companies for Inorganic growth.  

9.) Management/ Corporate Governance :- The company is promoted by a set of Institutions which are Highly credible and the company has a very strong Corporate Governance and most importantly, a Share-Holder friendly policy.


10.) Valuations :- In spite of so many advantages, the company is quoting at very attractive Valuations of less than 10x.

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Speaking about the mindset the following steps are very important.


1. Buying a stock is buying an ownership interest in that business

It is very important to have this perspective while investing in stocks. Are you ready to evaluate a stock as if you are planning to invest in that particular business? If not it is better to invest in some Index Fund or some Equity Mutual Fund with proven track record. It is very important to behave like an owner to a particular business, so that you can rationalize the functioning of that business and evaluate it's decisions more pragmatically.

2. If you can’t explain the business to a five year old or your grand mother, you don’t understand it.

You should be absolutely comfortable in understanding the day to day operations and other facets of the business of the stock you plan to invest in. Absolutely, no negotiations with this.


3. When purchasing an interest in a business, only use those funds which are not needed in near future.

Do not use reserve funds or day to day money. Create a separate fund for Equity Investment. Very very important to be disciplined.

4. If you value your leisure time, do not invest in stocks.

Investment in stocks require time to time re-evaluation of the business and to keep yourself updated of the geo-political macro conditions and their possible implications on the business. It is a tedious job and requires considerable amount of time. Evaluate this aspect before making a decision to invest.

Golden Rule of the market.

Buying is best done when others are desperate. Selling is best done when others are euphoric.

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Here is how to judge a promoter:

1. Reputation of fairness in dealing with all, including       

   shareholders;

2. Promoter holding is at least 30% for family-run companies;

3. A high RoE that is consistent over at least 10 years;

4. Low level of debt (unless it is a banking or finance business);

5. Good track-record with all their promoted ventures; 

6. Built profitable business with scale and leadership positions;

7. Good capital allocation decisions, so far.

Acknowledgement - Some parts of this article is based on an article of MoneyLife.

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Two ratios which will be very useful for Banking and NBFC stocks

LCR, Liquidity Coverage Ratio

The LCR measures a bank’s liquidity risk profile,  banks have an adequate stock of unencumbered high-quality  liquid assets that can be easily and immediately converted  in financial markets, at no or little loss of value. This category would include, for example, central bank deposits, corporate promissory notes or guaranteed bonds. The goal is to ensure that the institution can meet its liquidity needs for a 30 day hypothetical financial stress scenario.

The LCR is the percentage resulting from dividing the bank’s stock of high-quality assets by the estimated total net cash outflows over a 30 calendar day stress scenario.  Total net cash outflows is defined as the total expected cash outflows minus total expected cash inflows (up to an aggregate cap of 75% of total expected cash outflows).

Total  expected  cash outflows  are calculated by  multiplying the current balance of liability products (such as accounts and deposits) and  off-balance sheet commitments (such as credit and liquidity lines to customers) by the rates  at which they are expected to run off or be drawn down in accordance with the aforementioned stress scenario.

As of January 1, 2019, the minimum liquidity coverage ratio required for internationally active banks is 100%. In other words, the stock of high-quality assets must be at least as large as the expected total net cash outflows over the 30-day stress period.

NSFR, net stable funding ratio

The NSFR requires banks to maintain a stable funding profile in relation to their off-balance sheet assets and activities. The goal is to reduce the probability that shocks affecting a bank’s usual funding sources might erode its liquidity position, increasing its risk of bankruptcy. The NSFR standard seeks that banks diversify their funding sources and reduce their dependency on short-term wholesale markets.

The NSFR is defined as the ratio between the amount of stable funding available and the amount of stable funding required. Available stable funding means the proportion of own and third-party resources that are expected to be reliable over the one-year horizon (includes customer deposits and long-term wholesale financing). Therefore, unlike the LCR, which is short term, this ratio measures a bank’s medium and long term resilience. The stable funding requirements for each institution are set based on the liquidity and maturity characteristics of its balance sheet asset’s and off-balance sheet exposures.

Basel III requires the NSFR to be equal to at least 100% on an ongoing basis. In other words, the amounts of available stable funding and required stable funding must be equal.

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Notes on Wise Investing, Value Investing

On Business Success

"The great personal fortunes in this country weren't built on a portfolio of fifty companies. They were built by someone who identified one wonderful business."

-- The Tao of Warren Buffet, Simon & Schuster, 2006


On the Value of Firsthand Experience in Business

"Can you really explain to a fish what it's like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value."


On Challenges

"I don't look to jump over 7-foot bars; I look around for 1-foot bars that I can step over."


On the Skills Needed to Become an Investor

"If calculus or algebra were required to be a great investor, I'd have to go back to delivering newspapers."

-- The Tao of Warren Buffet, Simon & Schuster, 2006


On the Difference Between "Price" and "Value"

"Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether were talking about socks or stocks, I like buying quality merchandise when it is marked down."

-- Letter to shareholders, 2008


On the Traits Needed to Be a Great Investor

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."

-- Warren Buffet Speaks: Wit and Wisdom from the World's Greatest Investor, Wiley Publishers, 2007


On Surrounding Yourself with the Right People

"It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction."


On Learning How to Invest

"Investing is like baseball. If you want to score runs, don't study the scoreboard, study the playing field."


On Protecting Your Business Reputation

"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently."


Source - Taken from various articles available on the Internet. I wish to acknowledge the respective authors.

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Publishing some pearls of wisdom on Value Investing from varied sources.

1. Choose Simplicity over Complexity

When investing, keep it simple. Do what's easy and obvious. If you don't understand a business, don't buy it's stock.

2. Make Your Own Investment Decisions

Don't listen to the brokers, the analysts, or the pundits. Figure it out for yourself. Become a value investor. It's proven to be a very rewarding technique over the long term.

3. Maintain Proper Temperament

Let other people overreact to the market. To succeed in the market, you need only ordinary intelligence. But in addition, you need the kind of temperament to help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can surely prevail.

4. Be Patient

Think 10 years, rather than 10 minutes. Don't dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future. If the question is, "How long will you wait?" – "If we're in the right place, we'll wait indefinitely" .

5. Buy Business, Not Stocks

Once you get into the right business, you can let everyone else worry about the stock market.

Business performance is the key to picking stocks. Study the long-term track record of any company that is on your buy list. Look for following five main things before investing in a company.

(i) Business you can understand

(ii) Companies with favorable long-term prospects

(iii) Business operated by honest and competent people

(iv) Businesses priced very attractively

(v) Business with free cash flow

Don't think about "stock in the short term." Think about "business in the long term".


6. Look for a Company that is a Franchise

Some businesses are "franchises". Franchise generates free cash flows.


7. Buy Low-Tech, Not High-Tech

Successful investing is rarely a gee-whiz activity. It's less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.

Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies). They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will be doing more business, e.g Gillette Blades.


8. Concentrate Your Stock Investments

A the "Noah's Ark" style of investing – that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each.

Portfolio concentration – the opposite of diversification – also has the power to focus the mind. If you're putting your eggs in only a few baskets, you're far less likely to make investments on impulse or emotion.


9. Practice Inactivity, Not Hyperactivity

There are times when doing nothing is a sign of investing brilliance. Be a decade's trader, not a day trader.

10. Don't Look at the Ticker

Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth. Abstain from looking at share prices every day. Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.


11. View Market Downturns as Buying Opportunities

Market downturns aren't body blows; they are buying opportunities. Change your investing mind-set. Reprogram your thinking. Learn to like a sinking market because it presents great buying opportunity. Pounce when the three variables come together. When a strong business with an enduring competitive advantage, strong management, and a low stock price come onto your investment screen.


12. Don't Swing at Every Pitch

What if you had to predict how every stock in the Standard & Poor's (S&P) 500 would do over the next few years?

In this scenario you have very poor chance of being correct. But if your job was to find only one stock among those 500 that would do well? In this revised scenario you have a good chance. A few good investments are all that is needed.


13. Ignore the Macro; Focus on the Micro

The big things – the large trends that are external to the business – don't matter. It's the little things, the things that are business-specific, that count. It's possible to imagine a cataclysm so terrible that the markets would collapse and not bounce back. Externalities don't matter – and you can't predict them, anyway. And what can you do about them? Focus on what you can know: the workings of a good business.


14. Take a Close Look at Management

The analysis begins – and sometimes ends – with one key question: Who's in charge here?

Assess the management team before you invest. A investing in any company that has a record of financial or accounting shenanigans, (creative accounting, accounting jugglery). Weak accounting usually means weak business performance. Strong companies do not have to resort to tricks.

15. Remember, The Emperor Wears No Clothes on

Wall Street is the only place where people go to in Rolls Royce to get advice from people who take the subway. Ignore the charts. A value investor is not concerned with charts. Search for discrepancies between the value of a business and the price of small pieces of that business in the market.  This is the key to value investing, and it's far more productive than getting dizzy studying hundreds of stock charts. Offer documents of most mutual funds say – in small print – that past performance is no guarantee of future success. 


16. Practice Independent Thinking

When investing, you need to think independently. Make independent thinking one of your portfolio's greatest assets. Being smart isn't good enough. Lots of high-IQ people fall victim to the herd mentality. Make it one of your own.


17. Stay within Your Circle of Competence

Develop a zone of expertise, operative within that zone. Write down the industries and businesses with which you feel most comfortable. Confine your investments to them.


18. Ignore Stock Market Forecasts

Short-term forecasts of stock or bond prices are useless. They tell you more about the forecaster than they tell you about the future. Take the time you would spend listening to forecasts and instead use it to analyze a business's track record. Develop an investing strategy that does not depend on the overall movement of the market.

19. Understand "Mr. Market" and the "Margin of Safety"

What makes for a good investor? A good investor is one who combines good business judgment with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, remember Ben Graham's "Mr.Market" concept, and look for a "margin of safety".

Make sure that you also understand the concepts of Mr. Market and the margin of safety. Like the Lord, the market helps those who help themselves. But, unlike God, the market doesn't forgive those who "know not what they do". Bide your time, and wait for Mr. Market to get depressed and lower stock prices enough to provide a margin-of safety buying opportunity. 


20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful

You can safely predict that people will be greedy, fearful, or foolish. Trouble is you just can't predict when or in what order.Buy when people are selling and sell when people are buying.

21. Read, Read Some More, and Then Think

Mr. Warren Buffet spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks. He therefore advises get in the habit of reading. The best thing to start is to read Buffet's annual reports and letters. Finally, restrict your time only to things worth reading.

22. Use All Your Horsepower

How big is your engine, and how efficiently do you put it to work? Warren Buffet suggests that lots of people have "400 – horsepower engines" but only 100 horsepower of output. Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200-horse-power engine, says Buffet, is a lot better off.

Make sure that you have the right role models. Strive for rational behavior, good habits, and proper temperament. Write down the habits, practices and philosophies that you want to make your own. Then be sure to keep track of them and eventually own them. Financial success is a "matter of having the right habits".

23. Learn from the Costly Mistakes of Others

This is self explanatory and need no comments!

24. Become a Sound Investor

Buffet says that Ben Graham was about "sound investing". He wasn't about brilliant investing or fads and fashions , and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor.

To become a sound investor, you need to develop sound investing habits. Always fight the noise to get the real story. Always practice continuous improvement.It's less about solving difficult business problems, says Warren Buffet, and more about a finding them. It's about finding and stepping over "one-foot hurdles" rather than developing the extraordinary skills needed to clear seven foot hurdles.

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The commandments of Value Investing

Benjamin Graham is regarded as the father of value investing and his books are investment classics. Securities Analysis (first published in 1934) and The Intelligent Investor (first published in 1949) continue to sell steadily. In addition to this legacy, he has permanently influenced many successful investors, including Warren Buffet, the wealthiest man in America; William Ruane, founder of the super-successful Sequoia Fund; and well-known investor Walter Schloss.

Ben was a prophet in a very specialized but important realm of life. He preached commandments that any investor can use as stars when navigating the vast and mysterious seas of the investment world. An individual investor, who is not under pressure to shoot comets across the heavens but would like to earn a smart and substantial return, especially can benefit from Ben’s guidance. In greatly simplified terms, here are the 14 points Graham most consistently delivered in his writing and speaking. Some of the counsel is technical, but much of it is aimed at adopting the right attitude:

1. Be an investor, not a speculator

“Let us define the speculator as one who seeks to profit from market movements, without primary regard to intrinsic values; the prudent stock investor is one who (a) buys only at prices amply supported by underlying value and (b) determinedly reduces his stock holdings when the market enters the speculative phase of a sustained advance.”

Speculation, Ben insisted, had its place in the securities markets, but a speculator must do more research and tracking of investments and be prepared for losses if they come.

2. Know the asking price

Multiply the company’s share price by the number of company total shares (undiluted) outstanding. Ask yourself, if I bought the whole company would it be worth this much money?

3. Rake the market for bargains

Graham is best known for using his “net current asset value” (NCAV) rule to decide if the company was worth its market price.

To get the NCAV of a company, subtract all liabilities, including short-term debt and preferred stock, from current assets. By purchasing stocks below the NCAV, the investor buys a bargain because nothing at all is paid for the fixed assets of the company. The 1988 research of Professor Joseph D. Vu shows that buying stocks immediately after their price drop below the NCAV per share and selling two years afterward provides an excess return of more than 24 percent.

Yet even Ben recognized that NCAV stocks are increasingly difficult to find, and when one is located, this measure is only a starting point in the evaluation. “If the investor has occasion to be fearful of the future of such a company,” he explained, “it is perfectly logical for him to obey his fears and pass on from that enterprise to some other security about which he is not so fearful.”

Modern disciples of Graham look for hidden value in additional ways, but still probe the question, “what is this company actually worth?” Buffet modifies the Graham formula by looking at the quality of the business itself. Other apostles use the amount of cash flow generated by the company, the reliability and quality of dividends and other factors.

4. Buy the formula

Ben devised another simple formula to tell if a stock is under-priced. The concept has been tested in many different markets and still works.

It takes into account the company’s earnings per share (E), its expected earnings growth rate (R) and the current yield on AAA rated corporate bonds (Y).

The intrinsic value of a stock equals:

E(2R + 8.5) x Y/4

The number 8.5, Ben believed, was the appropriate price/to/earnings multiple for a company with static growth. P/E ratios have risen, but a conservative investor still will use a low multiplier. At the time this formula was printed, 4.4 percent was the average bond yield, or the Y factor.

5. Regard corporate figures with suspicion

It is a company’s future earnings that will drive its share price higher, but estimates are based on current numbers, of which an investor must be wary. Even with more stringent rules, current earnings can be manipulated by creative accountancy. An investor is urged to pay special attention to reserves, accounting changes and footnotes when reading company documents. As for estimates of future earnings, anything from false expectations to unexpected world events can repaint the picture. Nevertheless, an investor has to do the best evaluation possible and then go with the results.

6. Don’t stress out

Realize that you are unlikely to hit the precise “intrinsic value” of a stock or a stock market right on the mark. A margin of safety provides peace of mind. “Use an old Graham and Dodd guideline that you can’t be that precise about a simple value,” suggested Professor Roger Murray. "Give yourself a band of 20 percent above or below, and say, “that is the range of fair value.”

7. Don’t sweat the math

Ben, who loved mathematics, said so himself: “In 44 years of Wall Street experience and study, I have never seen dependable calculations made about common stock values, or related investment policies, that went beyond simple arithmetic or the most elementary algebra. Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience, and usually also to give speculation the deceptive guise of investment.”

8. Diversify, rule #1

“My basic rule,” Graham said, “is that the investor should always have a minimum of 25 percent in bonds or bond equivalents, and another minimum of 25 percent in common stocks. He can divide the other 50 percent between the two, according to the varying stock and bond prices.” This is ho-hum advice to anyone in a hurry to get rich, but it helps preserve capital. Remember, earnings cannot compound on money that has evaporated.

Using this rule, an investor would sell stocks when stock prices are high and buy bonds. When the stock market declines, the investor would sell bonds and buy bargain stocks. At all times, however, he or she would hold the minimum 25 percent of the assets either in stocks or bonds — retaining particularly those that offer some contrarian advantage.

As a rule of thumb, an investor should back away from the stock market when the earnings per share on leading indices (such as the Dow Jones Industrial Average or the Standard & Poor’s composite index) is less than the yield on high-quality bonds. When the reverse is true, lean toward bonds.

9. Diversify, rule #2

An investor should have a large number of securities in his or her portfolio, if necessary, with a relatively small number of shares of each stock. While investors such as Buffet may have fewer than a dozen or so carefully chosen companies, Graham usually held 75 or more stocks at any given time. Ben suggested that individual investors try to have at least 30 different holdings, even if it is necessary to buy odd lots. The least expensive way for an individual investor to buy odd lots is through a company’s dividend reinvestment program (DRP).

10. When in doubt, stick to quality

Companies with good earnings, solid dividend histories, low debts and reasonable price/to/earnings ratios serve best. “Investors do not make mistakes, or bad mistakes, in buying good stocks at fair prices,” Ben said. “They make their serious mistakes by buying poor stocks, particularly the ones that are pushed for various reasons. And sometimes — in fact, very frequently — they make mistakes by buying good stocks in the upper reaches of bull markets.”

11. Dividends as a clue

A long record of paying dividends, as long as 20 years, shows that a company has substance and is a limited risk. Chancy growth stocks seldom pay dividends. Furthermore, Ben contended that no dividends or a niggardly dividend policy harms investors in two ways. Not only are shareholders deprived of income from their investment, but when comparable companies are studied, the one with the lower dividend consistently sells for a lower share price. “I believe that Wall Street experience shows clearly that the best treatment for stockholders,” Ben said, “is the payment to them of fair and reasonable dividends in relation to the company’s earnings and in relation to the true value of the security, as measured by any ordinary tests based on earning power or assets.”

12. Defend your shareholder rights

“I want to say a word about disgruntled shareholders,” Ben said. “In my humble opinion, not enough of them are disgruntled. And one of the great troubles with Wall Street is that it cannot distinguish between a mere troublemaker or “strike suitor” in corporate affairs and a stockholder with a legitimate complaint that deserves attention from his management and from his fellow stockholders.” If you object to a dividend policy, executive compensation package or golden parachutes, organize a shareholder’s offensive.

13. Be Patient

“... every investor should be prepared financially and psychologically for the possibility of poor short-term results. For example, in the 1973-1974 decline the investor would have lost money on paper, but if he’d held on and stuck with the approach, he would have recouped in 1975-1976 and gotten his 15 percent average return for the five-year period.”

14. Think for yourself

Don’t follow the crowd. “There are two requirements for success in Wall Street,” Ben once said. “One, you have to think correctly; and secondly, you have to think independently.”

Finally, continue to search for better ways to ensure safety and maximize growth. Do not ever stop thinking.

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1. Risk: measure it, avoid it if possible, have a margin of safety, and limit downside.

2. Independence: don't follow the herd, the herd will only do average. 

3. Preparation: learning, building mental models, and continual improvement.

4. Humility: acknowledge what you don't know, don't be overconfident, stay within your circle of competence, and watch for errors. 

5. Analytic rigor: calculate value before looking at price, and be a business analyst and not a securities analyst. 

6. Allocation: consider opportunity costs.

7. Patience: Wait for the right opportunities.

8. Decisiveness: great ideas are rare, so bet big when they come along and when you have confidence in them.

9. Focus on Companies that pay full Income Tax along with consistent ROE of 20% over a period of 15 years.

I wish to acknowledge the authors of the original articles. Excerpts are taken from various websites and blogs.

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Diversification - View and Counterview

There is a very old saying "Failing to plan is planning to fail". This may sound simplistic but people who wish to be successful should always plan before doing any activity.

The world that you live in is very dynamic. Things change in a split second, so you should have a plan to prepare yourself face those uncertain changes and not let your daily routine be affected by that. People today, have understood the importance of planning right from the beginning, so in future, they are ready to face any unfortunate event.

Investments should also be done with proper planning and homework. The key for successful investment planning is proper asset allocation. Asset allocation is investing your savings in appropriate sectors and fields, so that you get decent returns in the future, that you anticipate, will help you achieve your financial goals. As an investor, you need to make sure that you carefully study the various processes involved in investments, how they work and have you properly allocated your hard earned money in different asset classes in order to fulfill your investment objective.

There are two very important factors that can have a great impact on asset allocation:

1. The ability to bear risks

2. The time horizon for the goal of the investor

Time horizon refers to the duration for which the person desires to invest the money in any particular field. Every person has a specific financial goal in mind and the time horizon can play a significant role in helping the person achieve that financial goal. Therefore the asset allocation of a 25 year old planning for retirement and a 40 year old planning for retirement will be quite different, even though their end goal is the same.

Risk tolerance is another key factor in asset allocation. The willingness and ability to lose part or whole of the money invested in return for larger potential returns is termed as risk tolerance.

Larger risk in investment is directly proportional to larger chances of revenue generated. Investors who are highly aggressive often accept investments with high risk in the hope of getting better results. Investors with lower risk tolerance are tagged as conservative investors. They invest money in avenues which offer lesser risk, but do not earn as much return.

A portfolio designed to cut down the risk by combining investments of different asset classes, i.e. equity, debt and gold, which generally doesn't moves in similar direction in terms of market movements is termed as diversification. The prime aim of diversification is risk mitigation. Diversification paves the way for more reliable and steady performances of the various asset classes under changing economic conditions.

Another adage springs to mind when one thinks of diversification - "Never put all your eggs in one basket." Diversification is nothing but splitting those eggs appropriately, so even if one basket breaks, you do not face too many losses.

However, the Buffet school of thoughts says that you should keep all your eggs in the same basket and should guard that Basket well. This view is recommended for people who are matured and wise enough to understand the meaning of risk, the various risks associated with the investment and how to measure and monitor them.

Lastly, what matters is that you carefully understand your own intuitions and carve out your own niche Investment Philosophy based on your preferences.

References and acknowledgement - Some part of the article and the basic premise has been taken from Quantum Mutual Fund Newsletter

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