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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