Information – Money Market
Can stocks rally back from 2008 low?
Can stocks rally back from 2008 low?
(USA Today)11 March 2008
NEW YORK – It’s test time on Wall Street
The question: Can the stock market right itself after falling below its January low — a level analysts say is a key level of support, or floor, that cannot be breached?
The outcome of the pass-or-fail test could provide a road map for where the struggling market is headed, says Richard Suttmeier, chief market strategist at RightSide.com. And that’s key, considering the Dow Jones industrial average, down 16% from its high, is flirting with a bear market, or a loss of 20%.
Last week, stocks continued their downward trajectory as the broad market declined nearly 3%. Another wave of bad economic news drove the selling. Headlines touting the biggest monthly job cuts in five years, more distress in the frozen credit markets and margin calls at a mortgage company and private-equity firm exacerbated fears of recession.
All three major U.S. stock indexes — the Dow, Nasdaq composite and Standard & Poor’s 500 — closed below their Jan. 22 lows, a level that, at the time, bargain-hunters viewed as a good buying point.
But the fact that stocks broke that 2008 low should serve as a “warning flag” to investors, Suttmeier says.
It is not uncommon during market downtrends for stocks to rally back from the dead only to relapse and head back down toward prior lows. This so-called retest of the lows is a way for traders who study stock charts to confirm whether stock prices have bottomed out for good or whether they need to fall more to attract buyers.
Despite the market’s recent descent to fresh lows, however, it is too early to tell whether it will ultimately pass or fail the test.
“We are still awaiting to confirm another leg down,” Suttmeier says.
Mark Arbeter, chief technical strategist at S&P Equity Research, also says it’s premature to say the market is headed decisively lower, even though the market is “sitting right at the edge” of more pain.
If the benchmark S&P 500 index, which closed Friday at 1293, continues to trend lower and dips, say, 1% below 1270, its intraday low hit in late January, and stays down there for two or three days, then the odds that the market is heading even lower would “increase dramatically,” Arbeter says. The S&P would have to decline nearly 2% from current levels to pierce the 1270 level.
The reason stocks tend to nose-dive after a key support level fails to hold is because all the buyers who came in at the prior lows are now “sitting on losses,” Arbeter says, and they sell to cut their losses.
Market bottoms don’t typically occur until panic surges and investors capitulate en masse. Only after everyone who wants to get out does can real buyers step in and push prices back up in a meaningful way.
“Panic? We haven’t seen it yet,” says Suttmeier, who is convinced that stocks are already in a bear market.
UAE sets up task force to de-peg dirham
UAE sets up task force to de-peg dirham
By Issac John (Deputy Business Editor) Khaleej Times 11 March 2008
DUBAI – The Central Bank of UAE has set up a task force to help implement a possible de-pegging of the country’s currency from the US dollar.
The committee is studying the benefits of de-pegging or revaluing and will help coordinate any de-peg of the UAE dirham. It is expected to report its findings to the country’s Ruler at the end of the year, people familiar with the matter said.
The year-long timeframe for the group to report its findings will dash the hopes of many currency speculators that have increased bets on the UAE severing its ties with the dollar in the coming months. The World Bank officials said in a recent interview that the Middle East economies will be hit by an expected slowdown in global growth and the weakening greenback. Growth across the Middle East is expected to fall to as low as 5.6 per cent through 2008, down from about 6.3 per cent, senior World Bank officials said.
Stock splits make stock more affordable and liquid for retail investors
Stock splits make stock more affordable and liquid for retail investors
Prerna Katiyar, TNN
Monday morning, when Mr Gupta opened his demat account to check his stocks, he was taken aback. “What has happened to my shares? How can it fall to this level? I bought the share at Rs 1,000 and it is now trading at Rs 240! Has the whole market crashed today or is it just my stock?” he wondered.
This had happened because the company has announced a 4-for-1 stock split and extra shares were still to be delivered in his account. Poor Mr Gupta, who had missed the company announcement, kept thinking he had incurred heavy losses. So let’s make the case easier for him and find the devil in the detail.
What is a stock split?
Stock split is the process of splitting shares with high face value into shares of a lower face value. It is like getting Rs 100 note changed for two Rs 50 notes. Does it change the value of your money? Not really. But now, you also have two smaller denomination notes which would be easily accepted by small vendors. A stock split increases the number of shares in a public company. The price is so adjusted such that the market capitalisation of the company almost remains the same.
Why split stocks?
Companies usually split their stock when they think the price of their stock exceeds the amount smaller investors would be willing to pay. “It is aimed at making the stock more affordable and liquid from retail investors’ point of view,” said Indiabulls CEO Gagan Banga. Generally, there are more buyers and sellers of shares trading at Rs 100 than say, Rs 400 as retail shareholders may find low-price stocks to be better bargains. Stock splits are usually initiated after a huge run-up in the share. This run-up may be linked to the performance of the stock.
All that brouhaha about bonus
All that brouhaha about bonus
Prerna Katiyar, TNN
The Reliance Power bonus issue is finally out. The company declared a 3:5 ratio on Sunday giving three extra shares for every five shares held by a shareholder. These shares were issued to only non-promoter shareholders. The record date for the issue is still to be declared by the stock exchange.
What is a bonus issue?
Any company, which has excess reserves that it may have build by retaining part of its profit over the years, may decide to convert some amount into its share capital by issuing bonus shares. This doesn’t change the market value of the company. “It is one of the ways, in which reserves of the company get capitalised,” said PN Vijay Financial Services managing director PN Vijay. In case of Reliance Power, the company is converting its share premium reserves into bonus.
What is bonus ratio?
New shares are issued in the proportion of their holdings. If the bonus ratio is 1:2, for every two shares held by the shareholder, he will get one extra share. This means, if someone was holding 100 shares of a company, he will get 50 free shares making total holding of shares in that company to 150 instead of 100. Rajesh Exports was another company to issue bonus. The ratio declared by the company was 2:1, which means every shareholder got two extra shares for each share held.
Why a bonus issue?
It is one of the ways for companies to capitalise their excess reserves and reward its shareholders. “Rajesh Exports has reserves in excess of Rs 500 crore and so the company decided to pass on the benefit to the shareholders in the form of bonus issue,” said Rajesh Mehta, the chairman of the Bangalore-based jewellery maker Rajesh Exports. Also, a bonus issue is seen as a sign of a company’s good health.
How do shareholders benefit?
The shareholders get the bonus shares for free, thus bringing down the cost of owning the shares and the company’s profit too remain intact. “It’s a win-win situation for both the issuing company and shareholders. While the company doesn’t need to generate free cash and issues the bonus shares from its accumulated reserves, the shareholders get free shares,” said JP Morgan Asset Management India chief executive Krishnamurthy Vijayan.
How does the company benefit?
Corporate actions like dividend payouts and bonus issues are ways of rewarding shareholders. While dividends are paid from profit after tax (PAT), bonus shares are issued from excess reserves the company may have. This means in case of the latter, the company is able to reward the shareholders without touching its profits.
Also, from the company’s point of view, it is more of an accounting entry that moves money from one accounting head to another. “Except for the sentiment among shareholders, there is no change in the company’s valuations after the bonus issue,” said Birla Sunlife Mutual Fund CIO A Bala Balasubramaniam.
Record date & ex-bonus
Record date is the date set by the company for determining the holders entitled to receive bonus shares. For Rajesh Exports, it was February 5, which means that anyone who had shares of the company till this date were entitled for free bonus shares. For Reliance Power, the date is yet to be declared. After record date, shares of the company become ex-bonus.
What about Reliance Power?
Anil Ambani holds 45% stake in Reliance Power and another 45% is held by Reliance Energy. Mr Ambani said he will be transferring his own 2.6% stake in Reliance Power to REL so that REL’s holding in Reliance Power remains intact.
For all those who are still wondering how the cost of acquisition for retail shareholders came to Rs 269, here’s the math: Suppose you were allotted 17 shares, making the total amount you invested to 430*17 or Rs 7,310. After the 3:5 bonus issue, most likely you will get 10 ‘free’ bonus shares, which means you now have 27 shares still keeping the invested amount at Rs 7,310. Now divide 7,310 by the new total number of shares you own (27) and you will get the answer.
Rights issues are a safe bet in bear market situations
Rights issues are a safe bet in bear market situations
Prerna Katiyar, TNN
MUMBAI: Companies like SBI, Exide Industries and Gujarat NRE Coke recently announced rights issues. While their share prices have reduced considerably in the recent meltdown, they’re still trading above the rights price.
The equity market has seen a sharp correction in the past week. Just a couple of weeks ago, companies like SBI, Gujarat NRE Coke announced issuance of rights shares. SBI, for instance, announced a 1:5 rights issue at a price of Rs 1,590 per share.
While the share prices have seen correction (it was at the Rs 2,400-level some days back) to Rs 2,159, the rights price is still at a 25% discount to the latest market price. After adjusting for equity dilution, it’s still available at an 11% discount. The discount factor has reduced, but long-term investors could still consider rights issues like that of SBI, Exide Industries, Gujarat NRE Coke, Dhanalakshmi Bank, Centurion Extrusion if they are upbeat about business prospects.
What is a rights issue?
Rights issues are shares issued by a company only to its existing shareholders. In fact, rights issue is a method of raising further capital from the existing shareholders/debenture holders by offering additional shares on a pre-emptive basis, usually at a discounted price. The number of shares offered depends on the number of shares already held and other terms made in the offer. For example, if you hold 200 shares in XYZ and it makes an offer of one-for-two, you can buy up to 100 shares at the price stated.
Why the discount?
The main idea behind this is to make the issue attractive for its shareholders. Also, as the shares of the company usually fall post-issue due to equity dilution, it makes sense for the company to offer the shares at a discount.
Why does the company offer a discount and not go in for a further public offering (FPO)?
It’s money and nothing else. The company makes the offer to raise capital. This is done either to expand its existing business, set up a new plant, or even pay back loans. “It is largely because the company want to pass on the benefit to its existing shareholders that it makes the rights issue rather than going in for an FPO,” says SBI MF manager Jayesh Shroff. Also, the transaction cost for a rights issue works out to be lower than going in for an FPO.
I’m not a shareholder, can I still benefit from rights issue?
Yes, provided you become a shareholder of the company before the record date. While declaring a rights issue, a company also declares the record date or the date on which a shareholder must officially own shares in order to be entitled for the issue. For SBI, it is February 4, 2008.
One thing to be kept in mind is that you will not be entitled for rights issue if you buy the share on this date. You need to buy the stock two days before the record date for becoming a shareholder. Another important date to keep in mind is the closing date.
What options do you have?
Rights issue is offered to all its existing shareholders individually and you have the choice to reject it (which means, not to subscribe for any shares), accept it in full (subscribe for all the shares offered) or accept it in part. So you do have a right to say no to it.
Can I go in for more shares than offered?
Usually, shareholders are given a chance to subscribe for more shares than offered. Although, there is no guarantee that those number of shares will be allotted.
Is rights issue transferable?
Yes. You can sell them in the open market or transfer it.
Should one always go for it?
“Provided the investor is confident of the company’s management and the business model, one can go for the issue for the simple reason that he is getting the stock at a discount than the present market price,” adds Mr Shroff. Although, in a falling market, the lucrativeness of the offer is falling day by day, one may consider these issues as one is aware of the trading history and performance of the stock.
How to achieve your financial goals
How to achieve your financial goals
Sheetal Mehta | February 25, 2008 for rediff.com
Saurabh Awasthi, 26, a media professional from Hyderabad was trying to figure out his financial goals. His wife Seeta, 25, too, was helping him in the exercise. At the end of the day both Saurabh and Seeta had exhausted themselves. They could not figure out as to what their priorities were: Planning for their 2 year old son’s higher education, buying a home for themselves which they desperately needed or spend Saurabh’s bonus on a world tour.
This, often, is the dilemma faced by many people planning their future finances. The most common question in such cases is how you should plan your finances. In the fast-growing Indian economy everyone is so keen on concentrating on their career and earning as much money as possible that they forget that the surplus money has to be invested for the future.
Or even if you do remember a bandwagon concept is adopted ?invest where everyone else is investing. But in the world of financial planning you must remember that one size does not fit all.
In my interaction with the people who I come across and further discussions with them I have noticed that they lack a clear picture of the purpose of their investments. Everyone just wants to invest and become rich. I wish if that were so easy.
Do not invest just for the sake of investing. As Ralph Seger rightly said, “An investor without an investment objective is like a traveller without destination.” Although this quote has been used n number of times I would still like to use it here as planning without a definite goal is akin to a traveller without destination.
First and foremost you must remember the most important aspect of financial planning, and that is, what you want to achieve? Try doing this: jot down 5 important financial goals that you want to achieve in the next 10-15 years. I am sure not many will be able to do this.
But there is a simple way that may help you to develop a fundamentally sound financial plan and achieve goals for which you are working so hard. The first and foremost step is to note down your goals as this is the starting point of your planning.
Don’t get foxed by returns on your investments
Goals give you an idea as to what you want to achieve. They can vary from just plain savings to your retirement, to your child’s education, buying a house, buying a car, funding your or your son’s/daughter’s marriage etc. The job does not end here though. Even after listing them, you must have a clear vision about their priorities. The best, way to make this daunting task easy is to divide your goals into the following three categories:
~ Responsibilities: Like providing for your parents, providing education to your children, funding their marriage, meeting any unforeseen events etc.
~ Needs: This includes requirements that you have like providing for retirement, buying a house, providing for day-to-day life and also saving for the near future, etc.
~ Dreams: Or aspirations. It can be anything like buying a luxury car to buying a solitaire for your wife or a world tour. Your dreams may be out of reach but there is no harm in listing them as this can act as a constant reminder for you to work hard.
Based on the above three criteria you categorise your goals. You need to prioritise the above listed goals in an order of importance in your life and their requirements.? There needs to be a fair balance drawn between needs and responsibilities as at a certain point in time both could be equally desired by you.
Time frame
Once you have set your goals then the second important step is to decide the time frame in which you would like to achieve them. This factor is very important when you are planning to invest. The time period for investment is based on the time in which you wish to achieve your set of goals.
Let’s take an example to understand it better.
Say you are planning to buy a car but are not sure when you can do it. You invest a part of your money in Public Provident fund, National Saving Certificate, Infrastructure bonds and some close-ended funds. After say 4 years a new car is introduced in the market which suits your requirements and you decide to buy it. But your entire sum is blocked as all of them have been invested in products which have a lock-in period.
Let me take one more example. Say your child’s admission to higher education is just a year away. You are planning to invest money to meet this requirement. Carried away with the stock market boom you invest all your money in the market. Just a few days before paying the fees the stock market crashes and your capital is reduced to half.
Remember that stock market is a good avenue to invest but only if you are a long term investor and your goal is at least 8 to 10 years away and not when it just a year away. You need the capacity to hold and stay invested. Also, to enter the stock market with the intention to be a trader and not an investor is a risky affair and such foolishness is better avoided.
However, it is not necessary to fix an exact time frame. A rough estimate of when you will need money can also give you a picture as to how to plan your financial goals. However, if you do not give a set time to achieve your goals then you may not only digress from the right path of planning but also end up depleting your hard earned money.
Charting
After you have done the above two exercises you need to put a financial figure as to how much money you will require when you reach that stage. That is, you must know the future value of your requirements in today’s cost. For instance, a two year MBA today may cost you say Rs 4 lakhs but eight years down the line you will surely need a higher amount for the same course.
To overcome this, the best way is to prepare a chart as given below:
(The above table is hypothetical)
You need to factor in the inflation cost and find out what will be the future value of financial goals. This can be calculated using a simple formula:
FV = Present Value * (1+ Inflation rate) ^ number of years left to achieve your goal
FV = 4,00,000 * (1+6%) ^ 8
FV = Rs. 6.37 lakhs (approximately). So this is the figure for which you need to plan for.?
I hope the above will help you lay a path for your investment planning. Planning varies depending upon your needs but the factors that help lay a path to your plan remain same for everyone. The above process gives you a clear picture as to the path you need to follow to achieve your goals. It also helps you to decide on the most suitable investment that will help you and not your friend or neighbour.
The author is a financial consultant and can be reached at dhanplanner@rediffmail.com.
How the Sensex is calculated
How the Sensex is calculated
Sharat Chandran, Commodity Online
For the premier Bombay Stock Exchange that pioneered the stock broking activity in India, 128 years of experience seems to be a proud milestone. A lot has changed since 1875 when 318 persons became members of what today is called The Stock Exchange, Mumbai by paying a princely amount of Re 1.
Since then, the country’s capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market.
Sensex is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, Sensex is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies.
The base year of Sensex is 1978-79 and the base value is 100. The index is widely reported in both domestic and international markets through print as well as electronic media.
The Index was initially calculated based on the “Full Market Capitalization” methodology but was shifted to the free-float methodology with effect from September 1, 2003. The “Free-float Market Capitalization” methodology of index construction is regarded as an industry best practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology. (See below: Explanation with an example)
Due to is wide acceptance amongst the Indian investors; Sensex is regarded to be the pulse of the Indian stock market. As the oldest index in the country, it provides the time series data over a fairly long period of time (From 1979 onwards). Small wonder, the Sensex has over the years become one of the most prominent brands in the country.
The growth of equity markets in India has been phenomenal in the decade gone by. Right from early nineties the stock market witnessed heightened activity in terms of various bull and bear runs. The Sensex captured all these events in the most judicial manner. One can identify the booms and busts of the Indian stock market through Sensex.
Sensex Calculation Methodology
Sensex is calculated using the “Free-float Market Capitalization” methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.
The base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.
The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex every 15 seconds and disseminated in real time.
Dollex-30
BSE also calculates a dollar-linked version of Sensex and historical values of this index are available since its inception.
Understanding Free-float Methodology
Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market.
It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.
In India, BSE pioneered the concept of Free-float by launching BSE TECk in July 2001 and Bankex in June 2003. While BSE TECk Index is a TMT benchmark, Bankex is positioned as a benchmark for the banking sector stocks. Sensex becomes the third index in India to be based on the globally accepted Free-float Methodology.
Example (provided by rediff.com reader Munish Oberoi):
Suppose the Index consists of only 2 stocks: Stock A and Stock B.
Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so-called ‘free-floating’ shares.
Similarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters and the rest 1,000 are free-floating.
Now suppose the current market price of stock A is Rs 120. Thus, the ‘total’ market capitalisation of company A is Rs 120,000 (1,000 x 120), but its free-float market capitalisation is Rs 96,000 (800 x 120).
Similarly, suppose the current market price of stock B is Rs 200. The total market capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its free-float market cap is only Rs 200,000 (1,000 x 200).
So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalisation of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).
The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalisation of the stocks that comprised the index then was, say, 60,000 (remember at that time there may have been some other stocks in the index, not A and B, but that does not matter), then we assume that an index market cap of 60,000 is equal to an index-value of 100.
Thus the value of the index today is = 296,000 x 100/60,000 = 493.33
This is how the Sensex is calculated.
The factor 100/60000 is called index divisor.
10 golden rules to become rich!
10 golden rules to become rich!
February 21, 2008 11:35 IST
Once you decide to put your money to work to build long-term wealth, you have to decide, not whether to take risk, but what kind of risk you wish to take. Here are 10 investing rules that can make you rich:
1. There’s no escaping risk
Once you decide to put your money to work to build long-term wealth, you have to decide, not whether to take risk, but what kind of risk you wish to take.
Yes, money in a savings account is dollar-safe, but those safe dollars are apt to be substantially eroded by inflation, a risk that almost guarantees you will fail to reach your wealth goals.
And yes, money in the stock market is very risky over the short-term, but, if well-diversified, should provide remarkable growth with a high degree of consistency over the long term.
2. Buy right and hold tight
The most critical decision you face is arriving at the proper allocation of assets in your investment portfolio — stocks for growth of capital and growth of income, bonds for conservation of capital and current income.
Once you get your balance right, then just hold tight, no matter how high a greedy stock market flies, nor how low a frightened market plunges. Change the allocation only as your investment profile changes. Begin by considering a 50/50 stock/bond-cash balance, then raise the stock allocation if:
You have many years remaining to accumulate wealth.
The amount of capital you have at stake is modest.
You don’t have much need for current income from your investments.
You have the courage to ride out the stock market booms and busts with reasonable equanimity.
As these factors are reversed, reduce the 50 per cent stock allocation accordingly.
3. Time is your friend, impulse your enemy
Think long term, and don’t allow transitory changes in stock prices to alter your investment program. There is a lot of noise in the daily volatility of the stock market, which too often is ‘a tale told by an idiot, full of sound and fury, signifying nothing’.
Stocks may remain overvalued, or undervalued, for years. Realize that one of the greatest sins of investing is to be captured by the siren song of the market, luring you into buying stocks when they are soaring and selling when they are plunging.
Impulse is your enemy. Why? Because market timing is impossible. Even if you turn out to be right when you sold stocks just before a decline (a rare occurrence!), where on earth would you ever get the insight that tells you the right time to get back in? One correct decision is tough enough. Two correct decisions are nigh on impossible.
Time is your friend. If, over the next 25 years, stocks produce a 10% return and a savings account produces a 5% return, $10,000 would grow to $108,000 in stocks vs. $34,000 in savings. (After 3% inflation, $54,000 vs $16,000). Give yourself all the time you can.
4. Realistic expectations: the bagel and the doughnut
These two different kinds of baked goods symbolize the two distinctively different elements of stock market returns.
It is hardly farfetched to consider that investment return — dividend yields and earnings growth — is the bagel of the stock market, for the investment return on stocks reflects their underlying character: nutritious, crusty and hard-boiled.
By the same token, speculative return — wrought by any change in the price that investors are willing to pay for each dollar of earnings — is the spongy doughnut of the market, reflecting changing public opinion about stock valuations, from the soft sweetness of optimism to the acid sourness of pessimism.
The substantive bagel-like economics of investing are almost inevitably productive, but the flaky, doughnut-like emotions of investors are anything but steady — sometimes productive, sometimes counterproductive.
In the long run, it is investment return that rules the day. In the past 40 years, the speculative return on US stocks has been zero, with the annual investment return of 11.2% precisely equal to the stock market’s total return of 11.2% per year.
But in the first 20 of those years, investors were sour on the economy’s prospects, and a tumbling price-earnings ratio provided a speculative return of minus 4.6% per year, reducing the nutritious annual investment return of 12.1% to a market return of just 7.5%. From 1981 to 2001, however, the outlook sweetened, and a soaring P/E ratio produced a sugary 5% speculative boost to the investment return of 10.3%.
Result: The market return leaped to 15.3% — double the return of the prior two decades.
The lesson: Enjoy the bagel’s healthy nutrients, and don’t count on the doughnut’s sweetness to enhance them.
5. Why look for the needle in the haystack? Buy the haystack!
Experience confirms that buying the right stocks, betting on the right investment style, and picking the right money manager — in each case, in advance — is like looking for a needle in a haystack.
Investing in equities entails four risks: stock risk, style risk, manager risk, and market risk. The first three of these risks can easily be eliminated, simply by owning the entire stock market — owning the haystack, as it were — and holding it forever.
Owning the entire stock market is the ultimate diversifier. If you can’t find the needle, buy the haystack.
6. Minimize the croupier’s take
The resemblance of the stock market to the casino is not far-fetched. Yes, the stock market is a positive-sum game and the gambling casino is a zero-sum game . . . but only before the costs of playing each game are deducted. After the heavy costs of financial intermediaries (commissions, management fees, taxes, etc.) are deducted, beating the stock market is inevitably a loser’s game. Just as, after the croupiers’ wide rake descends, beating the casino is inevitably a loser’s game. All investors as a group must earn the market’s return before costs, and lose to the market after costs, and by the exact amount of those costs.
Your greatest chance of earning the market’s return, therefore, is to reduce the croupiers’ take to the bare-bones minimum. When you read about stock market returns, realize that the financial markets are not for sale, except at a high price.
The difference is crucial. If the market’s return is 10% before costs, and intermediation costs are approximately 2%, then investors earn 8%. Compounded over 50 years, 8% takes $10,000 to $469,000. But at 10%, the final value leaps to $1,170,000 — nearly three times as much . . . just by eliminating the croupier’s take.
7. Beware of fighting the last war
Too many investors — individuals and institutions alike — are constantly making investment decisions based on the lessons of the recent, or even the extended, past. They seek technology stocks after they have emerged victorious from the last war; they worry about inflation after it becomes the accepted bogeyman, they buy bonds after the stock market has plunged.
You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does. Just because some investors insist on ‘fighting the last war,’ you don’t need to do so yourself. It doesn’t work for very long.
8. Sir Isaac Newton’s revenge on Wall Street — return to the mean
Through all history, investments have been subject to a sort of law of gravity: What goes up must go down, and, oddly enough, what goes down must go up. Not always of course (companies that die rarely live again), and not necessarily in the absolute sense, but relative to the overall market norm.
For example, stock market returns that substantially exceed the investment returns generated by earnings and dividends during one period tend to revert and fall well short of that norm during the next period. Like a pendulum, stock prices swing far above their underlying values, only to swing back to fair value and then far below it.
Another example: From the start of 1997 through March 2000, Nasdaq stocks (+230%) soared past NYSE-listed stocks (+20%), only to come to a screeching halt. During the subsequent year, Nasdaq stocks lost 67% of their value, while NYSE stocks lost just 7%, reverting to the original market value relationship (about one to five) between the so-called ‘new economy’ and the ‘old economy.’
Reversion to the mean is found everywhere in the financial jungle, for the mean is a powerful magnet that, in the long run, finally draws everything back to it.
9. The hedgehog bests the fox
The Greek philosopher Archilochus tells us, ‘The fox knows many things, but the hedgehog knows one great thing.’ The fox — artful, sly, and astute — represents the financial institution that knows many things about complex markets and sophisticated marketing.
The hedgehog — whose sharp spines give it almost impregnable armour when it curls into a ball — is the financial institution that knows only one great thing: long-term investment success is based on simplicity.
The wily foxes of the financial world justify their existence by propagating the notion that an investor can survive only with the benefit of their artful knowledge and expertise. Such assistance, alas, does not come cheap, and the costs it entails tend to consume more value-added performance than even the most cunning of foxes can provide.
Result: The annual returns earned for investors by financial intermediaries such as mutual funds have averaged less than 80% of the stock market’s annual return.
The hedgehog, on the other hand, knows that the truly great investment strategy succeeds, not because of its complexity or cleverness, but because of its simplicity and low cost. The hedgehog diversifies broadly, buys and holds, and keeps expenses to the bare-bones minimum.
The ultimate hedgehog: The all-market index fund, operated at minimal cost and with minimal portfolio turnover, virtually guarantees nearly 100% of the market’s return to the investor.
In the field of investment management, foxes come and go, but hedgehogs are forever.
10. Stay the course: the secret of investing is that there is no secret
When you consider these previous nine rules, realize that they are about neither magic and legerdemain, nor about forecasting the unforecastable, nor about betting at long and ultimately unsurmountable odds, nor about learning some great secret of successful investing.
In fact, there is no great secret, only the majesty of simplicity. These rules are about elementary arithmetic, about fundamental and unarguable principles, and about that most uncommon of all attributes, common sense.
Owning the entire stock market through an index fund — all the while balancing your portfolio with an appropriate allocation to an all bond market index fund — with its cost-efficiency, its tax-efficiency, and its assurance of earning for you the market’s return, is by definition a winning strategy.
But if only you follow one final rule for successful investing, perhaps the most important principle of all investment wisdom: Stay the course!
[Excerpt from Investing Rules from the Masters by John C. Bogle, a doyen of the American mutual fund industry who was designated by Fortune magazine as one of US investment industry’s four ‘Giants of the 20th Century.’]
Source:rediff.com
If REPL offers 1:1 bonus, what would your gains be?
If REPL offers 1:1 bonus, what would your gains be?
By Shravan Sreenivasula, CNBC-TV18
Reliance Power is considering bonus issue to all its shareholders excluding promoters. That is, the bonus issue will be for non-promoters.
Non-promoters’ holding is about 22.8 crore shares. The public shareholding is 10.1%. The market is expecting the bonus issue to be at around 1:1 or 1:5 ratio, which means one bonus share for every share that a person holds or one share for every five shares that a person holds. Considering that ratio in our analysis, the public stake holding will go up from 10.1% to anywhere between 11.9-18.3%.
The cost of acquisitions may come down. If one looks at the QIB portion which is subscribed at about Rs 450, will come down to about Rs 375, if the ratio is 1:5; will come to Rs 358 from Rs 430, in case of retail investors.
In case of 1:1 ratio, then it will be Rs 225 for QIBs and Rs 215 for retail investors. If one takes a scenario where the current share price is held – around Rs 420, then the QIB portion will make a profit of about 10%, if the ratio is 1:5 and retail investors would make about 15% if the ratio is 1:5. But if the ratio is 1:1, they will make a huge profit – about 70% in case of QIBs and about 78% in case of retail investors.
But would the price be Rs 420? Maybe not. If one is reminded of last week, many people were talking of Rs 340 or Rs 350 to be the equilibrium price for the stock. So if one considers that particular thing, the profits for people would boil down to a ratio of 1:3. So if the ratio is above 1:3 – either 1:3, 1:2 or 1:1, then the investors would see profits in their accounts which is the main intention for the company to come ahead with this particular bonus issue. Another thing to watch out for is Reliance Energy – where the shareholding would reduce from 45% to anywhere between 41%-44%.
ICICI Bank fined Rs 10 lakh for denying credit card to lawyer
ICICI Bank fined Rs 10 lakh for denying credit card to lawyer
The Delhi Consumer Commission today imposed a Rs 10-lakh fine on ICICI Bank for refusing credit card to a lawyer for a “negative profile” profession. However, the bank refuted the charge that it was not giving credit cards to advocates and said it would appeal against order before an appropriate forum. The Commission asked the bank to deposit Rs 10 lakh in the State Consumer Welfare Fund, and pay Rs 50,000 as compensation to the complainant. In a strongly-worded order, the Commission, presided over by Justice J D Kapoor, also restrained all other financial institutions from rejecting consumers’ applications on the premise that their occupations fell under “negative profiles”. Deploring ICICI for not following the guidelines laid down by the Reserve Bank regarding financial credits, the Commission noted that the lender could not be allowed to “defame and demean” any profession in general and the legal fraternity in particular.
Following the order, an ICICI Bank spokesperson said in a statement that it has refuted it was not giving credit cards to advocates and submitted a list of advocates holding ICICI Bank Credit Cards.
“The bank would prefer an appeal before an appropriate forum. The bank had filed a reply taking a preliminary objection stating that the complainant is not a consumer of the bank, as provided for in the Consumer Protection Act,” the spokesperson said.
“There is no service provided, therefore, the question of deficiency of service does not arise and the complainant does not fall within the purview of Consumer Protection Act,” the bank added.
Source :ECONOMIC TIMES
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