DNA for Personal Finance

Crude Oil Shock - Again and Yet Again.

2020-04-21T00:49:00.000+05:30

I have been 'off' from blogging for a long long time but that doesn't mean I have been away from trying to understand the stock markets. While browsing through my unpublished and incomplete posts, I realized that one of the articles was about how in 2015, the crash was inexplicable and that every sector was impacted. It was an event I had never seen in the years of trading (till then).

The last 2 odd months, Covid-19 has created a round of panic selling and immediately followed by frenzied buying. What I saw in these last 2 months trumps my previous inference. I saw Dow Jones hit 7% circuit breaker not once or twice but 3 times. That's a first for me in 20 years of trading. Crude slumped to hit multi-decade lows. Again a first. Job losses across industry sectors never seen after the Great Depression of 1929, another first. A Phoenix-like rise of the markets never seen before and today, WTI Crude Contract hitting a low of -$37.63. How does crude oil contract go negative?

The answer from various sources is that there's no storage available for the crude oil. Why no storage? Because of Covid-19, demand has been less and the oil production (though lower than usual) has not stopped. So all the oil being produced needs to be stored somewhere and there's no space to store.

So will the stock markets crash during the day on Apr 21, 2020? Dow Jones Index @ 1517 Hrs on Apr 20, 2020 doesn't show any signs of a crash.

Its a wait and watch.

Risk - Is it Constant?

2020-04-21T00:28:00.001+05:30

Updated on 7 July 2025

Risk – Is It Really Constant? (2025 Refresh)

Recently, during a lunch with a friend, we got talking about the stock markets and the perceived risks.
That casual chat spiralled into a rapid-fire Q & A session that reminded me why risk is both mathematically equal for every trade and psychologically unique for every trader. Here’s the gist, updated for today’s markets.

“Can I calculate risk before I buy?”

My friend’s first salvo was: “How do I take calculated risks while buying stocks?”
We can’t measure market risk with stopwatch precision. Our lifetime, knowledge-processing power, money, and energy are all finite, while the variables moving stock prices are practically infinite. The game isn’t perfect calculation; it’s smart mitigation. Think of risk like monsoon rain: you can’t track every droplet, but you can carry an umbrella, choose your route, and avoid open drains.

Why the same trade feels different to two people

In any transaction the paper risk–reward is identical because buyer and seller meet at the same price. Yet the felt risk diverges wildly. One trader may accept a larger rupee draw-down for a bigger upside, another trims both profit target and stop-loss to sleep better. The spreadsheet says risk is constant, but nerves say otherwise.

The risk-appetite parabola

Visualize risk appetite on a graph with risk on the Y-axis and age on the X-axis. The curve forms a soft parabola.

Early career years are filled with enthusiasm but thin capital, so even small losses sting.
Peak earning years bring bigger capital and steady income, and that raises tolerance for calculated risk.
Approaching retirement, the nest-egg becomes irreplaceable, so caution rises again.

Draw a horizontal line through that curve and you’ll hit it twice, proving the same numerical risk feels different at two life stages.

Practical take-aways for 2025

Position size matters more than prediction. Decide the rupee amount you are genuinely willing to lose before you buy.

Diversification the boring way—equity, debt, gold, perhaps an international fund—still works best.

Automate exits with preset stop-loss and target orders so adrenaline at 9:15 a.m. never makes the decision for you.

Re-balance at least once a year; the fastest-growing asset now carries the most portfolio risk.

Keep a written trading checklist and read it every single time before pressing “buy” or “sell”.

A quick thought experiment

Suppose we both buy XYZ Ltd. at ₹ 900.

You aim for ₹ 960 and accept a stop at ₹ 870. Your risk–reward sits near one-to-two.

I aim for ₹ 1 080 and accept a stop at ₹ 840. My risk–reward is roughly one-to-three.

On paper my trade risks more cash, but the larger expected upside compensates. Which plan is safer? It depends entirely on whose pillow stays fluffier at night.

The bottom line

In our lives (and so in the stock markets), we are always living (and trading) by guesstimates and approximations of a huge number of variables.
That hasn’t changed. What has changed is our toolkit for mitigation. Focus there, not on perfect foresight.

Action step: Note the rupee amount that would hurt but not paralyze you if lost today. That is your personal risk line. Re-evaluate it once a year, because life moves and so does that line.

Disclaimer: Educational content only. Please consult a SEBI-registered adviser for personalized advice.

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Recently, during a lunch with a friend, we got talking about the stock markets and the perceived risks.

Some of the questions my friend posed during the conversation and my responses is what I have tried to re-capture here.

How do I take calculated risks while buying stocks? I feel that we can't 'calculate' risks especially in the stock markets. We can employ strategies to mitigate the risk but not necessarily 'accurately' calculate it. Our lifetime is finite, our ability to process knowledge is finite, our money which we can put into the market is finite, our efforts to put all this together is finite. So how can we manage or for that matter calculate the multiple variables and the infinite combinations thereof which contribute to risk. Focus on risk mitigation.

Why is risk in a trade constant at the same time relatively different?

In any trade the risk for gain and loss for any party is the same. After all, a trade is entered when a buyer and seller agree on a transaction price. Unfortunately, the counter trade is not always with the same party with whom you initiated the trade.

Let's assume that for every trade we enter we are either willing to make or lose in the ratio of 2 : 1.

Now if I enter trade (buy a stock) with the same ratio in mind and I am willing to make Rs 20 and lose Rs. 10.

On the other had you entered the same trade to make Rs. 10 and lose Rs. 5.

In both scenarios, the ratio of win-loss risk is the same but the risk is relatively different. The above ignore the fact of how the risk is valued by the individual (you or me) differently.

If you plotted it on a risk appetite (y-axis) vis-a-vis age (x-axis) graph; the plot of this graph will be more like a parabola (almost).

By drawing a line for any value for risk (parallel to x axis), it will meet at the parabola at 2 different points of the graph. Does it mean that the individual's risk appetite at two points in his life is the same? Actually, it never is. Here again, risk is the same but it actually is different.

I may have oversimplified my case above and there will be enough number of people who will argue against it but then complicating any situation need not necessarily gave you a more accurate answer.

In our lives (and so in the stock markets), we are always living (and trading) by guesstimates and approximations of huge number of variables. We try to improve our approximations by making some of the variables as constants. This is nothing but an act of risk mitigation than risk calculation.

When To Buy and When Not To Sell - Part 2

2015-06-15T00:31:00.000+05:30

In the first part of this series, I had shared some 'life experiences' of friends and family who have attempted 'success on the stock markets'. I'll re-use these experiences to share the Do's and Don'ts I have learnt, practiced and continue to improve on.

Here are some of my general views about the markets:

Don't follow opinions of analysts on business news channels.
- If they were so good, they would not be on TV. They would have been making money themselves.
- Most of them do not bet their money on the stocks they advise.
- Good news about stocks you have bought only confirms your bias about your stock. Bad news about the same stock does not help you make a decision to sell.
- Business newspapers will always have more BUY recommendations that SELL or HOLD. The reasons are:

Get you to enter the trade; once you have bought, then only SELL or HOLD recommendations become applicable

There are higher chances that you don't own the stock. If you already owned the stock, then a BUY recommendation confirms your bias about your stock pick

- BUY, STRONG BUY, ACCUMULATE are irrelevant in the context of buying a stock.
- Similarly, SELL, STRONG SELL, REDUCE is equally irrelevant when selling a stock.

- Most irrelevant is NEUTRAL, HOLD. Does it mean our educated analysts do not know what to do?

Coal India's Offer for Sale - Reason to Invest?

2015-01-30T23:29:00.002+05:30

Many years ago I had done an analysis on IPOs of 2010 and also had discussed Coal India as part of the list. See - "IPOs of 2010 - A Reflection"

A few facts of the Coal India IPO.
- Discovered price after closure of book-building - Rs. 245.00
- Listing Date: November 4, 2010
- Closing price on day of listing: Rs. 342.35
- % Return on day of listing: 39.73%
- Issue was oversubscribed by 15 times.

Since the day of listing and till Jan 29, 2015 the company has given dividend 7 times for a total of Rs. 569/-. Please remember the share price falls (at the minimum) to the extent of the dividend paid on the ex-dividend date.

Today's Offer for Sale (OFS) was oversubscribed at 1.1 times at the base price of Rs. 358/-. Taking the closing price from the day of listing and the base price, the annualized gain (across the 4 years) is 1.14%.

I have considered the closing price on listing day as that is the 'discovered price' after the stock has gone through the gyrations of the stock market. The price of a share in the stock market takes into account many factors and hence is a more accurate reflection of the true value of the stock than what merchant bankers decide during an IPO / FPO / OFS.

So here are my inferences:
- Despite the coal shortage in the country and the monopoly Coal India enjoys, its output has not increased substantially since the time of its IPO. If it had, the share price should have been much higher today.
- OFS route is the quickest route to sell shares. In the last few years, instead of "Follow-on Public Offer" (FPO), the government (in order to meet its disinvestment targets) has been using OFS route.
- Why the OFS route? The government can coerce its other companies (like LIC, SBI, etc.) to buy the shares and ensure the OFS is successful.
- Coal India was trading at Rs. 394/- on Jan 27, 2015, a day before the OFS date was announced, a drop of 10% in 3 trading days.

OFS is a route where the promoter is trying to offload his holdings to make a quick buck. The share price will fall slightly more in the following week when the shares are allotted to the people who subscribed to the issue. It could be a better opportunity to buy the share then!

If a company has great prospects, then the promoter should be either using the cash reserves to expand capacities or perhaps doing a buy-back if the share price does not reflect the true value of its future business.

Paying huge dividends, FPOs, OFS, etc. especially by Government companies is to just find a way to generate revenue to meet their budgetary targets and in turn window dress the fiscal deficit. :-)

Is India a Potential Case for a Sub-Prime Crisis?

2015-01-18T20:11:00.002+05:30

We all have heard about the sub-prime crisis (2008) which brought the world economy to its knees. Many of us have heard about the root cause of the issue, perhaps understood (well or vaguely) the cause-reason relationship how it caused the financial markets to fail.

Without going into the complexities of what took place in US, let me comment if a similar 'sub-prime' crisis can occur in India.

Few definitions in order:
Sub-prime: A borrower who has a poor debt repayment history or a poor credit score.

Sub-prime loans: Typically the interest on these loans are higher than the loans extended to people with a good credit score.

Credit Score: A rating / score assigned by a Credit Bureau (in India it is CIBIL) based on multiple parameters. Some of the parameters include number of loans (any type of loans, credit cards), amount of loans taken, repayment history, age, income reported (through tax filings).

I recently applied for my credit report and found an interest statistic shared in the report alongwith my credit score.

In India, CIBIL score are given in a range of 300 to 900. A score of less than 650 is considered poor credit rating and a greater than 800 is an excellent credit rating.
The reports indicates and I quote "57.6% of all new loans sanctioned during last 1 year falls in the category of people having a score of greater than 800".

"80.5% of all new loans sanctioned had a score of greater than 750"

"Only 4.7% of all new loans sanctioned had a score of less than 650"

The above statistics allows me to infer the following:
- Majority of Indians (individuals) have very good / excellent credit score
- Defaults (non-payment of dues on loans, credit cards, etc.) is potentially low in our country.
- We may not have a 'sub-prime' crisis in India soon.

What makes me wonder is if Indians are good at repayment of their dues, then why have our Banks being reporting higher NPAs (Non Performing Assets) over the last few years?

If individuals are not the reason why NPAs are increasing but corporates (who also take commercial loans) who are the culprits then shouldn't we have stronger checks and balances when loans are issued to them? Shouldn't there be stronger regulations to recover these loans?

Unfortunately, this is where our banking industry struggles. Our banks just don't have enough 'teeth to bite' wilful defaulters. E.g. Kingfisher and its flamboyant owner gets away by not paying back what he (his companies) owes to banks.

For more about Credit Bureaus

Indian Stock Markets Rally Post RBI Rate Cut

2015-01-15T21:57:00.003+05:30

A few days ago, I had blogged about how 'Global Stock Markets' skid on the news of falling crude prices (pre-dominant and most quoted reason), Euro-Dollar parity, and multiple other reasons which were beyond the grasp of the common man.

Today, the Indian Stock markets had their best rally in the last 68 months. So what has changed in the world since I last blogged. Crude price is down another $5, Euro-Dollar parity has worsened, Greece has not exited the Eurozone. In the last few days, the stock markets in US and Europe have been up and down and all over the place.

Today's rally was triggered by a 0.25% reduction in the repo rate (to 7.75%). Does this small reduction in a rate prescribed by RBI's mighty governor have such a mammoth impact? Before I share my views about the event, let's understand "Repo Rate".

Repo Rate is the rate at which the RBI lends money to commercial banks. Similarly, "Reverse Repo Rate" is the rate at which RBI borrows money from commercial banks. These rates act as benchmarks for the borrowing and lending rates in the markets.

Banks use deposits through 'Current Accounts - Savings Accounts' (CASA deposits) from their customers and lend at a higher rate to other customers. The difference between the rate on the deposits and the rate on loans is called the spread or margin.

Here's why this reduction is not important in the short term.
- First, any reduction in repo rate does not percolate through the banking system to consumers immediately. It takes close to two quarters.
- Secondly, banks are quicker to up interest rates than bring down rates.
- Next, when repo rates go down and if the lending rates have to go down, then rates on deposits will also go down. Banks will not compromise on the margins they make.

If costs of homes, cars, etc. are not coming down, does reduction in interest rates on loans 'excite' the customer to take a loan?

If companies are not running at 100% utilization of their factories, etc. as the demand for their goods is not picking up, will they take new loans to build newer capacities?

Interest movement does have an impact on a country's GDP, inflation, etc. but it cannot single handedly drive the change in a direction which the Finance Minister wants. This interest rate reduction is more of the 'political' pressure exerted on the RBI governor.

Good Economics is Rarely Good Politics. But Bad Politics is Surely Bad Economics.

Summary - wait for a correction to buy stocks. In the interim, analyse which business / company you want to bet on for the future.

Stock Markets Skid on Global Turm-(Oil)

2015-01-07T00:41:00.000+05:30

I couldn't resist writing on the chaos in the stock markets the world over. In 2008, crude oil was $145 per barrel and today its close to $50 per barrel.

In the last 2 days, stock markets have fallen anywhere between 3-5%. The new year has not taken off well!! Not a single industry / company, related or unrelated to crude oil, has survived the bloodbath on the stock markets. E.g. I don't see a direct correlation between stock prices of IT companies vis-a-vis price of a barrel of crude oil!

So at what price of crude oil will global stock markets focus on nothing but the fundamentals of a company and its future growth prospects. The answer - no price is the right price.

In a market mayhem, the mantra is 'Becho Phir Socho' (Sell First and Then Think). In the last few days, I have tried to make sense of why falling crude oil prices are creating so much havoc. Some of these commenatries are as follows (my comments in italics):
- OPEC countries have not reduced supply and global demand has fallen. I don't know if demand of a growing population (across the world) in the cold winter months could actually trigger such a massive fall in demand. I am also not sure if increased use of renewable sources of energy is creating the decrease in demand for oil

- Euro v/s Dollar parity is at a multi-year low. Since the dollar has been the world's global currency, why should its dominance become a problem overnight!!

- Greece will exit the Eurozone. This small country had people panicking 2 years ago too. GDP of Greece represents 0.39% of the World Economy. Can a country cause US stock markets to tank 3%! Wow.

- The 100 day moving average has been broken and hence the trend is bearish. Though I am not an expert in technical anaylsis of stock price movement, but if the markets turnaround in the next one week and if we use say a 120 day moving average, will the trend become bullish?

I can go on and on but none of the commentaries makes sense to me. My years (not comparable to the experience of market experts) in the stock markets has taught me one thing - any Tom, Dick and Harry on a business channel can explain just about anything of why a stock / index moved in a given direction post-facto and sound convincing. They talk with intelligent sounding stuff which the common man tends to accept as the truth. Even I sound intelligent at times. :-)

Conclusion: None of the experts on business channels place their money on their views. They even tell you that they have no personal investments in their recommendation. Take their views with a pinch of salt. Decide for yourself, place your bets, be disciplined in your entry and exit criteria for a stock. "Socho Phir Karo" (Think Before You Do).

Saving Taxes - Part 2

2014-12-30T12:00:00.001+05:30

For those who chose 'Option 1' (and the majority of my friends fall in this category), here's why you should not 'actively' pursue this route.

- As long as you are employed, the employer will ensure that a certain amount of your salary is allocated to your Provident Fund (PF) contribution. Typically, this is 12% of your 'basic pay' which is deducted from your salary and paid to your PF Account. One can increase his / her contribution upto 100% of 'basic pay' and is tagged as VPF (Voluntary Provident Fund).

My personal view - maximize your contribution to your PF account; it is portable (with the new unique account number you need not worry about transferring PF accounts whenever you move jobs), allows for withdrawal, has a 'good' rate of return.

- Public Provident Fund (PPF): Many of my friends build a 'fund' for their children's education by investing in PPF. As per FY 2015, the limit is Rs. 1.5 lakh per year. PPF has a lock-in of 15 years and this perhaps is its greatest disadvantage.
My personal view - instead of PPF, invest in VPF.

With the above two categories, people tend to max out the 1.5 lakh limit available under which you 'save taxes' under Sec 80 C of the Income Tax Act. The other categories are as below:

- Premium paid towards Life Insurance / Pension policies: All of us have some form of life insurance / pension product. Whether the 'Life Cover' is commensurate with the insurance needs of the people who have bought these products is a separate discussion!. They also fall under the overall limit of Section 80 C.
My personal view - buy a high life cover with a term insurance, then an endowment / money back policy and finally, a ULIP.

- Premium paid towards Medical Insurance: This avenue encourages people to support the expenses around medical emergencies. Premium paid is deductible (subject to limits - Rs. 15,000/- per year for non senior citizens; Rs. 20,000/- for senior citizens) under Section 80D.
My personal view - buy medical insurance as early as possible, for self, and parents even if the employer provides you a group medical insurance cover.

A smaller segment 'saves taxes' by donating to charitable organizations under Section 80G. The deduction varies from 25% to 100% depending on the charity you have donated to.
My personal view - if you want to donate, then forget about getting the extra leverage of the 'tax benefit'.

There many more options like 'interest paid on education loan', 'principal repayment for a housing loan', etc. but in all these cases potential to save tax is incidental. One does not take an education loan to study because there's an tax benefit on the interest paid!!

Let me remind you that "Investing to Save Tax is Not Investing'.

Next part is for the minority who chose Option 2.

Saving Taxes - Part 1

2014-12-30T01:24:00.000+05:30

Am back to my blog after a long long lazy break and here's my view on 'Saving Taxes' in the Indian context.

'Death and Taxes are the most certain things in life'; the quote (though slightly modified holds true in everyone's life.

As Indians, we are groomed to save. Right from childhood, parenting has inculcated the habit of saving for a 'rainy day'. Piggy banks of our childhood give way to complex jargon of the Income Tax Act during our earning years.

As many of my friends, I too 'saved' in 'safe' (from risks) instruments. Somewhere over the years, my efforts went from the primary focus of 'saving for the future' to 'saving from taxes'.

Over the years where I have learnt the nuances of personal finance from personal experience (and the experience of friends and family), I would like to highlight 2 key points.

Firstly, 'saving from tax' is not investing. Secondly, saving in 'safe' instruments is a dream.

Let me elaborate on each point.
In our country, where the taxman treats every citizen as a 'dishonest' tax payer, you are guilty of tax evasion till proven innocent. Tax evasion is not defined by the quantum of tax one has evaded. As the law of the land prescribes, tax needs to be paid on most 'sources of income' and 'forms of wealth'.

Another case in point is that our constant focus is to save in instruments which as per the stipulations of the Income Tax Act help us save some tax.

Let's take an example:
Option 1: One spends Rs. 100/- in a tax saving instrument (say Insurance Policy) and gets Rs. 30/- (highest tax bracket) reduced in his tax liability.

Option 2: Alternatively, you pay 30% on your Rs. 100/- as tax and invest the remaining Rs. 70/-

Given a choice which option will you choose.

When To Buy and When Not To Sell - Part 1

2014-12-30T01:19:00.000+05:30

Many of my friends and colleagues ask me for the next hot tip about a stock. One of my friends even asked me if there was a stock which will help him double his investment of Rs. 10,000/- in 6 months. This was a question he asked me in 2013, way before the Indian stock markets saw a fantastic rally.

My response to him was that he was better off trying his hand at gambling than stock markets.

Many of my acquaintances enter the stock markets for 'quick returns' with 'one time investments' which will not hurt them if they lose the entire amount. A quite a few enter 'penny stocks' as they can buy more for the same corpus instead of buying a stock of a blue-chip company trading at Rs. 2,000/- a share.

Here are the few 'life experiences' of people who have 'gambled away' their money on the stock markets.
- "Buy many a penny".
If I buy 1,00,000 stocks each worth Re. 1, and if the stock increases by another Re. 1 (for a stock to move by Re. 1 is very easy afterall), then I can safely exit my investment.

- "I have not lost till I have exited at a loss"
My stock selection or the stock markets have caused my stock portfolio to fall by 75% in value. I will will not sell as what is left does not hurt me for holding the stock for another 10 years for it to come back to my cost price

- "I bought because I was told to buy"
My friend / broker / relative told me to buy a given stock and its the new 'hot pick' on Dalal Street and everyone of Business Channels have great expectations about the company.

- "I have not sold because I was not told when to sell"
I was making Rs. 1,000/- profit on the stock in a single week but I wanted to go up further. Now its 50% of my cost.

- "You handle my portfolio but give me assured returns"
I have invested in a Portfolio Management Scheme (PMS) of a large broking house and the 'capital is protected' and it will be give me returns in line with the benchmark (e.g. Nifty).

Does any of these stories sound familiar? More in my next part.

Inflation - Part 3 of 3

2011-10-31T00:13:00.000+05:30

Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well-known measure of Inflation is the CPI which measures consumer prices.

The Consumer Price Index is a measure prices of a list of goods and services purchased by a 'consumer'. The inflation rate is the percentage rate of change of a price index over time (typically 1 year). The list of items which are part of CPI are
• Food (this group has 8 sub items)
• Non Food like Pan, Supari, Tobacco and Intoxicants
• Fuel & Light
• Housing
• Clothing
• Miscellaneous

Due to excessive money in the system (‘Quantitative Easing’ in US, the printing of free money in US and EU) costs of basic items of consumption have increased. Also, due to the economic growth of India, levels of affordability of Indian consumers has also increased (look at the crowd at Indian malls!!!). Today more and more Indians are willing to spend higher as compared to few years ago on consumption items which are both a necessity and luxury.

The ‘young, working population’ of our country (now seen as the biggest asset of India) spends more than it saves. ‘Saving’ for a rainy day was more a habit of my parents’ generation.

Today the motto is ‘Have Money, Will Spend’. So RBI can continue to increase interest rates but if people refuse to save more than they spend, inflation is not going to come down.

PS: Inflation will ease post January 2012 because of the base effect. That’s what all policy makers in India are hoping for (fingers crossed).

Inflation - Part 2 of 3

2011-10-21T17:06:00.001+05:30

Inflation reduces the purchasing power.

To control, inflation the RBI (Central Banks) increases interest rates. But how does increasing interest rates help reduce inflation.

Here’s how it works:
One pays interest on loans taken and receives interest on deposits made. To allow lending and borrowing, banks also borrow from / deposit with RBI.

By increasing interest rate, RBI achieves the following:
• Banks need money to lend so they borrow from RBI; if borrowing rate increases, they have to increase lending rates
• Loans become expensive and lesser people take loans
• Deposit rates become attractive so people save more and spend less
• Lesser ‘free money’ in the system
• Cost of items reduces as demand for the item falls (assuming supply is constant)

High inflation in India is not an exception though due to some India specific issues (supply side issues in agriculture) inflation is higher than other emerging countries.

Main reason for the inflation has been high globally is due to the loose monetary measures (keeping interest rates low and QE 1 & QE 2) by countries like US and the EU.

Next part: How’s inflation measured and why is not reducing even after interest rates have been increased by RBI many a times in the last 2 years.

Inflation - Part 1 of 3

2011-10-18T01:05:00.000+05:30

With so much of talk about inflation and RBI’s monetary policy, so here’s the low down and again in a multi-part series.

We all know that inflation makes things more expensive, reduces purchasing power, gives enough headaches to governments all around (including being the cause for governments to fall), etc.

Inflation in simplest terms is got to do with ‘supply of money’. It is more money chasing limited items; it’s about people spending more than they are saving.

Here’s an example:
There are 3 friends (Alpha, Beta, Gamma), of different socio-economic backgrounds.
All of them make purchases needed for living (all these items are finite and limited in quantity and are impacted by economies of demand-supply) – fruits, vegetables, fuel, etc.

Let’s take petrol as the item they would like to buy. All 3 friends, by virtue their socio-economic backgrounds will be willing to pay different amounts for the same item.
Alpha has Rs. 3,000/-, Beta has Rs. 5,000/- and Gamma has Rs. 10,000/- of ‘money power’ they are willing to spend. Since the supply of petrol is limited, Gamma has the maximum power of ‘affordability’. The other 2 guys will possibly chose to use public transport :-).

The sheer power of ‘affordability’ makes items expensive for many people.

And why will petrol be an ‘unreasonable’ price in the first place? Remember, a producer of an item (in this case Organization of Petroleum Exporting Countries aka OPEC) will always want to sell at the maximum possible value as long as there are consumers to pay for it.

Risks and the Stock Markets - Part 7 of 7

2011-10-16T01:04:00.000+05:30

As I come to the end of this series, my last food for thought – If one can survive with the risk of driving a car, one can very well survive the stock markets.

• Investing in the stock market / stock is very much like buying a car
o Identify your budget
o Do your research before you buy the stock
o Compare it with its peers
o Read reviews of the stock
o Look at historic performance of the stock
o Set your return targets of the stock and time period

• Investing in the stock market / stock is very much like driving your car
o Know your limits of the return on investment from your stock
o Don’t be ‘hands-off’ your portfolio
o One will not get good portfolio managers (just like you’ll not get good drivers)
o Be wary of what others are doing in the market not necessarily follow the herd
o Be cautious of the big vehicles (FIIs) who are also invested in your stock
o Maintain the course and speed; overspeeding (taking too many risks) is sign of desperation
o Bigger the car, higher is the confidence while driving (not applicable to auto drivers)

• Investing in the stock market / stock is very much like maintaining your car
o Review your stock’s performance regularly
o Check your portfolio with a financial advisor (not necessarily me :-)!)
o Sell your stock (just the way you would sell your car) when it reaches its end of fair value

Global Events, Global Markets, Global Euphoria!!

2011-10-16T00:56:00.001+05:30

Last time I wrote the below article (barely a month ago!!), it looked like the financial markets were preparing for the worst melt-down in the Financial Markets.

As on Friday, stock markets have given fantastic returns over the 3 week period since September 22, 2011.

Brazil and Indian stock markets have returned 7.2% and 5.2% respectively in the last one week alone.

As in my previous article, even today no one has the ‘probable solution’. So why the elation in asset classes?
Case in point is though EU has cleared a Euro 400 Billion Fund, the total debt in the EU is 6,500 Billion. The EFSF is 6.15% of the total debt of the EU.

The important point to note is that stock markets have very short term memory. No news lasts forever. So don’t try to time to ‘bottom fish’ for good stocks.

Risks and the Stock Markets - Part 6 of 7

2011-10-13T00:23:00.004+05:30

Here are the strategies for the various options you identify yourself with:
• Max profit of Rs. 10/- and max loss of Rs. 10/-
o Invest in an index linked mutual fund or an index ETF which gives you 10% returns and inflation reduces your value by 10%
o Net effect money’s value has neither increased nor reduced
o Disadvantage – you’ll never be able to keep pace with the loss in value of money

• Max profit of Rs. 20/- and max loss of Rs. 10/-
o Equity mutual funds (over 3 – 5 year periods) will give a return of 20% pa and inflation will reduce your money value by 10% pa
o This is a FAR BETTER option than PPF, FDs and endowment or money back insurance policies

• Max profit of Rs. 50/- and max loss of Rs. 50/-
o Large market cap stocks which are less impacted by macro and micro economic factors (E.g. FMCG stocks like ITC, HUL – we’ll not stop using toothpaste even if the dollar crashes, petrol becomes unaffordable )
o One needs to have some investment in these companies

• Max profit of Rs. 100/- and max loss of Rs. 100/-
o Penny stock, small market cap stocks (they rise, crash and most of the times vanish!!)
o Don’t get into these stocks
o People with very HIGH risk appetite should try

• Max profit of Rs. 200/- and max loss of Rs. 100/-
o Multi baggers like Hero Honda, Infosys and AirTel [I bought AirTel in 2002 @ Rs. 16, today the price is Rs. 744/- (price adjusted for stock split)]
o Current market provides many a opportunities of companies which will be “Blue Chip’ firms of tomorrow.

The next important rule is to split your Rs. 100 / Rs. 1,00,000/- in a mix and match of the above options. This is called portfolio diversification.

All options linked to the market should be looked as investments for atleast a 3+ year horizon.

Risks and the Stock Markets - Part 5 of 7

2011-10-04T00:09:00.002+05:30

Continuing from my previous part of the current series.

Now, if one invested Rs. 1,00,000/- and there was an opportunity to generate a profit or loss scenario as below, which one would you chose:
o Option A - Max profit of Rs. 10,000/- and max loss of Rs. 10,000/-
o Option B - Max profit of Rs. 20,000/- and max loss of Rs. 10,000/-
o Option C - Max profit of Rs. 50,000/- and max loss of Rs. 50,000/-
o Option D - Max profit of Rs. 1,00,000/- and max loss of Rs. 1,00,000/-
o Option E - Max profit of Rs. 2,00,000/- and max loss of Rs. 1,00,000/-

How many of you would change your choices compared to the previous illustration?

The question to all who changed their choices – the percentage gain or percentage loss was the same in both the illustrations, then why have different choices?

The reason for the change in choice is called ‘behavioral accounting’. For most of us, Rs. 100/- is an amount we are fine to run a risk of 100% loss. If one can get over this problem of mental accounting and based on your risk profile, you CAN INVEST in options linked to the stock market.

Risks and the Stock Markets - Part 4 of 7

2011-10-01T18:57:00.003+05:30

Over the last 3 parts, I have touched upon the following:
• Perception of ‘Risk’ as the measure of ‘gain’
• Money can never be completely safe – its ‘purchasing power’ diminishes
• Zero ‘Risk’ is Zero ‘Gain’
• Governments don’t have the mandate to keep your money ‘safe’ and keep it ‘growing’
• Saving is not investing

Let’s now identify the degree of risk aversion one is comfortable with:
If one had Rs. 100/- and there was an opportunity to generate a profit or loss scenario as below, which one would you chose:
o Option A - Max profit of Rs. 10/- and max loss of Rs. 10/-
o Option B - Max profit of Rs. 20/- and max loss of Rs. 10/-
o Option C - Max profit of Rs. 50/- and max loss of Rs. 50/-
o Option D - Max profit of Rs. 100/- and max loss of Rs. 100/-
o Option E - Max profit of Rs. 200/- and max loss of Rs. 100/-

In the above illustration, inflation is considered as money value destroyer. Hence, profit and loss scenario can occur at the same time.

Global Events, Global Markets, Global Turmoil

2011-09-23T00:25:00.006+05:30

Events like The World Wars, Great Depression, Lehmann Crisis, get etched in our minds by the sheer uniqueness or the magnitude of their occurrence.

Also, by virtue of the huge advances made in technology over the years, information (rumours, lies and truths) get disseminated ever so quickly.

Fortunately or unfortunately, in this ever increasingly connected world, making decisions for our investments becomes much more harder.

Today, among many other events, the global markets crashed. Over the last few months, every government, central banks, financial markets, commodity markets are clueless about the real problem, a probable solution, effectiveness of the solution and time period within which the solution will take effect.

Some countries are fighting high inflation, others are focusing on improving growth of their economies, some others fixing their debt crisis and a few are recovering from natural calamities . Since, all countries are not facing similar issues (pretty much expected at any given time), ‘One Size Fits All’ solution does not work.

Surprisingly, despite the varied issues countries are facing today, at the time of writing, stock markets across the world have fallen anywhere between 2% and 6%. Currencies have fallen between 2% to 7% against the dollar. Crude oil has fallen 3% to 5%, gold has fallen by 4%, silver by 10% ALL IN A SINGLE DAY.

Few of the key reasons for the current chaos (and at all other times :-)) and the root for the ‘negative perception of risk’

• Fear

• ‘Following the Herd’

• Greed

• Knowledge is power, ignorance is bliss – little of both is a recipe for disaster

If we can control the above reasons and ‘react’ better with our behaviour, global events will become less unique and smaller in magnitude.

Risks and the Stock Markets - Part 3 of 7

2011-09-16T23:50:00.005+05:30

In the last part, my closing view was that money under our pillows / beds / piggy banks were the safest places :-).

Arguments I have received in response to the above are:

• Money under pillows (and other options) is not ‘investing’ as money does not grow and it still has the risk of being robbed.

• Money in a bank (savings, FD, et. al) is ‘invested’ as money does grow and the risk of the bank going bust is minimal.

We all know that ‘risk-reward ratio’ implies a higher risk is an opportunity for higher gain (and also loss :-)).

And hence, the rationale for the views from people is driven by:

• One would rather keep the money in a bank than under a pillow as the ‘risk’ (the chance of loss to burglars, IT Department) for the latter is higher.

• Banks rarely go bust

• Keep your risks as low as possible as long as the principal is safe

Here’s a fact – there have been atleast 6 banks in the last decade which have been forced by RBI to be merged or acquired by larger Indian banks as the banks went bust or were on the verge of it (E.g. Global Trust Bank was force merged into Oriental Bank of Commerce).

Indians, by virtue of our social training, have a ‘saving’ mentality and are focused on preservation of capital even at the expense of being in a low return (low risk) investment. Unfortunately, rarely do we realize that other important macro-economic factors (inflation, government administered interest rates, etc.) are reducing the purchasing power of our savings.

The incentive for investing is not the safety of the capital (though people do not realize this fact). The BIGGEST DRIVER for people to ‘invest’ money under pillows, FDs, PPFs, NSCs, (all the safe investments) is because the fluctuations of expected return is the least in all these forms. In any or all these investment forms, we know the final return for the tenure the capital is invested. This is not true for any investment form linked to the stock market.

If an FD gives you a 10% pa return on your capital, and if a stock can give you 3% return in a quarter (approx. 12% pa) then given a choice, where will you invest your money?

Food for Thought: If we know what return we want / are expecting from an investment class / form for a given tenure, then why not use the same tenet in the stock market.

Risks and the Stock Markets - Part 2 of 7

2011-09-09T02:16:00.005+05:30

I’ll like to keep emphasizing through these series that one needs to look at ‘risk’ as the measure of gain / opportunity.

We all by training are conditioned to risk in almost everything we do which also includes our views about investing.

To invest (especially money) by definition is always about a profitable return. If you notice, ‘investing’ has no risk!!

Essentially, the problem lies not with investing but with the latter part of the definition, ‘profitable return’. This brings the concept of the risk-reward ratio.

From childhood, we are trained to save. The simplest form of saving was not to spend the money but to keep it aside in a ‘piggy bank’. Our parents saved in a slightly organized manner – they saved in PPFs, FDs, Savings Accounts, NSCs, etc. Fortunately, all these gave very ‘profitable returns’ and since most or all these instruments were backed by the government, there were ‘safe’.

But in our childhood did we realize that the money in our ‘piggy banks’ grew only if we saved more? By saving we only postponed our impulse to spend.

If I told you that the ‘Deposit Insurance & Credit Guarantee Corporation’ (a wholly owned subsidiary of RBI set-up in 1962) guarantees ONLY Rs. 1 lac regardless of the number of accounts (or type of accounts) held by a person in same capacity and the same right.

Essentially, if you held a savings account and / or current account and / or fixed deposit with one / more branches of the same bank, AND if the bank went bust, the MAXIMUM amount RBI will compensate will be Rs. 1 lac or the sum total of your money in all accounts whichever is LESSER.

With the above new input, is money in the Bank really safe? Is the return risk-free? Shouldn’t we just keep money under our pillows / beds (like the big politicians do) or just keep it in a PIGGY BANK!!

References –

www.dicgc.org.in

www.dictionary.com

Risks and the Stock Markets - Part 1 of 7

2011-09-07T13:20:00.007+05:30

My next multi-part series deals with ‘Risks and the Stock Markets – Part 1 of 5’ (not sure how many parts it will be :-)).

Every now and then I get a new prospect for my portfolio management services (through a reference) and the varied responses I get to my question ‘Why do you want to invest in stock market and it’s varied derived forms?’ are:

• I have burnt my money; want to recover some of it

• Get better returns than a fixed deposit / recurring deposit / savings deposit

• I have no other place to invest

• Other people have made money

• Am not sure what to buy

• No time to track what I have bought

One of the most important aspects of investing which people disregard is the concept of risk and the associated perception of risk.

Risk by definition is the ‘exposure to chance of injury or loss’. Humans attach various perspectives to risk and decide the quantum of risk one is willing to undertake. Unfortunately, the definition of risk also has a bias – it tends to be negative in thought.

When I was working with TCS and had to travel quite often by flight, my father used to be extremely nervous. Reason – if I could reduce the frequency of my flights, I reduce the risk of being hijacked / being in an air crash, etc. Many of you will cite the fact that air travel is the safest mode of transport but still for a parent the perecption of the risk is very different from my perception.

Similary, for every situation, the appetite for risk and the amount of loss which one is willing to suffer varies from our own social upbringing, our sense of security (job, personal, emotional, etc.) and mental accounting of the quantum of loss we are willing to take.

Food for thought – how difficult will it be for you to accept risk as a measure of gain / an opportunity; positive thinking :-)!!

Investment in Gold - Part 4 of 4

2011-09-07T02:13:00.001+05:30

This is the last of the 4 part series about ‘Investment in Gold’

e-Gold

• One of the most interesting investment cum consumption method of investing in Gold and picks the best aspects of all the previous investment methods

• Buy gold in minimum units of 1 (no fractional ownership) at prevailing market price - [similar to Gold ETF]

• Demat account to hold e-Gold is different from the one use for Gold ETFs / stocks – [no hassles of holding gold in lockers]

• Gold is of 995 grade (the highest grade in gold) – [purity is guaranteed]

• Brokerage is lower or equal to the brokerage as in gold ETFs – [overall transaction costs are lower]

• Your gold is held in a warehouse managed by the National Spot Exchange (view it as the gold in a very large locker) but you hold it in demat form - [safety, from a perspective of storage, as good as Gold ETFs]

• You can either sell gold and book profits (like you sell stocks / Gold Mutual Funds / Gold ETFs) or take delivery of the gold in the form of coins or bars by paying applicable state VAT and handling charges - [ease of selling]

• Trading window is 10:00 am to 11:30 pm - [unlike Gold ETFs or Gold Mutual Funds]

• Flexibility of buying any amount of gold without the hassles of getting a locker

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares.

• Not all brokers who deal with equity are brokers in e-Gold

Gold Futures

• Started in India in 2004; comes under the category of commodity trading

• The most rewarding AND riskiest of all investment methods in gold

• Works like stock futures

• You trade (buy / sell) large amount (multiples of lot size) of gold in a single transaction

• Minimum lot size for a gold future contract is 1 kg

• Not all brokers who deal with equity are brokers in Gold futures

Risk Reward Ratio (in decreasing risk and return)

Gold Futures > e-Gold > Gold ETFs > Gold Mutual Funds

Please note, I do not consider gold under the consumption category for the risk-reward ratio.

Investment in Gold - Part 3 of 4

2011-09-06T00:09:00.002+05:30

Gold Exchange Traded Funds (ETFs)

• Exchange Traded Funds are investments made by an asset management company to manage Gold as the underlying asset. They invest in physical gold.

• You buy Gold ETFs in units of 1 (no fractional units) through a broker as ETFs are traded like stocks and shares on stock exchanges.

• Price of 1 unit (approx. 1 gm) of gold ETF keeps changing similar to the price changes in a stock on a given trading day; except the price also moves in tandem to world gold prices. [Prices of a given stock changes based on the perception of the value (this in turn has its own set of variables) of the company, dynamics of demand and supply shares in the market].

• You need to pay a brokerage charge when you buy / sell the gold ETF.

• One needs a demat account (demat account for gold ETF is the same as that for shares)

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares.

• As the Gold ETF is management by an AMC, there's an additional expense of 1% pa.

• Physical gold is bought by the AMC and managed by authorized participants on behalf of the AMC.

• Gold ETFs were launched in India in 2007

• Well known Gold ETFs - BeES Gold ETF, UTI Gold ETF, Kotak Gold ETF

• Automatic SIP (Systematic Investment Plan) is not possible in Gold ETFs

Gold Mutual Funds

• The investment company (AMC) invests in either companies involved with the mining, refining, trading of gold or invests in Gold ETFs (Fund-of-Funds).

• AIG World Gold Fund and DSP BR World Gold Fund invests in companies which mine, refine gold ore

• Gold ‘Fund-of-Funds’ trend was started by Reliance in 2011 followed by Kotak Gold Savings Fund. Reliance Gold Savings mutual fund is a fund which invests money in Reliance Gold ETF. SBI's latest Gold mutual fund is again a Fund of Funds which invests in SBI’s Gold ETF.

• Any mutual fund which invests in another mutual fund gives a lower return and has higher costs.

• Reliance Gold ETF will give higher returns than Reliance Gold Mutual fund.

• No need for demat account to buy gold mutual funds

• For every amount you invest, you get units of the gold fund. Fractional units are possible when you invest through gold mutual funds

• Entry load / exit load and expense load (1.3%+ pa) as in any mutual fund is applicable

• Tax treatment on the profits made by buying and selling of ETFs in NOT AS tax treatment of profits on stocks / shares

• Automatic SIP (Systematic Investment Plan) is possible in Gold mutual funds

Investment in Gold - Part 2 of 4

2011-09-02T23:33:00.009+05:30

Here’s Part 2 of 3 of the series 'Investment in Gold'.

Gold As Consumption

Bars & Coins:

• Typically in standard weights of 1 gm, 5 gm etc.

• Available from Banks, Jewelers, Gold Marts

• Purity is 24 carats or 22 carats

• Price is subjective to the prevalent rate of the day in the World Market indicated in dollars per troy ounce for 24 carat gold.

• Additional charges include die charges for marking and certification of purity

• 1 Troy Ounce is 31.1 gms

• Price of Gold in India for Gold is calculated by

o Value of USD in INR per Troy Ounce

o Convert the rate from previous point to get rate per gram for 24 carat gold

• Don't buy bars / coins from Banks as they charge a higher premium

• Don't buy 24 carat gold bars / coins. Jewelers prefer to buy back 22 carat gold

• Purity of gold only guaranteed by banks for coins / bars sold by them

• BIS standards exist; all purchases from a jeweler are based on trust / reputation of the jeweler

Jewelry:

• No standard weight for jewelry bought

• Costs include making charges, wastage charges and state VAT.

• Indians typically choose to buy 22 carat jewelry

• More complex the design, higher the wastage and making charges which increases your cost of acquisition

• Though BIS standards exist, all purchases from a jeweler are based on trust / reputation of the jeweler

Additional cost of keeping the above forms of gold in bank lockers. Gold sitting in lockers does not generate any intrinsic value (until price of gold increases).

In many a movies (and in real life), selling of the 'household' gold is the last resort to encash the value of gold.

In India, culturally, Gold is an asset handed over from a generation to another (mother to daughter, mother-in-law to daughter-in-law, etc). Gold is also part of tradition / custom of many castes / religions in India.

Gold is an asset which is traditionally a way of giving a girl's share in the family property.

Now NBFCs (Non Banking Financial Corporations) like Muthoot and Mannapuram offer loans against gold.

• Here the price of the gold is taken as the average of gold price over the last 90 days.

• Purity and total weight of gold are key factors to arrive at the amount of loan you can get.

• Loan sanctioned is 70% of the total value arrived based on the above 2 points

• Interest on this type of loan is between 14 – 16 % per annum