What Your Dad forgot to tell you about Money and Stock Market

MONEY

2008-02-04T17:08:00.000-08:00

Money is one of the most controversial and yet the most important concept of our human existence .Yet your parents will never give you a lesson on this extraordinary concept. And I bet you must have heard everything on the religious issues, gods and mythical stories that are yet to proved. Most of the parents don’t know a dime about it and rest think it is the root of all evil, so they don’t discuss it. Unfortunately I was one of them. But fortunately I was inquisitive enough to find out myself most about it. I am writing this because of the basic misunderstanding among people, even people with extraordinary intelligence. This makes me sad. So let’s clarify few notions, which many know and those who don’t know will have an enlightening experience.
What exactly is money? Money is just a means to exchange goods and services. Goods and services that you can use in your daily life. What is the value of money? It is its capacity to buy goods and not how much you have. By money we refer to paper currency also called fiat currency but they are not the same thing, I will tell you about that later. Fiat is a legal binding command. The value of the currency is not a magic and certainly not arbitrary. Its value is legal binding command behind it. If the legal command behind it is weak and incompetent then the currency will be weak because a paper currency has no intrinsic value unlike gold. Legal command forces more and more people to use it thus giving it a status of an instrument of exchange. That is its value.
Let’s suppose you are shipwrecked at an island with two friends. Now one friend has 50 breads, you have a million rupees and the third person has lighter. Who is the worst-off? You will be worst off since they can just start exchanging goods with each other. Why they need your money, they can light a fire out of wooden logs rather than from your paper currency. So what I am trying to say is never just go on the amount of money someone has. But how much goods that amount can buy. This is a simple concept but this concept lies at the heart of inflation, foreign exchanges, investments etc. Many people just don’t understand why some countries have 1, 00,000 unit currency notes and some have only 100. It is just because overtime higher unit currency went through the shipwreck type conditions more than the other currency. Thus value of currency dropped and they have to increase the denominations of currency as it is awkward to give 100 hundred unit notes to buy bread. This is called inflation in modern terms. Inflation is just a process where too much currency is chasing few goods. That is the growth of currency is higher than the growth of the production of goods. This is what happened at the island (of course that is an extreme condition and something which we call hyperinflation, where the faith over currency just vanishes). Limited goods and increasing money supply. What happens to the value of the money? It takes a dip. That is Inflation for you.
Don’t think this is simple. This is just the start. When I was in my fourth year I was shocked to learn that one intelligent friend of mine mocked me. Why because I said that money is created and not produced, currency is produced. Yeah I know many people would have mocked me over this but hey am I writing. Since he was intelligent, he quickly understood my logic. Why this is so important? Creation or production. Production is manufacturing. You take input (paper and ink) and through machines produce the output (currency). That is manufacturing. Right. That is what we call printing money. Now I think it is simpler. Of course money is not printed. Confused? Bring back the shipwreck condition. If you had a money printing machine there, could you say that you are producing money? No, you are not producing money even if you are literally producing it. That’s what I am saying. So now what is the analogy of creation of money? Let’s assume that you have 1 million rupees with you at the island but your friends are not accepting it. So you don’t have money even if you have 1 million rupees. Right. So what if you start climbing the trees and bring coconuts. When their breads will run out you will propose an idea. To divide the 1 million rupees among one another equally. They are anyways useless. And start using it as instrument of exchange. So if they have to buy coconut they will have to give him rupees and take rupees to allow him to buy fire and whatever the other man has to offer. So they will think that they are getting 333 thousand rupees that can buy free coconuts without breaking a sweat. So they agree. Now what happened? You price your one Coconut as 1 lakh rupees and he priced his fire something. Suddenly you have money that can buy you fire. Did you produce money or created money? Creation is an act of bringing something into existence. Yes you just brought money into existence yet you never printed or produce money itself . How? By working hard, climbing trees and bringing the coconut and then using your brains to convert your useless 1 million rupees into money, an instrument of exchange. So what is money, is it the 1 million rupees or your hard work and your intelligence? Of course the latter. Phew! I think if you had any confusion, it is gone. So now you are poised to assimilate better and more complex issues relating money.

To be continued.....MONEY 2

Calvin & Hobbes : Best of Feb 1986.

2008-01-21T14:26:00.000-08:00

This month was smoking hot. I think waterson was at his peak. I tried to pick five and ended up picking 10 and i was thinking of adding more to this but decided otherwise. I am sure you will enjoy. But i liked "what's this, just water" one quite a lot. :D. No i am not that kind.

Calvin and Hobbes: Best of Jan 1986

2008-01-13T18:29:00.000-08:00

This was a tough month to take out Top 5.

Few of them were good because of the continuation. So i thought i can extend my list a little bit. I also clubbed all of them in one Jpeg file. So that readers won't have to click on each one to see them. But if anyone wants the previous format then they can leave a message in the comment section. I will try to see what i can do. As I said before I can't Zero down on the best strip in this month. If you have one then you can tell me.

Fundamental analysis 102

2008-01-13T17:05:00.000-08:00

My every Blog is so heavy that I feel the readers will just run away. So i thought if I post a financial post then I should also post something of pure fun. I like a lot of things and I always research on those so that won't be a problem.
Now we start were we left the fundamental analysis 101. PE ratio as you remember. What is great about this number that comes in so handy? Let’s answer this question. As you can see Price of share divided by earnings is just a way of telling yourself how much time in years it is going to take for the company to earn as much money as its share price is valued right now, with no growth whatsoever. Say IBM has PE of 10. Then it will take 10 years with no growth to create money/earn net profits equivalent to the price at which it is quoted right now. What is the price quoted is same as what you see in the stock market. Since both the numbers in the PE ratios are also multiplied by number of shares of that company so there is a fundamental way of saying the same thing i.e. (Price of a share* No. of shares)/Net profit of the comapny. Price of a share* No. of shares is what we call market Capitalization. PE is nothing but Market capitalization divided by net profit. Remember in long term the "investors" determine the value and price of a share and not the normal people like us. And every good investor looks at the PE of a company as the first thing. It is just like if I ask you to invest in my cookie shop then your first question will be/should be is how much time will it take to get your money back and after you get it, how much profit you will be entitled to. Precisely what PE ratio tells you about a stock. Now an intelligent person reading my Blog will point out what about a company with growth. Growth makes PE harder to imagine and the calculations become cumbersome. Of course you are not going to calculate a Geometric progression and some other things for every other stock. So here is one of the most important trick you can receive from someone. I received it from none other than the great Peter Lynch. I read it in his book of course. Whatever the PE of the company is, that’s what people pricing it thinks will be the growth of that company in next 11 to 15 years. So if PE is 10 then Market as one entity is assuming that the company will grow at 10% for the next 11 – 15 years. Why a range because I don’t know the inflation of your country. 12 years for no inflation to low inflation (1% types) and 15 for moderate inflation countries (6%). Don’t worry about the exact value because you can’t predict the exact future growth, only thing you can predict consistently is a range and bigger it is the greater is the consistency but lesser its practical value. A paradox, I love paradox. So the part highlighted in BOLD, just remember it by heart. It is not an advice but a statement. If you know mathematics then try it out and you will arrive at the same conclusion. I tried it out after reading Peter Lynch and came to the same conclusion. If you don’t know math then just take it on faith, that’s all I can say. At least better than an astrologer I think. It is very powerful way to gauge the overpriced and under priced stocks. Trust me.
I hear this so many times from people around me that I thought that this is not a trivial question as I used to think. Many times I hear “hey that stock is selling at around 100 Rs and the other stock is selling at 1000, so the stock priced 100 has to be cheaper”. I hear this from normal people who are buying stocks and selling it. And when these people lose money, they blame it on the stock market. I feel so sorry about them. Little knowledge about something is dangerous but no knowledge about something can be disastrous. So let’s clear few things out.
As I said PE ratio is Price of a share divided by the earnings per share/Net Profit per share. So Lets see an example. Company A has a net profit of 10 million and company B also has a net profit of 10 million. They both are in the same industry and are almost same to the customers. Call them pair companies. (Actually there are quite a few of them in real world and there is one good strategy discovered by people of Morgan Stanley few decades back that can still be profitable. Technically it is called pair trading. Like Ford and GM, Infosys and TCS etc.) Company A has 1 million shares in the market and the Company B has 100 thousand shares in the market. Always remember that number of shares is arbitrary number and has no significance in determining the value of the company. It can be anything that common sense permits. Company A’s share is selling at 100 Rs/share and Company B’s share is selling at 1000 Rs/share. Profit per share for company A is (10 million) / (1 million), that is 10 Rs per share. Similarly for company B it is 100 Rs per share. We technically call this as EPS (earnings per share and is same as Net profit per share). So what is the PE of the stock? Company A’s PE is 10 and company B also has a PE 10. If both have the same PE and same growth rate in same industry then how come one is under priced and other over priced. It can’t be and is not. Both are priced same, that is Company A’s share price of 100 is same as Company B’s share price of 1000. Under priced and over priced in stock market has different rules and has nothing to do with what your pocket feels about it. If that would have been the case then Berkshire Hathaway(Warren Buffet’s company) would be the most overpriced share and all the penny stocks selling for few cents will be the most under priced. The truth is exactly opposite and that’s why people lose money most of the time. I hope it is understood by now. Just remember the statement highlighted because it will be used quite often. Infact you can forget everything in this post and just remember that nice statement higlighted in Bold.

If you have any problems then just leave a comment and I will try to explain your query.

Calvin and Hobbes: Best of Nov 1985

2008-01-10T12:52:00.000-08:00

Remember in this Hobbes is same as Calvin, thats why he was not able to give the right answer as Calvin didn't know it, apart from the fact that this is funny. :D.

I wanted to jot down top 25 strips of calvin and hobbes, all time. But i realised it is extremely difficult and it won't be universal. When i choose a strip over the other and come back and read it, i feel no the other one is better. It is just futile to say that there are all time 25 strips of Calvin and hobbes because there so many of them that are so good that you can't differentiate it.The ranking changes every time you read it. It is paradoxical.How you differentiate between the best of the best. You can't, it becomes subjective. So I thought i should first take out the best ones from every month of its publication and then maybe i will be able to sort out a list out of it, if that is ever possible. :D.

Sportsperson or Entertainer?

2008-01-08T18:55:00.000-08:00

Why a sportsperson becomes great? Is it just because he is very good at a sport or is it something else? Why is it that sportspersons earn more than most of our top notch executives? What is it that they are creating that’s worth millions of dollars?
A sportsperson is not just a player playing his sport to win but he is also an entertainer playing to entertain his crowd. Their job is to create entertainment and not to just play and win. That’s what they are worth. So when Ronaldo does a scissors trick, he is not just faking the player in front but he is creating entertainment. When Air Jordon dunked from the two- pointer line, it was not the addition of 2 point on scoreboard that made him great but it was the screaming crowd that made him great. In those mere 2 points he instantly created entertainment worth millions of dollars. A sportsperson doesn’t become great until and unless he doesn’t win the crowd’s, fan and critics alike, heart. This is the reason why some sportsperson become more famous than others because that sportsperson wins the heart of the crowd. So when you watch a soccer player running towards the corner line after scoring a goal, you know that it is not the joy but it is a tribute to all the people in stadium and the people in the stadium understands it. That’s why soccer has more fans than any other sports in the whole world. No sport can prosper without giving people what they want: Entertainment. That’s what dying sports like field hockey should aim to provide and not to change some rules here and there because it’s not just the rules but the players that makes or breaks a sport.
A player’s greatness is not made by the great statistics he has amassed in his lifetime but it is made by the great moments in the people’s minds that are imprinted forever. So when someone says Jordan, it’s not the statistics that comes to my mind but it is the last shot (famously known as “The Shot” taken when 3 seconds was left and 2 people were guarding him) in the 1989 playoffs that comes to my mind. And that’s why he is great and not because he averaged 33.4 points per game. This is something every sportsman should strive for and die for.

THE SHOT Video

Calvin Hobbes : Best of Dec 1985.

2008-01-08T12:18:00.000-08:00

I am a big fan of Calvin and Hobbes. So if i am writing a blog then C & H should come into it. Anyways all technical details about the stock market was getting a little boring. So i thought i should mix some fun stuff also. If some one doesnot know about Calvin and Hobbes then here are few calrifications, which if you keep in your mind then you will enjoy the this strip all the more. Calvin is a pretty sarcastic kid who is infact quite sadistic, extremely creative, greedy and philosophical. Well, hobbes is his split personality which is more content, mentally stable, less mischievious but always helps his other personality. Bill Waterson came up with a amazing solution to depict the split personality of Calvin through the way Calvin most of the time see i.e. with Hobbes alive and talking to him and as his best friend. But Calvin doesnot have any idea of non-existence of Hobbes and yet you will see many shots of Hobbes as just a stuff toy. This is often to explain the audience what it will look to the normal people in the Calvin world and the alive Hobbes is what it looks to Calvin. That is the reason for all his unique personality. Remember, just don't read the sarcasm,pun, and fun dialogues but try to see the way the shots are presented. Most of the time you will realise the deeper meaning behind sudden switch between shots containg his monsters and real world people. Also remember when Calvin is talking to Hobbes then actually he is talking to himself i.e. he is only refuting and agreeing his own agreements. Like in one strip Calvin is abusing Susie, a new girl in his class and at the same time Hobbes is saying she is cute and asking him, does he like her.Remember these points and then read. You will enjoy more.

I am pretty sure that everyone will agree with me that never in the history of comic strips has been a work that was created as rich, deep, funny, philosophical and graphically pleasing as Calvin and Hobbes. Bill Waterson is awesome.

Ofcourse Calvin and Hobbes is copyrighted to Bill Waterson and I am here just to promote this Strip, nothing more. Hope you all are going to enjoy.

Fundamental analysis 101

2008-01-06T07:41:00.000-08:00

You must be wondering why i am writing so many posts about money?You must also have noticed that my posts are jumbled up. I have done that on purpose. It may not be perfect but i always try to introduce a concept when it is relevent. Like i can't tell you the similarity between magic poker and stock market without telling you that money is created out of nothing in stock market just like in the magic poker. So before I wanted to start about stock market i wanted to divide companies into categories so that i can discuss their profitablity and future prospects. Those categories are given in the Money 5. Later we will slowly build on those categories and learn what we can as investors and enterpreneurs. But that will be later, first we will talk about valuing a company with an example. Something that is at the very heart of fundamental analysis.

Fundamental Analysis is about valuing a company according to its future growth prospects and by deeply studying the balance sheet, cash flow etc.
It lies more on the concept that when you buy a share, you buy it because of the company that share represent and not because you think it will rise in the next 6 days or your broker told you to buy or your uncle told that it is a good stock. We will unravel this as we go along. Lets start with an example.

A fictional example set in say 1990s: One day a boy working at a shop observes that there is a government office on the other side of the road. Being a government office, people have to wait very long for everything. In this he spots a perfect opportunity to sell coffee to these people. Since these people are waiting, they will go for a time pass.What is a better time pass that he could offer than a cup of coffee. Easy to make. Low investment. So this boy asks his owner to lend him some money and tells him his plan. The owner gets impressed and gives him the money. The boy buys a espresso coffee machine and gets to business. He starts to charge 3 ruppes for a cup, which costs him 2.5. So he is making 0.5 Rs on every cup. Suddenly his demand picks up and in no time he finds himself selling 100 cups everday i.e. 50 rupees profit. He works for few months and returns his loan to the owner and starts to save. One day I visit this office and finds the boy's business model very appealing. Now the question is, how much should I offer to buy his business. I calculate 50 profit * 300 days = 15000 Rs/ year.Then I predict that this business is not going to last more than 5 years because government offices will get computerized by then. No one will wait then.Since I liked the kids gusto, I thought I would give him 1/3 rd more so that he won't refuse. I offer that kid 15000 * 5 = 75,000 + 25000= 1,00,000 for his business. But to my surprise the smart kid refuses the offer. (Why? lets see).

The boy has more plans about his business. He hires another boy and starts to produce 150 cups of coffee and realizes that this is the average demand at that office. Then he starts to replicate his model at other government offices every 4 month. He uses his saving which he had accumulated from before to buy another coffee machine. After say one year he has 3 coffee shops producing average 150 cups per day. Since he is hiring people so say his profit reduces to 40 paise per cup. So he is earning Rs 60 per day, with 3 shops he is earning 180 per day. So now even if his business doesnot expand( since he can go inter city with his plan) he can earn 54,000 per year(300 working days) for the next 4 years( before the computerization takes place). That is 2,16,000.Well my 1,00,000 offer pales to this figure in comparison.

You see what I missed. I missed the growth prospect of the business.In stock market the price of shares is similiar to the worth of the company. So if you are buying a share in that company then you are actually valuing that company. And so the growth of a company becomes very important. Now lets assume his comapany has 100 shares. I offered

1,00,000 for 100, i.e 1000 per share. Based on his current daily earning I had calculated 15000 profit per year. i.e. 150 Rs per share.

So now i will introdoce one of the most important terms in fundamental analysis. P/E or PE ratio. This means price is to earning ratio, i.e. Price divided by earnings. Lets calculate the PE ratio of that boy's company based on your offer. Price of share according to your offer is 1000 and earning is 150. 1000/150 is 6.66. So according to your offer the PE of the company is 6.66. If I had offered 2,00,00, i.e. 2000/share then it will be 2000/150 = 13.33. Savvy.

So if next time you see PE ratio next to a share price then you can calculate the earning per share (EPS) ,equal to profit per share, by dividing share price by PE ratio. Try this if you are new to this.

Money 5

2008-01-04T06:49:00.000-08:00

Now we will tackle the concept of creation and production. Both are neccessary to create money.It is easy to grasp, just read it carefully.
Lets start:--
Which product to produce/create that can be sold successfully and thus create money?

Read this slowly and watch for create and produce words. Only these words differentiate these various categories.

1) Produce something that people buy. What people buy: food & drinks, house, clothes? This is what Farmers, Real estate companies, Normal T-shirt Company (not Nike, they create clothes) do.

2) Create something that people buy. Example: Entertainment (Movies, Video Games, Internet stuff etc), Art, Recipes etc. Notice the difference between produce and create. Entertainment is created. Movies and video games have a story, direction, art… and do not grow on land from where it can be picked up and packaged like food grains. Coca Cola created the soft drink recipe. Nike creates styles in clothing and not just clothes.

Just ignore the “creates money for entity” in the following categories, it is there to assure you that in all these categories companies and individuals generate profits. These categories end up making one of the above products.

1) Produce to Produce: - Produce products that are involved in production of a product that “creates money for its entity”. Confusing statement? Look at the example then revisit the previous statement. Example, you can produce bottles for Coca Cola Company which in turn sells Coca Cola drink to people like us. You get profit by selling it to Coca Cola which needs bottle to market the product and thus buys it from you. Another one, produce cement, that is used to build houses, which is sold to consumers.

2) Create to produce:- Create products that will be involved in production of a product that “creates money for its entity”. Example- 3M invented sandpaper, used in polishing industry. Inventions are amalgamation of creation and production. Inventor uses his imagination to create something which didn’t exist before with things that existed. That’s creation. The patent of a product deals with the creation part(thats what this category's Create is about) and manufacturing of that product is production(thats what this category's Produce is about). So when I say Diesel engine is produced and not created whereas Diesel Engine blueprint/technology, that was patented, was created then I am right. Savvy. But remember, in this category, to create money you need to create for the purpose to produce. You can't keep a patent and create money without producing the real engine. Many important industries of previous era started under this category. Best example is Thomas Alva Edison’s General Electric.

3) Produce to Create:- Produce products that will be involved in creation of a product that “creates money for its entity”. Example: Maya software is produced (through CDs and packaged well) for sole purpose of creating animation. Thus used in special effects and animation in movies. Similarly, Pastels and water colors are produced to create Art.

4) Create to Create: - Create products that are involved in creation of a product that “creates money for its entity”. Example: Creator of Maya software created Maya for the movie animation. He must be taking royalty and sipping Pina Colada in his posh home. Maya was created and not produced like a bag of cement. You see the difference.

In this category these product saves time in producing/creating the final product which gives your profit?

5) Produce to Produce: - Produce a product which saves time (in other words produces time) in producing a product that “creates money for its entity”. Confusing? Like: a company starts to manufacture a machine that takes less time to produce same kind of T-Shirt than the previous machine.

6) Create to Produce: - Create a product which saves time (in other words produces time) while producing a product that “creates money for its entity”. Same as the above but notice produce is changed to create. Like: Create a blueprint of machine in the above example. That is what happens in patenting world.

7) Produce to Create: - Produce a product which saves time (in other words produces time) in creating a product that “creates money for its entity”.

8) Create to Create: - Create a product which saves time (in other words produces time) while creating a product that “creates money for its entity”. Now both produce & production is changed to create & creation. Example: Now this is what I am going to discuss in detail because both the companies that have changed our normal lives most exist in this category. Microsoft and Google. How? They both have products that were created. No doubt about it. Windows and Google search engine. What’s unique about them is they invariably produce time/save time in every field in which creation in involved. Example: Writer creates a masterpiece and google is there to save time. Microsoft word and Windows further saves time for them by editing their work. You want to make animation movie, try doing it without Windows and Google. You want to make games, again try doing that without Windows and google. Almost every field that wants to create something needs them. Where computers have come, Windows and Google come with them.

Go to Money 6 or Money

Money 4

2008-01-04T06:39:00.000-08:00

Till now we saw how money can be created physically and directly to be precise. By saving during a production process and by increasing the marketing of the product to establish a brand and then increase the selling price and earning profits in return. But these are minor to the fact that you still have to sell the product. And here is the real difference between all the rich people and ordinary people. How? Let’s see.
Assuming I am good at coding softwares. What if I make a software that asks you your name and then displays it across the screen and price it 50 rupees. Will you buy it? Ok I will hire a celebrity to advertise it and make a brand out of it. Will you still buy it? Well I created a product and I also created a brand .After that I will even optimize the way that software is made, bringing the production cost to almost zero. But if I am not able to sell it then I am not creating money. So the most important thing is to sell. In fact selling comes before production. From this statement I mean an entrepreneur (I am talking about entrepreneur because they create money through companies) should think that how I can sell a product before he must think that how he can produce it. This is one of the most common mistakes of entrepreneurship. Most of the times, people go for a field in which they are best or in which they have a technology that reduces the cost of production and then they find means of how to sell the product. But it should be opposite. First you must assume that you have made the product with your expertise and the best technology and on that assumption try to see as how you can sell that product. Don’t get me wrong, that doesn’t mean that you can’t go into the field in which you are good, but before that just see what you are selling and that means what other people are buying. That also means if other people are buying then explore the reason why would they buy your product.There are also few products which are needed for everyone’s survival. You can earn by producing/creating these products.Money 5 is dedicated to as how to see why someone would buy/use your product.

There is a more obscure way to create money. This many of us don’t know and don’t notice. It deals with non-physical concept of money. If you have read my Money 2 post there I mentioned that time is a non-physical incarnation of money.How? Now is the time to tell you how. We start with an example as usual. The best example is a Xerox Machine. Why do you think people buy or use Xerox and how it is different from my product that I told you about in the start? First similarity, (:D, I dared to compare these two but please stay with me) my product and Xerox don’t help people create/earn money directly. But Xerox does more than that. It saves a lot of time that otherwise will be wasted in typewriting all the documents that gets copied in secinds. Just try to think a world without Xerox machine and you will realize how Courts and Government offices will function. Their already low productivity will take further nosedive like a scuba diver. That is the value of Xerox. That’s how they sell their product and at the same time price their product more than what it takes them to produce. The difference it the created money and is the value of the Xerox technology that was created and the machine produced together. This created money is distributed to the patent holder of that machine (creator) and the company producing it (producer). More of this is there in Money 5 Blog.

If you are finding it difficult then just go through Money 2 to Money 4, consider it as one article and then you will be able to grasp the whole thing very easily.Then only go to next blog because next blog can be tough for unprepared. Thank you.

Go to Money 5 or Money 3

Recommended books

2008-01-02T02:20:00.001-08:00

These are the really good ones and I have read few not so good ones also, which said things like moon cycle and why nine months is used to predict the stock market because it takes nine months for most of us to be born. Well I am a rational being and I don’t believe in something that has astrology, planetary positions and strange logics. You should also be rational.

Rich Dad Poor Dad: It won’t tell you how to earn money but it will certainly inspire you into earning a lot. It will first clear all the misconceptions that we have about jobs and money management in general.

Rich Dad Poor Dad- Cash flow Quadrant: This you can skip but it is a good read and tells you about businesses in general and all kind of Kiyosaki’s trademark stuff like Cash flow Quadrant and all.

Buffettology - The Previously Unexplained Investing Techniques of WB: An amazing book written by his son’s wife. It is very simple so if you want to jump into this area, I would recommend you should start from this book. Trust me it is very easy to understand and is very powerful.

Peter Lynch -One Up on Wall Street: A great book by 2nd most successful investor after Warren buffet. He is into long term investing and is really good. This book has very nice methods to pick a winner among the stocks. When read it the first time I got so excited that I got down and identified some 30 stocks and bought 15 of them. I will discuss them and their great returns later . So even if you don’t read the book. Don’t worry I will cover it.

Peter Lynch- Beating the street: Again a great book. It is lighter, humorous and discusses mutual funds, fundamental analysis and other tips and tricks to identify great stocks.You will especially like the peter principles in it.

Technical Analysis of Stock Trends: This is the Bible of technical analysis. Technical analysis is a field in which you try to predict the stock movement by looking at the chart patterns. It is very useful for short term investors but has a steep learning curve. This book cuts short that learning curve significantly. In fact support and resistances are going to be your best friends in stock market. Technical analysis can be very beautifully mixed with fundamental analysis to give very powerful signals of impending disasters or windfalls. Especially in leveraged instrument.

Williams, Larry - The Secret Of Selecting Stocks For Immediate And Substantial Gains : This is a good book and explains stock market in a very different way, neither Technical or Fundamental Analysis. It uses supply demand concept and can be quite enlightening but if you don’t have time then stay with me, I will incorporate best of it here.

Najarian - How I Trade Options (2001): If you want to go into Options then this is the book to read. Nicely explained and contains all the tricks that retail investors can use.

Options Institute - Options Essential Concepts and Trading Strategies (2nd Ed.) : Amazing book. It should be read after you have a little knowledge about options. But once you learn the basics of options you will breeze through this book. Especially the chapter for retail investors is quite enlightening.

Lawrence G. McMillan - Profit with Options (Essential Methods for Investing Success): this must be for those who really love options and are striving to live rest of their lives investing in options only.If you want that then go ahead and read it.

And last but not the least if you don’t want to read all these books then you can keep coming to this site where I will tell you the best of all these books. Thank you

Stock Market 2.0

2008-01-02T02:10:00.000-08:00

Now I can tell you the best way to earn in stock market. As I said before it’s not intelligence that’s needed to earn in Stock market (of course it will give you an edge) but the real winners are the ones who are knowledgeable and have guts to test their knowledge. I am not saying that you have guts when you can take a huge risk. That is quantified as foolishness. By guts mean that you can take normal risks and maximize returns, which is tough when it comes to ordinary people like us. The winners know the Stock market in and out and thus they have a strategy for every kind of market. You can earn in any kind of market, stagnant market , rising or even falling market. First gain knowledge about the stock market and then gain experience by investing in the stock , then only you will be able to earn consistently.
Once you gain knowledge you will start to have confidence in your decisions. Most of the people lose because of little knowledge or blindly following other people's advice. This never cultivates into confidence when the market suddenly moves against them. As you have heard patience is the best friend you have and patience comes when you are confident. Just keep learning and you will never lose.

Advices on sites like Moneycontrol.com and other trading sites can save you a lot of time if you don't blindly follow them. All you have to do is to listen/read various advices and without taking them on their own face value, do your own homework and keep those which you think is good enough.

So we will start with one of the most time tested and successful strategies to pick stocks. And that is fundamental analysis. If you have heard of Warren Buffett then you must have heard about this also.

Fundamental Analysis is about valuing a company according to its future growth prospects and by deeply studying the balance sheet, cash flow etc.

It lies more on the concept that when you buy a share, you buy it because of the company that share represent and not because you think it will rise in the next 6 days or so or your broker told you to buy.

Money Part 2.2

2008-01-01T14:30:00.000-08:00

We saw in Money Part 2, how we can quantify creation of money? What ever I was talking in that post about the creation concept, you must have identified it as Profit. Yes, Profits are the created money and are the lifeblood of modern world. Why do you think the capitalist economies like US have grown so much over these years and countries like Russia and India are gasping far behind? It’s because in their pursuit of profit was the hidden pursuit to create money. And why creation of money is important is clearly given in the ‘Stock Market 1’ post? Magic Poker, remember.
Now we will see what brand is. Brand is just another money creation concept but seen at the selling side rather being at the production. By cutting the cost of production and keeping the selling price same we can increase profits or create more money. On the same hand by keeping the cost same and increasing the selling price can also increase the profits. Now do you understand why companies go for brand building image? No? Because brands allow these companies to increase the selling price. Of course, who wouldn’t like to wear shoes with the sign of Alan Iverson even if it comes at double the price of ordinary shoes? Do you really think Nike charge you for an excellent product? Most of the shoes are made in sweat shops in low income countries like Thailand Malaysia. Most of my Nike shoes don’t last for more than 1 year. This is brand for you and that’s why companies are crazy after it. It is just more subjective and harder to conceive. How do you know how much Tiger woods can increase the price of your product? Well, that questions answer is worth what Nike is worth of. That is why Branded companies can become a very good friend in a treacherous territory of stock market. Why I am explaining this is because when you will come across a company with a solid brand then take notice of it. Brand images are hard to break. Brand can be anywhere. Reliance in Reliance Industries is a brand itself. Brand gives flexibility to these companies to raise prices or decrease it when they want to. This flexibility is one of the main tenets in the dictionary of Warren buffet’s stock picking commandments. So in a nut shell Brand is important. Apart from the brand value you can increase your selling price by providing very good service (think of Airtel, I will think twice even to change to Vodaphone) and all kinds of other things that compel you to shell out that extra buck to buy a product that does a same job as the inferior one. Take quality for example and you will realize why Sony products are higher priced than others. So Brands are really important and takes different set of expertise to develop. More of marketing is needed in it. Mba’s excel in this area and researchers excel in the production side. That’s why the MBA and a engineer degree is such a killer combination. You know how to create money on both the front, production front and selling front.

Go to MONEY 3 or Go to MONEY 2.1

Stock Market 1

2007-12-25T21:16:00.000-08:00

I love when people say that putting money in stock market is like gambling. It’s amusing when you know the person in front has very little knowledge about what he is talking about and yet there is so much confidence and conviction. That is way it is rightly said "Little knowledge is dangerous". Well I will present before you the truest picture and it will be up to you to go ahead or drop the idea.

We start with an analogy.

Let’s look at the game of poker. What can be a better example of gambling than poker? I won’t go into trivialities of the game and probability and all the deep stuff. All I will touch is that the fact is poker is a Zero sum game. By Zero sum game I mean that whatever someone wins, someone somewhere loses. So it is a pure competition. Either you are a sucker or either you are a winner. So if a poker game begins where there are 8 players with 1000 each. So there is 8000 rupees on the table. That means there is 8000 rupees to be lost and 8000 to be won. So far it is good. Now let’s introduce a game and we call it “magic poker”. In this game we introduce a magical rule. There will be a magical pot in the centre which will create money somehow and that will be distributed in each round which is played. So say 100 rupees is created in each round. If 40 rounds are played we get 4000 more. One more thing to notice is that this money goes into the center pool where bets are placed. If you are not playing the game and taking the risk, you can’t lay your hands on this created money. Savvy. In this magical wonderful game the longer you stay (i.e. more rounds are played) the more money is created and you can walk out with more of it. There will be 12000 to be won and 8000 of people’s money to be lost. Clearly this is not a zero sum game because there can be a scenario where everyone is a winner. But you will always win more than you lose in the long term. Yeah I know you certainly want to play a game like this. Sadly this type of game doesn’t exist. But that is what most people think, but if you have read my past 3 money posts, you must have figured out what I am talking. This is why I laid so much stress to explain how money is created. Because when I will tell you Stock Market is kind of a magic poker game you won’t raise the eyebrow and shout “Hey! Money is never created”.

Now the question arises how stock market has a central money creation pot. Answer is The Companies. I don’t know that someone has told you this or not but the Companies create money more than anything else. All the companies together form that magical pot which creates the money. The amount of money created is profit which the companies earn. Gross profit or net profit? Answer is somewhere between them. You cannot calculate depreciation of the infrastructure used to produce. So you cannot find the exact figure because depreciation is always estimated based on theory. (We will talk more about this as we go on, role of debt creation, banking and all but right know this is all you need to know). Now another question how this money created in random manner comes back to the central table where bets are placed? Now that is the right question and answer is Savings, Investment and Dividends. A company can do these 3 major things with their profit.
First they can save and put that money in banks. These banks can invest this money back in the stock market(Or the central pool at table of magic poker) and at the same time issue loans equivalent to this amount to people, earning interest from it and returns from the stock market at the same time. (That’s why I love banking stocks).
Secondly, company re-invests this money into Greenfield projects which creates demand for jobs and products. The people earning through these projects save their money in banks, mutual funds, insurance companies, real estate and these in turn invest that money into stock market. You can see real estate and stock market are competitors in drawing the money from people and have their own cycles. We will see that later.

Thirdly, dividends are distributed to people who save those in banks or reinvest in stock market. Thus again the money is driven to stock market.

One important thing you will see that the money saved goes into the stock market. But what about the money spent. Money spending also has a very important role. When this created money is spent on different products, this increases the demand for the companies that are producing it. This additional demand ensures that the profit growth is there so that there is more money created the next year. If this money is not spent through investment and spending on buying products, there will be no profit growth and magical compounding effect will not take place. So you see the role of spending is also very important for the sustainability of the companies that comprises of stock market.

In short the profits (money creation) are life blood of Stock Markets. To be continued……

I hope it was useful. Any questions are most welcome.

Money 3

2007-12-19T01:48:00.000-08:00

I once went to a guitar lesson to learn a song in my school. But they started with all the strange things like first learn to play Sa Re Ga Ma and all that kind of stuff. I got impatient and left the idea all together. Because I thought why should I learn all the gibberish when I want to just play few songs? In short I gave up, something I do often. Now I know that I went there to learn how to play the song on guitar and not to learn the guitar. What will you do when at later date you unfortunately like more songs. Will you go every time to be coached for a song. Its always wise to make a system that is sustainable. I recalled this incident because the above incident is an analogy of stock market. Learning the song is like Earning Money. Sa Re Ga Ma is all the theoretical knowledge. Yet people never learn the Sa Re Ga Ma of the market and seek advice every time they want to learn a song(Earn Money). That is the reason of their downfall. Advices are free and always be cautious of those things that come free because there is always a huge price attached to it( This Blog is also free but as you see there will be no advice. So everything is up to you to believe or not). You must know how to improvise. when a different/tough song (different/tough situation in stock market) comes up to you, you must be well aware to improvise yourself for that. That is why you must learn the Sa Re Ga Ma of the stock market before we can jump into reality. Trust me, end result will be very satisfying and you will say that this is too simple. But like many things in life, most of the things are simple. It is our non-belief in simplicity which makes life complex.

Continued from Money 2

We start with another example. Let’s assume you and me are trapped on an island (Yeah It will be really depressing if you happen to be a guy. Forget that part please). Now we have 2 rupee each (I am talking about currency). So as Money part 1 says we both start producing something and convert that currency into money. Let’s say that you start climbing trees and bring coconut and I started catching fish. One fine day you bought a fish from me. So now I have 3 rupees and 1 rupee. But you being more intelligent come up with a recipe involving both fish and coconut, call Cocfish. You price it at 3 Rs. I bought it because it is very delicious.
Now you have 4 Rs and I have zero. I start to work hard and produce 3 fish for every CocFish you produce. Of course we are transacting through currency. After five days I sold 15 fish and you sold 5 Cocfish to me. But if you had produced 15 coconut also then you have extra 5 Cocfish, you ate rest 5. That is you have goods worth 15 rupees. Now since I am working hard I start to eat 2 Cocfish everyday. Since we don’t have the currency. So you come up with concept of debt. Next 5 days I bought 10 Cocfish and sold 15 fish. So I am in debt of 15 Rs and you have 15 Rs in account. Ofcourse this is on paper but you know that I am addicted to Cocfish and will pay for it in future or you took from me the CD of Resident Evil as collateral. As you can see you don’t have to work for next 10 days (you used 5 for Cocfish) and live off eating fish and on the other hand I have to work my ass off to pay my debt off. We should halt here and review the whole thing now.
You can see from the above example that we started with currency worth Rs 4 and in the end you had 15 Rs in account. How is this possible? Where this 11 Rs came from? Now you shouldn’t be astonished because you know that you created this money because of your ingenious recipe of Cocfish. You can see value of creation as 1 Rs per Cocfish as fish and coconut was worth 2 rs and you sold it at 3 Rs. Now its is getting ugly but stay with me. You had 15 Rs even when you had 5 Cocfish. But that was hidden form of money. What we say “Net worth”. But when I took the debt from you, you converted that hidden worth into a mathematical figure on the ledger and to enforce it you took my precious Resident Evil CD. This mathematical figure is as good as currency and it exists because we have only 4 Rs in currency form. So you see the money is continually created and converted into mathematical figure and mathematical figure is continually converted into net worth. Mathematical figure can be created into networth when I can’t repay your debt and you keep my precious CD.

Now lets come to real life. It is evident that currency is less than the total mathematical figure we have in our accounts all over the world. So currency is not even close to be equal to money in mathematical form yet alone leave the net worth( in form of real estate and stock market and etc) and since we are able to delink currency from money, it is easy to understand that money is continuously created and stored in the form of net worth and mathematical numbers in the banks which has no physical equivalent but just faith and promise from banks that when you will need the cash you will get it. But if everyone out there ask for their money, banks will not be able to give you the required currency.

In island example you converted Cocfish into currency when you lend money to me and by doing it you converted your net worth of 15Rs in Cocfish form into mathematical number in ledger which can be turned into currency. Think about it, it is sublime and beautiful. These concepts are testimony to the power of thinking. to be continued.....

Go to Money 4 or Go to Money 2

Please leave your comments as it is always better to discuss things rather than one sided conversation.

MONEY - part 2

2007-12-06T15:53:00.000-08:00

This is the continuation of Money part 1 which is two post down. I am assuming that you were not able to grasp the creation concept so I will try to explain it in more plain manner. It is because before I can tell you anything about stock market or anything else this concept should be assimilated completely.

What is it that everyone gives and none takes?.....................ADVICE. So I can safely assume that whatever advice I am going to give you, you are not going to take it. So in all my post I will only give you facts and inferences. No advice. Infact if there are one or two then you can safely ignore it. There are lots of professional out there to give you those. What I will try to tell you is the fundamentals of concept called money. You should notice that I call money a concept. Because it is a concept and it is not physical. Currency is physical incarnation of money. Non-physical incarnation of Money is Idea, Time and few more things. We will take all of them one by one. So you should know the difference. If you are still confused then go to my ‘Money’ post for the difference between currency and money. I know I confused you but just forget the last few sentences and start afresh.

How money is created.? So we start with an example straight away. Lets take the example of Google and a writer. Lets take 2 universe. Universe 1- there is no Google. Universe – 2 there is Google.
Universe-1 – if there was no Google. How a writer can research his book? He will have to go to the library. Take a cab of 30 Rs each and lets assume he takes 50 trips. That’s 1500 Rs. He will then have to find out the books he need to research from and then search through the contents and indexes and then retrieve what all material he needs. A time consuming process.

Universe-2 – There is Google. Now a writer can research about his books on internet only. He doesn’t have to take a cab. And so he can cut short his number of trips by say 25. So he saves 750 Rs. He pays 500 for internet. And overall he saves 250 and of course ‘Time’ than the first case.

Now in both the Universe we get the book (Forget, the time saved for now, we will come back to it later). But in 2nd universe we have 250 Rs more. So in other words Google created 250 Rs. Now our intelligent readers will point out that hey 250 Rs is currency so currency was created not money. Okk now we convert it into money. We go and buy 25 breads for that. Google created the purchasing power (which is same as money) to buy 25 breads extra. Don’t go into trivialities that what happened to cab driver and all. Here we are focusing on the product called book alone. We get that in the second universe with 25 breads worth of purchasing power extra. So :

Extra purchasing power created while producing the same good = money created.

Money Saved while producing a good = money created.

So if on Monday you produced 10 breads at cost of 10 Rs and on Tuesday you produced the same quantity and quality at the cost of 9 Rs, then you created 1 Rs on Tuesday. And Ofcourse if you produce it at 11 Rs you destroyed 1 Rs. Assuming you sold the bread at the same price on both day. Savvy.

Now don’t think that money saved is money created. I never said that. In that case she could have saved whole 1500Rs by just not writing the book. But that is not money created because we never got the good called Book. It’s the amalgamation of production and saving at the same time is what is called creation of money. You must notice that I have taken only production side and I am assuming that you are able to sell a product at a constant price. There is money creation at the selling side also. Something we call a brand. We will talk about later. To be continued.......

If someone reads this then can he/she tell me if my examples are comprehensible or not. Because I am feeling that maybe they are not. Thank you.

Go to MONEY 2.2 or Go to MONEY 1

Is Indian economy overheating?

2007-08-14T16:26:00.000-07:00

Before I start I would like to tell you that this is a humble attempt to explain to you the latest plague that is eating into our marvelous growth story. The plague's name is overheating and the disease carrier is dollars. How? For that you will have to read and understand what I have to say.
Overheating economy is one which has too much domestic demand. That is, when an economy is growing too fast and its productive ability cannot keep up with demand or in Keynesian economics when its productive ability is unable to keep pace with growing aggregate demand. When this happens the excess demand is met with the over employment of the resources. This can be achieved by employing workers for extra shifts or using machinery beyond their recommended working shifts.
There is a simple way to explain the causes. Growth is a function of savings and investment. Savings invested and output produced for each unit of investment is economy’s growth. This investment creates jobs, puts more money into the hands of more people. An economy rapidly growing overtime run short of workers. Employees bid up wages which leads to even more money in hands of people. Example- 1990s IT boom in US. So, extra money creates greater demands for goods and services. Investments typically take time to bear fruit and increase supply at home, so this demand for goods is serviced by importing them. This distorts the current account. And there is a chain reaction but let’s see all this in the Indian context.
You don’t have to be a genius to figure it by yourself that there are strong signs of overheating in this country. Clearly our productive ability is not able to produce enough goods and has resulted into large increase in imports. So, much so the trade deficit has reached a record level. Just take a look at our classic aviation or shipping industry. The infrastructure is bad, the airports and ports are just trying to fulfill the formality of physical existence. A perfect example of sectoral overheating. Result is heavy loses to airline industry and to our export competitiveness (turn around times at port are in days while it is in hours in Singapore).
Even a blind man can tell you how people are stuffed with money today. Suddenly the middle class income has exploded (if you are into economics then monetary aggregate M2 is measure of that). Why? Well, this is because rupee is pumped into the market for every dollar that is coming into India through foreign investment. This , rupee pumping, is done by the RBI to keep it pegged at a desired level set by RBI. So as not to hit our exports. Remember the hardening of rupee is bad for exports. This is precisely the reason our forex reserves are swelling. And as a topping to the cake, there is a manpower crunch hovering over the horizon in all the tier 1 cities. This has compelled companies to go to tier 2 or tier 3 cities for hiring. But you cannot substitute the teir 1 workers, who all have experience and better skill sets. So as a result there is increase in wages. Wage hike in our country is one of the highest in Asia. Of course only in skilled manpower. Above this we have banks. Which till recently have been distributing loans as if there is no tomorrow. The credit expansion by financial institutions has been phenomenal. But what overheating has to do with money and why am I talking about it. Because as earlier said, this money ends in savings and consumption. Savings in turn are invested and we see India flying and India poised campaigns. What happens next will be clear if I will explain about the goods which this money ends buying.
There are two types of goods. One is tradable and other nontradable among countries. As the word suggest tradable goods can be exported during the glut and imported during the shortage. But nontradable can’t. Like - houses, restaurants, hotels. So all the tradable goods (you can substitute tradable goods by importable goods if you want for simplicity), like- mobile phones are not going up in prices fast. But all the nontradable goods prices are reaching dizzying heights ( so if you are into stock markets then choose companies dealing in nontradable goods, the real profits are there). Take hotels for example, they are costlier than the hotels in New York. Real estate has no parallel and all must know it by now. You go on a date with your girlfriend and you will realize what I am talking about.Now coming back to money. Since the money buildup at the consumer level is massive and the nontradable goods are not matching that growth. The result is people are ready to give more for the same good . So there is a mismatch between the price growth of tradable and nontradable goods and our economic fabric is tearing apart . All this leads to high inflation which is bad. How high inflation? Because the prices of the nontradable goods shoots up. What our esteemed government does? They increase the interest rates. Stops pumping rupee in the forex markets or stops buying the excess dollars. This leads to rupee appreciation, rupee hardening, Infosys bleeding and blah-blah.( by the way if you are thinking of 1-year horizon, Infosys is a good bargain at 2000 levels) But all these are short-term measure. The root of the entire problem is Infrastructure. Why? Well remember the productivity talk. Our infrastructure is proving to be a bottleneck in our productivity and until and unless that improves, our productivity will lag demand. So, now you know the reason behind the “300 billion $ investment in infrastructure” talks by our ministers. Infrastructure building takes time but interest rate hardening has a quick but unhealthy effect on the economy. Government is trying both but it needs to put more money into our infrastructure if it wants to bring down the inflation and at the same time jack up growth rate. (If you are planning to buy a cement stock for a long-term perspective then you can because infrastructure needs cement more than anything, accumulate at dips).

So this disease is affecting the star of the Indian growth story, the IT sector. The profit margins are falling and the exports houses are finding it difficult to bear losses. You should know that this is a short-term measure. If government is an iota serious about our IT and export sector then it has to do something about the rupee (yeah ECB restriction was a positive step in that direction but not enough). It should realize that this is just the starting. India has proven itself as a competitive, professional and economical business destination. Dollar is going to flow like monsoon rains and worst of all this monsoon is going to be perennial. That’s why the great Manmohan Singh has proposed fuller convertibility which India will have to embrace sooner or later. It’s not a cure but it is the best shot we have. There is no running from it. Either we have to accept it or watch the jewel corrode under the acidic influence of the Dollar rain.