Wednesday, May 26, 2010

Be Worried..

http://bit.ly/9cF2Ot

"...one of the best ways to protect against a decline in purchasing power is to buy whatever is "out of favor, loathed and despised." So forget about gold or other trendy hedges. Instead, wait patiently for markets—European stocks, perhaps—to get so cheap that they turn most investors' stomachs. Then you can pounce."

"Sometimes, when you can't figure out a good defense, the best thing to do is to go on offense."

Wednesday, May 12, 2010

Investing and Happiness...

Silence speaks much more than words.  The best way to win an argument is not by arguing, but by action.

I see people wasting time arguing about how the stock they are investing is much better than another stock. This will not make you wealthy and happy.
We invest not to prove someone right or wrong or for the sake of theories, but to create wealth.
Investing should be silent, with actions.

Over the years, things have become easier for people who believe in – long term value based investments.
Thanks to the wide reach technology, internet forums, blogs and business news channels…more and more people are being deprived of thinking long term.
As we have seen in recent times, this can lead to sharp falls in stock prices of as much as 25% on a single day, that too, just on the basis of some negative news or court cases… which might be of a temporary nature.
Internet trading enables people to take decisions within seconds – and act on temptations.

I believe, because of all this we can take advantages of such situations. :)

When markets are climbing high, most people feel tempted with a sense of desperation to rush in and put money. They feel left out, and can’t resist temptation to buy. You can suddenly see many providing stock recommendations (free or paid) in a bull market.

Money doesn’t come to people who are constantly scared and afraid.
Just be open, happy, large hearted and confident – you will automatically start attracting wealth.

The best investors do the least amount of activity.

Sitting in front of a screen with numbers and watching CNBC, is not really what a fulfilling life is all about.  This, again, will not make you wealthy and happy.
And this definitely cannot be a great and recommended way to create wealth.

Every investor today needs to avoid an army of advisors and watching hundreds of news channels. He just needs to have the power of wisdom and knowledge with him.
Cut out the noise around you … and listen to the silence.

Invest silently.. Consistently. Avoid temptations. Don’t waste energy arguing.

Soon, when the world panics again, it will be time for a select few to create extraordinary wealth.

Tuesday, May 11, 2010

How Markets Work...


PS: Due credits to the image source.

Monday, May 10, 2010

Simplest Portfolio Idea...

For most of us (including myself) ... investing is scary. Simply because the world of finance is an ultimate confusopoly.
There are so many options from which to choose that many people are willing to pay perhaps 1-2-3% of their portfolios per year for experts to manage their money. (PMS services. Distributors, etc etc).
And those experts might invest your money in managed mutual funds (managed by yet other experts) that charge you another 1-2% to pick stocks for you.

And all this is despite the fact that on an average, experts can't beat a monkey with a dartboard when it comes to picking stocks…
In theory, no-one can beat markets while being strategic…as far as I know.

Worse yet, actively managed investments will generate more tax liability for investors than necessary…because managers need to churn stocks to maintain the appearance of usefulness.

It’s never that experts would agree, roughly, in how a typical portfolio should be allocated.
If you are young, you should own mostly stocks. If you are nearing retirement, you should have mostly bonds. But lately, even this assumption is being questioned. Some experts now say you need a healthy percentage of stocks even if you're nearing retirement, because you might live another 30 years or so.

Suppose if we could come up with the world's simplest portfolio that is better than what the average money managing expert might suggest. (by better, I mean, it convinces you that it would work).

Let’s try out some ideas here, which can be improved upon later, keeping within some simple guidelines.

1.        let's assume the hypothetical money is invested entirely for retirement, so we don't need to worry about keeping any of it liquid for college or buying a house. This assumption is just to keep things simple. Also because retirement planning is one of the most difficult financial planning I would ever do for myself.
2.       I will only think about investments that can be made up to 10 years prior to the planned retirement. This is because, when you near retirement, you would typically and gradually want to convert as much of your equity portfolio into bonds as necessary to get the monthly income you need. That's a more complicated scenario, I prefer not to discuss here. It’s easier said than done.

As a starting point, a perfectly adequate simple portfolio for young people might involve putting 70% of your money in an index-equity fund. (say NIFTY), which captures the entire market trend. In other words, you can buy one financial instrument and own a little bit of just about every public company in the market.(though technically might not be correct, as NIFTY is just a representation of some 50 odd companies, but that still is well diversified). That's all the diversification you can get within one country. And because these fund managers don't do much buying and selling within the portfolio, it doesn't generate much overhead costs to pass along to investors.

I picked 70% to allocate to this investment because I contend that no expert has a good reason for picking a different figure. Some experts might tell you 60% is the right allocation, and some might say 80%.
I contend that most allocation recommendations of that sort are no more defensible than horoscopes.

For the remaining 30% of your investments, we can invest in commodities like Gold exchange traded funds. This gives you a play on the commodity side with a hedge against equity, while maintaining growth in the long run.
That too at low cost, with no fund-manager-decisions involved and low taxes.

And remember that this suggested portfolio was supposed to be simple enough for the average person to understand and obtain without expert advice and without excess risk.

Does it sound good?

PS1: This is just a mental exercise I am doing for fun. Not an advice by any means. And if,  you were about to believe all this, you should understand that any roadside financial planner would be able to take you for a ride easily. Be cautious!
PS2: If you are serious about retirement planning, read this: http://wealth.moneycontrol.com/authorarticle.php?id=7061

Friday, May 07, 2010

Investment horoscope..aka..Financial Plan

I believe most Indians believe in astrology, even though there is no scientific evidence to support it. Superstition has been hard-wired in our culture and up-bringing.

I sometimes tend to compare financial experts (Relationship Managers) with jyotishi pundits (fortune tellers, horoscope readers).

 

Do you believe investors should rebalance their investment portfolio every year?

 

For instance, lets say, you start investment with a balance of 70% stocks (say all NIFTY) and 30% bonds, which for *some* reason you think is right for you.

God blessed you, and your stocks had a good year. Now you're at 80% stocks and 20% bonds. Should you rebalance?

 

Ideally, if you witness some fundamental changes that change your overall financial circumstances, such as nearing retirement or winning at kaun-banega-karorepati, you might need to rebalance your portfolio.

But what if the only thing that happened was that you aged from 30 to 31...and your stocks had an unusually good year? Do you rebalance still?

 

Most financial experts will tell you..there’s a *magical* number that each investor should try to maintain in terms of portfolio balance. (Asset allocation).

First indication that something is fishy is that different experts will come up with different magical numbers.

Second sign of trouble is that same experts will have a naked self-interest in getting you to rebalance more than you might need to.

 

I, personally am not yet convinced that portfolio rebalancing is really required just because it has aged by an year.

Please try convincing me…

US market plunge...

Do you believe yesterday's US stock market plunge was a "mistake" as rumored by some?

Or, was it a case of manipulation by someone who made a fortune on it?

 

Few years ago, I would have said it was a mistake.

Today that sounds naïve to me. No matter what they say. 

http://money.cnn.com/video/markets/2010/05/06/mkts_nyse_ceo.cnnmoney/

 

Monday, May 03, 2010

Insurance and Government...

The other day we had this interesting discussion and here is the outcome…

 

Let’s consider a hypothetical model …where we could actually replace our current government tax-collection model with an insurance-based model…

 

In this new model, the central government would buy every insurance company in the country…and ultimately becomes the formal and official insurance provider for the country. (and perhaps the rest of the world..or poorer world).

The profits from selling insurance would replace taxes…The government would become a “for-profit” enterprise.

 

In a way, the government is actually already a sort of big insurance company.

When something catastrophic happens, from floods to war, the central government steps-in,(providing relief funds to state governments etc..). All  I'm suggesting is…just formalize the arrangement and try to monetize it, with most of the profits coming from international sales (from poorer neighboring countries like Bangladesh maybe).

 

Consider that an insurance company does more than just premium collections and pay-out for losses. They also do work to reduce risks.

This is similar to what a government tries to do for its people. Governments urge you to quit smoking, and they force you to wear seatbelts, helmets...

Governments form armies to keep the homeland safe..fund schools to keep future generations from needing aid.

 

For all practical purposes, the government is already a big insurance company. All I'm suggesting is that we become more efficient at it, and make some money in the process.

 

It would be interesting about this new model to lead to practical laws, especially if law makers had some sort of profit motive.

For example, you might see the legalization of any activity that lowered financial risks. I think you'd find that in most cases, the majority of citizens coincidentally support just about every policy that saves money in the long run.

That's because the best way to save money in the long run is to keep citizens safe and healthy and prosperous.

 

In this imagined future world, politicians will still be elected by the people. And the big moral issues could still be decided based on cultural preferences over profits. The difference is that the voters would always have an estimate at hand to see how much those preferences might cost them.

 

Another benefit of this arrangement is that citizens would have just one policy for all sorts of risks, including motor, health, home, etc. etc.

Your premium costs would depend on your specific situation. Just check all of the appropriate boxes on a web page, and enter your bank account number for automatic deductions…and you just paid your taxes and handled all of your insurance needs in ten minutes.

 

I can imagine..it would make the world safer in the long run. Imagine two smaller countries spoiling for a fight, and one of them is an insurance client. The plodding and ineffective current governments would be irrelevant, but the new Insurance backed government would step in fast to protect its investment.. J

And no one will ever misjudge its intentions…because its motives would obviously be entirely transparent…profits!

 

PS: I agree that this imagined future can never happen…but it’s fun to imagine stuff.