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Showing posts from 2008

Portfolio Structuring Step 4: Asset Allocation

By now you have got most of the basic issues out of your way. You know how much money you have, what is your surplus for investing, taken care of your liabilities through insurance and also built up a contingency fund. The next most important step is Asset Allocation. Simply put, it means now you need to decide how much money to invest in what. There are various investment options like equities (shares), debt, bullion and physical assets (property, art etc).

One thing to understand is every investment carries some risk. The Bank FD that you think is secure carries default risk. That is the bank may become insolvent and may not be able to return your capital. Even government bonds, which are by far the safest, carry some risk of interest rate. For example, if you invest in a government bond at 8% interest for 5 years and next month the interest rate is raised to 12%, you lose out on the additional 2%. That is also a form of risk.

In terms of general risk perception, equities are the risk…

Porfolio Structuring Step 3: Build Safeguards

One of the most important things you can do is to build safeguards. That includes things like building a cash nest for contingency, taking insurance cover for life and non-life risk factors. Let us take them one at a time.

1. Contingency Reserve: You need to have a amount set aside in cash to meet any emergency requirements. A good amount to keep aside is 3-6 times your monthly expenses. So, for example, for a monthly expense of 20,000, you can set aside 60,000 to 120,000 as a contingency reserve. DO NOT touch this reserve unless there is an emergency. This is not meant for your day-to-day expenses.

2. Life Insurance: Your requirement for life insurance will depend on your life stage, your current networth (calculated in step 1) and your dependents. Simple back calculation tells you that to get a earning of 100 you approximately need to invest 1200. So, multiply your annual expenses with a factor of 12 to get the amount you need to have insured. But, its always better to have some buffe…

Porfolio Structuring Step 2: Understand Cash Flows

The second step is to understand your cash flows. If you are a salaried employee, that is fairly easy. Just look at the monthly take home pay you get. Also, look at the expenses you incur. While looking at your expenses, add things like your insurance premiums, vacationing expenses, eating out, gifts that you need to buy etc.
Basically, add anything that you spend money on during the year. Now, make it into a monthly estimate. For example,

Monthly Take Home Salary == 30,000

Annual Expenses (all inclusive) == 240,000
then, Monthly Expenses == 20,000

Then you have a disposable income of 1,000 every month after meeting all your expenses. That is the total money you have for investment.

Porfolio Structuring (PS) Step 1: Evaluate Current Status

The first step to any long term investment plan is to understand where we are at present. So, to start with you need to list down your existing networth. For example, you can have a list as follows:
Provident Fund100,000PPF50,000Bank FD50,000Mutual Funds-Equity150,000Mutual Funds-Debt50,000Cash In Savings Account30,000House2,000,000Housing Loan-4,000,000Others0Total-1,570,000
A couple of things to note here.

1. I am not calculating the value of any gold/silver jewellery that you may be having. Indians, typically are not very keen on selling their family gold/silver so it really does not count as investment. You can think of it as an additional bonus if you do have gold/silver.
2. I am including the housing loan you may have as a negative here under the assumption that that is your primary home and not a second home bought for investment purpose. Also, I am taking the full value that you need to repay to the bank for the loan as your liability. This approach may not be exactly orth…

Portfolio Structuring

It has been a while since I last wrote. And the market has proved everyone wrong. And, boy, how wrong were we!!! The bottoms just fell out. A lot of people are nursing their injuries of the market collapse. People have lost 70%-90% of their portfolios. My wife, who is a dedicated Bank FD investor has a know-it-all smile on her face, while I, a dedicated market buff can only put on a smile of pain.

However, being an optimist, I think that this fall has probably given us (long term investors) a great opportunity to structure our portfolios. So, weed out all the bull-market excesses and start afresh with a plan.

I will write follow-up posts on how and what to plan for to restructure your portfolio.

My takeaways from Investor Camp in Kolkata


* Look at overall economy for indication of sustainable growth
* Look at interest rates very closely as they are negatively correlated to equities. i.e, when interest rates go down, equities go up
* Fundamentals take time to develop
* Don't leverage yourself

Midcap investing has the best risk/reward in today's market

Midcaps bets can be of various types:
Plain Vanilla : Very fast paced growth in a good sector and will soon turn big enough to attract institution attention. e.g. Punj Lloyd, GMR infra, JP AssociatesMergers and Demergers: COmpanies create value by merging and demerging. e.g TV18, KECOverseas Acquisition: Often leads to rapid increase in size and mcap/salesRestructuring: Improving balance sheet by restructuring debtNew Story: New sunrise industries e.g. Educomp, Praj, MIC Electronics, Everest Kanto
Opportunities in 2008: Karuturi Networks, Shriram Transport Finance, Provogue

Ashwini Gujral

* Manage your capital so that no loss is your final loss.

* Only three things…

Falling Indian Equity Markets

Warren Buffet once famously said, "Only when the tide goes out do you discover who's been swimming naked". This market correction showed up a lot of people who were swimming naked. i.e, people who were long on stocks or futures with very little knowledge or conviction about the companies they are invested in. For long term investors, a large market correction provides a good time to invest into the market. The market again showed that you can get washed out if you are leveraged. A friend, who started active trading a few months back, was very happily making money before the carnage happened and was telling me about his stock market conquests. I asked him to be careful and he responded saying that he always puts stop losses in place. I still told him to be careful as stop losses does not always do what its meant for. I met him again today and he had lost ALL his capital and is in debt to his broker. So, he now needs to borrow money to pay his broker!!! I asked him what ha…

What to do when the market corrects?

Since, the markets are choppy and most of the stocks in the mid-cap universe are correcting, the question at the top of the mind is, what can be done to protect our capital? Well, there are three approaches that can work and I am listing them here.

1. Sell - This is the simplest of the propositions, but one of the toughest things to do from a behavioral perspective. If you have stocks that are fundamentally weak and you had bought them to take short terms profits in it, then it is better to sell them, even if it means that you need to take a small(or large) loss. However, if you are convinced about the business and future prospects of the company, then corrections are good opportunities to buy into the stock.

2. Short Sell - Active traders can think of this approach. Sell the stocks you have in your DP and buy it back at a lower price. That way your net position on the stock is not changed but you make some money on the way down.

3. Buy Puts - Again, this is for high risk traders. They c…

New Stock Idea - ICSA

Another stock idea - ICSA.

Its present in the products and solutions of Power transmission and distribution.
ICSA's main products are Distribution Transformer Monitoring Systems, Theft Detection Devices, Intelligent Automatic Meter Reading, Remote Street Light Control Systems in the Power Transmission and Distribution space. Its Intelligent Cathodic Protection Solutions is a star in the Oil and Gas pipeline space.ICSA’s clients in the power sector include almost all SEBs and leading private players like Reliance Energy. In the Oil and Energy space, it has huge orders from Oil India and is expected to finalize contracts with several others.I will put the financial data in the next blog entry.

Resolutions for the New Year

Since, its the New Year and it is sort of nice to have some resolutions, here are my ones.

Lose Weight - This has been at the top of my list for the last few years and as usual I have not lost a single kilo. So, this year I am renewing my resolve to lose weight. But, what I will also do is to have a plan for losing weight systematically.Spend More Time with the family - Work has seemingly taken over my life and time spent with the family has been on the decline. Utilization at work is a highly monitored metric. Resolving to have high "utilization" at home & with family as well.Make money - 2008 probably would be a year where it would be difficult for all market players to make money. My target is to preserve my capital and make atleast 15-20% returns by end of the year.