Archives for March 2012

The Secret of Peter Lynch’s Investing Success

If there is one legendary investor who not just beat the market but destroyed it, it is Peter Lynch.

Lynch ran Fidelity’s Magellan Fund in the US for 13 years, from 1977 to 1990. During this period, he beat the US stock market index S&P 500 in 11 years. His average annual return during this period stood at a mind-boggling 29%.

It means that every US$ 1 invested in his fund in 1977 grew to more than US$ 27 by 1990.

Fortunately for us, Lynch has laid down his secrets in two great books that every investor must own and read several times – One Up on Wall Street, and Beating the Street.

7 Steps to Becoming Your Own Financial Planner

I am a strong believer of managing one’s own money and finances.

The simple reason is that it’s your money at stake, and your financial future that’s being planned.

Nobody cares more about your money than you do. So if you are not motivated to improve your financial situation, nobody else is going to do so either…not even the best financial planner around.

I manage my own finances and see no reason why anyone else can’t do that on his or her own.

‘Einstein Way’ to Get Over the Stock Market Insanity

Albert Einstein defined insanity as ‘doing the same thing over and over again and expecting different results’.

In the stock market, these are some things that most people do, over and over again…

Worry where the Sensex is moving next
Worry where interest rates are moving next
Worry what FIIs will do next
Worry about the GDP growth next quarter and next year
Worry about the government’s fiscal deficit targets
Worry what the next quarter might bring for companies
Worry what will happen in the US, Europe, and China
Worry why most people are worried about these worries

The truth is that these worries either keep people away from investing, or these lead them to make serious errors of judgment with their investments.

How Much Term Insurance I Have, and Why

This seems like a season of disclosures!

After disclosing to you the stocks and mutual funds I own in my portfolio, today I discuss the amount of term insurance I’ve bought and my reasons for the same.

Buying a term insurance is one of the most important steps in your overall financial planning.

You may avoid buying any ULIP, Endowment, Money-Back, or Child Plan…but just don’t avoid term insurance.

This is especially true when you have dependents but don’t have enough assets (investments, trusts, etc.) to provide for them after your death.

However in case you have dependents and also have enough assets to provide for them after your death – a fully-paid-for home, a large and well-performing investment portfolio, frugal lifestyle – then you “do not” need term insurance.

Why This Paid-Versus-Free Financial Planning Di

This is what happens when you are enjoying your holiday and get a cold-call from a financial planner who first offers you a fee-based service, and then goes down to do anything for you for free.

This is with due regards to Dhanush and his team for their wonderful composition that I’ve twisted to suit what I want to tell you with respect to my view on this entire debate of “free versus paid” financial planning, and which one is better for you – the investor.

So here I go…

10-Point Checklist I Use to Sell My Stocks

“I wish there was a quarterly review possible in a marriage,” rued my wife after a small fight. “I also wish there was an exit clause,” she added, this time raising my interest levels.

Long term investing is a lot like a marriage.

For a peaceful relationship, you must be willing to…

Commit for the long term
Keep your ego and emotions aside
Keep your expectations realistic
Learn to say ‘no’
Learn to take the blame
Know that things could change and accept when they do change
Have immense patience

However, there’s one big difference between marriage and investing.

Rajiv Gandhi Equity Savings Scheme: Boon or Disaster for Small Investors?

As an investor, the only thing of interest in the latest Budget was the Finance Minister’s announcement of the Rajiv Gandhi Equity Savings Scheme (RGESS).

Here’s what the FM said on the scheme in his Budget speech…

To encourage flow of savings in financial instruments and improve the depth of domestic capital market, it is proposed to introduce a new scheme called Rajiv Gandhi Equity Savings Scheme.

The scheme would allow for income tax deduction of 50% to new retail investors who invest up to Rs 50,000 directly in equities and whose annual income is below 10 lakh. The scheme will have a lock-in period of 3 years.

When I multiply Rs 50,000 per person with around 1.5 crore people with annual income up to Rs 10 lakh and who do not have a demat account as of now, I get to a potential Rs 75,000 crore of fresh money that could flow to the Indian equity markets in the first year of this scheme.

This works to just around 1.2% of the current market cap of BSE. Even if you take Sensex’s market cap as the denominator, this is just around 2.6%.

Pranabda, Here’s My Only Wish from Budget 2012-13

Dear Pranabda,

Being the avid reader that you are, you must have read what the noted constitutional lawyer, (Late) Nani Palkhivala once said…

It is my firm conviction that no nation living today or which has flourished in the past would remain honest under the giddy rules and rates of direct taxes which prevail today in India.

Our people, like any other, fall under three segments:

1. Those who would be honest however heavy the burden,
2. Those who would be dishonest however light the burden, and
3. Those (and they constitute the overwhelming majority) who are basically not dishonest but the nature of whose response to the law is conditioned by the quality of the law.

I, the aam aadmi, believe that our tax legislation in India…

Doesn’t bother about the first class of people (the honest taxpayers)
Is preoccupied with the second (the dishonest), and
Completely ignores the third (honest but burdened by law).

Investor, Mind Your Behaviour!

Were you ever punished in school for not behaving properly in the class?

If you are like me, you must have experienced the happiness (mixed with some embarrassment) of being an ‘out-standing’ student on a regular basis! But then, you must have behaved well after that punishment.

Sometimes I wonder if we as adults were always guided and punished by our teachers for all our mistakes and mindless behaviour. Growing up and moving out of school gives us a lot of freedom to behave the way we want to. But then, for some of us, it becomes a license to behave any which way…even at the cost of our own peace, and money.

Talking about stock markets, the pundits will tell you that to learn to invest, you need to read the theory books. You need to understand complex accounting. You need to know the jargons, the P/E, the EV/EBDITA, the SOTP.

What these pundits however fail to tell you is that before you get to all that investing theory, you need to work on the practical. You need to study ‘yourself’…your behaviour.

Why Don’t You Invest in the Stock Market?

The obvious question I may ask you is – “Why do you invest in the stock market?”

Is it to fund your child’s higher education? Your dream home? Your retirement?

But there’s a related question that I have for millions of other Indians across the country (and you might be one of them) – “Why don’t you invest in the stock market?”

As per the SEBI, less than 5% of Indian households own stocks or related investments. That leaves 95% that do not.

Part of this is due to a lack of wealth. A large majority of Indian households simply don’t have any money to invest.