Mental accounting is one such money mistake even smart people commit. Understanding this mistake and avoiding this could make you richer.
Behavioural finance experts say that mental accounting works this way: Let us say you have bought Rs 200 ticket to a movie. When you show up at the entrance of the theatre and realise you have lost your ticket, do you buy another ticket?
If you were like most people, you would probably think twice. You may still drop down the money, but you will now feel that you paid Rs 400 for Rs 200 ticket.
But let's construct the scenario differently.
Let's say you hadn't bought the ticket yet, and you show up at the entrance to buy your ticket.
And unfortunately, you realise you've lost Rs 200 in cash since you walked from the parking place.
But fortunately, you still have enough in your wallet to cover the cost of the ticket. Do you buy the ticket?
Again, if you are like most people, you may feel upset about the lost money, but it probably won't affect your decision to buy the ticket.
Why?
Behavioural finance experts conducted similar experiments. They found that 46 per cent of those who lost the ticket were willing to buy a replacement ticket.
On the other side 88 per cent of those who lost an equivalent amount of cash were willing to buy a ticket.
Both scenarios are a loss of Rs 200. However, in the second scenario you separate the loss of Rs 200 from the purchasing of the ticket.
In the first you consider the cost of the movie as a total of Rs 400 and baulk at the high cost.
It is because of the psychological phenomenon known as mental accounting.
One of the fundamental concepts in economics says that wealth in general and money in particular, should be fungible.
Fungibility, in a nutshell, means that Rs 100 in lottery winning, Rs 100 in salary and Rs 100 tax refund should have the same significance and value to you since each Rs 100 has the same purchasing power in the market.
But do you treat them in a similar way?
Mental accounting has enormous consequences in your daily life. It affects how you spend money and how you save. It influences how you deal with losses and windfall gains.
How does mental accounting affect you?
* The source of the money affects how it is spent
* You tend to dine lavishly with the 'gift meal vouchers' given by your company. But you will be dining consciously if you were paying out of your salary
* You are most likely to spend more with credit cards than with cash
* You may consider tax refund as 'free money'. In actual terms it is your own money. You will not spend tax refunds, birthday gift money or lottery winnings on essential things like utility bills, school fees, paying off your credit card debt. But you will be more than happy to spend the same money on discretionary items such as vacations or a trendy mobile phone
Don't be a victim of 'relative cost'
Assume you are going to a super market to buy a laptop. The price is Rs 40,000. But you get to know that there is another branch of the supermarket, ten-minute walk away, in which the same laptop is sold for Rs 39,950.
Will you walk down to the other branch to save Rs 50?
Let us say instead of buying a laptop you have planned to buy a memory card. The price at the supermarket is Rs 100 and at the other branch the price is Rs 50.
Where will you buy the card?
Most of us will make a trip to the other branch for the memory card but not for the laptop. Because we think that the Rs 50 saved on Rs 100 item is better than the same amount saved on an item worth Rs 40,000.
But in both cases the situation is same. You save Rs 50 by making 10 minutes walk to the other branch.
Remember that money is money.
Rs 50 saved on Rs 40,000 laptop is not less money than Rs 50 saved on Rs 100 memory card.
How to face mental accounting and spend consciously?
* You can use mental accounting to your advantage by spending money out of your salary. Immediately invest the 'free money' like tax refunds, gifted money or any other windfall gains
* Imagine that all income is earned income
* Use the free meal vouchers and other gift vouchers to buy essential items
* Pretend you don't have a credit card. I am not telling you not to use credit cards. I am saying you should stop and think: would I buy this if I were using cash?
A successful practical strategy
You can have two bank accounts. One for the purpose of savings and the other one for spending.
Every month you need to set aside some amount for expenses as per your budget or previous experience. That amount you need to transfer to your spending account.
Keep the balance amount in your savings account.
You need to meet all your expenses including your credit card payment from the spending account. You should not spend from your savings account.
In between, if you receive any cash gifts or windfall gains, deposit them in your savings account.
If you receive gift vouchers, then transfer the money equivalent of that voucher from your spending account to your saving account.
This will help you not to exceed your spending limit when you receive the gift voucher. As a result you will not use it lavishly and use it only on pre-planned things.
When it comes to money your mind unconsciously plays this trick of mental accounting. You have understood that today. So hereafter, you can avoid this mistake and you become richer day by day.
Friday, November 19, 2010
Saturday, November 13, 2010
Stock basics: All you want to know about PE ratio
Commonly called the PE ratio (or just PE), it is often used in investment analysis. However, investors sometimes fail to understand the factors that determine it and its limitations
What is it?
The PE ratio is calculated by dividing a company's share price by its earnings per share (EPS). So, if we assume that a company's share price is Rs 200 and its EPS is Rs 10, the PE of the stock will be 20 (Rs 200 divided by Rs 10).
Note that the EPS of a company can be calculated in different ways, resulting in more than one PE for the same stock.
If the EPS for the last 12 months (four quarters) is used, the resulting PE is called trailing-twelve-month (TTM) PE.
If the EPS for the next twelve months is forecasted and used in calculation, the resulting PE is called forward PE.
For a company that operates in a cyclical industry, the EPS considered is the average EPS over the complete cycle, and it is called seasonally adjusted PE.
Interpreting the ratio
As the calculation of the ratio suggests, the PE multiple implies the amount an investor is paying for each rupee of the company's EPS. So, if the PE of a stock is, say, 20, the investors are paying Rs 20 for each rupee of the company's EPS.
The higher the PE ratio of a stock, the more investors are paying for that stock, and vice-versa.
That explains why it is said that a high or a low PE implies whether the stock is expensive or cheap, respectively.
How much should you pay?
The PE of a stock should ideally depend on some factors. The first is growth. Growth is directly proportional to PE.
The higher the growth, the higher will be the PE that the stock should command.
The second factor is risk, and it is inversely related to PE. So, a stock should have a low PE if the risk associated with it is high.
A company's dividend policy also determines its PE.
The greater the proportion of profit given as dividends, the higher will be the PE.
As shares do not always trade at a price based on their fundamentals, a stock's existing PE could differ from the one that should be based on the factors determining it.
So, pay for a stock based on these determinants.
The limitations
With various accounting standards available, a company's EPS figure will depend on which method it follows.
In other words, the PE ratio gets influenced by the accounting norms.
Also, when a company's earnings are negative, assigning a value to its stock using PE is not feasible.
What is it?
The PE ratio is calculated by dividing a company's share price by its earnings per share (EPS). So, if we assume that a company's share price is Rs 200 and its EPS is Rs 10, the PE of the stock will be 20 (Rs 200 divided by Rs 10).
Note that the EPS of a company can be calculated in different ways, resulting in more than one PE for the same stock.
If the EPS for the last 12 months (four quarters) is used, the resulting PE is called trailing-twelve-month (TTM) PE.
If the EPS for the next twelve months is forecasted and used in calculation, the resulting PE is called forward PE.
For a company that operates in a cyclical industry, the EPS considered is the average EPS over the complete cycle, and it is called seasonally adjusted PE.
Interpreting the ratio
As the calculation of the ratio suggests, the PE multiple implies the amount an investor is paying for each rupee of the company's EPS. So, if the PE of a stock is, say, 20, the investors are paying Rs 20 for each rupee of the company's EPS.
The higher the PE ratio of a stock, the more investors are paying for that stock, and vice-versa.
That explains why it is said that a high or a low PE implies whether the stock is expensive or cheap, respectively.
How much should you pay?
The PE of a stock should ideally depend on some factors. The first is growth. Growth is directly proportional to PE.
The higher the growth, the higher will be the PE that the stock should command.
The second factor is risk, and it is inversely related to PE. So, a stock should have a low PE if the risk associated with it is high.
A company's dividend policy also determines its PE.
The greater the proportion of profit given as dividends, the higher will be the PE.
As shares do not always trade at a price based on their fundamentals, a stock's existing PE could differ from the one that should be based on the factors determining it.
So, pay for a stock based on these determinants.
The limitations
With various accounting standards available, a company's EPS figure will depend on which method it follows.
In other words, the PE ratio gets influenced by the accounting norms.
Also, when a company's earnings are negative, assigning a value to its stock using PE is not feasible.
Wednesday, October 20, 2010
10 things HR managers look for in potential hires
1. Energy
Organisations need people who are always eager to learn new skills and are eager to add to their knowledge base. They have genuine receptiveness to change and are open to examine new ideas. They bounce back quick after failures.
2. Ability to energise
These people are self-motivated and they demonstrate it outwardly. They inspire people and get people excited about a cause. They have the ability to keep the mood positive even when things are tough. Managers look for that that elusive "spark" that draws others to them.
3. Edge
This is the ability to take decision in grey. The ability to take decisions in tough situations and never allowing the degree of difficulty to stand in their way.
4. Ability to execute
These candidates are action-oriented and are focused on getting results. They are the ones who put strategy into implementation. Organisations look for a candidates ability to convert energy and edge (of self and of the team) into action and measurable results.
5. Customer-focused and quality conscious
These people understand customer business and customer pain points and strive to make customers successful by delivering superior quality products and superior service delivery. They build partnerships with clients and they measure their success based on the success of their customers. They go the extra mile to achieve customer delight.
6. Respect for individuals
These candidates value different cultural and religious backgrounds. They compliment in public for a good job done and offer candid and constructive criticism in private. This helps in creating a truly global environment in the workplace.
7. Integrity
These candidates mean what they say and say what they mean. They make us trusted partners of customers or for that matter they make good partners in every sphere of our life. They help build great organisations that can sustain over long periods of time during periods of prosperity as well as during challenging times.
8. Creative and enterprising
To create a differentiator, it is important that we offer different and unique proposition to our customers, which will bring value superior to that given by peers. This calls for creative thinking and entrepreneurship. Creative people come up with out-of-the-box ideas. They find better ways of doing things or ways of doing things differently. Entrepreneurs are willing to take well-assessed risks.
9. Collaborative/ team player
Organisations need people who have good interpersonal skills and gel well in the team. They put team goals above individual goals.
10. Technical competency and solutioning mindset
Technical competency is important in helping to foster a firm's competitive advantage. People possessing sound technical competency and a solutioning mindset can create and also execute winning solutions tailored to specific needs of the customer/ industry.
Organisations need people who are always eager to learn new skills and are eager to add to their knowledge base. They have genuine receptiveness to change and are open to examine new ideas. They bounce back quick after failures.
2. Ability to energise
These people are self-motivated and they demonstrate it outwardly. They inspire people and get people excited about a cause. They have the ability to keep the mood positive even when things are tough. Managers look for that that elusive "spark" that draws others to them.
3. Edge
This is the ability to take decision in grey. The ability to take decisions in tough situations and never allowing the degree of difficulty to stand in their way.
4. Ability to execute
These candidates are action-oriented and are focused on getting results. They are the ones who put strategy into implementation. Organisations look for a candidates ability to convert energy and edge (of self and of the team) into action and measurable results.
5. Customer-focused and quality conscious
These people understand customer business and customer pain points and strive to make customers successful by delivering superior quality products and superior service delivery. They build partnerships with clients and they measure their success based on the success of their customers. They go the extra mile to achieve customer delight.
6. Respect for individuals
These candidates value different cultural and religious backgrounds. They compliment in public for a good job done and offer candid and constructive criticism in private. This helps in creating a truly global environment in the workplace.
7. Integrity
These candidates mean what they say and say what they mean. They make us trusted partners of customers or for that matter they make good partners in every sphere of our life. They help build great organisations that can sustain over long periods of time during periods of prosperity as well as during challenging times.
8. Creative and enterprising
To create a differentiator, it is important that we offer different and unique proposition to our customers, which will bring value superior to that given by peers. This calls for creative thinking and entrepreneurship. Creative people come up with out-of-the-box ideas. They find better ways of doing things or ways of doing things differently. Entrepreneurs are willing to take well-assessed risks.
9. Collaborative/ team player
Organisations need people who have good interpersonal skills and gel well in the team. They put team goals above individual goals.
10. Technical competency and solutioning mindset
Technical competency is important in helping to foster a firm's competitive advantage. People possessing sound technical competency and a solutioning mindset can create and also execute winning solutions tailored to specific needs of the customer/ industry.
Monday, October 11, 2010
Earn interest income while you invest in IPOs
ASBA (Application Supported by Blocked Amount) was introduced by SEBI in July 2008 but it is not yet known to many.
Under the normal system while applying for an IPO you have to pay the full application money with the application itself.
Earn interest income while you invest in IPOs
How does ASBA work?
Under the normal system while applying for an IPO you have to pay the full application money with the application itself.
With ASBA you can make an application for shares without actually parting with your money immediately.
As the name suggests (Application Supported by Blocked Amount), under ASBA every application for shares is supported by an amount, which is blocked in the account of the applicant itself.
The money is debited from your bank account only when basis of allotment is finalised and that too for the shares allotted to you and not for the shares applied for by you.
This helps you in eliminating the problems associated with delay in receipt of refund.
Moreover, now that banks have been mandated to give interest on the savings account on a daily balance, it helps those investors even more who are participating in the public issue of companies.
Moreover the money blocked in your account is taken into account for calculating the average quarterly balances (AQB).
Under ASBA you can make an application for any IPO/FPO/Rights issue and where the company does not offer more than one schedule of payment and the issue price is to be decided by bidding process.
With ASBA your banker blocks the money lying idle in your account to the extent of application money which is payable in respect of the shares being applied for by you.Where can you make an application under ASBA?
You can make ASBA application through any bank which is registered with SEBI as banker to the issue and furnishes the required certificate to SEBI. Such banks which are authorised by SEBI to accept these applications are called self certified syndicate sanks ( SCSBs).It is necessary that you need to have your bank account with the bank, which is recognised by SEBI for the purpose of accepting the ASBA applications.
You can make the application under ASBA either through physical application form or through Internet.
Some of the banks even allow you to make application through phone banking.
Here you need to ensure that you have sufficient balance in your bank account.
Money, which is blocked under ASBA, remains in your bank account till the time shares are allotted to you and is debited only if shares are allotted to you.
The money which is blocked under ASBA is unblocked fully or partly as and when the shares are allotted or the issue is withdrawn.How to make an application under ASBA?
You need to fill a separate, special ASBA application form available with your bank for making physical application or you can apply through net banking channel of your bank.For making application through net banking or phone banking you need to register yourself for this purpose with your bank. Also you need to have a demat account, not necessarily with the same bank, through which you are making an application, and of course a valid PAN number.
The ASBA process can not be used for making application for allotment of shares in physical mode.
In your ASBA application, in addition to the details of your demat account, you have to provide your banker with your DP ID and client ID as per your DP account. You also need to specify the quantity you wish to bid for.
Can you revise or withdraw your application?
Yes, you can revise the bid or withdraw the application before the bid closing date by making an application for withdrawal to your bankers where you have submitted your application.However if you want to withdraw the application after the bid closing date, you can do so before the process of allotment is completed by submitting your withdrawal application to the Registrar to the issue.
Under ASBA, the bank uploads the data in respect of applications and revisions to the site of stock exchanges electronically and does not have to send physical copies of the application to either stock exchanges or registrar to the issue.Saturday, August 14, 2010
9 investment lessons to learn from Warren Buffett
Price is what you pay. Value is what you get.
-- Warren Buffett
Every investor dreams of becoming as successful as Warren Buffett, to be the richest person in the world. But rarely do these investors follow their icon's mantras conversed through television interviews, books, periodic journals, etc. It is worthwhile to pay heed to Buffett's stock investing tips. This knowledge on value investing will help drive investors to make sound investment decisions.
1: Invest in quality businesses, not in stock symbols
If a business does well, the stock eventually follows.
Most investors don't analyse the businesses they invest in. They simply follow the symbols or brands of successful corporate houses. The best example is the Reliance Power IPO. When the IPO of Reliance Power was announced, many investors rushed to subscribe to it with the reason that it had the brand name 'Reliance'. However, the stock was overvalued at the time of IPO and investors made a considerable loss after the stock was listed on the stock exchange.
When considering IPOs, one needs to do considerable research about the concerned company, it's past performance, how the IPO money will be utilised, details about the company management, and when the operations will commence so that company starts generating profits.
As, Buffett states, 'An investor needs to buy the stock as if he is buying the whole company down the road'. Investors are also expected to be acquainted with the following before buying the company stock:
• What are the company's products?
• How consistent is its products' sales?
• How receptive is the company to change in consumer trends?
• Who are its competitors? What distinguishes it from them? What is the company's USP?
• What would be the most worrying thing (risk) about owning such a company's stock?
2: Don't invest for 10 minutes if you're not prepared to invest for 10 years
Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.
Investors get panicky when they track share prices continuously. Share prices are quite volatile in the short-term. However staying invested in a value company will pay you rich rewards over a long-term period, unlike short-term investments that are prone to constant price fluctuations.
Note: A smart investor needs to also think before selling an investment that may be in a loss due to certain economic factors but has tremendous potential to rise in future.
3: Scan thousands of stocks and look for screaming bargains
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
A smart investor needs to identify stocks of a company that have great potential to grow in years to come. Most investors buy a stock when it is extremely high because it's in demand. The key is to identify stocks which have potential to grow and are available at a cheap or reasonable price.
Such acumen can be achieved by scanning the company's annual financial reports, understanding its vision and mission statements, its business cycle and business process, long term plans, etc.
Essentially, it means taking some time out to carefully understand and analyse the company and its business. Investors also need to keep updates of their selected companies and sector news on a regular basis. Information about a company is readily available through secondary sources such as journals, economic newspapers, television, etc. Many a time such secondary sources are sufficient for analysing and arriving at a decision for investment.
4: Interpret how well money is being utilised by the company's management
Beware of geeks bearing formulas.
The money available to the company's management is called capital. The capital comprises the equity and long-term debt of the company. The success of any business depends on how well its management uses its capital. Such an analysis can be made with the help of 2 ratios: Return on
Equity (ROE) and Return on Capital Employed (ROCE).
ROE: It measures a company's profitability by revealing how much net profit a company generates through shareholders' equity.
Return on Equity = Net profit / Shareholder's equity
ROCE: It indicates the efficiency and profitability of a company's invested capital; calculated as:
ROCE = EBIT/ Total assets - Current liabilities
EBIT = Earnings before interest and tax deductions
A smart investor must interpret the company's financial statements and understand the quality of return on his investment.
One needs to search and invest in companies with good returns on capital invested while employing little or no debt. This means that ROE and ROCE should essentially be the same.
5: Stay away from so-called 'glitter' stocks
Rule No 1: Never lose money. Rule No 2: Never forget rule No.1.
There are thousands of stocks traded each day on Sensex and Nifty. A smart investor has to find the best out of the available investment options. There are stocks that have high trading volume, extreme movements in their price (either up or down), or are constantly in news.
A smart investor should examine whether the stock-in-news has some real value or is just glittering at the moment.
For example, remember the Satyam fiasco? The stock was glittering for many years and was a hot pick among investors and analysts alike until its accounting fraud surfaced in 2008 when Ramalinga Raju (the company's mentor) confessed to the crime. The company tampered its annual reports and fooled investors for years, all the time being 'A-listed' on national stock exchanges.
Although the episode is behind us now, it is wise to do your homework before investing in each and every company. You would also be wise to diversify your investments across sectors and asset classes, which will give you the needed cushion from loss from any one investment.
6: Wait for a fat pitch then decide what to do with it
Value is what you get.
Wait...wait...wait until everything is in your favour while buying a stock. These are the stocks with the highest chance of being successful and making you money year after year. To be able to do this effectively, one needs to master the below steps as suggested by Buffett.
As mentioned earlier, invest in stocks that are not glittering on investment magazines or recommended by stock analysts/editors on popular television channels. Perform your own research then make vital investment decisions.
After identifying great businesses to invest in at a fair price, buy a "meaningful amount of stocks in them". That means hold only a limited number of companies in your portfolio; holding excess stocks results in lower returns on your overall portfolio and spending more time to keep track of the same. This may also add considerable risk as it is not feasible for an individual to diligently observe all companies in his/her portfolio.
Ideally, one should limit the number of stocks in his/her portfolio to 10-15. This way, there is an advantage of your portfolio not being cluttered.
Buffett elaborates about knowledge and confidence. According to him, one must require the knowledge of selecting the right stocks by careful research and also build confidence in one's decisions. Market will test your patience to reach the expected returns. So, you need to stay firm with your investment decisions during volatile trading sessions. Do a good amount of homework and keep faith in your research and decisions.
7: Calculate how much money you will make...
...not whether the stock is undervalued or overvalued, according to some academic model such as the discounted cash flow.
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
A smart investor needs to keep an eye on expected returns from particular stocks in the long term and calculate the entry and exit prices of invested companies. This requires thorough research and analysis of the company's available data. Buffett recommends being one's own analyst to profit from investing in stocks.
8: Remove the weeds and water the flowers -- not the other way around
Someone's sitting in the shade today because someone planted a tree a long time ago.
One of the best practices according to Buffett is to sell loss-making stocks during a bull run and buy the winner stocks during a bear hug.
The amount realised by discarding loss-making stocks can be utilised to invest in stocks with future growth potential and there by achieving better returns.
9: Become a conscious investor
It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
Most of the time investors make little progress due to insensible investment decisions. Their decisions are based on emotion, hope and wishful thinking without carrying out proper research and analysis.
It's necessary for a smart investor to think logically while investing and performing research. You need to keep on asking yourself why you want to invest in a particular company and eliminate decision-making based purely on intuition, emotion and herd mentality.
Due diligence before investing in a particular company saves you from the worry of your money being tied-up in companies and businesses that you have little or no knowledge about.
So follow the sound advice provided by Warren Buffett -- avoid the noise and glitter, do your own research, and constantly update your knowledge and stock-picking skills.
In short, be a smart investor!
-- Warren Buffett
Every investor dreams of becoming as successful as Warren Buffett, to be the richest person in the world. But rarely do these investors follow their icon's mantras conversed through television interviews, books, periodic journals, etc. It is worthwhile to pay heed to Buffett's stock investing tips. This knowledge on value investing will help drive investors to make sound investment decisions.
1: Invest in quality businesses, not in stock symbols
If a business does well, the stock eventually follows.
Most investors don't analyse the businesses they invest in. They simply follow the symbols or brands of successful corporate houses. The best example is the Reliance Power IPO. When the IPO of Reliance Power was announced, many investors rushed to subscribe to it with the reason that it had the brand name 'Reliance'. However, the stock was overvalued at the time of IPO and investors made a considerable loss after the stock was listed on the stock exchange.
When considering IPOs, one needs to do considerable research about the concerned company, it's past performance, how the IPO money will be utilised, details about the company management, and when the operations will commence so that company starts generating profits.
As, Buffett states, 'An investor needs to buy the stock as if he is buying the whole company down the road'. Investors are also expected to be acquainted with the following before buying the company stock:
• What are the company's products?
• How consistent is its products' sales?
• How receptive is the company to change in consumer trends?
• Who are its competitors? What distinguishes it from them? What is the company's USP?
• What would be the most worrying thing (risk) about owning such a company's stock?
2: Don't invest for 10 minutes if you're not prepared to invest for 10 years
Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.
Investors get panicky when they track share prices continuously. Share prices are quite volatile in the short-term. However staying invested in a value company will pay you rich rewards over a long-term period, unlike short-term investments that are prone to constant price fluctuations.
Note: A smart investor needs to also think before selling an investment that may be in a loss due to certain economic factors but has tremendous potential to rise in future.
3: Scan thousands of stocks and look for screaming bargains
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
A smart investor needs to identify stocks of a company that have great potential to grow in years to come. Most investors buy a stock when it is extremely high because it's in demand. The key is to identify stocks which have potential to grow and are available at a cheap or reasonable price.
Such acumen can be achieved by scanning the company's annual financial reports, understanding its vision and mission statements, its business cycle and business process, long term plans, etc.
Essentially, it means taking some time out to carefully understand and analyse the company and its business. Investors also need to keep updates of their selected companies and sector news on a regular basis. Information about a company is readily available through secondary sources such as journals, economic newspapers, television, etc. Many a time such secondary sources are sufficient for analysing and arriving at a decision for investment.
4: Interpret how well money is being utilised by the company's management
Beware of geeks bearing formulas.
The money available to the company's management is called capital. The capital comprises the equity and long-term debt of the company. The success of any business depends on how well its management uses its capital. Such an analysis can be made with the help of 2 ratios: Return on
Equity (ROE) and Return on Capital Employed (ROCE).
ROE: It measures a company's profitability by revealing how much net profit a company generates through shareholders' equity.
Return on Equity = Net profit / Shareholder's equity
ROCE: It indicates the efficiency and profitability of a company's invested capital; calculated as:
ROCE = EBIT/ Total assets - Current liabilities
EBIT = Earnings before interest and tax deductions
A smart investor must interpret the company's financial statements and understand the quality of return on his investment.
One needs to search and invest in companies with good returns on capital invested while employing little or no debt. This means that ROE and ROCE should essentially be the same.
5: Stay away from so-called 'glitter' stocks
Rule No 1: Never lose money. Rule No 2: Never forget rule No.1.
There are thousands of stocks traded each day on Sensex and Nifty. A smart investor has to find the best out of the available investment options. There are stocks that have high trading volume, extreme movements in their price (either up or down), or are constantly in news.
A smart investor should examine whether the stock-in-news has some real value or is just glittering at the moment.
For example, remember the Satyam fiasco? The stock was glittering for many years and was a hot pick among investors and analysts alike until its accounting fraud surfaced in 2008 when Ramalinga Raju (the company's mentor) confessed to the crime. The company tampered its annual reports and fooled investors for years, all the time being 'A-listed' on national stock exchanges.
Although the episode is behind us now, it is wise to do your homework before investing in each and every company. You would also be wise to diversify your investments across sectors and asset classes, which will give you the needed cushion from loss from any one investment.
6: Wait for a fat pitch then decide what to do with it
Value is what you get.
Wait...wait...wait until everything is in your favour while buying a stock. These are the stocks with the highest chance of being successful and making you money year after year. To be able to do this effectively, one needs to master the below steps as suggested by Buffett.
As mentioned earlier, invest in stocks that are not glittering on investment magazines or recommended by stock analysts/editors on popular television channels. Perform your own research then make vital investment decisions.
After identifying great businesses to invest in at a fair price, buy a "meaningful amount of stocks in them". That means hold only a limited number of companies in your portfolio; holding excess stocks results in lower returns on your overall portfolio and spending more time to keep track of the same. This may also add considerable risk as it is not feasible for an individual to diligently observe all companies in his/her portfolio.
Ideally, one should limit the number of stocks in his/her portfolio to 10-15. This way, there is an advantage of your portfolio not being cluttered.
Buffett elaborates about knowledge and confidence. According to him, one must require the knowledge of selecting the right stocks by careful research and also build confidence in one's decisions. Market will test your patience to reach the expected returns. So, you need to stay firm with your investment decisions during volatile trading sessions. Do a good amount of homework and keep faith in your research and decisions.
7: Calculate how much money you will make...
...not whether the stock is undervalued or overvalued, according to some academic model such as the discounted cash flow.
Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
A smart investor needs to keep an eye on expected returns from particular stocks in the long term and calculate the entry and exit prices of invested companies. This requires thorough research and analysis of the company's available data. Buffett recommends being one's own analyst to profit from investing in stocks.
8: Remove the weeds and water the flowers -- not the other way around
Someone's sitting in the shade today because someone planted a tree a long time ago.
One of the best practices according to Buffett is to sell loss-making stocks during a bull run and buy the winner stocks during a bear hug.
The amount realised by discarding loss-making stocks can be utilised to invest in stocks with future growth potential and there by achieving better returns.
9: Become a conscious investor
It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
Most of the time investors make little progress due to insensible investment decisions. Their decisions are based on emotion, hope and wishful thinking without carrying out proper research and analysis.
It's necessary for a smart investor to think logically while investing and performing research. You need to keep on asking yourself why you want to invest in a particular company and eliminate decision-making based purely on intuition, emotion and herd mentality.
Due diligence before investing in a particular company saves you from the worry of your money being tied-up in companies and businesses that you have little or no knowledge about.
So follow the sound advice provided by Warren Buffett -- avoid the noise and glitter, do your own research, and constantly update your knowledge and stock-picking skills.
In short, be a smart investor!
Tuesday, April 27, 2010
Eight things employees want from a CEO
After working with more than 100 CEOs, Melissa Raffoni, Faculty at MIT's Sloan School and Harvard's Kennedy School has created a list of what employees want their leaders to do.
She says that while interacting with CEOs, she often reminds the CEOs that leading takes time and energy. Directing the feelings, attitudes, actions, and behaviors of a team is a big task. Often, she also hears the secrets of these CEOs' employees, about what truly aggravates them and what they love about their bosses.
Here is the list of what employees want their leaders to do.
1. Tell me my role, tell me what to do, and give me the rules. Micromanaging? No, it's called clear direction. Give them parameters so they can work within broad outlines.
2. Discipline my coworker who is out of line. Time and time again, I hear, "I wish my boss would tell Nancy that this is just unacceptable." Hold people accountable in a way that is fair but makes everyone cognizant of what is and isn't acceptable.
3. Get me excited. About the company, about the product, about the job, about a project. Just get them excited.
4. Don't forget to praise me. Motivate employees by leveraging their strengths, not harping on their weaknesses.
5. Don't scare me. They really don't need to know about everything that worries you. They respect that you trust them, but you are the boss. And don't lose your temper at meetings because they didn't meet your expectations. It's often not productive. Fairness and consistency are important mainstays.
6. Impress me. Strong leaders impress their staffs in a variety of ways. Yes, some are great examples of management, but others are bold and courageous, and still others are creative and smart. Strong leaders bring strength to an organization by providing a characteristic that others don't have and the company sorely needs.
7. Give me some autonomy. Give them something interesting to work on. Trust them with opportunity.
8. Set me up to win. Nobody wants to fail. Indecisive leaders who keep people in the wrong roles, set unrealistic goals, keep unproductive team members, or change direction unfairly just frustrate everybody and make people feel defeated.
She says that while interacting with CEOs, she often reminds the CEOs that leading takes time and energy. Directing the feelings, attitudes, actions, and behaviors of a team is a big task. Often, she also hears the secrets of these CEOs' employees, about what truly aggravates them and what they love about their bosses.
Here is the list of what employees want their leaders to do.
1. Tell me my role, tell me what to do, and give me the rules. Micromanaging? No, it's called clear direction. Give them parameters so they can work within broad outlines.
2. Discipline my coworker who is out of line. Time and time again, I hear, "I wish my boss would tell Nancy that this is just unacceptable." Hold people accountable in a way that is fair but makes everyone cognizant of what is and isn't acceptable.
3. Get me excited. About the company, about the product, about the job, about a project. Just get them excited.
4. Don't forget to praise me. Motivate employees by leveraging their strengths, not harping on their weaknesses.
5. Don't scare me. They really don't need to know about everything that worries you. They respect that you trust them, but you are the boss. And don't lose your temper at meetings because they didn't meet your expectations. It's often not productive. Fairness and consistency are important mainstays.
6. Impress me. Strong leaders impress their staffs in a variety of ways. Yes, some are great examples of management, but others are bold and courageous, and still others are creative and smart. Strong leaders bring strength to an organization by providing a characteristic that others don't have and the company sorely needs.
7. Give me some autonomy. Give them something interesting to work on. Trust them with opportunity.
8. Set me up to win. Nobody wants to fail. Indecisive leaders who keep people in the wrong roles, set unrealistic goals, keep unproductive team members, or change direction unfairly just frustrate everybody and make people feel defeated.
Subscribe to:
Posts (Atom)