Tuesday, September 22, 2015

Importance of Ethics in the Corporate World

Time and time again, ethical failures erupt in the corporate world (including at the so called blue-chip companies) demonstrating that lessons from history are conveniently forgotten by business organizations in their pursuit of top line and bottom line.

The focus on top line and bottom line blinds the top executives in business enterprises so much that they choose to ignore unethical practices in the organization. The top guns in many organizations are those who possess uncanny street smarts and strong horse sense.

The top guns are typically those who get customer orders, sell products, deliver services, collect invoice money, etc. and while doing so may at times indulge in unethical practices which might be viewed by the organization as "being smart".

Several cases in the last few decades serve as grim reminders of how the system finally catches up with the street smartness of top guns and the end consequence of unethical practices garbed as uncanny street smarts and strong horse sense.

Financial Purpose of Life

The overall purpose of life is very hard to nail down. However, the financial purpose of life is relatively less harder to nail down. The financial purpose of life can be summed as the quest to transition to a state where one's income is resilient to recession from a state where one's income is exposed to recession.

State of income being resilient to recession means one would have multiple sources of income which is generally steady even if one looses employment. This would mean one has, in a sense, become a capitalist.

The advantage of being a capitalist is that money comes not from spending labor but from investing capital. So a capitalist will get an income without working. In fact, a capitalist will not need to have employment and would rather give others employment. Those who get employment from the capitalist would be at the mercy of the capitalist for their employment.

State of income being exposed to recession means one would have no or few sources of income which may not even be steady if one looses employment. This would mean one is, in a sense, a laborer.

The challenge of being a laborer is that money comes from spending labor. So a laborer will need to be employed to get an income. A laborer will depend upon the mercy of a capitalist for employment.

So one has to save some money from the job one has and invest it wisely to transform it into capital. The capital thus formed should be used to get earnings which can then be re-invested to further grow the capital.

Once the size of the capital grows to an amount which can provide returns that would replace the salary received from the job and some more, one can stop working purely for financial reasons.

The capital amount at which one achieves financial freedom is simply the transition point between the state of being exposed to recession and the state of becoming resilient to recession.

Saturday, September 19, 2015

Thinking about Living till the Age of 100 Years?

Living till the age of 100 years is no mean achievement. It would imply the person took care of all the three - character, health and wealth - throughout a very very long innings. It would also mean the person succeeded in exemplifying what some wise man had said "if wealth is gone nothing is gone, if health is gone something is gone and if character is gone everything is gone".

Holding on to character in all situations is very important as that would in turn provide the strength to hold on to health and wealth and even if they are lost to earn them again. Character is what ensures that health and wealth are put to good use by the person. Good character plays an important role in achieving good health and good wealth. Holding on to character for 100 years is undoubtedly extremely difficult but if done, is absolutely commendable and worth emulating.

For living till 100 years of age one ought to stay fit and healthy. With the food and lifestyle one is exposed to in the current times, it is extremely difficult to stay fit and fine. Controlling one's food habits, investing some time on exercising regularly and ensuring adequate rest and relaxation go a long way in helping one stay healthy.

Also it is important not to spend too much time in a bed-ridden state before one passes away. The best thing would be to die all of a sudden while one is engaged in the daily chores and in the worst case not more than a week in the bed before bidding the final adieu. Those who spend weeks, months and at times even years on the bed before they pass away may live long but would undergo tremendous amount of pain and suffering in embracing death. Death should ideally be something one should long for at the end of a long life, a life which was lived well!

Finally, living long has a financial angle to it. One would typically start earning when one reaches the age of 25 and retire at the age of 60 years. For living till the age of 100 years one would have to save and invest whatever is earned in 35 years (from age 25 to age 60) to last for 40 years (from age 60 to age 100).

In the earning phase of one's life, one has to ensure savings and investments are planned even though one has to spend part of the money earned for necessary expenses (utility bills, etc.), taking care of liabilities (like loan payments, etc.) and taking care of family and social obligations (kid's education, marriage, etc.). The retirement kitty has to be attended to throughout the working life to ensure one has enough money to sustain  the financial burden of living till the age of 100 years.

Lately, the wealth part has come under severe attack due to the turmoil and uncertainly in the world economy. Earlier one could be assured of working from the age of 25 years till the age of 60 years. However, in the current times, retirement can come abruptly. One might be 45 and suddenly find oneself jobless any fine day due to reasons over which one has no control.

In  light of the above, one needs to exercise frugality and prudence in spending the money one earns. This may in fact require one to become extremely stingy at least in the earlier part of one's earning life. Money thus saved should be invested wisely, earnings from the investments should not be spent rather re-invested to increase earnings potential. The cycle of investment and earnings re-investment in combination with the power of compounding is a very useful financial concept that can help one manage one's life beyond retirement at the age of 60 or even earlier, if it comes to that.

Wednesday, September 16, 2015

Why Warren Buffet Doesn't Own Technology Stocks?

Why Warren Buffet doesn't own technology stocks? Well, only Warren Buffet really knows the true answer to this question - "why Warren Buffet doesn't own technology stocks?"

In case one would like to take a good guess at why it is so, then perhaps following reasons could be offered.
  • Technology landscape keeps on changing rapidly and it is not certain whether technology of today will survive tomorrow and it is next to impossible to project this ten years hence.
  • Technology stocks are based on products and services which are not essential to human existence. One cannot live without eating bread for even a few days but one can easily live for as long as one would want to without sending a tweet!
  • Technology business is good and one can perhaps make some money as well, when the first product or service offering comes out but as soon as the novelty wears off and lookalikes appear in the marketplace the revenue model becomes weak and loss-prone. For understanding this aspect one just needs to search for "buy xyz online", where xyz could be anything. The number of websites which come up as options to consider are too many that one can be sure that most of them are not going to be making money.
  • Technology stocks tend to glamorize and glorify technology over customer and business needs. For example. buying something online should be seen as another way to buy something. However, at times the impression one might get is that buying something online is the only way to buy. The technology behind it is shown to be worth billions of dollars based on the valuations done by certain class of investors (this class would certainly exclude Warren Buffet).
  • How can the channel to sell something become more valuable than the thing being sold? Any customer would buy something to get some experience and buying channel is a small part of the overall experience. 
  • After all, no one can eat an e-bread in case one is hungry. You can e-buy bread but you can never buy e-bread. It is not hard to guess what is more important for human existence - bread or buy.

Saturday, September 12, 2015

Analysis of Stock Price Moving Up and Moving Down

It is generally believed that it is tough to recover from the loss on a stock since if the stock price moves down by a certain percentage it needs to go up by a higher percentage to get even.

Though the above is factually true it is not a very relevant factor when one is investing in stock markets. The above is the mathematical effect of base whereby percentage increase for the same quantum would be lower for higher base and vice versa.

Suppose you have 100 dollars. An increase of 10% would mean the price would move up to 110. Now to go back to 100, 110 has to move down by the same quantum. In case this effect is represented as percentage the numbers would be different. While moving up the percentage would be (110-100)/100, which is 10%. And while moving down the percentage would be (100-110)/110, which is -9.1%. The net effect on the profit/loss from the stock doesn't change due to this mathematical effect.

Following table and chart shows this relation quite clearly. It is just a mathematical result and should not be of much concern to anyone involved in stock market investing.

Some Thoughts and Tips on Stock Market Investing

Despite the risks and challenges inherent to stock market investing, lot of people have made good money from stocks. Some thoughts and tips on stock market investing are given below. These have to be seen as broad guidance and should be calibrated to suit different conditions.
  • Making money from stocks is actually quite simple if one were to consider the revenue model. Buy a stock A at X and sell at Y. Return, quite simply, is Y - X. If Y > X, one makes profit, it’s as simple as that. The thing which is not simple, however, is how to make sure one picks stock at price X so that the likelihood of it going on the upside is almost certain and the likelihood of it going downside is almost nil. This should surely be the case in the medium-term and long-term.
  • Choose a certain amount of money, say X, which represents the money per share that one is willing to and can afford to loose on a stock. Don’t buy any stock which has a sticker price above 1%-2% below X. With brokerage, taxes, etc. the final price per share will come close to X. The exact numbers have to calibrated based on the brokerage, taxes, etc. prevalent in the stock market one chooses to operate in. The idea is to cap your loss per share to a maximum of X. Remember a bad news about any stock can lead its market price to drop closer to zero (like in the case of Enron the stock price fell to few cents from 90 to 100 dollars in a few days time)
  • Stocks that are picked should be bought in sufficient quantity. Imagine one bought 100 shares of a company at X. So the total investment was 100 X. Assume the stock price goes up by 60% (which means stock price would become 1.6 X). In such a case the investment will grow to 160 X, a profit of mere 60 X which is not much. In fact the real return will be lesser than 60 X. If however, 1000 shares were bought the profit will be 600 X.
  • Build position of an amount around A to B in the selected stock, where A to B would have to be significantly large enough. This at the per price cap of X (from point 2 above) would translate to around M to N stocks (which should be large enough so that overall profit is high enough as per point 3 above) . For stocks with lesser price the quantity will be much larger.
  • The idea behind taking a sufficiently large position in any stock is that the increase in the price per stock will translate into gains that are significant enough in volume terms in case they are significant in percentage terms. Obviously, this would mean losses will also be significant enough in volumes terms in case stock price declines significantly in percentage terms. And that is what it should be as this is precisely what the game of stock picking is essentially all about.
  • Assume one buys one stock by investing an amount X. On the downside, one can loose the entire X, which is the maximum risk per share. However, on the upside, X can become 1..5 X, 2 X, 5 X, 10 X or even higher (a multi-bagger as Peter Lynch would call them). The science and art here is to buy the stock at a price at which the probability of it going further down is minimized which in turn would minimize the risk of loss. If this can be coupled with the analysis of the company fundamentals behind the stock that the probability of the stock going up, if not immediately and in the short-term but certainly in the medium-term and long-term is reasonably high enough it would maximize the de-risking of eventual gain.
  • Price of a stock prices move up and down based on news related to the overall economy, industry sector and the specific company behind that stock. Experts in the market distill the news to figure out the direction and quantum of price movement. This change in price can move in the direction to the extent of the quantum thought to be the “needed correction”, over several days, weeks and even months.
  • Expectations around the financial performance of the company play a major role in reinforcing the impact of relevant news and in some way are seen as the culmination of the news that keeps trickling in. The actual results on its own as also compared with the expected results reinforce or counteract the direction and quantum of price movement.
  • It is commonly understood that if the price of a stock declines by 50% then it needs to rise by 100% to be back where it was at the start. For example, if the price at which a stock is purchased is X and subsequently falls by 50% to reach 0.5 X then to be X again it needs to rise by 100%. This however is due to mathematical base effect, percentage increase for the same quantum of increase declines with the number becoming larger and vice versa. This is not so relevant since theoretically speaking, on the down side stock price can never go below zero but on the upside can reach infinity. It is an interesting thought to consider that if a stock picker is lucky enough in his life to invest a substantial capital in one stock that goes up infinite times, figuratively speaking, he will be infinitely rich, again figuratively speaking
  • Suppose a person has 2 Z amount and he invests Z in stock A and another Z in stock B. Assume company behind stock A shuts shop making Z(A)=0, also assume company behind stock B does stupendously well so that Z(B) becomes N X, where N is a sufficiently high number. For an extremely high value of N, the person would have made it in life, at least the financial part of it.
  • Trading should be avoided to the extent possible. Assume a person buys a stock at price X and sells it at a price Y. Return from such an investment will be Y - X. However, real return will be much lesser due to brokerage, taxes, etc. Let’s assume this cost is a% of the base cost. So the actual buy price will be X + aX and the actual sell price will be Y - aY. The real return in this case then would (Y + aY) - (X + aX), which is equal to (Y - X) + a(Y - X). As is clear, a(Y - X) is what goes to the broker and the Government. The number ‘a’ can be assumed to 1% to 2% in case one holds the stocks for the returns from it to be considered under long term capital gains. The number ‘a’ would be much higher in case the return falls under short term capital gains.
  • Patience to buy or not to buy is very important.In addition, maintaining liquidity is quite important. Having liquidity when opportunity to buy a stock presents itself is so utmost important that it can make a significant difference to the overall portfolio performance. Hence having patience to invest money in a staggered manner is crucial as it allows at least some part of the portfolio getting picked up at the bottom or very near to the bottom. The cheaper one can buy the better off one is. In any case, one should maintain 10% of portfolio as “contingency” amount to be used only when any rarest of rare opportunity presents itself. This by definition would happen but once or at best few times in a stock picker’s lifetime. Patience to sell or not to sell is equally important in a likewise manner.
  • Big players have the leverage to cause huge gains and losses over a short period of time, in fact at times within few minutes, hours or one trading day. These big players buy and sell in huge numbers leading to sudden and extreme price changes.
  • Select M to N stocks across various sectors. M to N could be 20 to 25 stocks or any number of stocks that can be comfortably managed and depends on how much time one can spend on managing the overall portfolio (Walter Schloss apparently had more than 100 stocks whereas Warren Buffet apparently has fewer number of stocks) . Buy them at the right time, which means at reasonably low price with immense upside potential in the future. Buy in sufficient quantity so that possibility of significant gain is large.
  • Read the last two years annual report and don’t invest outside the index. Companies which are in the index are under higher scrutiny from auditors, analysts and authorities. However, they all could go wrong and mislead an investor (think Enron). That is why the cap of X is helpful in case there is a fraud. History tells us this is likely to happen again.
  •  Buy dividend paying stocks if one wants some tax-free income to come one's way. Dividend are tax free and can be re-invested in the same stock to effectively reduce the price per stock.
  • Buy with the thought of holding forever (Warren Buffet style). However, assess the portfolio performance regularly (every day if possible otherwise at least once every week) and if there is a case to sell, don't hesitate to sell.
  • Target how much money you want to have so that you can live comfortably. First and foremost try reaching that target. Once one is financially secure, one can make riskier investments that have the potential to earn more. Keep some part of the money in bonds or fixed deposits always. Don't be 100% invested in stocks.
  • Avoid mutual funds, unit-linked plans and exchange traded funds, if one can invest in stocks directly. These are designed to generate consistent salary and commission for the fund mangers even if they make loss for the investors. They clearly violate the principle of pay for performance. 
  • If one has stayed invested in life insurance policies, mutual funds, unit-linked plans and exchange traded funds for several years, one may want to continue. If one wants to exit, it is advised to compute the surrender cost, consider the returns so far and take an informed decision. Don't exit just because experts tell you they are not good or someone tells you the best investment is putting your entire money in stock market.

Thursday, September 10, 2015

Why Working Towards Quitting the Rat Race is So Very Critical?

Most of those having a day job are a part of the rat race.

Like a rat scurrying from one corner to another in search of food and safety, corporate rats are scurrying from one day to another, 9am to 6pm, crushing their souls and suppressing their happiness.

Everyday they are braving mad traffic and leaving behind urgent family issues to reach their place of work which they don't love at all to do a job they may not like much or at all!

(Source: http://cliparts.co/clipart/5908)

Most of the employees don't enjoy what they do, have no fun at where they work and have little or no respect for their reporting supervisor.

This is especially true in those cases where the supervisor despite being thoroughly incompetent has been dropped from above by the higher management that loves boot-licking from such supervisors and their absolute loyalty.

Like rats can be caught unawares anytime and thrown out of the house, corporate rats can also be fired at any time.

In any organization except the founders and their loyalists/stooges (in the top management or below) everyone is a rat.

It is critical, therefore, for corporate rats to start preparing themselves for quitting the rat race as early as possible.

Delay can be expensive since as time passes the rats would get heavier (higher compensation and benefits) and hence become a big liability.

In case the business runs into trouble the fat rats are the ones who will be asked to go first.

Corporate rats should work towards saving and investing what they earn in such a manner that they manage to generate enough income to survive in case they loose their job.

Remember, it is harder for a fat rat to come back into the market once thrown out.

Creating financial cushion to see them through life is extremely important for corporate rats.

Life time employment is long gone. Retirement benefits are completely missing or not guaranteed.

And due to increasing pace of change and complexity in the world, rats are highly overexposed and vulnerable.

Remember in the corporate world, retirement is sudden and immediate.

So are you a corporate rat?

Are you worried about your financial security being too much tied to your job security?

Are you anxious that as you live paycheck to paycheck, loss of job would have severe impact on the financial well-being of you and you family?

Are you stressed and afraid about the fact that you may not have a full-time job for very long and certainly not after you turn 40 or 45?

If yes, time is ticking for you, the corporate bomb you call as workplace is waiting to explode.

A smart corporate rat will start accumulating stuff for the rainy days. Saving and investing can go a long way in enabling this.

 A smart corporate rat will also watch out attentively, rain can start anytime!

Friday, September 4, 2015

Small Companies but Big Politics and Even Bigger Egos

Small companies are small only in terms of size of business and number of employees however they are big in terms of politics and even bigger egos. Working in such companies can be a real pain not only in the neck but also the other parts of the body.

Such companies are like a mini zoo where one can find a scary collection of corporate animals. These animals are generally high on attitude and low on competency and maturity. And that may be the reason why they would not survive in a truly professional and big organization. Following paragraphs provide the various types of silly and strange corporate animals in small organizations.

Type P - These are people who are asked to look after areas where they have the least competence just because they are part of the inner circle of the top dog in the company. Loyalty means everything in such organizations and hence they get promoted despite lack of competence. Their position in the organization is a direct function of their foot-licking and yes-sir approach to dealing with Type V. They are unfair, unethical. unprofessional and non-transparent in their dealings with others. They love writing immature and stupid emails (a trait shared with other animals in the zoo-like small company - Type R, Type M, Type S and Type M/D).

Type M - These are people who carry big attitudes on their shoulders as if they are big-shots and movers and shakers of the industry. Such people are hardly known in the industry and no one recognizes them beyond the four walls of the small company. Their egos are however as big as the size of an elephant.

Type R - These are people who think they are the only ones who are smart. They treat others as if others don't exist. They believe being a part of the core team only they are important. They make others feel as outsiders. They are very grade conscious and carry a holier than thou and condescending attitude towards others especially those who have lower grade than theirs.

Type S - These are people who are abrasive, uncouth and pugnacious. They are hyper defensive and would generally not accept any suggestion that they need any improvement. They would make silly and immature comments and try to show how they are the only ones who are working while others are passing their time in the company.

Type T - These are people who are silent henchman. They would do as Type V would command them to and would come across as very well meaning. However, being a part of the inner circle they also adopt a style of treating others who are not a part of inner circle as outsiders. In addition, in moments of truth they show the outsiders their true place.

Type M/D - These are the true losers in the whole set-up. They are really dead-woods in the system and are wannabe Types T. However, they lack the grace and professionalism. They would come across as smart asses (along the lines of Type R). They are generally cynics and too demanding on others. They believe their view is only right and only what they do is important. They try to maintain exclusivity of the work they do but fail to realize that what they are doing is very commonplace. Again like Type M, no body knows them in the industry but they behave as if they are the only experts. They have a pugnacious, accusative and demeaning style of dealing with others. In some sense they complement the characteristics of Type P and no wonder are good pals with Type P. They would form a triad and gang up on others to drive their malicious agenda.

Type V - These are people who generally sit at the top and adopt a hands-off style. Their favorite hobby is writing emails once in a while and drop an initiative on a parachute. There are no discussions and no deliberations their requests are orders. Type P act generally like slave of Type V.

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