How the Investor can maximize VALUE of his Investments?

What would it be like if we tried to click the mouse pointer on an icon and the icon kept shifting position? It would definitely irritate and frustrate us. Similarly “value” is something which can behave like the irritant icon. In the financial world which “value” is “true value” for a particular investment can be difficult if not impossible to determine. This is because the parameters based on which evaluation is being made may shift, throwing up a different figure each time.

 

Value

 

So what is “value” ? It is generally believed that the value of a stock is built around the organization’s patents, brand, fixed assets like land and building, financial resources, human capital, financial resources, growth potential or ability to produce earnings and cash flow. Many would be of the opinion that it is the organization’s ability to produce consistent earnings over a period of time. At the other end of the spectrum would be something called “liquidation value”, which in simple terms would be the short-term assets which are pegged at a higher value, after meeting all liabilities than the market quoted capitalization.

 

Back in the 1950s’ people were interested about the information pertaining to business enterprises which were on the verge of liquidation as the prices tended to move north when such an eventuality presented itself. “Worth more dead than alive” was a rhetoric which was popularly used to describe such opportunities. However it is important to note that the ‘value of today’ may be different from what it was yesterday and could vary with the “price of tomorrow”.

 

It boils down to the fact that it is of paramount importance to the investor to get his assessments right, as that is where the crux of the matter lies. A conclusive assessment of the stock value which the investor loosely believes in is far better than an inconclusive or incorrect opinion on valuation which is firmly believed and implemented. 

 

The Relationship between Price and Value

 

It is always true to say that “value for money” is derived from acquiring an article or making an investment when the utility derived from the object (article or investment) is greater than the price paid for it. This analogy may be further extended to state that “Investment success doesn’t come from buying good things but rather buying them well”.

 

Identifying Opportunities for Value Investments

 

Investment markets are of a nature which creates opportunities from people who buy and sell emotionally and from people who trade in the market instead of investing in the market. That’s why Warren Buffet quoted that ‘ Stock market is designed to transfer money from Active to the Patient. It is important to note that the investor needs to make a concerted attempt towards understanding the mind and motives of other investors. It can provide enriching knowledge and experience required for sustained profitability in the financial world.

 

On the flip side, investing aimlessly would be like chasing a mirage. An oasis which seems to exist but actually may or may not be there. It leads to a situation where the investor will either gain a windfall or  incur stupendous losses. It can be safely concluded that – buying something at less than its intrinsic value is what it is all about in the investment market.

 

Adding Value

 

No prediction is cent percent foolproof unless proved so in the long run. The full risk in a portfolio can only be understood threadbare until hindsight is visible and by then perhaps the worst is over anyway. It is always a good policy to weigh the management performance against the market volatility to have a fair estimate of the investment opportunity when such a possibility presents itself.

 

Value Investing Skills

 

What kind of result a person can expect if he masters the value investing skills? Here is a matrix which has been used by Howard Marks to compare the priorities and expected outcome of two different investors and an assessment of their respective prospects:

 

	Aggressive Investor	Defensive Investor
Without Skill	Records high gains when the market is on an upswing and looses heavily when the market moves down.	Does not lose much when the market moves down but does not gain much either when the market moves up.
With Skill	Records high gains when the market moves up but does not lose as much when the market moves down.	Does not lose much when the market moves down but does record good gains when the market moves up.

 

 

Tips to become a better Investor

 

So what does the investor do to assess value of an investment which he or she has made or proposes to make in the future? Well, if we may emulate Warren Buffet, the best thing to do is to gather as much relevant information as possible. Buffet, is known to read the Wall Street Journal, New York Times, Washington Post besides the business section of the Los Angeles Times, Chicago Tribune, Fortune, Forbes and Business Week.

 

1.     Read the business section of your daily newspaper with particular attention to news on companies whose stock you hold or propose to hold.

 

2.     Gather a fair idea of the different economic parameters which have an effect on stock price- petroleum prices, GDP figures, ratings by international rating agencies etc.

 

3.     Fix your own parameters as regards your risk taking ability, the amount of investment to be made and other investment priorities.

 

The above should hold every investor in good stead on a long term basis. 

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company

 

Investment Discipline: One thing that Changes Everything about your Investments

There are people who are disciplined and there are who are not. What is the difference between these two sets of people? The first set of people lead an orderly, healthy and peaceful life, prepared for the ups and downs, not upset with the lows, and make others feel comfortable in their company. The second set of people are those who keep moving from one crisis to the other driven more  by circumstances and responding to them wholly unprepared taking a toll on their health, peace of mind and relationship with others.

Why Discipline is Necessary?

Life is a journey. Whenever we think of going on a vacation do we go it just like that?. For such vacation, there has to be lots of planning and preparation to meet certain uncertain eventualities. Same is the situation for life. A planned journey makes it orderly, happy and peaceful. So is for life and so is for investment.

Discipline is a Key factor to be a Successful Long Term Investor:

Why do we need to invest at all? The answer is to meet our short term, medium term and long term financial goals. Our idea of investing is not getting returns from one single transaction, but to invest and generate returns in multiple transactions over period of time. So that, we can meet all our financial goals and be a successful long-tem investor. To be a successful long term investor, you need to be a disciplined investor. You need to follow some strategies consistently. You need to review your portfolio regularly.

Creating a Disciplined Investment Plan:

The Discipline of writing something down is the first step toward making it happen. We are living today much longer and we are going to live much longer tomorrow. Most people are not in a position to earn by working once they are above 75 years of age. If they have to live another 15 years or so they would need money and with inflation, they would need more money than today, to lead the present lifestyle.

Hence a disciplined investment approach will help them to achieve their long term financial needs and will not be required to depend on others. For this, one has to invest in equity more, when one is young, and after doing it for 25 to 30 years may start moving towards more to debt. You need to invest in such way that your investment are beating inflation at least during the accumulation phase i.e. pre-retirement phase.

A long term plan of investing in Mutual Fund SIP (Systematic Investment Plan), in mutual fund schemes with a good track record, will give you fabulous returns in an investment horizon of 25 to 30 years. The last 40 years in Indian economic scenario we have seen several ups and downs and we are going to see similar volatility in the next 40 years. The human spirit creates the volatility and also helps overcome them and move towards a more comfortable life style.

Why Discipline in Investment is Needed?

There is no magic wand that can resolve our problems. The solution rests with our work and discipline.

A journey of investment over 30 years is like going for the Mt. Kailash Manas Sarovar Yatra of olden days (not that of today where you go by air to Kathmandu, then take a beautiful SUV to China border and from there a still more beautiful bus to Mt. Kailash Manas Sarovar) where meticulous planning is required with regular monitoring when faced with uncertain weather and other challenges during the Yatra. A highly disciplined person would have been able to complete the Yatra and return to family and friends in those days.

Same is the case for a 30 years period yatra of investments, where you have vehicles like , Blue chip Company stocks, good Mutual Fund Schemes,  Gold ETFs and Fixed deposits with banks and will help you to build a financial castle which will take care of all the earthquakes, cyclones, and droughts of life beyond 75 years of Life. Get prepared in a Disciplined Way!!!

Some Disciplines to Ponder Over:

·         Create a customised financial plan, implement the financial plan and stick to the financial plan regardless of the market conditions.

·         Create an asset allocation ratio based on your risk taking appetite and required rate of return; Rebalance periodically and maintain the same asset allocation.

·         Continue your Mutual Fund SIP till you meet your financial goals. Don’t stop in-between.

·         Review your financial plan and investment plan regularly.

Discipline is the bridge between goals and accomplishment.

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company. 

The Biggest Threat to your Investment Decisions and What You can do about it!

One of my clients got a call from her mother when we were seriously building her portfolio. I enquired after seeing her panicky reaction. Her mother wanted my client’s son to be removed from a school immediately because there is an accident happened in the swimming pool. The student died during a swimming session. How correct the decision would be to take the child out of the school without understanding what exactly happened?

Be it good or bad, human mind takes decisions based on availability bias. Read ahead to understand the impact of availability bias in the investment decisions we make and how we can avoid this situation.

What is availability bias?

The availability bias is nothing but taking decisions influenced by the recent happenings or under dramatic circumstances. Most of the times, we make decisions based on such occurrences. Yes, we do this while investing our hard earned money.

What happens when you take investment decision influenced by availability bias?

How do you decide to buy or sell stocks? Do you just rely too much on immediately available information? It could be something you read in a paper, advice from your friend or hyped among investors. Do you know what happens when you take such decisions?

You must know about few incidents that happened in the recent past. India’s largest coal production company Coal India came public in 2010. It was known as ‘mother of Indian IPO’. Some even claimed that Coal India IPO would show the mountain to climb for the investors. The investors rushed and bought a high number of stocks. Look at it now, just within 3 years. As the coal prices and so the stocks going down, it is considered as the most dreadful investment option by the investors. The reliance IPO stands out as one more example here.

The same happened with the tech bubble in the end of 19s and the beginning of 20s. Everyone wanted to become an entrepreneur and holding some stocks that has ‘.com’ in its name. Not only in India, house bubble that occurred in USA is the perfect example of people loosing huge if the decision is taken because of availability bias. The reason is the popularity of the products.

How can we avoid falling a victim of availability bias?

Sir John Templeton, a brilliant investor and mutual fund pioneer, even advises us to avoid popular. He says, “Avoid the popular. When any methods of buying or selling stocks become popular, move on to the unpopular one”

Taking decisions based only on emotions, immediately available information, popularity leads to disaster. What can be done to avoid putting ourselves in such scenario? Study, study and study more about the product before investing in it.

Read, analyse and map with your goals while creating a portfolio. Invest in a product only when you have made enough research about it. Listen to what others are saying without having any prejudiced thoughts. Use the information collected from others just as pointers for your research, not for taking any major decisions. Analyse the pros and cons of each product.

Seeing any red flags in the portfolio. Do not ignore them. Dig more to understand why you have them in red. At the end of the research the red ones may become green and vice versa.

Bottomline:

Think about September 11 terrorist attack on the twin towers in America. Remember looking at the planes crashing at the twin towers and the fatality it brought in? Imagine, what would have happened if people chose to go by road instead of flying due to availability bias? Road accidents would have gone up. Whereas in reality, flight journey has become much safer due to the safety measures applied all over the world.

Likewise, not getting influenced by your emotions, the recent ups and down in the market, information from your friend or family is very important while taking the most important decisions about your investments.

Still feeling difficulty to get rid of these. Follow the simple exercise to get rid of availability bias.

-          Write about a product you want to buy or sell

-          Write about the reasons why you want to buy or sell

-       Take a break once written. Go out for walk, read a book, watch a nice movie or play with your child, so that you don’t think your investments.

After a break read the reasons again and again. You will get a clear picture on what exactly needs to be done now. Take your decisions brilliantly now!

K. Ramalingam is the chief financial planner at Holistic Investment Planners, a leading financial planning and wealth management company.