Being wealthy is not about how much you earn, or what car you drive, or what size home you live in. Real Wealth is about securing a regular income stream, without you physically working, of more than double your living expenses.
Bringing home a huge salary, or being a very successful entrepreneur, does not make you rich. Although it is easier to become rich if you are earning well, however you do need to fulfill this Wealth Building Potential.
When you start living beneath your means, you are on the road to wealth creation. You need to invest the difference. As an aspirational spender, always wanting the branded clothes, watches, and later on cars, or a larger home, you will never develop real wealth. You need to sacrifice what you want now, for what you will need in the future.
Creating wealth can be started from any income level, but it is easier to become rich if you have a large income. It does not really matter which vehicle you use to create wealth. It can be real estate, shares, fixed deposit, commodities, etc. What is important is making a PLAN to be financially free. You can leverage your results by contacting a Certified Financial Planner – a CFP professional would have studied such diverse topics such as insurance, investments, estate planning, tax planning, retirement planning and would be able to take a more holistic view of the planning process.
Hence do make a plan today, to be wealthy in 10 or 15 years.
Thursday, May 20, 2010
Monday, May 10, 2010
When to cash out your share
According to Warren Buffett, the best holding period is forever. That is how he has made his great wealth, by picking the right companies and holding them for long, long period of time.
I have worked out a plan, to make myself financial free. I have a target to invest every month. Whether I invest in equity or debt i.e. my asset allocation depends Price / Equity of the Sensex
- Below 12 times 90% equity and 10% debt
- 12 – 15 times 80% equity and 20% debt
- 15 – 20 times 70% equity and 30% debt
- 20 – 25 times 60% equity and 40% debt
- above 25 times 50% equity and 50% debt
I tend to have a core portfolio – blue chip shares which I will never sell, and the rest of the portfolio – shares which will book out when certain parameters have been met.
With the core blue chip portfolio, every time the Annual Report appears, I study the same, and on the basis of the conditions mentioned in my earlier blog, determine at which price I would add to my stock. If that price is reached, I buy.
Reasons to sell:
1. When a stock that has been historically traded at between 10-25 times earning, begin trading at 40 or more times earnings, for no other reason than that the stock market is going through a period of mass speculation, its time to get out.
2. A good rule of thumb, is to add up the expected per share earnings of a company over the next 10 years and them compare the sum with what you would earn if you sold the stock and placed the proceeds in bonds instead.
3. Other reasons:
(a) A better opportunity presents itself.
(b) The business or environment changes.
(c) When the target price of the security has been met.
i. First target price – sell quarter the stock when the price goes up by 50%
ii. Second target price – sell another quarter of the stock when the price doubles. (the stock is almost free)
I have worked out a plan, to make myself financial free. I have a target to invest every month. Whether I invest in equity or debt i.e. my asset allocation depends Price / Equity of the Sensex
- Below 12 times 90% equity and 10% debt
- 12 – 15 times 80% equity and 20% debt
- 15 – 20 times 70% equity and 30% debt
- 20 – 25 times 60% equity and 40% debt
- above 25 times 50% equity and 50% debt
I tend to have a core portfolio – blue chip shares which I will never sell, and the rest of the portfolio – shares which will book out when certain parameters have been met.
With the core blue chip portfolio, every time the Annual Report appears, I study the same, and on the basis of the conditions mentioned in my earlier blog, determine at which price I would add to my stock. If that price is reached, I buy.
Reasons to sell:
1. When a stock that has been historically traded at between 10-25 times earning, begin trading at 40 or more times earnings, for no other reason than that the stock market is going through a period of mass speculation, its time to get out.
2. A good rule of thumb, is to add up the expected per share earnings of a company over the next 10 years and them compare the sum with what you would earn if you sold the stock and placed the proceeds in bonds instead.
3. Other reasons:
(a) A better opportunity presents itself.
(b) The business or environment changes.
(c) When the target price of the security has been met.
i. First target price – sell quarter the stock when the price goes up by 50%
ii. Second target price – sell another quarter of the stock when the price doubles. (the stock is almost free)
Saturday, April 17, 2010
INVESTING DIRECTLY IN THE SHARE MARKET
If you are not willing to put in the time and effort to study the share market and invest in the same, it would be better to invest through mutual fund. Spend at least that much time on your share investment study as you would do to buy a new fridge. Most people make their share purchase decisions based on the following:
1. Reference from your stock broker, who earns brokerage only when you buy and sell your shares.
2. Hot tips from your friends.
3. Noise on CNBC or other news channels
Just investing into blue chips would not protect you. Some of the blue chips are so overvalued that it could take years to get any returns on your investment. Sometime a mediocre company attractively priced could be a better investment than a blue chip company which is growing at 20% every year.
While going through the Annual Report, always read Directors / Chairman’s Report and check the auditors notes to the accounts. I am listing out some of the considerations to be taken into account while making a share purchase decision:
1. Understanding the company and its share
(a) When was it incorporated
(b) What is the business of the company
(c) Address / location
(d) Who are the promoters and what it their holding in the company
(e) Investor returns
i. Dividends
Company should be giving regular dividends over the last 5 years or if not they should be having great alternative investment opportunities
ii. Bonus shares
iii. Right shares
(f) Stock movement over the last 10 years.
All this would give you a feel for the company, it products and the share price movements
2. Profit and Loss account Over last 5 years minimum
(a) Income is increasing regularly
(b) Profit before depreciation, interest and taxation growing
(c) Profit after tax growing
(d) Profit after tax to income
Profitability should be more than that of its peers.
3. Buisness Fuel Over last 5 years minimum
(a) Working Capital to Sales
The lower the better
Retail 10-15%
Heavy manufacturing 25-35%
(b) Current Ratio
Current Asset / Current Liabilities
It gives an idea of the company’s ability to pay the short term liabilities (sundry creditors and short term debt) with is short term assets (cash, inventory and receivables)
If the ratio is less than one, it means that the company cannot meet its short term liabilities. Normally should be around 2:1. Sudden spike in ratio shows a problem with efficiency
(c) Quick Ratio
Cash + Marketable securites / Current liabilities
(excludes inventory)
It is a measure of the company’s liquidity to meet the short term liabilities
Should be one. Less than one shows liquidity problem and too high shows efficiency problem,
4. Investments
Always check out this schedule in the accounts. See whether the company is investing in group companies
May or may not be a good thing.
5. Debt of the company
(a) Debt / Equity Ratio
Indicates how the company is financing its assets or how leveraged the company is.
2:1 debt equity ratio is desirable
(b) Interest Coverage
Earnings before interest and taxes / interest
This ratio is used to determine how easily a company can meet its debt obligations, if the earnings fall
Ideally should be in the range of 3-4 times
(c) Profit after Tax to Long Term debt.
According to Warren Buffett this should be less than 5 times, except for banks and financial institutions.
6. Bang for the Buck Over the last 5 years minimum
(a) Earnings per share
Profits divided by number of shares
Should be increasing every year.
(b) Profit after tax / Capital Employed (Equity + Reserves)
Should be more than 15%
(c) Historical Price Equity
PE ratio is calculated by dividing the share price by the earning per share.
Check the last 5 years PE ratio and the current PE ratio should be less than the average of the last five years.
(d) Beat Treasury returns
EPS divided by current share price gives the returns earned by the share at the current price.
Should be more than 8% which is Government security returns.
(e) Price to Book Value
If the company is trading less than the book value, it means the market believes the asset value of the company is over stated or the company is earning very poor (or negative) returns on its assets
According to Warren Buffett, you should understand the company’s business. You have to look for companies which have a durable competitive advantage. You need a product that wears out quickly or a service that you need to use again and again. If the company re-purchases its shares, it would be a positive.
This analysis is done by a layman without looking at future earnings, which is an unknown, or technicals of the market. It anyone has further points to add to this, please do add to the discussion on the subject to veena@veenamalgonkar.com or malgonkar@vsnl.com
Next week, I would look at when to sell the shares, although according to Warren Buffett the best holding period is forever.
Wednesday, April 7, 2010
Budget 2010
IMPLICATIONS FOR INDIVIDUALS WITH THE BUDGET 2010
Enclosed are only those parts of the budget which will affect you directly.
1. TAX RATES
Tax rates have widened to encourage consumption and saving
Revised Tax Rates Earlier Tax Rates
Unto Rs 160,000 - Nil Unto Rs 160,000 – Nil
Rs 160,000 to Rs 500,000 – 10% Rs 160,000 to Rs 300,000 – 10%
Rs 500,000 to Rs 800,000 – 20% Rs 300,000 to Rs 500,000 – 20%
Rs 800,000 and above – 30% Rs 500,000 and above – 30%
For women and senior citizens the tax free limit is Rs 190,000 and Rs 240,000 respectively.
2. New Direct Tax Code will be implemented by 1st April 2011. I will be looking at the implication of this shortly.
3. Deduction of Rs 20,000 allowed for investment in Long Term Infrastructure bonds over and above the 80C limit of Rs 100,000
4. Dividend:
Dividend on Equity and debt continue to be tax free. Dividend on equity mutual funds also not taxed. No dividend distribution tax for equity mutual fund. However for debt mutual fund the dividend distribution tax is 13.841% (22.145% for corporate) and liquid funds it is 27.681% for both individuals and corporate.
5. Renting:
Renting of immovable property to attract service tax
6. Auditing of Accounts:
(a) Professionals with income of more than Rs 15 lacs.
(b) Companies with business more than Rs 60 lacs.
7. New Pension Scheme
The Government will give Rs 1000 per year to each person who joins the NPS with an annual investment of upto Rs 12000.
Enclosed are only those parts of the budget which will affect you directly.
1. TAX RATES
Tax rates have widened to encourage consumption and saving
Revised Tax Rates Earlier Tax Rates
Unto Rs 160,000 - Nil Unto Rs 160,000 – Nil
Rs 160,000 to Rs 500,000 – 10% Rs 160,000 to Rs 300,000 – 10%
Rs 500,000 to Rs 800,000 – 20% Rs 300,000 to Rs 500,000 – 20%
Rs 800,000 and above – 30% Rs 500,000 and above – 30%
For women and senior citizens the tax free limit is Rs 190,000 and Rs 240,000 respectively.
2. New Direct Tax Code will be implemented by 1st April 2011. I will be looking at the implication of this shortly.
3. Deduction of Rs 20,000 allowed for investment in Long Term Infrastructure bonds over and above the 80C limit of Rs 100,000
4. Dividend:
Dividend on Equity and debt continue to be tax free. Dividend on equity mutual funds also not taxed. No dividend distribution tax for equity mutual fund. However for debt mutual fund the dividend distribution tax is 13.841% (22.145% for corporate) and liquid funds it is 27.681% for both individuals and corporate.
5. Renting:
Renting of immovable property to attract service tax
6. Auditing of Accounts:
(a) Professionals with income of more than Rs 15 lacs.
(b) Companies with business more than Rs 60 lacs.
7. New Pension Scheme
The Government will give Rs 1000 per year to each person who joins the NPS with an annual investment of upto Rs 12000.
Saturday, November 21, 2009
Road to Financial Freedom
It is not how much you earn that makes you rich. You can be earning Rs 300,000 per month, but if you are spending more than that amount, you are still poorer than the person earning Rs 30,000 per month and investing Rs 10,000 out of it.
Have a plan for financial freedom and every month first pay your asset column before making any other payments. This will soon become a habit. Your asset column is anything that gives you income - and be very clear, the big home you live in is not an asset, but instead a liability. So take regular steps forward towards financial freedom and ultimately riches.
If you need any help in building a financial plan do contact me at malgonkar@vsnl.com
Have a plan for financial freedom and every month first pay your asset column before making any other payments. This will soon become a habit. Your asset column is anything that gives you income - and be very clear, the big home you live in is not an asset, but instead a liability. So take regular steps forward towards financial freedom and ultimately riches.
If you need any help in building a financial plan do contact me at malgonkar@vsnl.com
Sunday, October 25, 2009
Mind Your Own Business
Most breadwinners spend their lives minding someone else’s business and making that person rich. Even if you are self employed, your time is spent in serving your clients. Every month, do spend some time on your own business, which is building up your own assets.
Real Assets are:
1.Businesses which do not require my presence
2.Income Generating Real Estate
3.Stocks
4.Mutual Funds
5.Bonds, Fixed Deposits, etc
6.Royalties from intellectual properties
7.Anything else that produces income
Real Assets are:
1.Businesses which do not require my presence
2.Income Generating Real Estate
3.Stocks
4.Mutual Funds
5.Bonds, Fixed Deposits, etc
6.Royalties from intellectual properties
7.Anything else that produces income
Saturday, August 8, 2009
THE MASTER PLAN
Understanding Financial Planning
Financial planning is the process of meeting your life goals through the proper management of your finances. Basically as the name implies, financial planning is "A PLAN". The plan should work whether the markets are up or down, whether you are earning or lost a job, whether you are sick or well, even whether you are alive or dead.
Financial planning is the process of meeting your life goals through the proper management of your finances. Basically as the name implies, financial planning is "A PLAN". The plan should work whether the markets are up or down, whether you are earning or lost a job, whether you are sick or well, even whether you are alive or dead.
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