The Wish - Part 1

[ Series of 3 parts: Part 1 | Part 2 | Part 3 ]

Like every fresh beginning of any course, I saw many new faces, but this new girl was surprisingly quiet, quite as dead, and never spoke to anybody. She used to sit on her favorite spot at the corner alone. Her face was always pale without any expression.

I kept noticing her for some days. One fine day Prof. Lakshman a.k.a "Prof. Laughatron", cracked a funny joke, which was so hilarious that everybody laughed very hard except her. It made me curious, "what's wrong with her? Why is she so dead inside?  Maybe she went through hell in her life. Maybe I should talk to her." Other girls had already made their groups, and nobody noticed her. She was all alone.

I decided to talk to her. And, ask if she could lend me her notebook for one day, as I was absent yesterday. 

"Hey! Megha, can I borrow your book for one day? I was absent yesterday (with a nervous smile)". She gave me her notebook without saying a word. I figured maybe I should ask a question which will make her say something, "Well, it's cold in here, isn't it? Would you like to go out to the canteen and have a cup of coffee with me?". She nodded her head up and down slowly. I was disappointed as I wanted to hear her say something.

Well, we went to have the coffee. The entire time I kept on talking to avoid the awkwardness, as I knew she was a shy type and a little weird. I stopped talking when I saw her drink her coffee. She was drinking it like a cute little kitten. I kept looking at her. It was then I noticed how cute she was. I don't know why I felt like holding her softly and kiss her forehead. I wish I could remove all her pain from her life.

The next thing I notice is: I am lying on my bed, and my mom is trying to wake me up. "What the hell just happened?"   How am I here? I was in the canteen. I was so curious, I asked my mom, "Maa, why am I in bed? I was in my college", mom laughed and said "just shut-up and get ready for college you drama king."

I was very confused; maybe I was dreaming I convinced myself. "Varun! Your friend Megha is here to go to college with you" said mom. I was both happy & confused, "I will be there in a minute Maa". I got ready real quick, and as soon as I reached the hall, I saw Megha laughing and talking with my mom. I had never seen her smile before. "Wtf? Is my Maa such a good comedian? Even Prof. Laughatron couldn't make her smile a bit, but my Maa made her laugh without even breaking a sweat-thank you Maa, I am proud of you" I said to myself in my mind. And with a blush, I looked at Megha's beautiful eyes and said "Come Megha, we are getting late”, while leaving I saw my Maa smiling and mouthing slowly "She is nice, I like her (with a wink)". It made me think "No wonder Megha Laughed, which Maa says that to her son? Maybe my mom is not possessive at all, or does she love my stupid named sake little brother Vishnu more?”. “Are you thinking something" a sweet voice reached my ear, "OMG, she is talking to me (with a blush)" I responded "yes, I was thinking will go every day together to college, where do you live exactly? And I am glad you found my home”, "I am your neighbor you silly; I live next building" she said with a hypnotizing smile. "Mannnn! She smells so good. I so wanna hold her hand and walk with her" I thought in my mind, and I responded "Oops! My bad! Well, why are you so quiet in class? I mean I feel special today that at least you spoke to me.", I was curious. "That was my past, because of you I can smile again, thank you Varun"..........       to be continued in Part 2.

The Wish                                                          © Random Tales

Introduction to Stock Market - financials

Even stock markets have bulls!

My previous post on equity markets received a good response, so I decided to continue educating our followers about the wonderful world of shares. By the way, in India, just 2% of population invest in stocks, while in developed countries like the US, almost 50% people invest in stocks.

It hurts to see that most of our very profitable companies (which we call 'Indian') are owned by FIIs (Foreign Institutional Investors) and FPI (Foreign Portfolio Investors). For example, more than half of HDFC bank, which is the most valued bank in India and the second most valued bank in the entire world, belongs to foreign investors. Just a few thousand invested in HDFC bank, 20 years ago, would be worth crores by now. Similarly, Indian people have lost billions of dollars of profits, in many companies, to foreign investors. Just because most of the Indian investors invest for short term, they can't hold high-quality stocks for the long term, and thus, most of us aren't able to build wealth in equity markets.

The power of compounding

The human brain isn't wired to process compounding. Our brain can process arithmetic progression. You can quickly calculate the result of adding a number 10 times. But can you calculate the result of growing a number by 15% every year for 30 years? Take a guess. 

Let's see the result of compounding  INR 1 lac at 8%, 15%, 20%, 25% and 30% for 30 years.

                     

Compounding for 30 years

You can see that at 8%, which is our current (government bonds, FDs)interest rate and which is going to go down with time, the amount will become INR 10 lacs. If I include the tax on interest, the final value will be very less. 

But suppose you get your hands on a stock that grows by 15%, 20%, 25% or 30%. Isn't the contrast between the end results astounding! Increase the time by 30 years more and you won't believe your eyes.

For 60 years.

                                             

Compounding for 60 years

It is the power of compounding. I assure you that it's near impossible to see 30% compounding for such a long time. Even 20-25% compounding is hard. But many Indian companies like Nestle, HUL, Infosys, TCS, Asian Paints, Kansai Nerolac, Apollo Hospitals, ITC, HDFC Bank, HDFC, Kotak Mahindra Bank, etc., have given such kind of compounding in the past. Some of these have given even more than 30% for a specified period of time. And that's why these companies have become so big. But after a certain size, growth starts slowing down, and that is natural. 

That's why we should try to spot these companies when they are small in size. But even now, after becoming big some of these businesses will continue giving superior returns compared to fixed deposits and government bonds. The trick is to buy them below their fair value and keep holding on to them. If you pay a very high price(much higher than the fair value), even for the greatest company, you're going to lose money. But I'll come to the concepts of valuation later. For now, let me make you guys familiar with certain terms and ratios used while evaluating a stock.

Stock market jargon     

Here are some financial terms you'll encounter while studying financial results of a company.             

Accounting period: Financial statements are made for a fixed period. For most of the companies, the annual accounting period is from 1st April to 31st March, and this annual period is divided into four parts of 3 months each, called quarterly periods. Every listed company publishes quarterly results and annual results. They also publish an Annual Report of the business every year.

These are the terms you can find in a typical profit/loss statement.

Sales/Revenue/Total Income: Value of the products sold/ or services delivered during an accounting period.

Operating Profit(OP): Think of operating profit(EBITDA) as profit you get after you cover the costs of running your day to day business like Raw material, Salaries, Maintenance, Marketing expense and other business expenses. So OP it is Sales minus operating costs. 

Operating Profit Margin(OPM):  Operating profit/Sales. The higher the OPM, the more efficient the business (because it has lesser costs compared to its competitors). 

It is also known as EBITDA - Earnings before interest, tax, depreciation and amortisation.

Net Profit: Operating profit -  (other costs like Interest paid on debt and depreciation/amortisation of assets)  - tax paid for the period  

EPS:   Earnings per share =  (Net Profit)/(No of shares). Suppose the company has INR 10 crore net profit and it has one crore outstanding shares, so its EPS becomes 10/1 = 10/share. 

P/E:  Price to earnings ratio is (the Current trading price of the stock)/(EPS). 

Let's take the above example.  Suppose the current price of the stock is INR 100/share and EPS is 10, so the P/E becomes 10. Generally speaking, the lower the P/E, the cheaper the stock price. But P/E ratio, in isolation, can give a wrong picture of the stock. It is a useful tool in comparing a stock to other stocks in the same industry(or comparable).

Now let me give you an example of a profit/loss statement

Income Statement

The is a snapshot from the Dec quarter result of Hatsun Agro Ltd, A south based dairy products company.

You can see Total Income from operations, amortisation which is 830 crores(For Dec-15),  it's also known as sales and revenue. 

You can see "profit from operations before Other income and finance costs" which is 43.53 crores. Add to this Depreciation and Amortization expense (27.12 crores) and you'll get Operating profit(EBITDA) which is 70.65. (Note: depreciation and amortisation are not operating costs)

You can see net profit which is 17.55 crores for the dec-15 quarter.

Now for finding EPS, we need to find the total number of shares. You can see share capital, which is 10.87 crores with a face value of INR 1. Just divide the share capital by the face value and you'll find the total number of shares. Total shares = 10.87/1 = 10.87 crores. 

So, EPS for the December quarter is 17.55/10.87 = 1.62 

You can compare the dec quarter results with the previous quarter results given above and check the growth rate of the company and the improvement in operating profit margins. You can also see the 9 month results(from April to Dec) and you can see that the net profit(EPS) growth is very fast - from 2.83 to 7.11. What do you think is the reason for this EPS growth? Analyze the statement again and give your answer in comments.

P/E ratio can't be determined from quarterly EPS, and we won't know the annual EPS till the march quarterly results are out. But by observing the growth rate in EPS, and by observing the 9 month EPS (which is 7.11), we can make an educated guess of about 9.5 annual EPS. The current share price is 414, so estimated P/E ratio would be 414/9.5 =  43.35. Does this stock look expensive to you?

I think this is enough for now. In the next post, we're going to look at certain Balance Sheet terms. If you've any questions, please feel free to ask.

Is your money really growing in Fixed Deposits?

Are you one of those people who keep most of their savings in their bank accounts? If yes, then I have some bad news for you. While you may think that the money you've invested in fixed deposits is very safe and its value is growing every year, in reality, you couldn't be further from the truth.

Yes, I agree that your money is increasing by 8%(after taxes & fees) every year. But does its value increasing? Let's see.

INR 1 crore, invested at 8% compounded interest rate, ten years ago, would have become INR 2.15 crores today. That looks like a huge gain; your money has more than doubled, right?

Now think about what you could have bought for INR 1 crore, ten years ago.

Think about real estate. In last decade, housing prices have gone up by 5x-10x(even 100x at some places), all over India. So a plot of land, which you could have afforded ten years ago, has become so expensive that the interest which you've earned won't even cover it by half!

Think about everyday household items that you use. Most of the branded items like shoes, hair oil, food, etc., have become 3x-4x expensive.

In fact, the real inflation rate, not CPI or WPI but what we experience, is about 10-12%. So you're losing money like anything while you think it's safe! Is that what you want?

How can you beat inflation?

Well, don't worry if until now you've "invested" in fixed deposits. Worrying won't change anything. But now that you know what the problem is, you can do something about it. 

Since most of you're employed, it would be difficult for you to start your own business. That leaves you with three options - real estate, the stock markets and commodities(chiefly gold). 

Real estate is a tricky investment. You've to know many things like location, expected development, price, etc. Plus when you part with your investment, you've to pay at least 20% ltcg tax and 3% cess. If can really give enough time to check all the facts, then you can invest in real estate.

Even gold has been proved to be a sound investment over the long term. In last ten years, it has gone up about 4x, which turns out to be about 14% CAGR, which is an excellent return. Though from last few years, it has come down a little bit. I don't know much about gold so I won't elaborate further but you can google it. You can also take a look at platinum, which cheaper than gold nowadays! But remember, like real estate, even investment in gold will be taxed at similar rates when you sell it.

The stock market can also be a very rewarding investment. You may have heard of people like Rakesh Jhunjhunwala and Warren Buffett, who have made billions from the equity markets. The most notable advantage of shares over real estate and gold is that, in India, LTCG(long term capital gains) in stocks are completely tax-free! Let me elaborate on stocks a bit.

Stock Market

BSE Sensex has 16.4% CAGR growth rate since inception.

Sensex since April 1979

Some businesses need external funds to grow - for starting new factories, for expanding distribution/marketing network, etc. When a business achieves sufficient size or when the owners of a company want to sell a part of their business, they come with an IPO(Initial Public Offering) to the stock markets. During an IPO, investors(like you and me) can buy the shares of the company. 

A Share or Stock represents a (small) part of a company. For example, if a company has ten lacs total outstanding shares and you own 10000 shares of the company, then you're 1% owner of the company.

After the completion of IPO, the shares of companies are traded on Bombay Stock Exchange(BSE) or National Stock Exchange(NSE) or both. So you can buy shares of any listed company through these stock exchanges. 

Why invest in stocks

If you think that a business can grow a lot in coming years or if you believe that the shares of a company are trading below their expected fair value, then you can buy its shares. 

For example, three years ago, when microfinance industry was going through a crisis, I felt that SKS Microfinance LTD was trading below its fair value. So, I accumulated its shares at an average price of INR 150.

Stock Price of SKS Microfin

On Friday, its closing price was 546. So, it almost has been a 4 bagger(yes that's what we call it) for me in 3 years. And that's been possible because its profits have grown at a healthy rate.

Similarly, there are other businesses that have grown a lot over many years. Take Eicher Motors Ltd, the maker of 'Royal Enfield' bikes, as an example.

Stock Price of Eicher Motors

It has shown an astounding growth of 17-18x over the last five years. And what is the reason for such an increase in its share price? Simple because its profits have grown at a very fast pace and because it was undervalued.

But not all companies give such kind of returns. Take SBI, which is a poorly managed bank, as an example.

Stock Price of SBI

As you can see, SBI has destroyed shareholders' wealth over the last five years. It is because the business isn't performing very well. Did you know there is four lacs crore worth of bad loans (like Mallya) in our banking system and most of them are in public sector banks; meanwhile, private sector banks like HDFC Bank, Yes Bank and Kotak Mahindra Bank are growing at a decent pace!

So the moral of the story is that you can earn a lot of money from the stock market provided you select right stocks at low prices and keep on holding to those stocks for the long haul. And amazingly you don't even have to pay taxes on your long-term gains! You can beat the shit out of inflation. So think again the next time when you're going to "invest" your savings in fixed deposits!

*If you want more articles on stocks, you can request in comments.

Low self esteem drives people away

Low self-esteem attracts negativity

Just a simple painting which describes how low self-esteem creates the negative aura around a person, This creates a negative atmosphere around them.

RT's Law of Emotion says:- "Like Emotions Attract, i.e., Negative attracts Negative & Positive attracts Positive".  

Negative thoughts attract negative results. And Negative effects creates a negative atmosphere. 

-ve Thoughts -> -ve Results -> -ve Atmosphere

+ve Thoughts -> +ve Results -> +ve Atmosphere 

The following example will help us understand this law.

Example 1: When we watch Sad Clips from Movies/ TV Series, what do we feel? Most of us become sad and majority of females drop few tears or so. This shows how sad dialogues create sad thoughts, and this further creates sad atmosphere and we cry or become sad.

 Example 2: - We all love comedy movies and series, to name few "Mr. Bean, Tom and Jerry, Two & a half man, The Big Bang Theory", What do we feel like when we watch these show? Don't we smile and giggle along with the characters? 

Hence we can conclude that if we want something good to happen, we must think positive and be positive. If things don't work out don't loose hope. 

According to RT's law of equilibrium of emotion, we understand that life has both Negative & Positive situations.  Hence, we conclude the following quote:

Life is like a round chain of Sadness & Happiness, if your bad time is going on, believe that your good times are on the way.

FYI (For Your Information) RT is a short form of "Random Tales" :p if you find it different from established law, it's because we modified it a bit. :p  

Restrictions is a cruel punishment

Restrictions kill dreams

Never put restrictions on your loved ones, it's a selfish move which will kill their dreams and freedom. If you love your partner, let them do what makes them happy, be happy in their happiness.