Financial Values for Kids!

I happened to read an article (Raise a money-smart kid) which reiterates the fact that the process of relating to our money begins from a very young age. Like all other things, how we see our parents relate to money will have an effect on how we relate to it. All parents want their children to appreciate the value of money and to understand it from a young age, so that as they grow older, they make better finance related decisions.

Here are some tips from the article:

• When children ask for something that you do not want to purchase, don’t just say no or tell them we don’t have money. Explain to them why you are choosing not to spend your money on that particular item.
  
• Give an allowance and create a spending plan with their money. For example, a portion of the money goes into a savings jar, a portion goes into a spend jar and a portion goes into a giving jar.
  
• Invite kids into the account balancing activities.
  
• Teach kids how much things cost.
  
• When you find yourself making an impulsive purchase, explain that to your kids.
  
• Have open communications at home regarding money. Being secretive and stressed will be passed on to children

PS: This is not a parenting blog ;-) Just happened to like this article.

Smart Investment Questions

Continuing with our series of "Investment Thinking", here's a list of questions that you should ask yourself before making an investment:

1. Do you believe in the business the company is in?

2. Does the sector have growth potential?

3. Are you sure you want to be part of it?

4. Are you willing to stay in for the long haul?

5. Are you willing to not get perturbed by temporary price setbacks?

If you have answered yes to all the questions, you are on your way to making a smart investment!

When to Say No to an IPO

Are you planning to invest in an IPO either because you are getting the shares at par value or because the company you are investing in is sound and stable? WAIT!! Play safe and ensure you are not duped.

Par value is the face value of the share. This par value is arrived at through an accounting decision and bears no relation to either the intrinsic value of the company or how the public view the company. For example, XYZ Co. share has a par value of Rs 5, but it's market price could be around Rs 3,000 per share. When the share is traded in the stock market, however, this value may go up or down depending on the supply of and demand for the stock. If everyone wants to buy the shares, the price will go up. If nobody wants to buy them, and/ or many want to sell them, the price will fall. This price is referred to as the market price. A share with a face value of Rs 10 may be quoted at Rs 55 (market price higher than the face value) or even Rs 9 (market price lower than the face value).

The fact that you are getting shares at par value is no guarantee that the company is going to do well and you are going to rake in big bucks. Often, most companies come out with shares that are at a premium to their face value. Those that come with shares at face value seem to appear more alluring.

Some companies whose shares are already available for trading come out with a fresh lot of shares. This is referred to as a new issue or a Follow-on Public Issue (FPO). A common bait investors fall for is the fact that the price of the new issue is cheaper than the current market price. For example, the current market share may be Rs 100, while the FPO may be offered at Rs 90.

Don't let this be the only reason you buy those shares. Sometimes, the prices of the stock may get manipulated in the market to keep the prices high before a new issue is announced. So, while you think you are getting a good deal because the shares are available at a discount to the market price, the reality is that the market price has been artificially hyped up because of manipulation by brokers.

A share that is being oversubscribed does not mean it's a good investment for you. The process is that investors have to bid for shares in an IPO. When the bids exceed the number of shares, the issue is said to be oversubscribed. There could be a number of reasons why this happens.It could be that many banks and financial institutions are liberally offering loans to apply for the issue. This could result in oversubscription. Also, institutional investors (as against retail investors like you and me) don't have to put up money upfront when they make their bids. That means they can put in any amount of bids, hoping that the resulting hype about oversubscription will lure more investors.

At the same time, just because you are investing in a sound and stable company, it does not mean you have to pay a very high price for it. It would be a futile investment if the company was excellent but the price of the issue was sky high.

So think about these issues next time you go shopping (IPO shopping that is ;-) )

When to Say Yes to an IPO

When the stock market is on fire, everybody seems to be making money on IPOs. You buy an IPO for a simple reason: you get it cheaper. Often, companies come out with a cheaper issue price. An issue price is the price at which you can buy a share when you apply for an IPO. When the shares are listed on the stock exchange and are available for trading, the price generally rises.

Take, for example, the Jet Airways IPO. It had an issue price of Rs 1,100 per share. On March 14, 2005, the day it was listed and made available for trading, the price rose to a high of Rs 1,339. In just a few weeks, you would have made a profit of more than Rs 200 per share.

So, besides getting the shares cheaper, those who want to make a quick buck sell it soon after it is listed. Within a short span of a few weeks, they make a neat profit.

This is the reason why investors flock to IPOs.

It is not mandatory that the price of the stock rises on listing. There could be instances where it does not. Much depends on the timing of your sale. The price may rise on listing, but you may hold on for just a few days longer and it could slump. Those who invested in the Jet Airways IPO at Rs 1,100 per share were thrilled as the share price kept rising. Soon after listing (as we mentioned above), the price rose. On March 14, 2005, it was Rs 1,339 per share and rose to Rs 1,361 per share on June 1, 2005. However, after that, it has generally been going downhill. On December 6, 2005 it touched Rs 1,269; on January 6, 2006, it was Rs 1,148. On February 3, 2006, it was Rs 983.Those who did not sell at the initial levels would be rather dismayed.

The best reason to invest in an IPO is because you believe in the company and are willing to hold on to the shares for the long term. Often, companies that are going public offer their shares cheap and go on to become very successful. An IPO thus offer investors the chance to participate in the company's potential prosperity.While the chief attraction may be making a profit the moment the price of the share rises, don't let it be the only one.

Asset Allocation for Dummies

Asset allocation is dividing and allocating your money (or investable assets) among different asset classes. For example, asset allocation may be as simple as dividing your money equally among stock index funds and bonds or dividing it among large-caps, mid-caps, and small caps. An asset allocation plan (also known as an investment plan) is important because without an investment plan, people tend to buy what they shouldn’t buy! I know a lot of people who invest their savings in the fund that performed the best last year. The chances of that fund performing better this year are pretty slim.

The importance of asset allocation can be best understood with the help of an example. Suppose I invest in the following manner according to my asset allocation plan:

25% or Rs. 25,000 - Large-Cap fund

25% or Rs. 25,000 - Mid-Cap fund

25% or Rs. 25,000 - Small-Cap fund

25% or Rs. 25,000 - Bond fund

Let’s say the different funds had the following rates of return this year:

Year I

+10% - Large-Cap fund

+08% - Mid-Cap fund

+15% - Small-Cap fund

-02% - Bond fund

My portfolio would look like this:

The formula for calculating return for one year is:

Beginning Amount * (1 + the rate of return )

25,000 * 1.10 = 27,500 Large-Cap fund

25,000 * 1.08 = 27,000 Mid-Cap fund

25,000 * 1.15 = 28,750 Small-Cap fund

25,000 * 0.98 = 24,500 Bond fund

Total Portfolio value at end of Year I = 107,750 or a 7.75% rate of return.

Most people would probably want to sell all of their bond fund and put it all in the small-cap fund. That’s human nature. Nobody likes to hold an investment that seems to be losing money. However, suppose the next year, the fund’s returns were like this:

Year II

- 05% - Large-Cap fund

+03% - Mid-Cap fund

- 20% - Small-Cap fund

+05% - Bond fund

At the end of Year II, the portfolio would like this:

27,500 * 0.95 = 26,125 Large-Cap fund

27,000 * 1.03 = 27,810 Mid-Cap fund

53,250 * 0.80 = 42,600 Small-Cap fund

The portfolio would be worth Rs. 96,535 (one year LOSS of 10.41%!)

Finally, had this person stuck with his asset allocation plan and reallocated 25% to each of the 4 funds, he would have had a loss of only 4.25% instead of 10.41%:

26,937 * 0.95 = 25,950 Large-Cap fund

26,937 * 1.03 = 27,810 Mid-Cap fund

26,937 * 0.80 = 21,550 Small-Cap fund

26,937 * 1.05 = 28,284 Bond fund

The portfolio would be worth Rs. 103,170 (one year loss of 4.25% which is MUCH better than the 10.41% loss)

Gross National Happiness (GNH) : An Inane Concept

Have you ever wondered what happiness is? Happiness is quite often equated with money. The gross domestic product, or GDP, is routinely used as shorthand for the well-being of a nation. But the tiny Himalayan kingdom of Bhutan has been toying with a completely different idea for a while. King Wangchuck has decided to make his nation’s priority not its GDP but its GNH. And believe it or not but the most unlikely place on earth for the birth of an international trend is emerging as a global leader in the promotion of this whole new concept of the 'Gross National Happiness.'

According to Wiki, Gross National Happiness (GNH) is an attempt to define quality of life in more holistic and psychological terms than GDP. The concept of GNH is based on the premise that true development of human society takes place when material and spiritual development occur side by side to complement and reinforce each other.

I am sure we all will agree that happiness is a feeling, a subjective experience. I may say “I am happy” just as I may say “I am rich.” The two statements sound similar but these statements are qualitatively different. There is an objective validity to the statement “I am rich” because my wealth can be measured. But happiness is subjective and does not allow interpersonal comparisons, while richness does. We can definitely say how A’s wealth compares to B’s wealth but cannot say how A’s happiness compares to B’s happiness.

GDP is a measure of the annual production of final goods and services in an economy denominated in monetary terms. GDP does not aggregate cows. Thus saying that the GDP does not accurately tell me anything about how many cows are in the economy is as silly as saying that GDP does not tell me whether the people in the country are happy or not!

I have never considered the GDP to be the end-all and be-all of an economy any more than I consider the monthly income to be the only relevant characteristic of a person. Those who complain that GDP is not all that matters are making a valid but rather trivial complaint. What I don’t understand is the attempt by the detractors of GDP aping a metric which they have perhaps misunderstood. They are in effect saying that GDP does not measure happiness. So we must come up with an alternate aggregate measure we will call Gross National Happiness which will be more appropriate. That is GNS - Gross National Stupidity ;-) Tomorrow they may say that GDP does not give a count of the number of cows so we should come up with some kind of Gross National Cow index!

Investment Banker Wisdom

This one is reeeeeally hilarious guys! (forwarded to me by one of my friends)

The investment banker was at the pier of a small coastal
Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellow fin tuna. The investment banker complimented the fisherman on the quality of his fish and asked how long it took to catch them.

The fisherman replied, only a little while.

The investment banker then asked why didn't he stay out longer and catch more fish?

The fisherman said he had enough to support his family's immediate needs.

The investment banker then asked, but what do you do with the rest of your time?

The fisherman said, "I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life, senor."

The investment banker scoffed, "I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat. With the proceeds from the bigger boat you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You can leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC where you will run your expanding enterprise."

The fisherman asked, "But senor, how long will this all take?"

To which the American replied, "15-20 years."

But what then, senor?

The American laughed and said that's the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.

Millions, senor? Then what?

The American said, "Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos."

;-)

Investment banking for dummies

Ever heard about Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Jefferies & Co etc.? Ever thought what these guys do? Well...they make billions of dollars every year through investment banking. If you are a neophyte and new to the world of finance then you must have come across the term Investment banking. Investment banks assist public and private corporations in raising funds in the Capital Markets, as well as in providing strategic advisory services for mergers, acquisitions and other types of financial transactions.

An organization may generate funds in two different ways through investment banking:

• They may draw on public funds through the capital market by selling stock
• They may seek out venture capital/private equity in exchange for a stake in their company

Investment Banks also do a large amount of consulting. Advice on mergers and acquisitions, on when to make public offerings etc. is given to the companies. The line between investment banking and other forms of banking has blurred in recent years. With the advent of mega-banks which operate at a number of levels, many of the services often associated with investment banking are being made available to clients who would otherwise be too small to make their business profitable. Large financial-services conglomerates combine commercial banking and investment banking. Prominent among these are ABN Amro, Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, HSBC, JPMorgan Chase, Rabobank, UBS.

Careers in IB are lucrative and most sought after in the money-market world. A career in investment banking may involve extensive traveling, grueling hours and a cut-throat lifestyle. Although IB is highly competitive and time intensive, it also offers huge financial incentives ;-)

Inflation: Are Banks Responsible?

“That we are overdone with banking institutions which have banished the precious metals and substituted a more fluctuating and unsafe medium [paper, and now not even paper]…that the wars of the world have swollen our commerce beyond the wholesome limits of exchanging our own productions for our own wants, and that, for the emolument of a small proportion of our society who prefer these demoralizing pursuits to labors useful to the whole, the peace of the whole is endangered and all our present difficulties produced, are evils more easily to be deplored than remedied.”

—Thomas Jefferson to Abbe Salimankis, 1810

Now this statement seems to be absolutely absurd!! After all who can dare question a bank's role in the development of any economy? I, for one, am a banking enthusiast but sometimes I ponder whether banks could be held responsible for inflation.

Over 95% of the world's population does not understand the meaning of “dividend” , “mutual fund sales” and “investment-banking fees” but thanks to these three things, the Royal Bank of Canada made record profits of 1.49 billion dollars in the first quarter—which, from a purely instinctive point-of-view, seems STUNNINGLY OUTRAGEUOS to me!

By doing nothing-productively-tangible for the world—in fact by simply creating money—are banks nothing more than an aspect of that part of the machine that endlessly drives up inflation by devaluing currency?

Taxing ESOPs - RIDICULOUS!!

Chidambaram seems to have completely gone wrong on the issue of the Fringe Benefit Tax assessment of Employee Stock Ownership Plans, or ESOPs. This could be one of the most regressive steps in the disappointing Union Budget 2007-08. FM has included ESOPs in the Fringe Benefit Taxes' ambit.

ESOPs are a capital asset. Technically speaking, an ESOP is a transfer of remuneration from the company via a capital asset. They are a wealth-creating asset and FM is taxing them like income. Which canon of economic thinking can EVER justify that?? In an interview to CNN-IBN, Chidambaram said that ESOPs are fringe benefits, so they need to be taxed. Are ESOPs really fringe benefits? ESOPs are not a like a car, or a house or gardener a company provides its employees. It's much more than that. ESOPs are a way to include the employees in the growth of an organisation. It's a participatory or an inclusive way of running an organisation. Actually, what the FM has done is to tax those professionally run companies who believe in offering ESOPs. So by including ESOPs in the FBT regime, FM is penalising such companies. It's a highly regressive step, and will kill the entrepreneurial and start-up culture. It's not too late to get the FM roll back such a measure. If the media and the industry associations like Nasscom and CII put pressure on FM, he may just roll back.

Budget 07 - Not Good, Too Bad, And Seriously Ugly!

10 years ago, a guy named Palaniappan Chidambaram rose to present a budget. People hailed it as a "Dream Budget". Now the same guy presented another budget. Forget dreams, this is a budget that is disappointing, unimaginative and seriously sad. Everything was in place for the Finance Minister to present another dream, this time though he chose to present a nightmare for us. So what actually makes the nightmare budget so nightmarish?

Instead of trying to help the so-called "aam aadmi" by reducing the taxes, the minister chose to increase the government's expenses by Rs 100,000 crore!

• Education came first with a whopping 34.5% increase. Now that sure is a welcome step, if you decide to overlook the fact that most of this will go into providing reservations and very little will actually help the education of the "general quota". (An article on reservations - Coming soon! ;-) ) The 2% education cess has been increased to 3% and many experts believe that this is NOT going to help education at all (Read article).
• Next came the farm sector. A proposal for Rs 2,25,000 crore for farm credit and a target to bring 5 million more farmers under farm credit. Also a promise of 100 per cent subsidy to small farmers and 50 per cent subsidy to other farmers. Dear minister, when will you realize the fact that you are putting all that money into a black hole. Agriculture in India, in its present form is unviable. Farming on tiny individual plots is never a good idea (much less an efficient way of agriculture). The minister ought to have encouraged farm consolidation, but nothing of the sort happened.
• Rural India dominated with hiked outlays under the Rajiv Gandhi Drinking Mission, the Bharat Nirmal Housing Programme, the National Rural Health Mission. Now our dear minister seems to have forgotten that people live in urban areas too. While the cost of health services in the urban areas has been rising, our minister chose to ignore the fact. With the infrastructure crumling in our urban areas, attention to urban infrastructure would not have hurt. While its good that our minister has tried to help the rural area, the complete lack of focus on urban areas is disappointing and unfortunate.
• The budget proposes to include any sweat equity shares allotted by a company to its existing or former employees within the ambit of fringe benefits for the purpose of taxation. So with the ESOPs now under the FBT regime, employees stand to lose (I'll write more about it in my next article).
• Of course, the finance minister did not forget to bring IT companies under MAT or the minimum alternative tax. India’s export-oriented enterprises such as in the thriving software outsourcing industry were brought back under the tax net. Now they have to pay 11.33 percent of the adjusted book profits as MAT.

Some questions that came to my mind while listening to the boring and unimaginative budget:

• While I appreciate the focus on rural development, the fact is that people live in urban areas too, and they too need infrastructure. Btw, do you think the urban middle class is just about a hundred people or so? (the complete disregard of the urban middle class in your budget makes me think that someone told you so)
• While IT too should be taxed like any other industry, don’t you think its too early?What in the world makes you think that 11.33% MAT would hardly make any difference to the IT companies?? Sir, it can push a lot of small companies (already with razor thin margins) into loss making units?
• What the hell is this FBT thing? Yeah, I know it was introduced in the last budget because someone went brain dead but continued writing the budget. Don’t you think it should have been scrapped?
• And hey, all this cess and surcharge needs to be done away with. You ALREADY collect taxes for doing things that the government is supposed to do - like building roads, providing basic education etc. Why the hell do you have a road cess (on petrol) and an education cess (on all taxes)??

Has the dream merchant stopped daring to dream?

How to Calculate Your Server TCO?

With the current focus on fiscal responsibility and due diligence, CIO’s and IT executives have indicated that more than 80% of current IT purchases require financial analysis for justification. In an effort to to justify the use of server virtualization platforms, I devised a model for assessing the 'Total Cost of Ownership' (TCO) of any production (server) environment. TCO analysis for the server park should ideally be done for a period of 4 years since the estimated lifetime of a server is 4 years. Yearly / monthly TCO can thus be obtained to get a fair idea of how much is being spent yearly / monthly. Following are the major points on which the TCO calculations are based:

Hardware Costs

• Cost of physical servers
• Cost of processor/RAM upgrade
• Cost of extra storage devices
• Cost of SAN
• Cabling cost
• Cost of racks

Software Costs

• Cost of OS
• Cost of anti-virus s/w
• Cost of backup s/w
• Cost of server management software (NetIQ etc.)
• Cost of other softwares

Vendor Support

• Cost of service agreements
• Cost of warranties

Setup & Maintenance

• Cost of setup of servers
• Cost of installation
• Cost of maintenance
• Cost of training
• Cost of consultancy

Facility Costs

• Power & cooling costs
• Flooring costs

The TCO thus calculated may then be used to model typical data center strategies and best practices of specific alternative server and operating system solutions. The calculations should be performed using comparable competitive scenarios.

Why Total Cost of Ownership Matters

How are you going to react if I tell you that you'll end up spending 75 thousand bucks over 4 years on that li'l PC you bought a couple of days back for 30k? According to Gartner, nearly 80% of total costs occur AFTER the purchase of the unit! The decision to buy a computer may result in the following TCO analysis: the greater initial price of a high-end computer is to be balanced by adding likely repair costs and earlier replacement to the purchase cost of the cheaper bargain brand, among other factors. The initial price becomes just the beginning of the life cycle of costs. For more than 15 years, Gartner has counseled its business community clients to consider all costs associated with computing when making management decisions about computer acquisitions,upgrades, support and administration. As enterprises have begun to address the significant and rising costs devoted to computing infrastructure, the message has gained wide acceptance among technology users.

Total cost of ownership (TCO) is a financial estimate designed to help consumers and enterprise managers assess direct and indirect costs related to the purchase of any capital investment, such as computer software or hardware.

A TCO assessment ideally offers a final statement reflecting not only the cost of purchase but all aspects in the further use and maintenance of the equipment, device, or system considered. This includes the costs of training support personnel and the users of the system, costs associated with failure or outage (planned and unplanned), diminished performance incidents (i.e. if users are kept waiting), costs of security breaches (in loss of reputation and recovery costs), costs of disaster preparedness and recovery, floor space, electricity, development expenses, testing infrastructure and expenses, quality assurance, incremental growth, decommissioning, and more. TCO is a good metric for comparing the different operating system and server infrastructure choices which organizations face. A good TCO analysis should fit the business plan and identify the best solution to match the business goals.