21 April 2014

Money Saving Tip # 3 - Not For Those Who Are Married

In continuation of Money Saving Tip series, here is another uncommon way to save your money.

Please note: If you are married, please ignore this post. ;-)

Warren Buffett was once asked about the secret of living a successful life. He answered in just two words. And surprisingly, his answer had nothing to do with saving or investing.

He said:

Warren Buffett Marriage Advise

I would extend his answer & use it as the new money saving tip.

Please note that this tip is only for those who are unmarried, or those who are planning to get unmarried ;-)

If you are one of those who have some serious trouble saving money; or among those who run out of cash at every month end; or don’t know where your money goes, then this tip is for you.

So, here it goes…

Find a life partner who is frugal* and has a great financial mind.

* Frugal means one who spends wisely or does not spend unless absolutely necessary. Frugal does not mean miser.

The benefits are obvious.

If you are deep in debt, then your partner will help you get out of it. If you have a habit of spending excessively, then they can help you in not doing so. If you do not know how to save your money, then they can tell you how to do it.

You might think that this post is written without any seriousness. But I have seen guys earning less than Rs 20,000 a month and buying exorbitantly prices smartphones worth Rs 50,000 by taking personal loans or credit card debts, which charge interests ranging from 15% to 30%. There is no doubt that these guys are walking on very clear path of financial disaster. And just imagine if such a guy marries a girl who has similar spending patterns. A tale full of financial horror.

I leave it for you to decide whether this tip is to be taken as a joke or not. But if you are thinking about the strangeness of this tip, I would recommend you read previous ones too. Those are much stranger and give you evil ideas to reduce your phone bills  and also tell you how to save money by switching off your television!!


17 April 2014

Sensex @ 40,000 in next 2 years!!

In one of my recent posts about why I want Indian elections of 2014 to fail, I mentioned that due to recent run up in stock markets, experts were regularly coming out with one big target after another for Sensex.

Though I hate speculation, the fact is that we are all humans and its unavoidable. I hate it but I speculate every now and then. Very recently, I was fortunate enough to double my investment in MCX in just few months after company’s parent was caught in a crisis. Another stock which I believe can surprise in times to come is SAIL. I did two very detailed posts on why it was a good time to accumulate cyclical stocks like SAIL last year (2013). I still stand by that speculation. :-)

Anyways, this post is a reaction to a report from a reputed research house, which thinks that Sensex would reach 40,000 soon. (Source)

Sensex Target 40000
Such Headlines are becoming common these days (Read: rising markets)

How soon?

If they had said 5 years, it would have meant a reasonable growth rate of 12.5% from current levels of 22,500. And this would have seemed quite achievable considering that chances of India getting a good, business-friendly political environment for next 5 years are pretty high.

But according to the news item, analysts of this research house feel that Sensex would reach 40K in less than 2 years!!  (Between 18 and 24 months to be precise)

This means a compounded annual growth rate between 35% and 48% for this period.
Is it possible?

I think it’s a little too optimistic and the research house is being Irrationally (Very) Exuberant. The current P/E multiple for indices like Sensex and Nifty stands at 19. And in case this target of 40,000 was to hold true by end of 2015, it would mean that earnings of constituent companies would have to grow at a rate in excess of 40%, just to keep the P/E of index at 19. And that too for two consecutive years!! 

Now here we need to note two things:

  • P/E ratio of 19 is not cheap.
  • Earnings cannot grow at 40% for two consecutive years (Its not impossible, but its very tough)

Now, P/E Ratio for stocks (and indices) are calculated using below formula:

P/E Ratio Formula
Formula used to calculate P/E Ratios

So, in case earnings (denominator) don't grow by 40%; but index (numerator) continues to grow at a rate in excess of 40%, then this would result in expansion (increase) in P/E ratio. This would mean that Sensex would become more expensive than current P/E ratio of 19. And stock market history tells that P/E multiples in excess of 20 to 24 are unsustainable and markets correct after reaching such levels.

But does it mean that Sensex cannot reach 40K in next two years?

No. Anything is possible.

But common sense says that its better not to believe the so called expert opinions which sound to good to be true.

What do you say?

15 April 2014

Answer to the BIG question - “Why Am I Not Getting Richer?”

Didn’t you always have this question? 

That even after earning so much, why are you are not getting any richer?

I guess you must have felt like this before. In a post I did some time back, a person earning more than Rs 1 lac every month was barely able to make his ends meet; but that is before he took matters in his own hands and retired at a young age of 37.

What does it mean?

This simply means that there is something fundamentally wrong about the way we manage our incomes and more importantly, expenditures. But all is not lost. If you are ready to take care of some really simple but critical factors while managing your finances, then chances of you getting richer are bound to rise.

So here are the 5 less-discussed but really important ways to help you become rich.

Reinvest your profits
I have seen people making the mistake of not reinvesting their profits many times (to be precise, 19 times out of 20). Don’t be tempted to spend your profits. If you reinvest profits from your investments, then you would be helping yourself in the long run as you would be contributing to the magic of compounding. And don’t worry if the profit is small. In the long run, compounding takes care of converting small amounts into very large ones.

Control small expenses
Be obsessive over controlling small but wasteful expenditures. For example, just because one of your colleagues has got himself a new phone, you decide to buy a newer one to satisfy your ego. Agreed that such expenditures can give you pleasure & satisfaction. But these would be short lived. And such useless expenditures also dent the process of long term wealth creation. Exercising vigilance over small expenses can help you divert funds from going towards unnecessary expenditures towards better investment (profit) opportunities.

Limit What You Borrow
It is simple common sense. Living on credit card and loans won’t make you rich. Period. It is only when you are debt-free that you can think of saving and investing to become rich. If you are not debt free, then most of your time would be devoted in servicing the EMIs and Credit Card Bills. Think about it.

Assess The Risk
Just because a family member or a good friend introduced you to something which looks-too-profitable-to-be-true does not mean that you should blindly do what you are being told. Asking ‘and then what’ can help you see all possible consequences and risks involved when making the final decision.

Be Willing To Be Different
Just because it did not work for somebody else does not mean it won’t work for you. But more importantly and similarly...just because it worked for somebody else does not mean that it would also work for you. Remember this and assess the risk provided by every opportunity. It’s always possible that life is offering you something unique to benefit from; and which was never offered to anybody else. So be ready and be capable of recognising such opportunities.

Warren Buffett Richest Man
To be rich (& not poor) is glorious and glamorous | :-)

Note – Most of these 5 points/ways are based on Warren Buffett’s philosophy. Hence the picture above.


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