INVESTOR AWARENESS PROGRAM

The Magic of Compounding

“Compounding is the 8th Wonder” – Einstein

The Rule of 72 Divide 72 by

number of years of Doubling to get Rate of Return and vice versa

“Doubling Time”

At 6% per year inflation, expenses will double in 72/6 = 12 years

If rate of return is 9%, money will double in 72/9= 8 Years

At 12%, 72/12= 6 Years At 18%, 72/18= 4 Years At 24%, 72/24 = 3 Years

Think long term..A child born today

24 Years later..

If today’s marriage expenses are Rs.16 Lakhs At 6% inflation, the expenses will

double (72/6) every 12 years At the age of 24, the required

expenses will be 16 x 2 x 2 = Rs.64 Lakhs

If I can get a return of 18% on my investments, how much amount should I set aside today?

At 18% return, the money will double every 4 years.. Rs.100 invested today Rs.200 at 4 years Rs.400 at 8 years Rs.800 at 12 years Rs.1600 at 16 years Rs.3200 at 20 years Rs.6400 at 24 years

I can have Rs.64 Lakhs by investing only Rs.1 Lakh..

But is there an asset which will give me 18% returns?

Lessons of History..Look at the BSE Sensex! Sensex started in 1979 at base value of Rs.100 Today it is at 18,400 That is 184 times in 32 years Resulting in a compound annual return of 17.70%

But in March 2009, the Sensex was at 9,870. That is 98.7 times in 30 years The compounded annual returns work out to 16.54%

Similar results will be seen from Real Estate, Gold, Silver.

This is Power of Compounding over the long run!

Wealth Creation and Wealth Management “Wealth preservation will be done by

diversification, for Wealth Creation you need concentration” – Warren Buffett

Wealth Creation – Do it yourself, your Own Business!-Strategic in Nature, Concentration of

Mind Resources Risks

Wealth Management aims at Preservation through a Portfolio of Different Assets - May be done by others

Who can help?

The investor himself must be involved at policy level.

Goddess Laxmi helps those, who help themselves!

Agency Conflict

Will someone else take the same care, that the owner himself will take? Is he equipped? Experienced? Trust worthy?

Detached Involvement

Many decisions are influenced by emotions and sentiment.

A view from “outside the frame” helps.

Mentors & Guides

People who are successful and willing to help.

Wealth Preservation - I

Diversification“Don’t put all eggs in the same basket”Combine low correlation assets, which are affected differently by different economic changes.Portfolio should have low correlation to own business

Avoid Big MistakesSuch as taking large, concentrated risk in a single business venture that is not in your Core Competence

Keep expenses in control Plan expected Cash Outflows & provide.

Wealth Preservation II

Preserving from Inflation and Taxes

“Safe Assets”:

What is the real return?

Bank Deposit will give a negative real return

Same is the case with Bonds and Company Deposits.

1 Year Bank FDInterest 10.00%

Tax -3.09%

Inflation -9.00%

“Real Return”

-2.09%

Calculated Risks

To really preserve wealth against Inflation and Taxation, we need a different approach

Think Long Term Look at Appreciating Assets Buy when Out of Favour Value vs. Price… Buy at reasonable

prices Consider “Doubling” time, not yearly

return!

BSE Sensex1990 to 2010A peak into the History

Returns will come only if we buy at reasonable prices!Year End Sensex

5 Year Return

31-Mar-79 100.00  

31-Mar-80 128.57  

31-Mar-81 173.44  

31-Mar-82 217.71  

31-Mar-83 211.51  

31-Mar-84 245.33 19.66

31-Mar-85 353.86 22.44

31-Mar-86 574.11 27.05

31-Mar-87 510.36 18.58

31-Mar-88 398.37 13.50

31-Mar-89 713.60 23.81

31-Mar-90 781.05 17.16

31-Mar-91 1,167.97 15.26

31-Mar-92 4,285.00 53.04

31-Mar-93 2,280.52 41.76

31-Mar-94 3,778.99 39.57

31-Mar-95 3,260.96 33.09

Year End Sensex5 Year

Return

31-Mar-96 3,366.61 23.58

31-Mar-97 3,360.89 (4.74)

31-Mar-98 3,892.75 11.29

31-Mar-99 3,739.96 (0.21)

31-Mar-00 5,001.28 8.93

30-Mar-01 3,604.38 1.37

28-Mar-02 3,469.35 0.64

31-Mar-03 3,048.72 (4.77)

31-Mar-04 5,590.60 8.37

31-Mar-05 6,492.82 5.36

31-Mar-06 11,279.96 25.63

30-Mar-07 13,072.10 30.38

31-Mar-08 15,644.44 38.69

31-Mar-09 9,708.50 11.67

31-Mar-10 17,527.00 21.97

Life Cycle Financial Planning

Different strategies neededat Different Life Stages Early stage

Income low, Wealth low, Family Responsibilities High

Use TERM INSURANCE to bridge the gap, Prudent Borrowing Accumulation Stage

Income rising, Wealth low, Family Responsibilities High

Continue Insurance, Start Long Term Investments, Prudent Loans

Maturity Stage

Income High, Wealth High, Family Responsibilities low

Insurance less important, Wealth Building centre stage,

Use of Trusts to ring fence wealth from Liabilities Distribution Stage

Income low, Wealth High, Family Responsibilities low

Withdraw for own expenses, Estate Planning important

Bond - Stock Allocation

Follow Rules of Asset Allocation

Normally not less than 25% nor More than 75% in Equities. Inverse 25%/75% will apply to Debt.

When protracted bear markets create a Bargain Level, the Equity exposure can go up to 75%. Inversely, when in the investor’s opinion the prices are Dangerously High, he can start shifting to the Bonds. These copybook maxims are easy to tell and difficult to practice.

Allocation depends on Age & temperament. Normally, % equal to (100 – Age) in Equities.

Lessons of History..Look at the BSE Sensex! Sensex started in 1979 at base value of Rs.100 Today it is at 18,400 That is 184 times in 32 years Resulting in a compound annual return of 17.70%

But in March 2009, the Sensex was at 9,870. That is 98.7 times in 30 years The compounded annual returns work out to 16.54%

Similar results will be seen from Real Estate, Gold, Silver.

This is Power of Compounding over the long run!

BSE Sensex1990 to 2010A peak into the History

Returns will come only if we buy at reasonable prices!Year End Sensex

5 Year Return

31-Mar-79 100.00  

31-Mar-80 128.57  

31-Mar-81 173.44  

31-Mar-82 217.71  

31-Mar-83 211.51  

31-Mar-84 245.33 19.66

31-Mar-85 353.86 22.44

31-Mar-86 574.11 27.05

31-Mar-87 510.36 18.58

31-Mar-88 398.37 13.50

31-Mar-89 713.60 23.81

31-Mar-90 781.05 17.16

31-Mar-91 1,167.97 15.26

31-Mar-92 4,285.00 53.04

31-Mar-93 2,280.52 41.76

31-Mar-94 3,778.99 39.57

31-Mar-95 3,260.96 33.09

Year End Sensex5 Year

Return

31-Mar-96 3,366.61 23.58

31-Mar-97 3,360.89 (4.74)

31-Mar-98 3,892.75 11.29

31-Mar-99 3,739.96 (0.21)

31-Mar-00 5,001.28 8.93

30-Mar-01 3,604.38 1.37

28-Mar-02 3,469.35 0.64

31-Mar-03 3,048.72 (4.77)

31-Mar-04 5,590.60 8.37

31-Mar-05 6,492.82 5.36

31-Mar-06 11,279.96 25.63

30-Mar-07 13,072.10 30.38

31-Mar-08 15,644.44 38.69

31-Mar-09 9,708.50 11.67

31-Mar-10 17,527.00 21.97

Reasons of Investor Discomfort

Despite the advantages, investors are not always comfortable investing in stocks. The reasons could be Unpleasant past experience of loss of capital, Feeling of not being knowledgeable about how the

‘market’ works, Stock valuations most of the times different than

what most private businesses are valued at. Not the Balance Sheet Value or Book Value or Net Realizable Value.

Dealing only in “Virtual” or “Intangible” values: - The Price is at a large variance from the Book Value.

Equity Market Participation Low Risk

Index Funds Large Cap Diversified Funds

Medium Risk Sector Funds Midcap / Small Cap Funds Direct Stock Portfolio Investments

High Risk Delivery Based Trading ( Buying & Selling) Intraday Trading /Futures & Options

Highest Risk Writing Options

Types of Equity

Based on Market Cap Large Cap Mid Cap Small Cap

Based on Style Growth Value

Business Cycles

Started with the Industrial Revolution

Production in anticipation of Demand

Creation of Capacity in anticipation of Production

Capacity mismatches

Overcapacity – Low Profits

Under capacity – High Profits

What not to do..

Avoid over Popular / Glamour Stocks The companies may be good, but overpriced. Short term enthusiasm may mean there is nothing left on the table for us!

Avoid Fad IndustriesWhen company stocks jump when they announce that they “propose to enter” this area or when Mutual Fund Schemes are formed to target the sector …

Avoid Companies without Track Record

Avoid GimmicksFancy complicated investment “Products” with High Fees.

Avoid Swinging to the Market Timing TuneIs it not sensible to stay focused on the “Pricing” than trying to Predict & Time?

What will work..

Buying Stocks as a slice of the business that you know sufficiently about

Buying when Stocks have no friends Make market fluctuations your friends Buy solid fundamentals When buying “Growth”, we are not buying

something that is cheap today. Try to be sure that it will soon become cheap at today’s prices.

If stocks in general do not seem cheap, stand aside.

Keep an eye on what the Master Investors are doing. Stick to the Strategy, Flexibility of Redefining it!

Fundamental or Sentimental?

Markets act like a herd. The investor, of course, is also a part of this herd. Can he resist the temptation to blindly follow others?

Lemmings: These are small rodents from the tundra region. They are noted for their Mass Exodus to the Sea. In normal periods, lemmings move during spring in search of food and new shelter. Every 3 or 4 years, something odd starts happening. Because of high breeding and low mortality, their population begins to rise. As their number grows, they start an erratic movement. They move about in broad daylight, and start their march towards the sea. In this march, they will frantically attack even cats, dogs or other predators. Many will die from starvation, predators and accidents. The survivors reach the sea. They plunge in and swim till they die of exhaustion.

The Lemming behavior is not fully understood by scientists. But does it not sound familiar?

Investor & Market Fluctuations Markets tend to overdo or exaggerate.

Enthusiasm will turn into Euphoria. Pessimism will turn into Depression. Two approaches to tackle this:

Timing approach: Investor will try to anticipate the market movements. Buy or hold when the expected future movement is upward and sell when downward future movement is expected .

Pricing approach: Buy when Price is Below the Fair Value, Sell when it rises Above.

Timing has great psychological importance to the Speculator, as he is in a hurry and not to the investor.

Pricing is clearly a more conservative approach. It is “Protective” rather than “Predictive”.

Investor & Market Fluctuations

Patient investor will greatly benefit by Buying Straw Hats in Winter.

Typical Bull market will have a number of well defined characteristics

- Historically High Price Levels

- High Price / Earning Ratios- Low Dividend Yields as compared to Bond Yields- High Volume of Speculation on Margin- Many New Issues of Poor Quality

The Investor should endeavor to buy when Stocks have No Friends. When everybody is interested in the Stock Market, it is probably the time to start taking some Money Off the Table.

ZAHEER AHMED