Early this year, Arun, an old friend who is a senior software designer, got an offer from a prestigious international firm to work in its India operations developing a specialised software. He was thrilled by the offer. He had heard a lot about the CEO of this company, a charismatic man often quoted in the business press for his visionary attitude. The salary was great. The company had all the right systems in place - employee-friendly
human resources (HR) policies, a spanking new office, the very best technology, even a canteen that served superb food. Twice Arun was sent abroad for training. "My learning curve is the sharpest it's ever been," he said soon after he joined. "It's a real high working with such cutting edge technology."
Last week, less than eight months after he joined, Arun walked out of the job. He has no other offer in hand but he said he couldn't take it anymore. Nor, apparently, could several other people in his department who have also quit recently. The CEO is distressed about the high employee turnover. He's distressed about the money he's spent in training them. He's distressed because he can't figure out what happened.
Why did this talented employee leave despite a top salary? Arun quit for the same reason that drives many good people away. The answer lies in one of the largest studies undertaken by the Gallup Organisation. The study surveyed over a million employees and 80,000 managers and was published in a book called First Break All The Rules. It came up with this surprising finding: If you're losing good people, look to their immediate supervisor. More than any other single reason, he is the reason people stay and thrive in an organisation. And he's the reason why they quit, taking their knowledge, experience and contacts with them. Often, straight to the competition. "People leave managers not
companies," write the authors Marcus Buckingham and Curt Coffman. "So much money has been thrown at the challenge of keeping good people - in the form of better pay, better perks
and better training - when, in the end, turnover is mostly a manager issue." If you have a turnover problem, look first to your managers. Are they driving people away? Beyond a point, an employee's primary need has less to do with money, and more to do with how he's treated and how valued he feels. Much of this depends directly on the immediate manager. And yet, bad bosses seem to happen to good people everywhere. A Fortune magazine survey some years ago found that nearly 75 per cent of employees have suffered at the hands of difficult superiors. You can leave one job to find - you guessed it, another wolf in a pin-stripe suit in the next one.
Of all the workplace stressors, a bad boss is possibly the worst, directly impacting the emotional health and productivity of employees. Here are some all-too common tales from the battlefield: Dev, an engineer, still shudders as he recalls the almost daily firings his boss subjected him to, usually in front of his subordinates. His boss emasculated him with personal, insulting remarks. In the face of such rage, Dev completely lost the courage to speak up. But when he reached home depressed, he poured himself a few drinks, and magically, became as abusive as the boss himself. Only, it would come out on his wife and children. Not only was his work life in the doldrums, his marriage began cracking up too. Another employee Rajat recalls the Chinese torture his boss put him through after a minor disagreement. He cut him off completely. He bypassed him in any decision that needed to be taken. "He stopped sending me any papers or files," says Rajat. "It was humiliating sitting at an empty table. I knew nothing and no one told me anything." Unable to bear this corporate Siberia, he finally quit.
HR experts say that of all the abuses, employees find public humiliation the most intolerable. The first time, an employee may not leave, but a thought has been planted. The second time, that thought gets strengthened. The third time, he starts looking for another job.
When people cannot retort openly in anger, they do so by passive aggression. By digging their heels in and slowing down. By doing only what they are told to do and no more. By omitting to give the boss crucial information. Dev says: "If you work for a jerk, you basically want to get him into trouble. You don't have your heart and soul in the job." Different managers can stress out employees in different ways - by being too controlling, too suspicious, too pushy, too critical, too nit-picky. But they forget that workers are not fixed assets, they are free agents. When this goes on too long, an employee will quit - often over a seemingly trivial issue. It isn't the 100th blow that knocks a good man down. It's the 99 that went before. And while it's true that people leave jobs for all kinds of reasons - for better opportunities or for circumstantial reasons, many who leave would have stayed - had it not been for one man constantly telling them, as Arun's boss did: "You are dispensable. I can find dozens like you." While it seems like there are plenty of other fish especially in today's waters, consider for a moment the cost of losing a talented employee. There's the cost of finding a replacement. The cost of training the replacement. The cost of not having someone to do the job in the meantime. The loss of clients and contacts the person had with the industry. The loss of morale in co-workers. The loss of trade secrets this person may now share with others. Plus, of course, the loss of the company's reputation. Every person who leaves a corporation then becomes its ambassador, for better or for worse. We all know of large IT companies that people would love to join and large television companies few want to go near. In both cases, former employees have left to tell their tales.
"Any company trying to compete must figure out a way to engage the mind of every employee," Jack Welch of GE once said. Much of a company's value lies "between the ears of its employees". If it's bleeding talent, it's bleeding value. Unfortunately, many
senior executives busy travelling the world, signing new deals and developing a vision for the company, have little idea of what may be going on at home. That deep within an organisation that otherwise does all the right things, one man could be driving its best people away.
Sunday, June 27, 2004
Thursday, June 17, 2004
Battling the Bears
A year ago, an article advising you to ignore a few market-timing bears that had crept out of the woods following a 12% rise in the Standard & Poor's 500 in five months. A 12% rise, mind you, that was fresh on the heels of a 23% loss in 2002.
However, a year after the article appeared, the Dow and S&P 500 are up about 15%, and the Nasdaq is pushing a 25% gain.
So what?
I bring this up not to say "I told you so," because I didn't. As it was explained then, the fact is that no one had any idea where the market was going in the near term. Instead, I'm calling this to your attention to remind you of a basic investing tenet: We buy companies with the intention of holding them for a very long time. Stories can change, of course, and we may very well sell after a short period.
Over your investing lifetime, you'll have several losers and several marginal winners. If you've chosen well, however, you'll also have a small handful of massive, multiyear outperformers, and if you follow the "buy right, sit tight" strategy and hang on to those winners, your chances of significantly beating the market are greatly enhanced.
If you've sworn off individual stocks and invest only in an index fund, you have even more reason to ignore the pundits and gurus trying to scare you out of the market. As I said a year ago, it's perfectly valid to discuss the valuations. But the total market is a different issue entirely.
Take a look at this logarithmic chart of the Dow Jones Industrial Average from 1929 to present. It beautifully points out both the risks and rewards involved in stock investing. It's hard to pick a random point that does not see the chart higher 10 years later, and, of course, the entire 75-year period shows average returns of about 10% per year. Yet nothing is risk-free, and those who first entered the market with a lump sum in 1929 had to endure many years before they earned back their principal.
And yet, as Benjamin Graham pointed out in his classic "The Intelligent Investor", a person who began dollar-cost averaging into the market in 1929 would have earned more than 8% compounded annually by 1948 -- despite the fact that the Dow's value fell from 300 to 177 during that period!
Invest through thick and thin, my dear Friend. Don't bother timing the market.
Different paths to victory
Keep Dollar-cost averaging. Consistently buying. Holding on to those securities. Some may wind up like the legendary Shelby Davis, owning hundreds of stocks worth millions of dollars.
Don't let that scare you. Although a fine way to invest, that type of diversification isn't for everybody. Perhaps you'd rather own very few stocks at any one time -- similar to the Warren Buffett punch card strategy. That's valid also, especially for the more experienced.
But whatever your preference, we encourage you to start investing if you're not yet doing so and continue investing if you have. Years later, you'll be glad you did.
Courtesy - By Rex Moore (Fool.com)
However, a year after the article appeared, the Dow and S&P 500 are up about 15%, and the Nasdaq is pushing a 25% gain.
So what?
I bring this up not to say "I told you so," because I didn't. As it was explained then, the fact is that no one had any idea where the market was going in the near term. Instead, I'm calling this to your attention to remind you of a basic investing tenet: We buy companies with the intention of holding them for a very long time. Stories can change, of course, and we may very well sell after a short period.
Over your investing lifetime, you'll have several losers and several marginal winners. If you've chosen well, however, you'll also have a small handful of massive, multiyear outperformers, and if you follow the "buy right, sit tight" strategy and hang on to those winners, your chances of significantly beating the market are greatly enhanced.
If you've sworn off individual stocks and invest only in an index fund, you have even more reason to ignore the pundits and gurus trying to scare you out of the market. As I said a year ago, it's perfectly valid to discuss the valuations. But the total market is a different issue entirely.
Take a look at this logarithmic chart of the Dow Jones Industrial Average from 1929 to present. It beautifully points out both the risks and rewards involved in stock investing. It's hard to pick a random point that does not see the chart higher 10 years later, and, of course, the entire 75-year period shows average returns of about 10% per year. Yet nothing is risk-free, and those who first entered the market with a lump sum in 1929 had to endure many years before they earned back their principal.
And yet, as Benjamin Graham pointed out in his classic "The Intelligent Investor", a person who began dollar-cost averaging into the market in 1929 would have earned more than 8% compounded annually by 1948 -- despite the fact that the Dow's value fell from 300 to 177 during that period!
Invest through thick and thin, my dear Friend. Don't bother timing the market.
Different paths to victory
Keep Dollar-cost averaging. Consistently buying. Holding on to those securities. Some may wind up like the legendary Shelby Davis, owning hundreds of stocks worth millions of dollars.
Don't let that scare you. Although a fine way to invest, that type of diversification isn't for everybody. Perhaps you'd rather own very few stocks at any one time -- similar to the Warren Buffett punch card strategy. That's valid also, especially for the more experienced.
But whatever your preference, we encourage you to start investing if you're not yet doing so and continue investing if you have. Years later, you'll be glad you did.
Courtesy - By Rex Moore (Fool.com)
Tuesday, June 15, 2004
Tight Fiscal Policy Not the Cure for India's Economy
The stunning defeat of Prime Minister Vajpayee's National Democratic Alliance (NDA) government in India's recent general elections has opened the door to significant changes in the country's economic policy. Multilateral lenders, foreign analysts and investors universally believe that fiscal consolidation should be the centerpiece of economic policy changes implemented by India's new government headed by Prime Minister Manmohan Singh. The call for fiscal consolidation is supported by the mistaken conviction that reduction of the fiscal deficit will accelerate long-term economic growth in India. As proven in Latin America over the past 15 years, fiscal consolidation in India will lead to slower economic growth and political and social instability. If the Singh government hopes to quicken the pace of economic growth it must increase public sector investment and government subsidies. India should use, to the fullest advantage, the economic policy latitude it enjoys as a result of the very limited leverage multilateral lenders hold over the country.
The electoral drubbing dealt on the NDA government by the India National Congress (INC) and India's leftist political parties shocked both government cadres and outside observers. After all, India was enjoying the fruits of strong economic growth and booming asset markets. That the incumbent should lose the elections under such positive circumstances was almost unthinkable. However, the electoral demise of the Vajpayee government was obvious to anyone acquainted with India's increasingly unstable social environment - a product of rising unemployment, declining wages and deteriorating social conditions. India was not shining for millions of voters. These voters used their ballots to register their opposition to economic reforms first implemented in the early 1990's and modestly accelerated by the Vajpayee government. These reforms, which included reduction of public sector investment and government subsidies, trade liberalization and accelerated privatization of public sector companies, benefited only a small proportion of India's population as well as foreign investors. For the bulk of the population these reforms were deleterious.
India's electorate has given the INC-led government, along with its leftist allies, a strong mandate for a revision of economic policy. Inherent to the electorate's expectations are greater government focus on social development through increased public sector investment and government subsidies. In sharp contrast to the electorate, multilateral lenders, foreign analysts and investors expect changes in economic policy to include tighter fiscal policy, implicit to which is further reduction of public sector investment, expenditure on subsidies and the continued decline of social development. In the face of irrefutable evidence to the contrary, these lenders, analysts and investors glibly believe that tight fiscal policy will lead to accelerated economic growth in India. Argentina and Brazil, which have long followed IMF-directed fiscal adjustment policies, provide excellent examples of the negative impact tight fiscal policy has on economic growth and social and political stability.
Over the past 15 years the IMF has conditioned credit for Argentina and Brazil on the maintenance of tight fiscal policy. The IMF assumed that tight fiscal policy would lead to steady decline of the debt burden in these countries, thus supporting accelerated economic growth and underpinning foreign and domestic investor confidence. However, the outcome has been much different. Tight fiscal policy in both Argentina and Brazil undermined economic growth, leading to rapidly increasing debt burdens in both countries. Between 1989 and 2003 the average annual rate of GDP growth was 2.9 percent and 2.3 percent in Argentina and Brazil, respectively. Over the same period, the ratio of public sector debt to GDP increased from 28 percent to 140 percent in Argentina and 26 percent to 91 percent in Brazil. In addition to reducing economic growth and pushing the debt burden much higher, tight fiscal policy produced unprecedented political and social instability and the largest ever sovereign default in Argentina. The probability is high that Brazil will also be forced into default as continued economic weakness leads to further political and social instability, undermining investor confidence.
In comparison to Argentina and Brazil, fiscal policy has been easier in India over the past 15 years. Apart from a short period in the early 1990's following the country's balance of payments crisis, India has not been subject to IMF-directed fiscal adjustment policies. India's endemically large fiscal deficit, which averaged 8.4 percent of GDP between 1990 and 2003, supported GDP growth, which averaged 5.6 percent annually over the same period. Despite the large fiscal deficit, the ratio of public sector debt to GDP has risen modestly from 60 percent in 1989 to 75 percent in 2003.
Strong economic growth, underpinned by easy fiscal policy, prevented Latin-style runaway buildup of public sector debt in India. Economic growth in India could have been even faster over the past 15 years if public sector investment had not been sharply reduced after the country's balance of payments crisis in 1991. In that year, Finance Minister, Manmohan Singh, implemented fiscal reforms that included the reduction of public sector investment as well as rationalization of public sector employment - reductions and rationalizations that were deepened by the Vajpayee government.
The case for increased public sector investment in India is compelling. Between 1989 and 2003, capital outlays by the public sector have plummeted from 6 percent of GDP to 2.5 percent of GDP. Coinciding with this decline in investment has been the reduction of government subsidies, particularly food subsidies. The consolidation of public sector investment and subsidy payments has had an enormous negative impact on rural India. This has encouraged rural-urban migration, overwhelming the capacity of urban public utilities. In addition, the steady reduction of import tariffs has further contributed to deteriorating social conditions by subjecting both the agricultural and manufacturing sectors to imports that are often heavily subsidized in their home countries.
Doubling the rate of public sector investment, targeting agricultural infrastructure in particular, would sharply increase long-term economic growth in India. Investment in agricultural infrastructure, as well as increased food subsidies, would benefit a very large portion of the population, promoting political and social stability. Such an increase of investment and subsidies could be financed by a hike in import tariffs. Admittedly, this perspective is quite unconventional, but conventional methods of increasing economic growth, namely fiscal deficit reduction, have proven unworkable. To avoid Latin-style political, social and economic instability, the Singh government should take advantage of the very limited leverage multilateral lenders and foreign investors have over India and act unconventionally.
Courtesy - Jephraim Gundzik - Condor Advisers
The electoral drubbing dealt on the NDA government by the India National Congress (INC) and India's leftist political parties shocked both government cadres and outside observers. After all, India was enjoying the fruits of strong economic growth and booming asset markets. That the incumbent should lose the elections under such positive circumstances was almost unthinkable. However, the electoral demise of the Vajpayee government was obvious to anyone acquainted with India's increasingly unstable social environment - a product of rising unemployment, declining wages and deteriorating social conditions. India was not shining for millions of voters. These voters used their ballots to register their opposition to economic reforms first implemented in the early 1990's and modestly accelerated by the Vajpayee government. These reforms, which included reduction of public sector investment and government subsidies, trade liberalization and accelerated privatization of public sector companies, benefited only a small proportion of India's population as well as foreign investors. For the bulk of the population these reforms were deleterious.
India's electorate has given the INC-led government, along with its leftist allies, a strong mandate for a revision of economic policy. Inherent to the electorate's expectations are greater government focus on social development through increased public sector investment and government subsidies. In sharp contrast to the electorate, multilateral lenders, foreign analysts and investors expect changes in economic policy to include tighter fiscal policy, implicit to which is further reduction of public sector investment, expenditure on subsidies and the continued decline of social development. In the face of irrefutable evidence to the contrary, these lenders, analysts and investors glibly believe that tight fiscal policy will lead to accelerated economic growth in India. Argentina and Brazil, which have long followed IMF-directed fiscal adjustment policies, provide excellent examples of the negative impact tight fiscal policy has on economic growth and social and political stability.
Over the past 15 years the IMF has conditioned credit for Argentina and Brazil on the maintenance of tight fiscal policy. The IMF assumed that tight fiscal policy would lead to steady decline of the debt burden in these countries, thus supporting accelerated economic growth and underpinning foreign and domestic investor confidence. However, the outcome has been much different. Tight fiscal policy in both Argentina and Brazil undermined economic growth, leading to rapidly increasing debt burdens in both countries. Between 1989 and 2003 the average annual rate of GDP growth was 2.9 percent and 2.3 percent in Argentina and Brazil, respectively. Over the same period, the ratio of public sector debt to GDP increased from 28 percent to 140 percent in Argentina and 26 percent to 91 percent in Brazil. In addition to reducing economic growth and pushing the debt burden much higher, tight fiscal policy produced unprecedented political and social instability and the largest ever sovereign default in Argentina. The probability is high that Brazil will also be forced into default as continued economic weakness leads to further political and social instability, undermining investor confidence.
In comparison to Argentina and Brazil, fiscal policy has been easier in India over the past 15 years. Apart from a short period in the early 1990's following the country's balance of payments crisis, India has not been subject to IMF-directed fiscal adjustment policies. India's endemically large fiscal deficit, which averaged 8.4 percent of GDP between 1990 and 2003, supported GDP growth, which averaged 5.6 percent annually over the same period. Despite the large fiscal deficit, the ratio of public sector debt to GDP has risen modestly from 60 percent in 1989 to 75 percent in 2003.
Strong economic growth, underpinned by easy fiscal policy, prevented Latin-style runaway buildup of public sector debt in India. Economic growth in India could have been even faster over the past 15 years if public sector investment had not been sharply reduced after the country's balance of payments crisis in 1991. In that year, Finance Minister, Manmohan Singh, implemented fiscal reforms that included the reduction of public sector investment as well as rationalization of public sector employment - reductions and rationalizations that were deepened by the Vajpayee government.
The case for increased public sector investment in India is compelling. Between 1989 and 2003, capital outlays by the public sector have plummeted from 6 percent of GDP to 2.5 percent of GDP. Coinciding with this decline in investment has been the reduction of government subsidies, particularly food subsidies. The consolidation of public sector investment and subsidy payments has had an enormous negative impact on rural India. This has encouraged rural-urban migration, overwhelming the capacity of urban public utilities. In addition, the steady reduction of import tariffs has further contributed to deteriorating social conditions by subjecting both the agricultural and manufacturing sectors to imports that are often heavily subsidized in their home countries.
Doubling the rate of public sector investment, targeting agricultural infrastructure in particular, would sharply increase long-term economic growth in India. Investment in agricultural infrastructure, as well as increased food subsidies, would benefit a very large portion of the population, promoting political and social stability. Such an increase of investment and subsidies could be financed by a hike in import tariffs. Admittedly, this perspective is quite unconventional, but conventional methods of increasing economic growth, namely fiscal deficit reduction, have proven unworkable. To avoid Latin-style political, social and economic instability, the Singh government should take advantage of the very limited leverage multilateral lenders and foreign investors have over India and act unconventionally.
Courtesy - Jephraim Gundzik - Condor Advisers
Wednesday, June 02, 2004
10 Tips for the Successful Long-Term Investor
While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. In this article, we'll review 10 general principles that can help investors get a better grasp of how to approach the market from a long-term perspective. Keep in mind that these guidelines are quite general, and each will have a different application depending on the circumstance. But every point embodies some fundamental concept that will make you a more knowledgeable investor.
1) Sell the losers and let the winners ride! - Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in hopes of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst case cenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:
Riding a Winner – Peter Lynch was famous for talking about his "tenbaggers," his investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple--say three, for instance--you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule--if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.
Selling a Loser – There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgement of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater!
In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.
2) Don't chase the "hot tip" - Whether the tip comes from your brother, cousin, neighbor, or even broker, no one can ever guarantee what a stock will do. When you make an investment, it's important you know the reasons for doing so: do your own research and analysis of any company before you even consider investing your hard earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips may sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.
3) Don't sweat the small stuff – In tip #1, we explained the importance of realizing when your investments are not performing as you expected them to--but remember to expect short-term fluctuations. As a long-term investor, don't panic when your investments experience various movements within shorter time periods. When tracking the activities of your investments, you should look at the big picture, or the long-term. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement--the one that occurs over many years--so keep your focus on developing your overall investment philosophy by educating yourself.
4) Do not overemphasize the P/E ratio – Investors often place too much importance on the P/E ratio. Because it is one important tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
5) Resist the lure of penny stocks - A common misconception is that there is less to lose in buying a low priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you'd still have a 100% loss of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.
6) Pick a strategy and stick with it – Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades and, despite criticism from the media, it prevented him from getting sucked into the new tech companies that had no earnings and eventually crashed.
7) Focus on the future –The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.
A quote from Peter Lynch's One Up on Wall Street about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twenty fold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made seven fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.
8) Investors adopt a long-term perspective - Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out, make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.
Neither investing style is necessarily better than the other--both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education, and desire. (For more on this, check out "Defining Active Trading".) Most people don't fit into this boat.
9) Be open-minded when selecting companies – Many great companies are household names, but many good investments are not household names (and vice versa). Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps: over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the S&P 500 returned 0.53%.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.
10) Taxes are important, but not that important – Putting taxes above all else is a dangerous mentality, as it can often cause investors to make poor, misguided decisions. Yes, tax Implications are important, but they are a secondary concern.
The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision.
Conclusion
In this article, we have covered 10 solid tips for long-term investors. We started off saying that there is an exception to every rule, and we can’t overemphasize this point. Depending on your circumstances, you might even disagree with something in this article! However, we hope that the common sense principles we’ve discussed benefit you overall and provide some insight into how you should think about investing.
Courtesy - Investopedia.com
1) Sell the losers and let the winners ride! - Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in hopes of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst case cenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high quality investments while selling the poor ones is great in theory, but hard to put into practice. The following information might help:
Riding a Winner – Peter Lynch was famous for talking about his "tenbaggers," his investments that increased tenfold in value. The theory is that much of his overall success was due to a small number of stocks in his portfolio that returned big. If you have a personal policy to sell after a stock has increased by a certain multiple--say three, for instance--you may never fully ride out a winner. No one in the history of investing with a "sell-after-I-have-tripled-my-money" mentality has ever had a tenbagger. Don't underestimate a stock that is performing well by sticking to some rigid personal rule--if you don't have a good understanding of the potential of your investments, your personal rules may end up being arbitrary and too limiting.
Selling a Loser – There is no guarantee that a stock will bounce back after a protracted decline. While it's important not to underestimate good stocks, it's equally important to be realistic about investments that are performing badly. Recognizing your losers is hard because it's also an acknowledgement of your mistake. But it's important to be honest when you realize that a stock is not performing as well as you expected it to. Don't be afraid to swallow your pride and move on before your losses become even greater!
In both cases, the point is to judge companies on their merits according to your research. In each situation, you still have to decide whether a price justifies future potential. Just remember not to let your fears limit your returns or inflate your losses.
2) Don't chase the "hot tip" - Whether the tip comes from your brother, cousin, neighbor, or even broker, no one can ever guarantee what a stock will do. When you make an investment, it's important you know the reasons for doing so: do your own research and analysis of any company before you even consider investing your hard earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips may sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.
3) Don't sweat the small stuff – In tip #1, we explained the importance of realizing when your investments are not performing as you expected them to--but remember to expect short-term fluctuations. As a long-term investor, don't panic when your investments experience various movements within shorter time periods. When tracking the activities of your investments, you should look at the big picture, or the long-term. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.
Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement--the one that occurs over many years--so keep your focus on developing your overall investment philosophy by educating yourself.
4) Do not overemphasize the P/E ratio – Investors often place too much importance on the P/E ratio. Because it is one important tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.
5) Resist the lure of penny stocks - A common misconception is that there is less to lose in buying a low priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you'd still have a 100% loss of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.
6) Pick a strategy and stick with it – Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades and, despite criticism from the media, it prevented him from getting sucked into the new tech companies that had no earnings and eventually crashed.
7) Focus on the future –The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.
A quote from Peter Lynch's One Up on Wall Street about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twenty fold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made seven fold after that." The point is to base a decision on future potential rather than on what has already happened in the past.
8) Investors adopt a long-term perspective - Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out, make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.
Neither investing style is necessarily better than the other--both have their pros and cons. But active trading can be wrong for someone without the appropriate time, financial resources, education, and desire. (For more on this, check out "Defining Active Trading".) Most people don't fit into this boat.
9) Be open-minded when selecting companies – Many great companies are household names, but many good investments are not household names (and vice versa). Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps: over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the S&P 500 returned 0.53%.
This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.
10) Taxes are important, but not that important – Putting taxes above all else is a dangerous mentality, as it can often cause investors to make poor, misguided decisions. Yes, tax Implications are important, but they are a secondary concern.
The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision.
Conclusion
In this article, we have covered 10 solid tips for long-term investors. We started off saying that there is an exception to every rule, and we can’t overemphasize this point. Depending on your circumstances, you might even disagree with something in this article! However, we hope that the common sense principles we’ve discussed benefit you overall and provide some insight into how you should think about investing.
Courtesy - Investopedia.com
Tuesday, June 01, 2004
The Forex Market: A Jewel in India's Crown
The Indian forex market has witnessed a high degree of volatility in the past few years in the aftermath of the East Asian crises as well as 9/11 attacks. However, developments taking place in the Indian forex market have brightened the prospects for the Indian economy significantly in the current financial year. These circumstances have been supported by the upsurge in the forex kitty of the country touching the levels of USD 116 billion as on April 09, 2004.
As a consequence, the Indian rupee has been appreciating steadily, which in turn has led to faster repatriation of export earnings and remittances by expatriates. The appreciation in the rupee rose to 4.7% for the calendar year 2004. The outlook for the current financial year is viewed with confidence throughout the industry following a sharp rise in agricultural production as well as achievement of a two digit GDP growth of 10.4% in the third quarter of the financial year 2003-04.
A rising rupee helped in reducing the burden of the foreign debt on both the government and Indian corporates. Now, Indian corporates, like Bharti group are taking advantage of the soft US interest rates and raising foreign currency loans, known as External Commercial Borrowings (ECBs). An appreciating rupee also helps importers to buy goods and services at a cheaper rate that before. This is imperative for a developing country like India that relies heavily on imports. Exports have gone up significantly in the last two fiscal years, as have imports, indicating a prosperous future for the Indian economy as higher imports normally mean enhanced economic activities taking place in the country.
According to the governor of the Reserve Bank of India (RBI), Dr. Y.V. Reddy, the Indian rupee is relatively stable compared to other international currencies. Dr. Reddy said, "Volatility is not easy to define and I always said the broader line between flexibility and volatility is rather waving and shifting. The rupee value has to be seen in the context of supply and demand, both in the country and across currency movements globally."
Burgeoning Forex Reserves: Contribution of Foreign Institutional Investors (FIIs)
The major contributor to the forex kitty of the country in the first three quarters of the fiscal year 2003-04 had been foreign investments. The total foreign investment was 38.3% of the reserves out of which 9.5% was foreign direct investment and 28.8% was portfolio investments by the FIIs. The total addition to the kitty was $26.4 billion as compared to $16.3 billion during the first three quarters of the fiscal year 2002-03. Moreover, the Indian forex kitty exceeded the total external debt of the country. On April 9, 2004 the total forex reserves stood at $116 billion and the total external debt was $112 billion.
After the FIIs, it is the banking sector (and its capital) that topped the list of the major contributors. Banking capital contributed a whopping 21.3% to the forex reserves, including net inflows to the tune of $3.4 billion from NRI deposits. Shot term credit accounted for 9.1% of the reserves. Valuation gains registered a whopping 20.5% coming to $5.6 billion as compared to $3.7 billion for the same period in the fiscal year 2002-03.
There is no doubt that foreign institutional investor inflows into the Indian capital markets has led to a sudden upsurge in the forex reserves of the country. The initial public offers (IPOs) too played a key role in this.
India's growth potential is now far more widely recognized than ever before. In the 1990s, the majority of foreign inflows were from the remittances made by the Indian workers working in the Gulf region. But now the picture is quite different. Foreign investment only has contributed more than $10 billion dollars into the Indian economy during the period Apr-Dec 2003. Moreover, the non-resident Indian (NRI) community - which moved far and wide during the IT boom - are now beginning to transfer their savings back home.
The Indian software community has gained a tremendous reputation abroad, attracting many foreign companies to set up the call centers and information technology enabled services (ITES) in India.
Robust Service Exports
Total exports between Apr-Jan of the fiscal year 2003-04 were valued at $47502.50 million, a growth of 12.83% over the previous year, while imports were valued at $61933.02 million - a growth of 24.70% over the same period in the last fiscal year. Consequently, the trade deficit for Apr-Jan 2003-04 is estimated at $14430.52 million, much higher than the deficit of $7566.59 million during the same period in the fiscal year 2002-03. In spite of such a high trade deficit, the overall current account balance of the country doubled in the third quarter of the fiscal year 2003-04 to $1.8 billion over the same period in the previous fiscal year. Much of this can be attributed to the splendid performance of the Indian software industry as well as tourism.
RBI: The 'Stabilizer'
The central bank of a country is always ready to mop up any enduring liquidity in the markets. When it comes to India, the Reserve Bank of India has already taken initiatives to absorb the excess liquidity in the money markets. The Apex Bank has come out with a scheme known as the 'Market Stabilization Scheme (MSS)' through which the central bank will be issuing bonds in the market in an order to mop up surplus liquidity as and when required. The total corpus for the MSS scheme is Rs 60000 crore that would be issued in the fiscal year 2004-05. The Apex Bank has already issued securities worth Rs 10000 crore so far in the second week of April'04 and another issue of MSS bonds will take place on April 27 by the RBI. Clearly, the central bank is acting as a stabilizer to smooth out the volatilities in the money markets.
Conclusion
It's a matter of pride and a cause for celebration that India has made the transition from a market facing the BoP crises to one with official forex reserves of more than $116 billion. The RBI has done an admirable job of managing the external liquidity and debt position of the country. Recent developments in the Indian money and forex markets have brightened the prospects for the forthcoming economy of the country significantly. The outlook for the current financial year is one of confidence, following the recent upsurge in the forex kitty, GDP growth and growing current account surplus.
Courtesy - Vivek Jain - ICFAI
As a consequence, the Indian rupee has been appreciating steadily, which in turn has led to faster repatriation of export earnings and remittances by expatriates. The appreciation in the rupee rose to 4.7% for the calendar year 2004. The outlook for the current financial year is viewed with confidence throughout the industry following a sharp rise in agricultural production as well as achievement of a two digit GDP growth of 10.4% in the third quarter of the financial year 2003-04.
A rising rupee helped in reducing the burden of the foreign debt on both the government and Indian corporates. Now, Indian corporates, like Bharti group are taking advantage of the soft US interest rates and raising foreign currency loans, known as External Commercial Borrowings (ECBs). An appreciating rupee also helps importers to buy goods and services at a cheaper rate that before. This is imperative for a developing country like India that relies heavily on imports. Exports have gone up significantly in the last two fiscal years, as have imports, indicating a prosperous future for the Indian economy as higher imports normally mean enhanced economic activities taking place in the country.
According to the governor of the Reserve Bank of India (RBI), Dr. Y.V. Reddy, the Indian rupee is relatively stable compared to other international currencies. Dr. Reddy said, "Volatility is not easy to define and I always said the broader line between flexibility and volatility is rather waving and shifting. The rupee value has to be seen in the context of supply and demand, both in the country and across currency movements globally."
Burgeoning Forex Reserves: Contribution of Foreign Institutional Investors (FIIs)
The major contributor to the forex kitty of the country in the first three quarters of the fiscal year 2003-04 had been foreign investments. The total foreign investment was 38.3% of the reserves out of which 9.5% was foreign direct investment and 28.8% was portfolio investments by the FIIs. The total addition to the kitty was $26.4 billion as compared to $16.3 billion during the first three quarters of the fiscal year 2002-03. Moreover, the Indian forex kitty exceeded the total external debt of the country. On April 9, 2004 the total forex reserves stood at $116 billion and the total external debt was $112 billion.
After the FIIs, it is the banking sector (and its capital) that topped the list of the major contributors. Banking capital contributed a whopping 21.3% to the forex reserves, including net inflows to the tune of $3.4 billion from NRI deposits. Shot term credit accounted for 9.1% of the reserves. Valuation gains registered a whopping 20.5% coming to $5.6 billion as compared to $3.7 billion for the same period in the fiscal year 2002-03.
There is no doubt that foreign institutional investor inflows into the Indian capital markets has led to a sudden upsurge in the forex reserves of the country. The initial public offers (IPOs) too played a key role in this.
India's growth potential is now far more widely recognized than ever before. In the 1990s, the majority of foreign inflows were from the remittances made by the Indian workers working in the Gulf region. But now the picture is quite different. Foreign investment only has contributed more than $10 billion dollars into the Indian economy during the period Apr-Dec 2003. Moreover, the non-resident Indian (NRI) community - which moved far and wide during the IT boom - are now beginning to transfer their savings back home.
The Indian software community has gained a tremendous reputation abroad, attracting many foreign companies to set up the call centers and information technology enabled services (ITES) in India.
Robust Service Exports
Total exports between Apr-Jan of the fiscal year 2003-04 were valued at $47502.50 million, a growth of 12.83% over the previous year, while imports were valued at $61933.02 million - a growth of 24.70% over the same period in the last fiscal year. Consequently, the trade deficit for Apr-Jan 2003-04 is estimated at $14430.52 million, much higher than the deficit of $7566.59 million during the same period in the fiscal year 2002-03. In spite of such a high trade deficit, the overall current account balance of the country doubled in the third quarter of the fiscal year 2003-04 to $1.8 billion over the same period in the previous fiscal year. Much of this can be attributed to the splendid performance of the Indian software industry as well as tourism.
RBI: The 'Stabilizer'
The central bank of a country is always ready to mop up any enduring liquidity in the markets. When it comes to India, the Reserve Bank of India has already taken initiatives to absorb the excess liquidity in the money markets. The Apex Bank has come out with a scheme known as the 'Market Stabilization Scheme (MSS)' through which the central bank will be issuing bonds in the market in an order to mop up surplus liquidity as and when required. The total corpus for the MSS scheme is Rs 60000 crore that would be issued in the fiscal year 2004-05. The Apex Bank has already issued securities worth Rs 10000 crore so far in the second week of April'04 and another issue of MSS bonds will take place on April 27 by the RBI. Clearly, the central bank is acting as a stabilizer to smooth out the volatilities in the money markets.
Conclusion
It's a matter of pride and a cause for celebration that India has made the transition from a market facing the BoP crises to one with official forex reserves of more than $116 billion. The RBI has done an admirable job of managing the external liquidity and debt position of the country. Recent developments in the Indian money and forex markets have brightened the prospects for the forthcoming economy of the country significantly. The outlook for the current financial year is one of confidence, following the recent upsurge in the forex kitty, GDP growth and growing current account surplus.
Courtesy - Vivek Jain - ICFAI
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