Can't C Me

Stock Options

2009-09-06T11:35:00.000-04:00

I've just discovered the world of stock options. It's an excellent way to make money in the stock market. My first trade was writing (i.e. selling) a covered call on some shares that I own.

I'm finding that my philosophy regarding the capital markets has also changed. I will write more on that later.

Begin with the end in mind

2009-08-29T13:00:00.000-04:00

The following is an excerpt from The 7 Habits of Highly Effective People, by Stephen R. Covey.

In your mind's eye, see yourself going to the funeral of a loved one. Picture yourself driving to the funeral parlor or chapel, parking the car, and getting out. As you walk inside the building, you notice the flowers, the soft organ music. You see the faces of friends and family you pass along the way. You feel the shared sorrow of losing, the joy of having known, that radiates from the hearts of the people there.

As you walk down to the front of the room and look inside the casket, you suddenly come face to face with yourself. This is your funeral, three years from today. All these people have come to honour you, to express feelings of love and appreciation for your life.

As you take a seat and wait for the services to begin, you look at the program in your hand. These are to be four speakers. The first is from your family, immediate and also extended - children, brothers, sisters, nephews, nieces, aunts, uncles, cousins, and grandparents who have come from all over the country to attend. The second speaker is one of your friends, someone who can give a sense of what you were as a person. The third speaker is from your work or profession. And the fourWth is from your church or some community organization where you've been involved in service.

Now think deeply. What would you like each of these speakers to say about you and your life? What kind of husband, wife, father, or mother would you like their words to reflect? What kind of son or daughter or cousin? What kind of friend? What kind of working associate?

What character would you like them to have seen in you? What contributions, what achievements would you want them to remember? Look carefully at the people around you. What difference would you like to have made in their lives?

What it means to "begin with the end in mind"

The most fundamental application of "begin with the end in mind" is to begin today with the image, picture, or paradigm of the end of your life as your frame of reference or the criterion by which everything else is examined. Each part of your life - today's behaviour, tomorrow's behaviour, next week's behaviour, next month's behaviour - can be exhamined in the context of the whole, of what really matters most to you. By keeping that end clearly in mind, you can make certain that whatever you do on any particular day does not violate the criteria you have defined as supremely important, and that each day of your life contributes in meaningful way to the vision you have of your life as a whole.

It's incredibly easy to get caught up in an activity trap, in the busy-ness of life, to work harder and harder at climbing the ladder of success only to discover it's leaning against the wrong wall. It is possible to be busy - very busy - without being very effective.

People often find themselves achieving victories that are empty, successes that have come at the expense of things they suddenly realize were far more valuable to them. People from every walk of life - doctors, academicians, actors, politicians, business professionals, athletes, and plumbers - often struggle to achieve a higher income, more recognition or a certain degree of professional competence, only to find that their drive to achieve their goals blinded them to the things that really mattered most and now are gone.

How different our lives are when we really know what is deeply important to us, and, keeping that picture in mind, we manage oursleves each day to be and to do what really matters most. If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster. We may be very busy, we may be very efficient, but we will also be truly effective only when we begin with the end in mind.

If you carefully consider what you wanted to be said of you in the funeral experience, you will find your definition of success. It may be very different from the definition you thought you had in mind. Perhaps fame, achievement, money, or some of the other things we strive for are not even part of the right wall.

When you begin with the end in mind, you gain a different perspective.

The 7 Habits of Highly Effective People

2009-08-24T07:00:00.003-04:00

The 7 Habits of Highly Effective People is a book by Stephen R. Covey. So, what are the seven habits?

1. Be Proactive

- Being proactive means "as human beings, we are responsible for our own lives."

- "Our behaviour is a function of our decisions, not our conditions. We can subordinate feelings to values. We have the initiative and the responsibility to make things happen."

2. Begin with the end in mind

- "Begin with the end in mind is based on the principle that all things are created twice. There's a mental or first creation, and a physical or second creation to all things."

- "To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you're going so that the steps you take are always in the right direction."

3. Put first things first

- The ability of put first things first is the common denominator of success.

- "If you want to get something done, give it to a busy man."

4. Think win/win

- "Win/Win means that agreements or solutions are mutually beneficial, mutually satisfying" for all parties.

- "Win/Win" is based on the paradigm that there is plenty for everybody, that one person's success is not achieved at the expense or exclusion of the success of others."

- "Win/Win" is a belief in the Third Alternative. It's not your way or my way; it's a better way, a higher way."

5. Seek first to understand, then to be understood

- "Most people do not listen with the intent to understand; they listen with the intent to reply."

- "Diagnose before you prescribe."

- "When you can present your own ideas clearly, specifically, visually, and most important, contextually - in the context of a deep understanding of their paradigms and concerns - you significantly increase the credibility of your ideas."

6. Synergize

- Synergy means that "the whole is greater than the sum of its parts."

- "The essence of synergy is to value differences - to respect them, to build on strengths, to compensate for weaknesses."

7. Sharpen the saw

- Habit 7 is "preserving and enhancing the greatest asset you have - you."

- Habit 7 is "renewing the four dimensions of your nature - physical, spiritual, mental, and social/emotional."

- Sharpen the saw means "exercising all four dimensions of your nature, regularly and consistently in wise and balanced ways."

Related Post: Begin with the end in mind

Disclosure of Executive Compensation

2009-08-23T07:00:00.002-04:00

Is it a good idea for companies to disclose their CEO's compensation package?

Many decades ago, the United States' Securities and Exchange Commission (SEC) made it mandatory for companies to disclose what they were paying to their Chief Executive Officer (CEO). This was done in the interest of the shareholders, who collectively, are the silent owners of the company. The SEC rightly contemplated that shareholders have a right to know what the person running their company is earning.

At the time (early in the 20th century) when the disclosure rule was put in place, the CEO's salary was a reasonable few notches higher than the workers who actually "ran" the company and did all the work. At the time, the CEO's remuneration actually made sense. The CEO was a leader who made tough decisions and captained the company in the direction of prosperity. Being the head of the organization, the CEO was understandably paid more than everyone else. A study found that CEO salaries were quite stable prior to the implementation of the disclosure rule.

Fast forward to the 21st century and the CEOs compensation packages have skyrocketed into the stratosphere. The highest paid CEO in 2008 earned over US$700,000,000! In a ploy to mislead the company's shareholders, the CEO's base salary was only US$350,000; the rest of his salary came in the form of bonuses, stock options and other incentives. I have discussed this trick to fool the shareholders here.

Today's CEO's salary is not just a few notches above the workers salary, but at least 1000 times higher than a worker's salary. One explanation for why this has happened has to do with the SEC making it mandatory to disclose CEO compensation. A study on executive compensation found that CEO salaries have been consistently going up since that rule was put in place. The explanation provided is that disclosure made it possible for CEOs to know what CEOs of competitor companies were earning. This lead to competition in salaries, which in turn lead to a rise in salaries.

I think it will probably be a good idea if we, once again, go back to an era where CEO compensation was not disclosed. It will probably ease the pressure on salaries to rise.

What do you think?

Mark-to-Market Rules

2009-08-20T20:12:00.001-04:00

In April 2009, the Financial Accounting Standards Board (FASB) eased the mark-to-market (MTM) rules, which required companies to report on their balance sheets all their investments (financial instruments, real estate) valued at the current market price (and not the price at which they were bought, or the price at which the company hopes to sell in the future).

The MTM rules have been blamed for the Credit Crunch that we are in today, and also the bankruptcy of several banks. Banks and investment firms held billions of dollars of CDO (Collateralized Debt Obligation) investments. CDOs are complex derivatives that contain U.S. mortgages and other loan receivables. The firms holding CDOs have had to take significant write-downs on their balance sheets owing to the rising mortgage default rates in the U.S., which affected the CDO's value. The market for CDOs also dried up (i.e. low liquidity) following the collapse of the U.S. housing market, which further negatively affected the prices.

According to the rules, when a company prepares its balance sheet and income statement, if an investment that a company holds has fallen in value, then the (paper) loss in value has to come out of the earnings. Therefore, billions of dollars in write-downs have led to billions of dollars in losses for companies.

Is it fair to force companies to take write-downs on their investments even if they don't intend to sell their investments today? What if the company believes that they might be able to receive a higher price in the future when the market improves? In this case, isn't it logical that they should value their investments at prices they believe they might be able to receive for them? These were exactly the arguments the FASB board took into account when easing the MTM rules.

Did you notice that there haven't been a rash of write-downs since April when the rules were eased? I think the easing of the rules was a band-aid solution to the problem. It might lead to major problems later when companies start to misuse the "power" that they now have to value their investments according to what they "think" they might receive for them when they sell those in the future. Obviously, we should expect companies to overstate the value of their investment to "beef up" their balance sheets. Once everyone starts misusing the power, and FASB decides to do something about it (e.g. reinstate the MTM rules), it will lead to another rash of write-downs - and another bear market.

Also, it will now be difficult to compare balance sheets of two companies because they might value the same investment differently. Earlier, at least we knew that if two companies held the same investment, then those would have the same value on their respective balance sheets - even if the prices were artificially low due to liquidity problems or a bear market.

What do you think? Did FASB make the right decision by easing the MTM rules?

Sell Sensex!

2009-05-18T17:08:00.005-04:00

India's benchmark stock index, SENSEX, created history on Monday, May 18th, 2009, by shooting up 17% in a single day after the re-election of the Congress party to power.

I don't think this rise is sustainable; we will see a big correction within a day or two when investors and speculators alike will start to book profits. I think it's best to sell all Indian stocks at this point; there will be opportunities to buy on the dips.

I sold mine today.

Equity Markets: Good News & Bad News

2009-05-07T19:35:00.007-04:00

I think the recession is coming to an end. Most global stock indices have rallied over 20% since bottoming out in early March. Stock markets are leading indicators of the economy and they rally well before we get confirmation that the recession is indeed over. Similarly, the markets had started dropping well before we knew we were in a recession.

Among the BRIC (Brazil, Russia, India and China) nations, the Indian markets are the best performers with India's BSE Sensex Index clocking over a 40% gain since the early March low! Many of the blue chip stocks such as ICICI Bank and Tata Motors have more than doubled. I'm very pleased to have made some very significant investments in Indian equities when the markets were dropping like a rock.

The good news is that the recession is coming to an end; the bad news is that the market has already bottomed (in early March). So, all those investors who had been waiting for the market to bottom to start purchasing stocks - the market has already bottomed.

Having said that, I don't think it is too late to make long-term investments. Since the market has had a good rally, I wouldn't be surprised to see a small correction soon, and that, I think, will be a prudent time to make long-term investments by all those who had been waiting for the market to bottom.

If an investor keeps in mind that it is impossible to buy at the absolute bottom and sell at the absolute top, then I think (s)he will do well in the long-term. This is my Golden Rule, which I try to follow.

Please take the poll on the left-hand side of this page and vote 'yes' if you think the market has already bottomed, and 'no' otherwise.

New US Currency

2009-02-27T18:08:00.002-05:00

Given the state of the American economy, the United States Mint has issued this new one dollar bill:

Quixtar: A Multi-Level Marketing Scam

2008-09-02T19:00:00.008-04:00

After learning that one of my acquaintance was running his own business, I asked about the kind of business he was running -- just out of curiosity. I was in for a surprise. I was expecting a short-and-sweet to-the-point answer, but what I got was an hour long "information session" on Quixtar (supposedly an online shopping company). He claimed it was the solution for gaining my financial independence by becoming an IBO - Independent Business Owner - affiliated with the company.

As much as it motivates me to be my own boss and run my own business, I'm always sceptical whenever someone talks about the big bucks I can [potentially] make in a [relatively] short period of time in some sort of business with minimal investment. And of course, they have the fancy charts, literature and math to back up the numbers.

Despite what they say, Quixtar is a pyramid scheme, albeit a cleverly disguised one. Citibank's Primerica also operates in a similar fashion. Both are "multi-level marketing" schemes. The basic idea is for an IBO to sell Quixtar products and to "sponsor" (i.e. recruit) other IBO's (who will work under you). The sponsoring person gets a bonus for recruiting, and a fee from everyone that the new IBO recruits. The recruiter also get a percentage of the new IBO's sales and of the sales of everyone under the new IBO (if any). The new IBO is strongly encouraged to sponsor/recruit more people.

Advocates of Quixtar are quick to point out that almost all corporations operate in a pyramid fashion, where the employees are at the bottom of the so-called pyramid and company executives reap all the benefits of a regular employee's hard work. This is certainly true. But what's the point of becoming a Quixtar IBO and "owning your own business" if the employee-employer relationship still holds true, where the IBO can be thought of as an employee of Quixtar and all the hard work is benefiting the company? I think it makes much more sense to get into a business where you are the sole beneficiary of your hard work. Otherwise, you may as well be a salaried employee of some company (with paid vacation days, benefits and then some)!

I don't think it is possible for IBO's to make any significant amount of money by re-selling Quixtar products, which are over-priced. It's "re-selling" because an IBO purchases products from Quixtar and re-sells to the public. The concept is similar to a franchise, where Quixtar is the franchiser and the IBO is the franchisee. It's not a money-losing strategy for the IBO, but obviously not a money-making one either.

No wonder the average gross income for an IBO was only $115/month in 2006 (the most recent year for which data is available). Gross income is total income before taxes or expenses. The actual amount one will pocket will be much less. I wonder how much time one has to put in to gross $115/month... I suspect it is a lot. I would much rather spend time with family, friends and doing things that I love, instead of wasting it on this business.

I've learned the hard way that if it seems too good to be true, then it usually is. One cannot break the golden rule of life, which is, you reap what you sow. Somehow I'm suppose to receive exponential benefit from other people, by paying a one time fee of only US$250 to "setup" my business. In business and in finance, just as in life, risk and reward go hand-in-hand. Although not always true, the bigger the risk (i.e. investment), the bigger the potential gain (or loss).

Clearly, the only way to make money in these types of businesses is by mass recruiting, and not by re-selling Quixtar products. This is why it is a pyramid scheme. Money simply flows up the chain in the form of referral bonus/commission. Those at the top make lots of money; those at the bottom make next to nothing. If I become a Quixtar IBO now, it will be like going to a party when the party is over. I'll be at the bottom of the pyramid with little to no chance of even recovering my initial investment. The people at the bottom of the pyramid who are not able to recruit any IBOs themselves are the losers in the game.

About five years ago when I was looking for a summer job I got caught in a trap laid by Primerica. I was told at the first "interview" that I was exactly what they were looking for. The interview was more like a brain-washing session where they tell you what everyone wants to hear (i.e. how much money you can make and how they will make you a "Team Leader" and how it will help you accomplish your financial goals). Primerica's concept of a "Team Leader" is the same as Quixtar's "IBO". I was subsequently invited for an orientation, which was another brain-washing session. I don't want to go into more details, but this turned out to be a pyramid scheme just like Quixtar. Luckily I was able to get out in only two weeks without any major financial loses. However, I wasted a lot of time with them attending "business meetings" (at my own expense!) and other such nonsense. It is indeed quite an elaborate scam and it's very easy to fall prey to it.

Perhaps the biggest problem with this business is the way IBO's are trained to recruit new people. The whole process is so misleading that one gets an entirely wrong idea about the business. This business also forces an IBO to look at every single person as a potential recruit. Promoting your business is one thing and trying to recruit every new person you meet is quite another. I think my friends and family will hate me if I try to get them involved in this.

I'm not the only one who feels this way about Quixtar. There are quite literally thousands of people who feel duped by this business and say that it is a "scam". Just google "Quixtar scam" or "Quixtar pyramid" for thousands of relevant stories on the many people who feel duped by this business! Google'ing anything is usually a self-fulfilling prophecy, but is it wise to ignore their experience? Ignore at your own peril, but then again, ignorance is bliss.

Having said all this, I don't think the folks who talked to me about Quixtar had any intention of misleading or misguiding me. I felt that their passion for this business was genuine and that was admirable. I wish them all the best!

Made In America: The "Credit Crunch"

2008-08-01T00:00:00.010-04:00

A lot has been said about the volatility of stock markets due to the "sub-prime" mortgage woes in America and the so-called "credit crunch". This has been going on for almost a year now. This is a 100% 'Made in America' problem that is affecting everyone worldwide - finally something that is not 'Made in China'!

It took me a while to understand how the sub-prime loans and the credit crunch were related and how they were affecting the economy. I'm sure there are many who still do not understand what the credit crunch is all about. Let me try to explain:

- Banks have a "prime" rate, which is the lowest or best interest rate that is offered to people with a perfect credit rating.

- People with a less-than-perfect credit rating have to pay a premium on top of the prime interest rate.

- The premium is to compensate the lender for taking on the additional risk of loaning money to someone who may not be able to pay it back.

- Generally speaking, banks do not lend money to people with poor credit ratings.

- However, in the U.S., amidst the booming real estate market, many mortgages were sanctioned to Americans with poor credit ratings, on some seemingly good terms.

- Under the terms, the lenders charged a special interest rate which was below the prime rate (i.e. "sub-prime"), for the first three years.

- The catch was that after three years, the rate would reset to a rate significantly higher than the prime rate.

- The lenders, in the mean time, would immediately "sell" the mortgages, which are their assets (loan receivables), to investment companies.

- The investment companies, would "re-package" the mortgages into what are called "CDOs" or Collateralized Debt Obligations, which are in turn sold to investors all over the world. The investors were mainly big banks, brokerages and hedge funds in the U.S. and Europe.

- CDOs are nothing more than different types of loan receivables - e.g. credit card receivables, mortgage receivables (including sub-prime) etc.

- Ratings companies, like S&P and Moody's, gave a higher rating to the CDO than any individual receivable in it.

- The reasoning was that if one of the loan defaults, it still wouldn't affect the CDOs ability to pay interest - due to diversification of loans.

- The problems began when after three years, the interest rates reset to higher rates. Americans found it difficult to make their (now higher) monthly mortgage payments and faced foreclosures.

- With foreclosures numbering in the hundreds of thousands every month, investors began to question the value of their investment: the CDO.

- Ratings' agencies cut the rating on some mortgage-backed securities (like CDOs) from investment grade to pure junk status in one calendar year!

- This triggered massive panic among investors and the market for CDOs quickly dried up. Many panic-stricken investors sold these at a fraction of what it cost them to buy.

- Not knowing the true value of the CDOs they held, many investors who did not sell were forced (due to mark-to-market regulation) to take massive write-downs on the value of these investments. The write-downs have so far totalled almost half a trillion dollars and analysts expect the total to reach $1 trillion before it is all over.

- Now, "credit crunch" is when lenders are unwilling to lend money ("credit") to businesses. This happened because the lenders (banks) had lost billions in the CDO market and some no longer had the cash even to stay afloat, let alone lend money to others. If banks don't lend money, they don't make any money.

- The banks are even afraid to lend to each other because they don't know what the other bank's exposure to CDOs is, and their ability to pay back.

- If businesses are unable to borrow money (to expand or to pay their own obligations), then they either cut-back on expansion plans or may even go into bankruptcy, thus resulting in recessionary conditions.

- If individuals are unable to borrow, then they may have to declare bankruptcy or hold-off on buying big-ticket items like houses, automobiles and appliances, again, leading to recessionary conditions.

Quite interesting the way capital markets work!

Bring in the Bears!

2008-07-02T23:01:00.006-04:00

I'm getting excited about the capital markets these days. I look forward to oil prices hitting new records and the Dow Jones Industrial Average dropping triple-digit points. The valuations are becoming increasingly attractive - especially the non-US financial institutions.

All of this is possible thanks to some smart investment bankers and incompetent ratings' agencies (like Moody's), risk managers and portfolio managers.

Why the investment bankers? Because they were able to "package" various sub-prime mortgages into a new type of investment and then sell it (usually to banks) for a profit. The people at ratings' agencies played their part by giving these new investments an "investment-grade" rating. It is now clear that they did not understand what they were rating. They figured the packaged investment was sufficiently diversified. I guess they did not understand the terms of the mortgage (i.e. low "teaser rates") nor the borrowers.

As the US homeowners started to default on their payments, the banks who bought these investments now have no idea what their investments are really worth - hence the write-downs. What were the people at "Risk Management" doing while these investments were being bought in the billions? Sleeping, of course! And last, but not least, the portfolio managers. How could they break one of the golden rules of investing - not to buy things you do not understand?

If this continues for a while more, I will be making some substantial long-term investments. I look forward to doing that.

Keep it up and bring in the bears (and sheep)!

Truth About Corn-Based Ethanol

2008-04-20T19:38:00.006-04:00

One of the arguments supporting the use of corn-based ethanol as fuel is that when it is used as an automotive fuel, either by itself or in an ethanol-gasoline blend, the result is less carbon monoxide and lower emissions of hydrocarbons into the air.

However, the major flaw with corn-based ethanol is that the production process requires buring of 1L of petroleum to make 1L of ethanol! Thus, any benefit derived by using ethanol is fully nullified.

At least in Brazil, they are using sugarcane-based ethanol, which uses significantly less energy to make 1L of ethanol than corn-based ethanol.

The US/European politicians are doing a good job misleading the public about corn-based ethanol as a "green" alternative energy source.

As more and more corn is diverted for ethanol production, what will happen to the world's food supply?

My Take on Investing and Life

2008-03-12T20:59:00.008-04:00

On Technical Analysis (TA):

Nothing but mumbo-jumbo. Makes enough sense that it is easy to fall prey for it - the lure of fast money, after all, is too much for most people. I myself have tried it and failed miserably. I learned my lesson. I think if you live by TA, then you will die by TA. TA is an art, rather than a skill. Most people cannot expect to make any money using TA. See A Tale of the Speculator and Technical Analysis for more.

On gambling:

I don't gamble in the stock market. Nor do I play the lottery. Taking some calculated risks in the market is not the same as gambling. I'm primarily a long-term investor with an investment horizon of 10 years or more. I won't be jumping off a bridge if the market drops 30% tomorrow!

On volatility:

I love market volatility. I think most people misuse that word; they use it without even understanding what it means. They think volatility is bad. In fact, volatility is what gives me the opportunity to make money in the stock market. Whether I actually exploit those opportunities is another story! One of my New Year's resolution is to have more courage to open doors when investment opportunities knock. I think I'm on the right track.

On Modern Portfolio Theory:

Not everything needs to be "measured" or "quantified". Security analysts these days are obsessed with measuring everything from risk to volatility. Standard deviation and variance are standard measures of risk, and volatility can be measured by beta. Small investors cannot be expected to know how to calculate these things and are therefore easy to entice to seek professional help. Nor can anyone expect small investors to know how to construct a portfolio in which the correlation of any pairs of securities is close to zero (this is one of the definitions of a "diversified portfolio"). The calculations involved here are indeed mind-boggling! I don't think one needs to know these calculations to make money in the market. The impression given to a small investor is that you cannot do it alone. I disagree. I think in most cases you can do better alone. In fact, I think you are better off not knowing these things!

On EBIT and EBITDA:

Analysts pay too much attention to useless numbers like EBIT (Earnings Before Interest and Taxes) and EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). The problem with these numbers is that interest and taxes are "real" expenses that we cannot simply ignore. What is the purpose of excluding interest and taxes from earnings when both have to be paid? As far as non-cash expenses like depreciation are concerned, they too are very real. You will find out exactly what depreciation is if you buy a car today and sell it tomorrow, or if you've ever had to do repairs/maintenance on your home. Depreciation accounts for these expenses.

On analyst ratings and recommendations:

Analysts are constantly upgrading and downgrading stocks. They have to do this to justify their existence. Frankly speaking, I don't think it is possible to make money listening to analyst recommendations. Many times I have seen analysts upgrading a stock when it has hit a 52-week high or even an all-time high, and downgrading a stock when it has been beaten down by too much pessimism. Not that they're always wrong, but they're wrong enough times to blur the distinction between a professional and an amateur. Generally speaking, I tend to pay more attention to their research on a company (which can be insightful) than their rating or recommendation.

On EPS:

Assuming all else is equal, is a company that earns $5.00/share a better value than a company that earns $2.50/share? Yes. What about a company that earns -$5.00/share compared to one that earns -$2.50/share? Which one is a better value? It is not necessarily the company that earns -$2.50/share. An understanding of how EPS is calculated will clarify why this is so. EPS is calculated by dividing net income by the number of shares outstanding. The fewer shares a company has outstanding the more income is attributed to each share (and therefore, each shareholder). This means that if a company has a large loss, then it can make its loss appear smaller, in EPS terms, by simply issuing more shares, which is bad for existing shareholders. This is why a negative EPS is not always very meaningful.

On charity:

If I donate, I want to donate because I want to. If I volunteer, I want to volunteer without expecting anything in return. It's sad to see some people who volunteer because they want a prestigious 'certificate of recognition'. Donating a suitcase full of clothes from Canada to a remote mountain village in India is probably the best thing I have ever done in my life. I think I was inspired by Dr. Prakash Amte (son of late Baba Amte).

On mountains:

Why do I love the mountains so much? They give me immeasurable peace of mind and happiness. There's a certain excitement in hearing and watching a bird swoosh past you. Watching an everyday phenomenon - a sunset - is a much-anticipated event and a real treat for the eyes. Every time I'm there, I say to myself, "what a wonderful world!"

Besides that, I have learned so many things about myself because of mountaineering - that I have an incredible amount of energy and will power. Now I just hope to harvest some of that energy and will power for other things.

My life ain't promised but it'll sure get better... until then, you'll find me in a cubicle!

Daylight Saving Time

2008-03-09T20:18:00.003-04:00

Does the environment really benefit from Daylight Saving Time? In theory, an extra hour of daylight will replace an hour of electrical light. However, for all practical purposes, more energy is conserved by moving the clock forward by one hour. Energy-hungry air-conditioners are used an hour longer by adding an extra hour of sunlight to evenings. Most of the energy comes by burning climate-warming coal.

In 2007, U.S. President George W. Bush touted enacting earlier starting dates and later ending dates for daylight time in the name of "energy conservation".

But who really benefits by starting daylight saving early? It's certainly not the environment! The retailers lobbied strongly to start daylight saving earlier. An extra hour of daylight in the evening means more time for shopping after work.

After all, nobody likes shopping when it's dark outside...

CFA

2008-01-24T19:36:00.004-05:00

After several anxious weeks, I finally found out yesterday that I've passed the CFA Level 1 examination - in my first attempt. It feels good, especially after knowing that only 39% of all candidates who wrote the exam passed it!

To the uninitiated, CFA - Chartered Financial Analyst - is a worldwide recognized designation conferred by the CFA Institute (http://www.cfainstitute.com/). It is earned after passing three exams (levels) and by having some minimum working experience in the Investment industry.

With the latest passing rates of about 40% for Level 1, 40% for Level 2 and 50% for Level 3, simple math shows that only 8 out of every 100 candidates pass all three levels!

It is practically a requirement these days to be a CFA Charterholder to be considered for a position of an Investment/Portfolio Manager. I think I will be a good portfolio manager.

The only reason the exam is difficult is because of the depth of the material that is covered. There are 6 text books; about 700 pages each!

I will start preparing for Level 2, which is considered to be the hardest, later this year. I will write the exam in June 2009. I don't think I have enough time to study to write the exam in June 2008.

I still don't know what I want to do in my life. There are many uncertainties - I guess we all do. I just hope to make a little, give a little, and just be happy and contented! :)

TSX-MX Merger Freebee

2007-12-10T19:32:00.002-05:00

The Toronto Stock Exchange (TMX) and Montreal Exchange (MX) announced today that they are merging to form Toronto Montreal Exchange (TMX).

I had purchased shares of MX a few months ago in anticipation of this event. Given the consolidation in the world exchanges (e.g. NYSE Euronext), it was plain to me that this merger was inevitable.

I thought MX would either merge with TSX or get taken over by New York Mercantile Exchange (Nymex) which already owns 10% of MX. This has yielded an almost risk-free profit of nearly 30% in less than 4 months (or 123% annualized).

I don't think TMX can stay independent for too long. I wouldn't be surprised if TMX eventually gets taken over by private equity groups or other larger exchanges. However, I don't think this will happen in a matter of few months, but rather a couple of years.

TSX will pay me $13.95 in cash for my MX shares, plus 0.5 share of TSX Group for every 1 share of MX. I will keep the new shares for another freebee when TMX gets taken over :)

We're Going to America!

2007-06-28T21:37:00.002-04:00

In the US, people line up to be the "first" to get an iPhone, a Play Station 3, movie tickets of the latest installment of Star Wars or just to get into a store on Boxing Day.

In Developing Nations, people line up to get food, drinking water and even their daily wages.

No wonder everyone wants to come to America!

Mr. Hyde of Business

2007-06-17T11:48:00.002-04:00

The Indian government and Indian companies need to stop exploiting India's poor and vulnerable!

Recently, Tata Motors announced plans to build a new factory in West Bengal. The factory is to be built on farmland. The company purchased farmland from farmers for an agreed upon amount. The poor, and mostly uneducated, farmers now believe they were cheated in the transaction (i.e., not given a fair price for their land) and rightly want more compensation.

The company responded by saying the price paid was fair and the government responded by beating up the protesting farmers.

I do not understand the mentality of the government and companies like Tata Motors. They don't mind paying a huge premium when purchasing foreign owned companies. However, when dealing with its own poor and therefore, most vulnerable people, they don't have any problems cheating them out of what they deserve. After all, business is business, right?

A few months ago, Tata Steel - controlled by the same Tata family who control Tata Motors - purchased Anglo-Dutch steelmaker Corus for 6.2 billion Euros or 12.2 billion Dollars. The final price paid represented a premium of 64 percent to Corus's pre-bid share price! The deal made Tata Steel the world's fifth largest steelmaker. The company had to take on a huge debt load for the purchase and most analysts concluded the deal was expensive.

This is a very typical and sad example of robbing from the poor to pay the rich. Tata Motors would not have to pay, what would have amounted to a few thousand dollars more, to fairly compensate the farmers for their land (forget about premium!).

The government is doing similar things by acquiring thousands of acres of valuable farmland at less than fair value for it's "Special Economic Zones" or SEZs. And what will happen to the millions and millions of self-employed shopkeepers if American retail giant, WalMart, enters the Indian market?

WalMart has already blocked space in Mumbai. It is currently "lobbying" (bribing) the government to open up foreign direct investment (FDI) in retail. I have little doubt that FDI regulations will be lifted soon.

Mountain trekking has taken me to many small, remote, isolated, self-sufficient and truly beautiful villages in India. The villagers are some of the most gentlest, kindest and helpful people I have ever met. They have little material things and face many hardships, yet they are happy. City dwellers can learn something from them. I would never even dream of cheating or exploiting these people.

I encourage people to visit some of the villages, not to exploit, but to learn how to live. Show some love, please!

Full Disclosure

2007-06-15T20:17:00.001-04:00

Here are the securities that I currently hold, or have held in the past, in my personal investing portfolio as at Friday, June 15th, 2007.

Company Name	Country	Total Dividend Return (%)	Total Unrealized Return (%)	Annualized Return (%)
Canadian Imperial Bank of Commerce	Canada	7.01	47.73	18.38
China Petroleum & Chemical Corporation	China	6.95	165.76	53.23
ICICI Bank Ltd.	India	1.57	104.49	103.30
Telefonos de Mexico	Mexico	8.20	116.77	39.79
ING Group	Netherlands	10.54	53.79	20.65
Statoil	Norway	9.00	70.65	26.28
Allstate Corp.	USA	3.31	16.98	9.45
Hillenbrand Industries*	USA	1.90	7.38	8.40
Mattel Inc	USA	5.51	41.20	19.80
Morgan Stanley	USA	3.06	71.59	33.68
NewMarket Corporation*	USA	0.00	21.77	207.47
Weighted Average		4.33	58.60	49.07

* = sold security; all returns for sold securities are as of the sell date.

As you can tell, I am a fan of dividend paying companies. In some cases, a large percentage of my total return comes from dividends.

For those who don't know, 'unrealized return' is a gain/loss that does not include the effects of paying commissions and/or taxes. 'Annualized return' is the average compound annual return.

I'm looking to establish more positions in the emerging markets of India. However, the benchmark SENSEX index of the Bombay Stock Exchange is at or near all-time record highs. Unless there is a substantial correction, I do not feel comfortable buying at these levels.

India's last major correction was in June 2006 when the SENSEX index suddenly shed 30% of its value. Some parts of the country were even put on "suicide watch"! It gave me an opportunity to buy ICICI Bank for myself and Tata Motors for my dad.

I'm looking to establish fairly large (for me!) positions in India's automotive, pharmaceutical and media industry. Why? -the country's economy is booming and I want to be a part of it.

Until the next correction happens, and it surely will, I will have to wait and raise funds for my planned purchases (which is why I sold NewMarket Corp.).

Executive Compensation

2007-03-01T23:09:00.000-05:00

Ever wonder why most companies pay executives (i.e. CEO, CFO, COO etc.) in stock options rather than cash?

The annual base salary of a CEO of a large U.S. company could be $800,000 "only", but he may end up receiving stock options worth $10,000,000! The companies normally state that the stock options are an incentive to the executives to work well (since the stock options are not exercisable until the share price hits a certain value).

However, the stock options usually become exercisable almost right away since the "exercise price" is set too close to the current share price for the options to qualify as long-term or even medium-term incentive.

Obviously, shareholders are being misled. The stock options given to an executive should, more appropriately, be considered as part of the annual salary - and not as incentives.

The company derives a huge advantage in the financial statements - namely the Income Statement - by paying executives in stock options. The advantage is that it does not have to deduct from its revenue the amount paid to executives in stock options. Salary paid in cash is deducted (among other expenses) from revenue to arrive at the net income figure.

The result is that revenue is overstated. The executives are filling their pockets with shareholders' money and shareholders are none the wiser.

In the interest of shareholders and investors - and fairness - the securities commission should make it mandatory for companies to deduct the value of stock options paid to executives from the Income Statement.

Can't C Me is Still Alive!

2006-12-31T02:04:00.000-05:00

Haven't posted anything in a while now. Will post something soon! I'm happy to say that my annualized rate of return so far has been over 45%. I only made a couple of purchases in 2006 and no sales. Simply holding on and getting the dividends. Value investing is, no doubt, working. Remember, don't gamble your money in the stock market - invest it.

Happy New Year! Happy investing in 2007!

Balance Sheet Analysis: A Better Approach to Investing

2006-07-02T21:23:00.003-04:00

In my previous post I talk about all the things that are wrong with using Technical Analysis for making investments. In this post I will talk about what I strongly feel is a better approach to investing - investing based on Balance Sheet analysis.

A key difference between Technical Analysis and Balance Sheet analysis is that the former uses the past performance of the share price to determine whether a company will make a good investment and the latter uses the past performance of the company itself.

Personally, I believe Balance Sheet analysis is better since it allows us to base our decisions on facts about the company. The past performance of a company’s shares does not necessarily reflect the true value of the company. It is obvious that a company's true "worth" does not change as frequently or dramatically as its share price. Therefore, it is important to get a rough estimate of a company's worth so that you can invest in it when its share price is attractive. This way you will not be buying simply because the shares are rising as is the case with using Technical Analysis.

Even though most people realize the importance of researching a company before making an investment, they either find it too time consuming or simply do not want to be bothered to look at a company's financial statements. They, therefore, depend on friends and family for investment advice. The advice usually amounts to "tips" on what is currently "hot" and a "must-buy" and as a bonus, the so-called "advisor" usually throws in a short-term prophecy on the stock market! All of these are recipe for an investment-related disaster.

The biggest problem people have is figuring out what companies to invest their hard-earned money in. Even with the Internet making available all information about a company right at your finger tips, it is still very time consuming to gather information on all companies and then investing in the most promising and "undervalued" ones. With thousands of companies listed on stock exchanges, it is no wonder that this is true.

After trying my luck with short-term trading, Technical Analysis and taking "tips" from others, I have realized that none of these things work over the long-term. Over the years, I have found that it is best to invest in companies that have the most "healthy" balance sheets - i.e. low debt and a high Net Tangible Asset value. But, another challenge is to find companies with the healthiest balance sheets amongst thousands of listed companies.

To make it easier for me to invest, I have setup Excel spreadsheets that contain all securities listed on the Toronto Stock Exchange, New York Stock Exchange, NASDAQ and American Stock Exchange - "Stock Guides".

Using JAVA programs that I wrote, I was able to extract the latest share prices, EPS and dividend information, balance sheet data (current assets, intangible assets, debt and more), from various web sites. These programs can be run as frequently as desired.

The JAVA programs are fed an input file containing "symbols" of all the listed companies or even a custom made list. The program feeds each symbol to a predefined web site (e.g. http://quotes.nasdaq.com/) that contains the necessary information and extracts the required data by analyzing the html file. The output of the programs is stored in text files. The data in the text files can then simply be copied onto the "stock guide" - i.e. Excel spreadsheet.

The idea is to use various filters in the spreadsheet that will narrow down the list of potential investments based on balance sheet data. For example, you may want to eliminate all companies that are carrying a debt that is larger than their Net Tangible Assets. The filters are based on two of Benjamin Graham's books, The Intelligent Investor and Security Analysis. This way I can make decisions based on facts and figures rather than simply relying on tips and advice ... or worse - Technical Analysis!

I use the Stock Guides to narrow down the list of possible investments in a logical manner. Once a list of potential investments is generated, it is still necessary to double-check the data on the spreadsheet and to look at the original financial statements from at least the previous five years.

Below are all the fields in the Stock Guide sorted according to the category under which they belong:

Stock Market Data

Symbol: Stock Exchange symbol.Price: Last business day's closing price.
EPS: Rolling twelve-months earnings per diluted common share.
Dividend: Dividend per common share.
Shares Outstanding: Outstanding common shares.
Market Value: Price × Shares Outstanding.

Balance Sheet Data

Date As Of: Balance sheet data as at this date.
Cash & Equiv: Cash assets on balance sheet.
Inventories: Inventories on balance sheet.
Current Assets: Total current assets (i.e. cash, receivables, inventories etc).
Intangibles: Total Intangible assets (eg. goodwill) on balance sheet.
Total Assets: Total assets on balance sheet.
Current Liab: Total current liabilities on balance sheet.
Total Debt: Short-term debt + long-term debt.
Total Liab: Total liabilities on balance sheet.

Asset Values

Net Cash Assets (NCA): Cash & Equivalent – Total Liabilities.
Net Current Assets (Liquidation Value): Current Assets – Total Liabilities.
Net Tangible Assets (NTA/Book Value): Total Assets – Intangibles – Total Liabilities.

Ratio of Current Price to _ _ _

NCA: Ratio of current price to Net Cash (& Equivalent) Assets.
LQV: Ratio of current price to Net Current Assets (or Liquidation Value).
NTA: Ratio of current price to Net Tangible Assets (NTA/Book Value).

Value Ratios

P/E: Price ÷ Earnings Per Share.
E/P Yield: "Earning power on price", Earnings ÷ Price × 100.
Div. Yield: Dividend per share ÷ Price × 100.Erngs/NTA: Earnings ÷ Net Tangible Assets × 100.
CA/CL: Current Assets ÷ Current Liabilities.
NCA/Debt: Net Current Assets ÷ Total Debt.
Note: Net Current Assets = Current Assets – Current Liabilities.

Price Filters

P ≥ x: Yes if price is greater than or equal to x. Otherwise No.
P ≤ x: Yes if price is less than or equal to x. Otherwise No.
P ≤ x% of LQV: Yes if price is less than or equal to x% of the Liquidation Value. Otherwise No.
P ≤ x% of NTA: Yes if price is less than or equal to x% of Net Tangible Assets. Otherwise No.

Value Filters

P/E ≤ x: Yes if the price to earnings ratio is less than or equal to x. Otherwise No.
CA ≥ x × CL: Yes if Current Assets are greater than or equal to x times Current Liabilities. Otherwise No.
Debt < x% of NCA: Yes if Total Debt is less than x% of Net Current Assets (NCA). Otherwise No.
Note: Net Current Assets = Current Assets – Current Liabilities. This filter should only be used for Industrial companies.
Debt < NTA: Yes if Total Debt is less than Net Tangible Assets (NTA). Otherwise No.
Some Current Dividend: Yes if Dividend is greater than zero. Otherwise No.
P:NTA × P/E ≤ x: Yes if the ratio of current price to Net Tangible Assets (NTA) multiplied by the price to earnings ratio is less than or equal to x. Otherwise No.
Note: x = 22½ accepts a company trading at 1½ times book value and a P/E of 15.

Other Filters

Mkt Cap ≥ x: Yes if market capitalization is greater than or equal to x. Otherwise No.
Mkt Cap ≤ x: Yes if market capitalization is less than or equal to x. Otherwise No.
Trust or Fund: Yes if company is a Income or Business or any other trust or fund. Otherwise No.

Tags: Balance Sheet Analysis

A Tale of the Speculator and Technical Analysis

2006-06-18T22:48:00.004-04:00

The Indian stock market is a classic example of what happens when speculation reaches its boiling point. After reaching an all-time high in May 2006, Bombay Stock Exchange's Sensex Index has fallen close to 30% in a month.

Neither the market nor the future can be predicted or controlled by the speculator, yet success is largely dependent upon them both.

To help make sense of the seemingly random behaviour of the stock market in the short-term, the speculator uses Technical Analysis. Technical Analysis gives a speculator the tools to "analyze" and "predict" the stock market - usually using trend lines, moving averages and other sophisticated statistical indicators.

Technical Analysis is popular with speculators because it is meant for people who want to make fast money. Unfortunately, like all things that are too good to be true, it does not work for the average person. But the lure of fast money (and a bull market!) is too strong for most to give up Technical Analysis.

Since mathematics and statistics is used in Technical Analysis, it appears as if the actions of the speculator are legitimate - after all, mathematics can't be wrong! Besides, what is wrong with using Technical Analysis to help you decide when to buy, when to hold and when to sell?

People also talk about meaningless "support levels" for individual stocks and market indices, below which all hell can break loose. Support levels, trend lines etc. are akin to lines on our palm that supposedly tell our future! These are all very interesting things but not very useful if one wants to make money in the stock market over the long-term (10 years or more).

There are a few fundamental problems with Technical Analysis that need to be brought to people's attention:

1. The speculator has no margin of safety. Since a proper margin of safety is lacking, the risk taken is often too high.

In Technical Analysis, there is no such thing as buying "undervalued" or "underpriced" securities. Technical indicators generate 'buy' and 'sell' signals. In a significant number of cases, a 'buy' signal is not generated until after a significant rise in the stock price - thus, a speculator misses some truly "golden opportunities". The idea is that a speculator is willing to give up some upside in return for little or no downside.

Speculators are in the market to make fast money. Generally speaking, speculators do not buy shares based on the company fundamentals (like profitability, debt load, book value etc.) or valuation, they instead buy shares based on technical indicators.

This means that the price paid is irrelevant as long as the technicals are good. For this reason alone Technical Analysis is dangerous because one could end up buying when the market is overheated.

2. Technical Analysis is an art/skill, rather than a science.

It cannot be learned from a book. Either you have the skill and intuition to be a successful technical analyst, or you don't. Being "average" at this will not make you rich and may yield disastrous results.

In the long run, most speculators end up making little or no money at all, or worse yet, losing money! In most cases, their few large speculative profits are fully offset by the many small losses.

3. Technical Analysis favours stockbrokers.

Brokerage houses and stockbrokers encourage using technical analysis because it is good for their business. Speculators buying and selling using technical indicators will be doing so often simply because these indicators are generated as the share price rises and falls.

Frequent trades mean more commissions for brokers and lower profits for speculators. Technical Analysis discourages long-term perspective and forces speculators to buy and sell on a weekly and even daily basis.

As a matter of fact, in Canada, the broker charges a "maintenance fee" on an account in which there has been no trading activity in the past twelve months! It's obvious they do not want us to simply buy and hold stocks - which is an intelligent way of building wealth.

Technical Analysis is good if one desires to become a sheep in the stock market - i.e. buying when everyone is buying and selling when everyone is selling. It sure is a great way of obtaining mediocre returns!

So, what should an investor with a long time horizon use to buy stocks? Balance Sheet analysis (i.e. value investing) ofcourse! Read more here.

The Investor and Market Volatility

2006-06-02T17:03:00.002-04:00

Looks like the bulls are tired of running. Global markets saw a significant decline in the month of May due to rising global interest rates and falling commodity prices. Rising interest rates makes stocks less attractive and bonds more attractive. Consequently, money flows out of the stock market and into the bond market, which results in a decline in the stock market.

Not a day goes by where in the words 'volatile' or 'volatility' are not used in the daily business news. Volatility is a characteristic of a security or market to rise or fall sharply in price within a short-term period. Mathematically, volatility is the annualized standard deviation of returns.

After listening to market analysts talking on business news and after reading news articles, the impression that a small investor like you and me will come out with is that a volatile stock market is bad. The reason given for this is that it is difficult to predict where the market is heading in the short-term so it is better to stay out of it (i.e. sell what you have!)

One thing I have learned over the years is that you never sell just because the market (or stock) has gone down and never buy just because the market (or stock) has gone up. Reasons to buy or sell need to be stronger than that.

If you're in the stock market for the long-term, then selling in a volatile market can be the worst action you can take for the following reasons:

1. Loss of income (if the stock is dividend paying).

2. Panic could set in due to falling prices and thus selling will result in a spectacular profit becoming a mediocre profit or even a loss. Stocks should only be sold following a rational argument.

So my dear investors, do not be afraid of volatile markets. Do not let your emotions control you - just hang in there. If you are feeling courageous, it might even be smart to buy on the dips. Remember that you can always say "no" to Mr. Market!

Tags: Volatile Volatility

Canada's Most Wanted

2006-05-29T15:36:00.003-04:00

People get too excited about IPO's (Initial Public Offering) because of the overly-optimistic outlook painted by analysts, mutual fund managers and investment advisors. This is usually nothing but hype. As a result, the shares of an IPO company have a spectacular performance on the first day of trading. An IPO is a corporation's first offering of stock to the public. Thus, the popular term "going public" refers to an IPO of a corporation.

A recent example was the much anticipated and most wanted Tim Hortons Inc. IPO on the Toronto Stock Exchange on March 24th, 2006. There was even a big party at the Toronto Stock Exchange to celebrate the going public of a Canadian icon. The IPO was richly priced at C$27.00, and when trading opened at 09:30, the shares shot up to almost $38.00 (+40%) and closed the day at $33.10 for a gain of over 22%. The 22% "gain" was reported nation wide in television news, the radio and newspapers.

But wait, would an "average investor" have made any money from this IPO? The answer is sadly... no. In fact, an average investor would have lost money in this IPO!

Most people do not think about this but normally only mutual funds and some high net-worth investors (also known as "sophisticated investors" - i.e. those who have at least $500,000 to invest in an IPO) are actually able to purchase shares at the IPO price - i.e. in the primary market.

So, it would have been almost impossible for an average investor to purchase Tim Hortons' shares at the IPO price of $27.00. An average investor would have had to purchase shares once they started trading on the stock exchange - i.e. in the secondary market.

If the shares were purchased when trading opened on the first day at $37.99, at the end of the day the investor would have lost 29% of the principal! In fact, shares purchased at almost any time on the first day would have resulted in a loss by the end of the day.

Here's a high-low-close chart of Tim Hortons since it's debut in late March 2006. Notice how the shares having been treading lower since the debut getting closer and closer to the IPO price of $27.00.

There are two good reasons why one should stay away from IPO's:

1. New issues have special salesmanship behind them, which calls therefore for a special degree of sales resistance.

2. Most new issues are sold under "favourable market conditions" - which means favourable for the seller and consequently less favourable for the buyer.

For every IPO that makes money for the investors in the first year of trading, there are ten that lose money for their investors.

Often, it is best to wait for the excitement and optimism to fade away to make purchases of new public companies.