The KISS - Keep It Simple Stupid

 Well, this KISS is a lot different that my previous post . But it is an important one in the understanding of personal finance.

http://www.valueresearchonline.com/story/h2_storyview.asp?str=25412

There is a storm coming - Article for the day 4th Sept

600 point swings on the market. SEBI asking banks to relook at how they calculate circuit filters. It looks like there are a lot of things for the 24x7 news channels to talk about these days. A few people started comparing the crisis with respect to 1991 when our current PM was the Finance Minister. However, I think this post is a little more balanced. How does this affect us? Well if you don't have a Batmobile, at least get an umbrella.

http://blogs.timesofindia.indiatimes.com/Swaminomics/entry/get-ready-for-another-asian-financial-crisis

P.S. The logic behind these posts can be found in this post

Facebook is going to die!! Article for the day 30 August

Facebook is in the news with its share price closing above its IPO price of $38 for the first time since May 2012 when it was launched. What is puzzling is the sky high valuations that they seem to be getting. Hi5 died, Orkut died. What makes Facebook so invincible? As the article summarizes -

Because we'll all have to start the stupid cycle over again. Teens find cool, new toy. Parents discover it a few years later. Teens leave. Cool, new toy goes out to pasture.

http://www.adrants.com/2013/08/this-is-how-facebook-is-going-to-die.php

P.S. The logic behind these posts can be found in this post

Investing for the "Long Term" - Article for the day 22nd August

Given the general pessimistic mood in the country right now and how everyone seems to be talking about the rupee dollar rate as well as the plummeting stock market, this article just made a lot of sense.

To quote 

"You'll be better off invested in equity rather than in fixed income of some kind. At a basic level, one can expect that over time businesses will generate more return than their cost of borrowing, otherwise it doesn't make sense to be in business. Individual businesses will do worse, but as a whole, Indian businesses will deliver a return higher than fixed income returns over time." 

http://www.valueresearchonline.com/story/h2_storyView.asp?str=23198

P.S. The logic behind these posts can be found in this post

 

Best wealth creation strategy I have heard - Article for the day 11 July

I loved this article for the ingenuity of the strategy. I don't think it will be possible in today's day and age given the disclosure requirements of most governments. But to beat the hedge fund managers at their game - that has got to be priceless. 

Source: http://radian.org/notebook/porsche

How Porsche Hacked the Financial System & Made a Killing

In 1931, Austro-Hungarian engineer Ferdinand Porsche started a German  company in his own name. It offered car design consulting services, and  was not a car manufacturer itself until it produced the Type 64 in 1939. But things got interesting for Porsche long before then.

In 1933, he was approached by none other than Adolf Hitler, who  commissioned a car designed for the German masses. Porsche accepted, and  the result was the iconic Beetle, manufactured under the Volkswagen  (lit. “people’s car”) brand. Today, Porsche’s company is one of the  world’s premier luxury car brands, while Volkswagen (VW) is itself the  world’s third-largest auto maker after General Motors and Toyota.

In 2005, Volkswagen found itself fearing a foreign takeover.  Porsche, the company, decided to step in and start buying VW stock  ostensibly to protect the landmark brand, widely fueling market  expectations that it would eventually buy Volkswagen outright. Of  course, this isn’t quite what came to pass.

For three years [2005-2008], Porsche kept accumulating VW stock without telling  anyone how much it owned. Every time it purchased more, the amount of  free-floating VW stock would decrease, driving the stock price up  slightly; your basic supply and demand at work. Eventually the share  price became high enough that, to outside observers, it wouldn’t have  made any sense for Porsche to buy Volkswagen. It would simply have cost  too much.

To explain what happened next, I’m going to first tell you about a financial maneuver called shorting.

Shorting

At any given point, only a certain amount of a publicly traded  company’s stock is floating freely in the market. The rest is held in  various portfolios, funds, and investment vehicles. Now, everyone’s  familiar with the basic idea behind the stock market: you buy stock when  it costs little, and you sell it when it costs a lot, profiting on the  difference.

But that assumes a company’s value is going to increase. What if,  instead of betting a company will go up, you want to make money betting  the company will go down? You can — by selling stock you don’t own.

Say you borrow a certain amount of stock from someone who already  owns it. You pay a fixed fee for borrowing the stock, and you sign a  contract saying you will return exactly the same amount of stock you  took after some amount of time. So, you might borrow a thousand shares  of Apple stock from me (I don’t actually own any, but play along), pay  me $100 for the privilege, and sign an obligation to return my stock in 3  months. At the time, Apple stock is worth $10 per share.

After you borrow the stock, you immediately sell it. At $10 a share,  you get $10,000. Two and a half months later, another rumor about Steve  Jobs’ health sends AAPL crashing to only $6 per share for a few hours,  so you buy a thousand shares, costing you $6,000. You give me back those  shares. Because you successfully bet the company would go down in  value, you earned $4,000 minus the borrowing fee. This is called  short-selling or shorting the stock, and the downside is obvious: if  your bet was wrong, you would have lost money buying back the shares  that you have to return to your lender.

Where Things Get Kinky

When Volkswagen’s share price exceeded the point where it made sense  for Porsche to buy the company, a number of hedge funds realized that  Volkswagen shares have nowhere to go but down. With Porsche out of the  picture, there was simply no reason for VW to keep going up, and the  funds were willing to bet on it. So they shorted huge amounts of VW  stock, borrowing it from existing owners and selling it into  circulation, waiting for the price drop they considered inevitable.

Porsche anticipated exactly this situation and promptly bought up  much of these borrowed VW shares that the funds were selling. Do you see  where this is going? Analysts did. According to The Economist,  Adam Jonas from Morgan Stanley warned clients not to play “billionaire’s  poker” against Porsche. Porsche denied any foul play, saying it wasn’t  doing anything unusual.

But then, last October 26th [2008], they stepped forward and bared their  portfolio: through a combination of stock and options, they owned 75% of  Volkswagen, which is almost all the company’s circulating stock. (The  remainder is tied up in funds that cannot easily release it.)

To put it mildly, the numbers scared the living hell out of the hedge  funds: if they didn’t immediately buy back the Volkswagen stock they  were shorting, there might not be any left to buy later, and it isn’t their stock — they have to return it to someone. If their only option is thus to  buy the VW stock from Porsche, then the miracle of supply and demand  will hit again, and Porsche can ask for whatever price it wants per VW  share — twenty times their value, a hundred times their value — because  there’s no other place to buy. They’re the only game in town.

Gains

Porsche’s ownership disclosure sent the hedge funds on such a flurry  of purchases for any Volkswagen stock still in circulation that the VW  share price jumped from below €200 to over €1000 at one point on October  28th, making Volkswagen for a brief time the world’s most valuable  company by market cap.

On paper, Porsche made between €30-40 billion in the affair.  Once all is said and done, the actual profit is closer to some €6-12  billion. To put those numbers in perspective, Porsche’s revenue for the  whole year of 2006 was a bit over €7 billion.

Porsche’s move took three years of careful maneuvering. It was darkly  brilliant, a wealth transfer ingeniously conceived like few we’ve ever  seen. Betting the right way, Porsche roiled the financial markets and  took the hedge funds for a fortune.

P.S. The logic behind these posts can be found in this post

The Great Facebook IPO

In the last few days one of the main things dominating the Business news pages is the Facebook IPO. For me the similarities with the failed Reliance power IPO seem to keep jumping up to say, "Those who fail to learn from history are bound to repeat the same mistakes".  

1) IF successful, this would cause it to break IPO records. 

Reliance Power attracted $27.5 Billion in opening bids creating IPO records. However, by the end of the first day it was trading at a 17% discount of the issue price. In the days to follow it only worsened to the extent that Reliance ended up issuing bonus shares. However, for stock that listed at Rs 450 and was rumoured to hit 800 - 900 on listing day, it has never gone above list price.

Facebook announced that it has increased the number of shares on offer and the price band and is looking at a valuation of close to a $100 Billion. This is insane when looked at along with #2

2) No Revenues really

Facebook has been trying to capitalize on its huge user base. Industry friends say that the Ad rates are horribly expensive.The general sense was people advertise once and don't see the response. They increase ad spending hoping based on the marketing team telling them they need more to make an impact. But with weak pull thoughs they eventually stop. While I have no evidence of this and it is mainly hear say, GM just annouced that it would stop its FB ad spending.

The same was true of Reliance power. They wanted money to fund their new projects. There were no underlying existing assets. There were only assets that were going to be built.  

3) Talk of windfall gains is drowning out the possible negatives

Given that Facebook net income is valued at $3 Billion with a profit of $1 Billion, it seems strange that it can command valuations of $100 Billion. If everyone is talking about selling it at 1.5 to 3 times the listing price on listing day, who is going to buy?

It seems like the Emperor might be walking around without his new clothes. But is it true and is anyone willing to say so?

Links
More on the Reliance Story on Wikipedia
Reliance to list at Rs 800 - 900
What actually happened to Reliance

Facebook targets a valuation of over $100 billion
Facebook revenue valuation
General Motors pulls the plug on Facebook advertising

The myth of investing in small companies and hitting the jackpot

Most people have heard about the story of, if you had bought Infosys shares at the time it went public and just held them, it would have made you x lakhs through dividend, stock splits / bonuses and appreciation. Example here

It is the traditional rags to riches story. However, I have a few major issues with the argument.

1) What never gets told is the number of companies that never made it big. There are lots of statistics that most of the start ups fail. I have a few friends who bought into small companies and the companies have just gone bankrupt. Unproved companies can go both ways. That is exactly why they are "Unproven"

2) The romanticizing of the story has people convert Rs 10,000 in today's terms. If I had 10,000 to invest in a unproven company in 1980 I would have already been in the top 1% of the country's earners. In 1980 people still talked in 4 annas and 8 annas. In 1992, we still had 5ps and 10ps coins. I remember saving them for Bubble gum and other small stuff. 10,000 was a princely sum.

Extending the idea above, to make any meaningful returns on 200% or 300% increases, the initial capital commitment is high. The 10,000 in 1982 (noted for Wipro) is 78,500 now. The 10,000 in 1992 for Infosys is approximately 60,000 now. ( For the mathematically inclined, the inflation index I used is here

3) As anyone who has traded in the market will tell you, the moment your investment doubles or triples, it is a little difficult to stay unemotional. We think of the spectacular crashes that have happened and cash out with handsome gains of 200 - 300%. The problem is that seeing the investment go to 600% causes us to look back at 300% with disdain. No matter that 300% bought us 3 times as much as what we could have hoped to buy. We feel stupid and foolish at missing out 600%

Thus take a closer look at numbers offered to you and don't blindly follow the herd. Definitely aim for the stars. But realize the dangers lurking along the way. While I am a staunch supporter of the buy and hold strategy, I think the investment in small companies is over rated.

Facebook's Zuckerberg now richer than Google founders - No. Not Really

A friend posted this on FaceBook today.

Zuckerberg now richer than Google founders

A quick Google search showed me that almost all the news papers were running this story (Money Control, Times of India, The Hindu, Business Today etc). It being a lazy Sunday morning I decided to do some math on it and it went as follows

If GSV bought 225k shares at $29.28 that is hardly an investment of 7 million. To say that this implies the company is worth 70 Billion is just a play with numbers. It means that because I bought 0.009% of the company at that price I am willing to pay that much for the full 100%.

Facebook is not publicly traded. So using the premium that someone might have paid to obtain shares can hardly be used to justify the price for the remaining 99.991% of the company.

Anyway, Going further into Price to Earnings ratio's I found that it is now beinghttp://www.blogger.com/img/blank.gif dubbed the Tech Bubble 2.0 since they are trading at a P/E ratio of over 100+ when the average P/E should hover around 20. More details are present at this NASDAQ story

I have to also add that the $2 billion in revenue is again just a estimate. Is it an estimate like the $70 billion worth of the company or is it more solid? I do not know.

With Google+ Being launched, GSV may end up being the poster boy for the slogan there is a sucker born every minute.

Not for the faint of heart

I got a complete shock when I opened Money Control just now. Market Crash of 17000 points?



It took me a few minutes to read the +150 points headline and the realization to dawn that circuit breakers would have halted trade for the day.