Saturday, December 10, 2016

The Top 17 Investing Quotes ....

1. "An investment in knowledge pays the best interest." - Benjamin Franklin
When it comes to investing, nothing will pay off more than educating yourself. Do the necessary research, study and analysis before making any investment decisions.

2. "Bottoms in the investment world don't end with four-year lows; they end with 10- or 15-year lows." - Jim Rogers
While 10-15 year lows are not common, they do happen. During these down times, don't be shy about going against the trend and investing; you could make a fortune by making a bold move - or lose your shirt. Remember quote #1 and invest in an industry you've researched thoroughly. Then, be prepared to see your investment sink lower before it turns around and starts to pay off.

3. "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
Be prepared to invest in a down market and to "get out" in a soaring market.

4. "The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Fisher
Another testament to the fact that investing without an education and research will ultimately lead to regrettable investment decisions. Research is much more than just listening to popular opinion.

5. "In investing, what is comfortable is rarely profitable." - Robert Arnott
At times, you will have to step out of your comfort zone to realize significant gains. Know the boundaries of your comfort zone and practice stepping out of it in small doses. As much as you need to know the market, you need to know yourself too. Can you handle staying in when everyone else is jumping ship? Or getting out during the biggest rally of the century? There's no room for pride in this kind of self-analysis. The best investment strategy can turn into the worst if you don't have the stomach to see it through.

6. "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen
Though investing in a savings account is a sure bet, your gains will be minimal given the extremely low interest rates. But don't forgo one completely. A savings account is a reliable place for an emergency fund, whereas a market investment is not.

7. "Invest in yourself. Your career is the engine of your wealth." - Paul Clitheroe
We all want wealth, but how do we achieve it? It starts with a successful career which relies on your skills and talents. Invest in yourself through school, books, or a quality job where you can acquire a quality skill set. Identify your talents and find a way to turn them into an income-generating vehicle. In doing so, you can truly leverage your career into an "engine of your wealth."

8. "Every once in a while, the market does something so stupid it takes your breath away." - Jim Cramer
There are no sure bets in the world of investing; there is risk in everything. Be prepared for the ups and downs.

9. "The individual investor should act consistently as an investor and not as a speculator." - Ben Graham
You are an investor, not someone who can predict the future. Base your decisions on real facts and analysis rather than risky, speculative forecasts.

10. "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for." - Robert Kiyosaki
If you're a millionaire by the time you're 30, but blow it all by age 40, you've gained nothing. Grow and protect your investment portfolio by carefully diversifying it, and you may find yourself funding many generations to come.

11. "Know what you own, and know why you own it." - Peter Lynch
Do your homework before making a decision. And once you've made a decision, make sure to re-evaluate your portfolio on a timely basis. A wise holding today may not be a wise holding in the future.

12. "Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this." - Dave Ramsey
By being modest in your spending, you can ensure you will have enough for retirement and can give back to the community as well.

13. "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." - Paul Samuelson
If you think investing is gambling, you're doing it wrong. The work involved requires planning and patience. However, the gains you see over time are indeed exciting!

14. "I would not pre-pay. I would invest instead and let the investments cover it." - Dave Ramsey
A perfect answer to the question: "Should I pay off my _____(fill in the blank) or invest for retirement?" That said, a credit card balance ringing up 30% can turn into a black hole if not paid off quickly. Basically, pay off debt at high interest rates and keep debt at low ones.

15. "The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton
Follow market trends and history. Don't speculate that this particular time will be any different. For example, a major key to investing in a particular stock or bond fund is its performance over five years. Nothing shorter.

16. "Wide diversification is only required when investors do not understand what they are doing." - Warren Buffett
In the beginning, diversification is relevant. Once you've gotten your feet wet and have confidence in your investments, you can adjust your portfolio accordingly and make bigger bets.

17. "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch
When hit with recessions or declines, you must stay the course. Economies are cyclical, and the markets have shown that they will recover. Make sure you are a part of those recoveries!

Wednesday, December 7, 2016

What are your options if the government puts a limit on gold holding?

 Courtesy : Econoomic Times

The market is rife with rumours that the government might take radical measures to unearth unaccounted wealth in the form of gold. This has made consumers uncomfortable about buying physical gold. A portion of the demand is expected to shift to Sovereign Gold Bonds issued by the RBI. These bonds offer 2.5% interest per annum (payable half-yearly) and their price is linked to the prevailing market price of gold. The bonds are listed on the exchange, facilitating early exit for investors. They mature in eight years, with an exit option at the end of five years from the date of issue. Sovereign Gold Bonds are a superior option to physical gold because while investors are assured of the market value of gold at the time of maturity, they also get periodical interest income. What’s more, the capital gains are fully tax exempt if the bonds are held till maturity and the investor can claim indexation benefits if he exits after one year.

The Sovereign Gold Bonds have evoked good response. Investors have bought bonds worth 14,071 kg of gold amounting to Rs 4,027 crore till now. The latest tranche, which was issued at a Rs 50 per gram discount on the prevailing market price of gold, saw investors buy bonds worth roughly Rs 915 crore. Anil Chopra, Group CEO and Director, Bajaj Capital, asserts gold bonds are a better alternative to physical gold. “Gold bonds not only provide better tax efficiency if held till maturity, they also do not have problems regarding safety and purity as is the case with physical gold.” Tanwir Alam, Managing Director of Fincart, reckons gold bonds will be a good alternative to fixed deposits as interest rates are likely to dip.

However, if the government cuts the interest rate on gold bonds, they will lose some of their charm. Since these bonds are linked to gold prices, a sustained disinflationary environment globally would also impact their returns, says Alam.

Investors may be deterred by some niggling issues as well. The latest issue concluded on 2 November but customers have not yet received the bonds. This could put off some investors, feels Manoj Nagpal, CEO, Outlook Asia Capital. “A better mechanism needs to be put in place by the RBI for the credit of these instruments in a defined timeframe.” There are other issues as well. While these gold bonds can be used as collateral for loans, several banks are refusing to sanction loans against them, says Vikram Dalal, Managing Director, Synergee Capital.

Meanwhile, the government’s Gold Monetisation Scheme has evoked lukewarm response, with a total of 5,730 kg of gold mobilised under the scheme as on 14 November. The scheme allows individuals to earn interest on idle, unused stock of physical gold in the form of jewellery, bars or coins. Depositors can get back the gold in physical form or in Indian rupees at prevailing market value at time of redemption. There is no capital gains tax on the appreciation in the value of gold deposited, or on the interest earned from it. Yet, investors have kept away from the scheme. “There are only limited number of branches for assaying the gold and investors have no control on the purification and no clarity on grammage of gold they will get in return for the gold they deposit,” says Amol Joshi, Founder, PlanRupee Investment Services. Most individuals hold physical gold in the form of jewellery, where the purity of the gold is often suspect and there is a high incidence of making charges. This deters people from submitting their gold lest it is valued far lesser than they expect. Also, the emotional attachment to jewellery and its snob value prevents most from parting with it. Even if a limit is put on gold holdings, people are likely to stay away from this scheme.

Saturday, November 19, 2016

Facing cash crunch after Rs 500, Rs 1,000 ban? Here's how to go cashless with digital payment options .

Courtesy : Economic Times
With the late-evening announcement made by PM Narendra Modi to scrap the existing Rs 500 and Rs 1000 currency notes from Wednesday, India's dream to go cashless has received a big push.

This big step taken by the Modi government will nudge people towards making digital transactions, with more people using virtual wallets and other digital modes of payment.

India, however, is an economy where cash is still the king. So this sudden shift may lead to some teething troubles. Here's help. We tell you how to manage your everyday transactions.

Unified Payments Interface (UPI):
UPI allows easier real-time transfer of money between bank account using smartphones. It is being touted as the biggest invention since ATMs. It has come to be a buzzword in the banking circles since its official unveiling on April 11. UPI allows a customer to pay directly to different merchants, both online and offline, without the hassle of typing card details, IFSC code or net banking or e-wallet passwords.

To use this app, the bank customer just needs to download the UPI-enabled app on his/her Android smartphone. To use this facility, the customer must have a bank account and a registered mobile number.

If you have these, you can create a virtual ID on the app or use your IFSC code and bank account number to complete the transaction.

A bank customer can use any bank's UPI app as per his/her choice.

E-wallet is an online prepaid account where one can store money, to be used when required. As it is a pre-loaded facility, consumers can buy an entire range of products from airline tickets to grocery without swiping a debit or credit card.

You can log on to sites ranging from telecom service providers, online grocery stores, recharge portals to even sites selling furniture that use e-wallet as an alternative payment option and get started on saving. The sites where e-wallet services are available generally have a few easy steps to get started.

What are the benefits
The sites where e-wallet services are available generally have the following easy steps to get started. They make for ease of use without having to enter your debit/credit card details for every online transaction.

For some sites there is no minimum amount. You can deposit an amount as low as Rs 10. You can pass on the benefits of your e-wallet to your friends and family as well. There is no chance of a decline of payment since e-wallet is a prepaid account.

Who offers e-Wallet
Some of the popular e-Wallets are: Paytm, Freecharge, Airtel, PayU Money, Oxygen, Wallet, Chillr, MobiQuick
Net Banking
Another option to transfer money from one account to other is through internet banking. There are three services available for such transfer: National Electronic Funds Transfer (NEFT), Real-time Gross Settlement (RTGS) and Immediate Payment Service (IMPS).
With IMPS one can transfer the money instantly and the service is available 24x7. The maximum amount one can transfer through IMPS is Rs 2 lakh. The transaction cost is usually around Rs 5 to Rs 15 depending on the value of the amount transfered.
In NEFT, the money gets transfered to another bank account during bank working hours in hourly batches. NEFT transactions cost between Rs 5 and Rs 25 depending on the value of the amount transfered. RTGS is for high value transactions-starting at Rs 2 lakh. And it costs Rs 30 to Rs 55 depending on the value of the amount transfered.
Plastic Money
There are three types of plastic cards available - Credit card, Debit card and Prepaid card. Debit cards are issued by the banks and they are linked to your bank account. Credit card are issued by banks and other entities. Prepaid card are alternative to cash and cheques and are issued by banks.

Prepaid card are very similar to prepaid mobile phone cards. All you have to do is buy a card and load it with the desired amount and the card is ready for use. One does not require any account to use these cards.

Saturday, October 15, 2016

How to Achieve Financial Freedom ....

Courtesy : WikiHow

Financial freedom is the ability not to be limited by money concerns. With some careful planning, financial freedom may not be as difficult as it seems. In order to achieve financial freedom, form a plan for yourself. See where you are now money-wise and find ways to cut back on frivolous spending. From there, find ways to eliminate unnecessary expenses. Make some plans for the future by thinking about your retirement and setting up a fund in case of emergencies.

Forming a Financial Plan


1) Figure out your finances at the moment. The first step towards financial freedom is determining where you stand now. You'll have to take stock of your finances and assets to get a sense of where you need to go from here to have more financial security. Figure out your net worth, which is essentially an honest assessment of your current wealth.
  • Tally up everything you own and its value. This includes obvious things, like your house and your car, but think outside the box as well. Do you have any valuable collectables? Do you own any property? Once you've tallied up your assets, add your annual income, as well as any additional money you make each year through side work or investments.
  • List anything that is losing you money, and figure out how much you're losing per year. This can include credit card debt, your mortgage, and any loans. Subtract this number from the first number. The number you have now represents your net worth.

2 ) Track your current spending. You'll want to figure out how much you're spending each month. This will give you a sense of where you could cut back on expenses. If you're vigilant about tracking expenses, you'll be surprised at how much money you spend extraneously.
  • Keep a small journal for a month and write down where you're spending your money. Keep track of any bills you pay, monthly rent or mortgage, insurance payments, and so on.
  • You should also add any extra expenses. Do you subscribe to any magazines or online services? Add that to your list. On a day-to-day basis, write down how much money you spend on things like shopping, eating out, recreational activities, and so on.
  • You may be shocked when you tally your expenses by category at the end of the month. You may be spending a lot more money on things like eating out and going out for drinks than you anticipated.

3) Make a budget. Now that you have a sense of where your money is going, develop a budget. A budget can help prevent you from overspending in certain areas. Make a strict budget regarding how much you can spend on things like groceries, eating out, recreational activities, and so on.
  • Figure out where you could stand to cut back. Say you realized you spend $350 eating out each month. Do you really need to eat out that often? You could cut that back to $150 and save $200.
  • Figure out what things you really value, and what you could stand to go without. Do you really read your monthly New Yorker or Time Magazine anymore? If not, maybe you could cut those subscriptions and save some money.

4) Set a series of financial goals. You'll want to set some financial goals for yourself. You need to have a clear cut plan for the future if you want to become financially independent.
  • Try to think ahead. Where do you want to be in 10 years? 15 years? How can you go about investing and saving your money to make sure you can achieve these goals? Keep realistic goals. For example, you can strive to have a job that pays well and has benefits. You can also strive to maintain your current standard of living into retirement.
  • Write down a series of goals, ranked in terms of important. Include both short term goals ("I want to cut down monthly spending by $300 this month) and long term goals ("I want to start a retirement fund so I can retire comfortably in the next 20 years.")
5) Aim to save 10 to 15% of what you earn. When it comes to saving, you should start right now. A good goal is to set aside 10 to 15% of what you earn each month in savings. Getting into the habit of saving money can really help your long term financial prospects.
  • You can do this either on a weekly or monthly basis. If you have online banking, you can put away a certain amount of each paycheck in savings. You can also talk to your bank about automatic transfers and have 10 to 15% of each paycheck automatically transferred to your savings account each month.
  • Automatic withdrawals are a good idea. Many people struggle to set aside money and feel tempted to spend everything they have.

Eliminating Expenses

1) Review your bills and cut out unnecessary expenses. Take stock of your monthly bills. Look over all the payments you have each month, and see where there's room to cut back.
  • You may be able to consolidate some services. For example, maybe you can put your family's cars under a single insurance policy instead of paying for three separate policies. In terms of cell phones, family plans are often cheaper.
  • Call and ask for a discount or a reduced rate. If you've been a customer for a long time, you may be able to negotiate a lower rate. Also, check for any rewards systems or loyalty policies. You may be missing out on potential savings.

2) Work on eliminating debt. Debt is a huge burden for many, and in order to become financially secure you'll need to eliminate as much debt as possible. Make a list of all the existing debts you have, and figure out how much you can reasonably pay each month towards eliminating these debts. You may have to make some sacrifices, like skipping the family vacation this year, but it'll be worth it to live debt free.
  • Prioritize your debt. Not all debt is created equal. You should aim to pay off high interest debts first, as they'll become much more expensive with time.
  • If you have to, see if you can find a side job so you'll have money to exclusively put towards a debt. If you can work an extra 20 hours a week, even doing freelance work for private clients, you could end up with a few extra hundred dollars to put towards that mountain of debt.

3) Pay your credit card bill in full each month. You should make sure you're not overusing your credit card, as this can lead to big debt. Credit cards accrue interest over time, and having debt over the long term can damage your credit score. Make sure to pay your credit card in full each month. Mark when the bill is due on your calendar.

4) Slash wasteful spending. Money you spend on unneeded goods and services could go towards savings and debt elimination. Therefore, it's a good idea to work on cutting out wasteful spending. Even small tweaks can result in big savings over time, eventually resulting in financial freedom.
  • Do you stop for coffee every day on your way to work? Maybe you could make coffee at home, saving yourself a couple bucks each day.
  • Think about any services you subscribe to. Do you really use your Netflix account anymore? Do you watch a lot of cable? Such services could probably be cut. How often do you use your gym membership? Couldn't you find ways to work out at home?

Planning for Your Future

1) Set up a retirement fund.. A retirement fund is vital to ensure a stable financial future. It is never too early to start putting money away for retirement. Take advantage of any program your employer offers, such as a 401K, and start putting money away as soon as possible.
  • If you're unsure if your business offers retirement benefits, make an appointment with a person in human resources to ask. If you do not have a job that offers retirement benefits, consider looking for work elsewhere.
  • You should also talk to a financial planner at your local bank. Your bank may provide free consultation, or offer you advice for a small fee. You can look into starting something like a Roth IRA to save for retirement.

2) Teach your kids about financial independence. You want your children to be financially independent. Even if they're young, start teaching them about how to handle money. Make a trip to the local bank and have your kids open a savings account. Encourage them to put money away so they'll see how money grows over time.
  • You should also talk to your kids about managing money. Tell them how to budget and spend wisely.
  • Think about setting up a savings account in your local bank where you can put money towards your children's college education.

3) Create an emergency fund.. If you want financial freedom, you do not want an accident or unforeseen circumstances to push you into debt. In addition to having solid insurance policies, you should strive to have an emergency fund just in case anything unexpected goes wrong.
  • Talk to your bank about opening a separate account to start building your fund. It's a good idea to have a year's worth of expenses set aside, but it can take a long time to gain this much capital.
  • Consider doing automatic transfers to this fund. The 10 to 15% you're taking out of your paycheck each month for savings could go into this account.

Saturday, October 1, 2016

Buy-And-Hold Investing Vs. Market Timing

Courtesy : Investopedia

If you were to ask 10 people what long-term investing meant to them, you might get 10 different answers. Some may say 10 to 20 years, while others may consider five years to be a long-term investment. Individuals might have a shorter concept of long term, while institutions may perceive long term to mean a time far out in the future. This variation in interpretations can lead to variable investment styles
For investors in the stock market, it is a general rule to assume that long-term assets should not be needed in the three- to five-year range. This provides a cushion of time to allow for markets to carry through their normal cycles. However, what's even more important than how you define long term is how you design the strategy you use to make long-term investments. This means deciding between passive and active management. 

Long-Term Strategies
Investors have different styles of investing, but they can basically be divided into two camps: active management and passive management. Buy-and-hold strategies - in which the investor may use an active strategy to select securities or funds but then lock them in to hold them long term - are generally considered to be passive in nature.

Active Management
On the opposite side of the spectrum, numerous active management techniques allow you to shuffle assets and allocations around in an attempt to increase overall returns. There is, however, a strategy that combines a little active management with the passive style. A simple way to look at this combination of strategies is to think of a backyard garden. While you may plant different crops for different results, you will always take the time to cultivate the crops to ensure a successful harvest. Similarly, a portfolio can be cultivated along the way without taking on a time-consuming or potentially risky active strategy. 

A good example of this method would be in tax management for taxable investors. For example, a security or fund may have an unrealized tax loss that would benefit the holder in a specific tax year. In this case, it would be advantageous to capture that loss to offset gains by replacing it with a similar asset, as per Tax rules. Other examples of advantageous transactions include capturing a gain, reinvesting cash from income and making allocation adjustments according to age. 


When it comes to market timing, there are many people for it and many people against it. The biggest proponents of market timing are the companies that claim to be able to successfully time the market. However, while there are firms that have proved to be successful at timing the market, they tend to move in and out of the spotlight, while long-term investors like Peter Lynch and Warren Buffett tend to be remembered for their styles.

This is probably one of the most commonly presented charts by proponents of passive investing and even asset managers (equity mutual funds) who use static allocation, but manage actively inside that range. What the data suggests is that timing the market successfully is very difficult because returns are often concentrated in very short time frames. Also, if you aren't invested in the market on its top days, it can ruin your returns because a large portion of gains for the entire year might occur in one day.

The Bottom Line

If volatility and investors' emotions were removed completely from the investment process, it is clear that passive, long-term (20 years or more) investing without any attempts to time the market would be the superior choice. In reality, however, just like with a garden, a portfolio can be cultivated without compromising its passive nature. Historically, there have been some obvious dramatic turns in the market that have provided opportunities for investors to cash in or buy in. Taking cues from large updrafts and downdrafts, one could have significantly increased overall returns, and as with all opportunities in the past, hindsight is always 20/20.

Saturday, September 17, 2016

6 Investment Styles: Which Fits You ?

 Courtesy : Investopedia

Do you know what your investment style is? If you're like most investors, you probably haven't given it much thought. Yet, gaining a basic understanding of the major investment styles is one of the fastest ways to make sense out of the thousands of investments available in the market today.

The major investment styles can be broken down into three dimensions: active vs. passive management, growth vs. value investing, and small cap vs. large cap companies. Walking through each one and assessing your preferences will give you a quick idea of what investment styles fit your personality.

Active or Passive Management

In determining investment style, an investor should first consider the degree to which they believe that financial experts can create greater than normal returns.

Investors who want to have professional money managers carefully select their holdings will be interested in active management. Actively managed funds typically have a full time staff of financial researchers and portfolio managers who are constantly seeking to gain larger returns for investors. Since investors must pay for the expertise of this staff, actively managed funds typically charge higher expenses than passively managed funds.

Some investors doubt the abilities of active managers in their quest for outsized returns. This position rest primarily on empirical research shows that, over the long run, many passive funds earn better returns for their investors than do similar actively managed funds. Passively managed funds have a built-in advantage – since they do not require researchers, fund expenses are often very low. 

Growth or Value Investing

The next question investors must consider is whether they prefer to invest in fast-growing firms or underpriced industry leaders. To determine which category a company belongs to, analysts look at a set of financial metrics and use judgment to determine which label fits best.

The growth style of investing looks for firms that have high earnings growth rates, high return on equity, high profit margins and low dividend yields. The idea is that if a firm has all of these characteristics, it is often an innovator in its field and making lots of money. It is thus growing very quickly, and reinvesting most or all of its earnings to fuel continued growth in the future.

The value style of investing is focused on buying a strong firm at a good price. Thus, analysts look for a low price to earnings ratio, low price to sales ratio, and generally a higher dividend yield. The main ratios for the value style show how this style is very concerned about the price at which investors buy in.

Small Cap or Large Cap CompaniesThe final question for investors relates to their preference for investing in either small or large companies. The measurement of a company's size is called "market capitalization" or "cap" for short. Market capitalization is the number of shares of stock a company has outstanding, multiplied by the share price.

Some investors feel that small cap companies should be able to deliver better returns because they have greater opportunities for growth and are more agile. However, the potential for greater returns in small caps comes with greater risk. Among other things, smaller firms have fewer resources and often have less diversified business lines. Share prices can vary much more widely, causing large gains or large losses. Thus, investors must be comfortable with taking on this additional level of risk if they want to tap into a potential for greater returns.

More risk averse investors may find greater comfort in more dependable large cap stocks. Amongst the names of large caps, you will find many common names, such as GE, Microsoft, and Exxon Mobil. These firms have been around for a while, and have become the 500 pound gorillas in their industries. These companies may be unable to grow as quickly, since they are already so large. However, they also aren't likely to go out of business without warning. From large caps, investors can expect slightly lower returns than with small caps, but less risk, as well. 

The Bottom Line 

Investors should think carefully about where they stand on each of these three dimensions of investment style. Clearly defining the investment style that fits you will help you select investments that you will feel comfortable holding for the long term.

Thursday, August 25, 2016


Dear Friends

For the past few days I am receiving lot of queries from my readers asking whether I am running any paid service. Today  received an SMS as shown below .

In this subject , I would like to again clarify that I am NOT PROVIDING ANY SUCH  SERVICE , and in no way responsible for any loss arising out of such recommendations provided by the persons/entities using the name 'Valuepick' in their communication.

Saturday, August 20, 2016

Basic Cocepts of Cash Flow

 Courtesy : Investopedia

Cash flow analysis is a critical process for both companies and investors. It's also a complex process that can leave the average investor with the feeling that delegating security analysis to a competent financial advisor just might be a good idea. If you aren't an accountant or a Chartered Financial Analyst, but you want to have a better understanding of what "cash flow from investing" means to business and investors alike, there are just a few basic concepts that you need to understand. 

Cash Flow Components

Corporate cash flow statements include three components:

  • Cash flows from operating activities
  • Cash flows from investing activities
  • Cash flows from financing activities
Cash flows from operating activities refers to money generated by a company's core business activities. This number highlights the firm's ability (or inability) to make a profit. While it provides good insight into whether or not the firm is making money, the other components of the cash flow statement also need to be taken into consideration in order to develop a more complete picture of the company's health.
Consider "cash flows from investing." Intuitively, cash flows from investing may sound like the amount of money a company generates from investments it has made, but the accountants who fill out corporate balance sheets are generally not referring to the number of shares of IBM the company has bought or the number of municipal bonds it has sold. Rather, from a corporate perspective, they are generally referring to money made or spent on long-term assets the company has purchased or sold. 

Upgrading equipment and buying another company to take over its operations and gain access to its clients and technology are investment activities from a corporation's point of view. Both of these activities cause companies to spend money, which is captured on a cash flow statement as negative cash flow. Similarly, if a company sells off old equipment or sells a division of its operations to another firm, these activities are also captured on paper as income from investing.
Cash flow from financing activities measures the flow of cash between a firm and its owners and creditors. Corporations often borrow money to fund their operations, acquire another company or make other major purchases. Timely operational expenditures, such as meeting payroll requirements, would be one reason for cash-flow financing. Companies are essentially borrowing from cash flows they expect to receive in the future by giving another company the rights to an agreed portion of their receivables. This allows companies to obtain financing today, rather than at some point in the future. 

What It Means to a Business

Cash flow is a key element of a successful business. Generating positive, sustainable cash flow is critical for a firm's long-term success. Keeping track of that cash flow is particularly important to business owners. The way that cash flow is captured and tracked plays a significant role in how businesses project their financial health to potential investors. A brief overview of cash and accrual accounting provides insight into the way accounting rules require companies to record revenues and expense.

For example, when a company sells a TV to a customer who uses a credit card, cash and accrual methods will view the event differently. The revenue generated by the sale of the TV will only be recognized by the cash method when the money is received by the company. If the TV is purchased on credit, this revenue might not be recognized until next month or next year.
Accrual accounting, however, says that the cash method isn't accurate because it is likely, if not certain, that the company will receive the cash at some point in the future because the sale has been made. Therefore, the accrual accounting method instead recognizes the TV sale at the point at which the customer takes ownership of the TV. Even though cash isn't yet in the bank, the sale is booked to an account known in accounting lingo as "accounts receivable," increasing the seller's revenue. 

What It Means to an Investor

Cash flow from operating activities is an important source of data for investors. Net income, depreciation and amortization, as well as changes in working capital, are included in this section of the corporate cash flow statement. The net number can be positive or negative.

As noted earlier, cash flow from financing activities measures the flow of cash between a firm and its owners and creditors. Negative numbers can mean the company is servicing debt but can also mean the company is making dividend payments and stock repurchases, which investors might be glad to see.
While "negative" cash flow doesn't sound good, it isn't always bad - sometimes you've got to spend money to make money. Companies need to invest in their businesses in order to grow. Of course, red ink can't be the only color on the statement. Conversely, high cash flow doesn't mean the company is in good shape - it may just be selling off assets. Non-recurring revenues such as making $1 billion by selling off a division boost cash flow, but that division can't be sold again next year. When reviewing the numbers, it is critical that income generated by such non-recurring events as sale of fixed assets, securities, retirement of capital obligation or litigation be taken into proper consideration. Any or all of these numbers could represent a one-time profit or loss that would distort the firm's prospects if viewed as recurring items.

The Bottom Line
Clearly, cash flow analysis is complex, but a useful topic for investors when analyzing the health of a specific company. Just keep in mind that a company's cash flow statement is only one source of data providing insight into a firm's health. Think of it as a compressed version of the company's checkbook that includes a few other items that affect cash, like the financing section, which shows how much the company spent or collected from the repurchase or sale of stock, the amount of issuance or retirement of debt and the amount the company paid out in dividends. Other important sources of information include a firm's balance sheet and income statement. Be sure to conduct a thorough review of all relevant data before making an investment decision. If you have any doubts about your ability to sort through the numbers and make a good decision, there are plenty of professionals available to provide assistance with your stock selection needs.

Saturday, August 6, 2016

The Art Of Cutting Your Losses

One of the most enduring sayings on Wall Street is "Cut your losses short and let your winners run." Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.No one will deliberately buy a stock they believe will go down in price and be worth less than what they paid for it. However, buying stocks that drop in value is inherent to the nature of investing. The objective, therefore, is not to avoid losses, but to minimize the losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article, we'll help you stand out from the crowd and show you how to identify when you should make your move.
 Reasons Investors Hold Stocks With Large Unrealized Losses

In spite of the logic for cutting losses short, many small investors are still left holding the proverbial bag. They inevitably end up with a number of stock positions with large unrealized capital losses. At best, it's "dead" money; at worst, it drops further in value and never recovers. Typically, investors believe that the reason they have so many large, unrealized losses is because they bought the stock at the wrong time or it was a matter of bad luck. Rarely do they believe it is because of their own behavioral biases.
Let's look at a few of these biases:
  • Stocks Always Bounce Back - Don't They?
    A glance at a long-term chart of any major stock index will see a line that moves from the lower-left corner to the upper right. The stock market, over any long time period, will always make new highs. Knowing that the stock market will go higher, investors mistakenly assume that their stocks will eventually bounce back. However, a stock index is made up of successful companies. It is an index of winners. Those less successful stocks may have been part of an index at one time, but if they've dropped significantly in value, they will eventually be replaced by more successful companies. The indexes are always being replenished by dropping the losers and replacing them with winners. Looking at the major indexes tends to overstate the resiliency of the average stock, which does not necessarily bounce back. In fact, many companies never regain their past highs and some go bankrupt.
 Investors Do Not Like Admitting They've Made a Mistake
By avoiding selling a stock at a loss, many investors do not have to admit to themselves that they've made a judgment error. Under the false illusion that it is not a loss until the stock is sold, they elect to continue to hold a losing position. In doing so, they avoid the regret of a bad choice. After a stock suffers a loss, many investors plan to hold onto it until it returns to its purchase price. They intend to sell the stock once they recover this paper loss. This means they will break even, and "erase" their mistake. Unfortunately, many of these same stocks will continue to slide.
  • Neglect.
When stock portfolios are doing well, investors often tend to them like well-maintained gardens. They show great interest in managing their investments and harvesting the fruits of their labor. However, when their stocks are holding steady or are dropping in value, especially for long time periods, many investors lose interest. As a result, these well-maintained stock portfolios start showing signs of neglect. Rather than weeding out the losers, many investors do nothing at all. Inertia takes over and, instead of pruning their losses, they often let them grow out of control.
  • Hope Springs Eternal.

Hope is the belief in the possibility of a positive outcome, even though there is some evidence to the contrary. Hope is also one of the primary theological virtues in various religious traditions. Although hope has its place in theology, it does not belong in the cold hard reality of the stock market. In spite of continuing bad news, investors will steadfastly hold onto their losing stocks, based only on the faint hope that they will at least return to the purchase price. The decision to hold is not based on rational analysis or a well-thought-out strategy; and unfortunately, wishing and hoping that a stock will go up does not make it happen.
     . Realizing Capital Losses

Often you just have to bite the bullet and sell your stock at a loss before those losses get bigger. The first thing to understand is that hope is not a strategy. An investor has to have a logical reason to hold a losing position. The second point is, what you paid for a stock is irrelevant to its future direction. The stock will go up or down based on forces in the stock market, the stock's underlying fundamentals and its future prospects.
Let's look at a few ways of assuring a small loss does not become "dead" money or turn into a much larger loss.
  • Have an Investment Strategy
    Having a written investment strategy with a set of rules both for buying and selling stocks will provide the discipline to sell stocks before the losses blossom. The strategy could be based on fundamental, technical or quantitative factors.

  • Have Reasons to Sell a Stock
An investor generally has quite a few reasons why he or she bought a stock, but typically no set boundaries for when to sell it. Don't let this happen to you. Set reasons to sell stocks, and sell them when these things occur. The reason could be as simple as: "Sell if bad news is released about corporate developments".

  • Would You Buy the Stock Now?
On a regular basis, review every stock you hold and ask yourself the simple question: "If I did not own this stock, would I buy it today?" If the answer is a resounding "No", then it should be sold.

Tax-Loss Harvesting Strategies

A tax-loss harvesting strategy is used to realize capital losses on a regular basis and provides some discipline against holding losing stocks for extended time periods. To put your stock sales in a more positive light, remember that you receive tax credits that can be used to offset taxes on your capital gains.

Taking corrective action before your losses worsen is always a good strategy. In investing, avoiding losses entirely may not be possible; successful investors accept this and try to minimize their losses rather than avoid them. Selling a stock at a loss and receiving a tax credit is one benefit you will receive. Selling these "dogs" has another advantage too - you will not be reminded of your past mistake every time you look at your investment statement.


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