Investment Pyramid

Building investment portfolio is an art and science, the former because it’s not a fixed formula you may apply to be successful at it, but there could a variety of ways around it, and latter because there’s still some method to the madness around building it. One of the simplest, yet intuitive investment principles is of the Investment Pyramid:

Levels of Investment

As you start out, there’s no need to put all your hard earned money into speculative and seemingly lucrative scrips, but to create levels of investments, allocating a variable percentage of your portfolio to different types of investments. As you move up the pyramid, there’s riskier, but more rewarding options.

Some people ask me why not invest directly in the riskiest asset classes, so that the return is the highest – It’s simple to understand why having a solid investment foundation to build onto riskier assets is a more sustainable approach. The percentage allocation to each asset class would be determined by a variety of factors, including the investor’s background, investment in question as a proportion of overall net worth, age, aversion to risk, liquidity requirements, etc.

When you are investing, it is important to keep this pyramid in mind in trying to expand out on a more sustainable investment strategy.

Buy Call on FB

I made a buy call on FB 2 months ago at $27 – My basis for the buy call are pointed out below were:

 

Fundamentally, the asset base, now a huge $15b as against $6b last year, and the new debt of $2b more than offset by liquid cash & short term securities. The goodwill was increasing at a rapid pace too. Also, notice that amongst the peers, this company stood at a massive EBITDA of $1.1b, 24%.

On the business side, then, one has to realize that the real value of a network increases exponentially with the number of people on the network (Reed’s law/Metcalfe’s law). Although the marginal increase is slower than before, but look at the size of the network, it’s already huge. 

Practically, I saw a trend of many other leading, potential technology and related businesses allowing log-in through Facebook login, and several other features intertwined with the Social networking website. I, therefore, foresaw growth in RPU after a bit. 

Just looking at relative valuation through P/E only in this industry isn’t of course the best way to assess the potential. Just look at so many loss-making entities there, so you can’t compare well across peers anyway.

Here’s the today’s rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing: Seven Effective Investment Habits

Investing money is a habit that most people find difficult to follow on in a disciplined fashion. Sometimes, people are confused on what to invest in and at other occasions people don’t know if they should start investing already or wait until a certain time in their life to do that. Also, there are many people who think that saving money is the best and safest strategy to pursue as far as investing is concerned because investing actively is risky.

Here, I have highlighted seven effective habits that positive, successful people cultivate to grow faster:

Pay yourself first: This simply means that you have to realize and separate out a certain proportion of your income every month to your investment portfolio. The idea is to prioritize this to the effect that this gets out of the income first – it’s easier for salaried individuals since they are somewhat sure about their salary and its timing, but this can also be extended to business people with some efforts on their end.

Start small: A lot of people hesitate to invest considering they just have a few thousand rupees, for instance, and say to themselves that they will start off when they accumulate some significant sum – the wakeup call: there will be no better time than today to start off. Even if it’s a fairly small sum, it’s all right to start off on the track to invest. Once you have started, it’s easier to add on and make it grow, but you have to start now.

Invest regularly:Some people start investing for a bit and then forget about that because of something else on their schedule. That’s not the right attitude. You have to take this as something needing mandatory attention on a regular basis. That doesn’t mean you are always spending 3-4 hours everyday to think about and do this, but it’s better to keep it as a monthly or bi-monthly practice and review after every 6 months against your goals.

Keep the final goal in mind:When investing, it always helps if you have a formal statement of purpose, often called an “Investment Policy Statement” or IPS. It’s a goals statement that any qualified investment professional can help you form, and with some attention and practice, even you can prepare for your own self. It helps you keep your investment strategy aligned to your investment needs.

Don’t change your portfolio very regularly – but do it every once in a while: If you’re looking at equities as a potential investment proposition and investing in them, don’t just juggle your portfolio everyday. Empirical evidence suggests that day traders earn lesser amount of money relative to semi-active traders on net levels due to the significant commissions that they have to pay on trading stocks.

Invest according to timeframe in mind:Are you thinking about investing for getting enough to go to your next holiday destination? or buying yourself a bigger car? or planning for your retirement? Your risk appetite would also be a factor of your time horizon. If you need to get out and cash your investments in a year, then it might not be worthwhile looking into strategies where illiquid assets are involve

Adjust for Risks: You have to realize that there is a term called risk-reward payoff. It applies to the investment world as well. In order to earn supernormal (above-average) returns on your investment portfolio, you would need to invest in riskier assets. Now, not everyone’s situations allow them to do so, therefore, it’s best to assess where on the risk spectrum you fall on and invest accordingly.

Happy Investing!

 

The Power is Yours

If you can inspire two people everyday to do something worthwhile and make an impact in such a manner that those two people would go out the next day and repeat the same with two more people each, then over the course of one week, by creating those 14 inspired souls, you would actually create 2,186 inspired souls!

That is the power of multiplier!

Stay happy and keep inspiring!

Penny Wise and Pound Foolish

The attached picture explains one of the most coveted concept of Economics – the concept of Opportunity cost:

 

So the next time you think saving a little money here is cheap, also consider what else you might be giving up for that saving.

Just do it!

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Where is the world moving out to? What do people and organizations want? It is funny how if you reflect mankind has been running after things everywhere with one thing at the back of his mind.. to find more time for himself. It is not a co-incidence we have come a long way towards specialization since Robinson Crusoe’s do-your-own-thing-live-your-own-life way of life. The concept of specialization picked up during the Industrial Revolution because that was needed by all these big factories – people who could keep working in a specialized job and seniority meant increased performance through repetitive and experiential job-based learning, hence, the concept of seniority-based pay. Once this revolution picked up, the next couple of decades were basically just an extension to it – the factory worker mindset was needed, so they had to inculcate discipline and then teamwork started to become institutionalized from an early age – from the earlier mentor-protege relationships in almost all sciences and arts studies, the concept of standardized learning approaches in classrooms were brought around. People started to get familiar and comfortable with the idea of standardized, institutional learning as a key to getting a safe, secure job.

Life was all about stability because that was what was expected of a factory worker mindset. However, now things have changed. Part of this change is the change in the platform – now, factories are only as important as mind-factories. So as this snapshot of the current top companies by market cap on NASDAQ shows, most of these sell products that are not as much related to routine work as innovative work. It is due to this innovative spirit need that companies are now talking about talent management, talent retention and organizational development.

Top Companies by Market Cap on NASDAQ
Top Companies on NASDAQ above $2b Market Cap

We need to think loud, think out of the box and think different to keep exciting an audience that is ever more important and ever more reachable. Just do it! 🙂

What to look for in Stock Investments?

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Investments are a topic that do not come easily for many, some people don’t know where to invest, others think about how much to invest and those that do are often not sure if theirs is a suitable investment for their preferences and risk profile.

Stock investments are a good way to earn money where the longer run returns on equity outpace returns on most debt instruments. For instance, if you invest $1,000 in good equity scrips, your overall return in say 5-10 years would be far higher than investing the same $1,000 in government treasury bonds over the period.

Equity investing is not easy, especially with the amount of financial lingo that people in financial circles are used to throwing. If you don’t know the terms, then understanding and assessing an investment can become a burden, perhaps this is one reason many people prefer to invest in equity through mutual funds.

For starters, if you are looking at any good scrip, check out the following numbers and compare them historically for the same company as well as with other peers and industry average to get the picture:

  • Net profit
  • Asset base
  • Equity
  • Cash flow from Operations
  • Earnings per share – EPS (Equity divided by Number of shares)
  • P/E ratio (The price of share divided by earnings per share)

 

Some qualitative factors to look into are:

  • Management competence through track record analysis
  • Company’s growth over time
  • Future plans of the company
  • Size of the market the company principally operates in

Keeping these pointers in mind would make you aware of whether a prospective investment is going to be a good one, and at the least let you ask the right “read: intelligent” questions.

Happy investing!