Wednesday, October 29, 2008


"The pessimist complains about the wind;
The optimist expects it to change;
The realist adjusts the sails."
-  William Arthur Ward

Any day, I will take an optimist if a realist is not available or realist is a way too much of realist.

"Pessimist - Person who knows price of everything and value of nothing."

"Mind is a darkroom where negatives are developed." Pessimists have a really large dark room and their apparatus is very busy developing negatives.

"There is a positive to every situation however bleak it may look like. Challenge is to go after the positive and find it."

"In any challenging situation, you can make yourself feel miserable or you can make yourself strong. Effort involved in either of them is the same."


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New definition of old finance terms

Picked these up from somewhere on the net. Enjoy!!!

CEO - Chief Embezzlement Officer.

CFO - Corporate Fraud Officer.

BULL MARKET — A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET — A 6 to 18 month period when the kids get no allowance, the wife gets no jewellry, and the husband gets no sex.

VALUE INVESTING — The art of buying low and selling lower.

P/E RATIO — The percentage of investors wetting their pants as the market keeps crashing.

BROKER — What my broker has made me.

STANDARD & POOR — Your life in a nutshell.

STOCK ANALYST — Idiot who just downgraded your stock.

FINANCIAL PLANNER — A guy whose phone has been disconnected.

MARKET CORRECTION — The day after you buy stocks.

CASH FLOW — The movement your money makes as it disappears down the toilet.

WINDOWS — What you jump out of when you’re the sucker who bought Reliance Power at Rs. 550.00 per share.

INSTITUTIONAL INVESTOR — Past year investor who’s now locked up in a nut house.

PROFIT — An archaic word no longer in use.

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Tuesday, October 28, 2008

Newton, Einstein and Frankenstein come together

"We live in Newtonian world, with Einsteinian laws and with Frankensteinian logic." - David Russesl

Looking at our own logic from time to time, it is no wonder our logic has become Frankenstenian. Too convoluted. Simplicity has vanished. Nothing simple appeals to us. It has to be complex. Even better if it is complicated. Simple is better than complex. Complex is better than complicated.

"Power of Simplicity" should be a must-read for everyone. It separates complex chaff from simple wheat.

"It is simple to be happy. It is difficult to be simple."

Simplicity starts with making with least amount of things. More things, more complicated the life is. More ownership, more headaches. Reduce ownership and start seeing the simplicity everywhere you go. Why own when you can rent at a fraction of cost and simplicity?

Btw, Frankenstein has not vanished all together. If you go to Universal Studio in Los Angeles, there is still a model who goes around wearing the mask of Frankenstein. Take a picture with him and carry it always in wallet. Everytime complexity rears it ugly head in your head, remember to stare at the picture of Frankenstein.


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Sunday, October 12, 2008

Rock Bottom

"Rock bottom is the rock to use for foundation to build (success) on."  - JK Rowling at Harvard University's commencement address - June 2008.

Google for JK Rowling's speech and listen to it. It is one of the most inspiring speeches I have heard in recent times. I did not expect someone who wrote reams of pulp fiction to speak so inspiringly. JK Rowling's speech will leave inspired and convince you that failure is not only uncommon but very much needed for one to be successful.

As I thought about the speech in general and above line in particular, it provided a lot of meaning to 'rock bottom'. Rock bottom - height of any depth or climax of something in negative direction. So, rock bottom is the height of failure. It is probably called 'rock bottom' because it serves as a really strong rock to build solid foundation on which you can build castle of success.

Good luck hitting the rock bottom. Remember, you need a strong foundation to build anything of lasting value. And  for good foundation, you need a good rock - rock bottom.

Btw, this is the same JK Rowling who wrote 'Harry Potter' series of best selling books.


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Balance sheet - current condition

"Nothing is right on the left side. Nothing is left on the right side."

This is the joke going around about balance sheets of many companies during these stressful financial times. Glad that people are able to find humor during these times.

You need to re-format the balance sheet for this to make sense. Left side includes assets and liabilities. Right side is shareholder equity. Balance sheet's equation is : Assets - Liabilities = Shareholder Equity. So per the above joke, nothing is right in assets and liabilities. Nothing is right on the left side - certainly true for assets, especially of banks. They can not value many assets on their balance sheet. They have many mortgages as assets on which people have hard time making monthly payments. Nothing is left on the right side. This means there is no shareholder equity left. Imagine holding onto useless shares of now defunct banks such Lehman Brothers. They may fetch some rare antique value after some time.


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Wednesday, October 08, 2008

Never before

"If you want something that you never had before, then you have to do something that you have never done before."

Never before - never had heard 'never before' used so well in any place, let alone in a quote.

Want something that you never had before? Then do something that you have never done before. It does not have to be totally alien to you. Even if you have never done 'that' before, there must be others who have been there and done that. Follow the experts. Don't they say - ' dwarf on the shoulders of the giants sees more than the giant sees.' ? So, use OPE (like OPM) - Other People's Experience (like Other People's Money).

Does the sensne of awkwardness follow you when you set out to do something that you have never done before? Well, that's only natural. That is the reaction from your personality to prevent you from getting out of 'comfort zone'. We all have built in safety mechanism which was meant to go off when we faced dangerous circumstances. It is still good. But, it has not relaxed as real dangers are far less as we have evolved from a cave man to modern man. So, we have to consciously loosen it so that we drop our guard and and really do something that we have never done before to get what we never had before.

Cheers to doing something that you have never done before!

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Monday, October 06, 2008

Needs & Wants

"We sometimes get what we want. We most of the times get what we need." - Mick Jagger (?)

I am tempted to say we get more than what is necessary most of the times. Oh yes, you can pat on your own back and say anything you want like - I work so hard. I am so smart. I studied so much more than so many people - anything. But, why should one get more than they need? Ok, not that we want socialism. Where everyone is equal and some are more equal :) But, the point is we do not seem to be happy when our basic needs are met. We always want more. Nothing wrong to aspire more. But, if we do not take a moment to be grateful for the fact that our needs have been met and we have many times gotten more than our needs, we are not going to be able to forgive ourselves and feel good about anything. Gandhi did not say for nothing - There is enough for everyone's need but not enough for anyone's greed. Greed is good. But, only after we are grateful for getting what we need.

You know one of the easiest ways to feel good ? Just start being grateful for one thing every day. May be one day you are grateful for wonderful health you got. Next day, may be for wonderful family you have and next day may be for wonderful job you still have. So on and so forth. Continue to remember everything you can be grateful for. Try this for few days and see for yourself how your outlook changes so much for better. Watch your energy levels. It is sad that we have so many things to be grateful for and we do not seem to care for none of that and brood over few trivial things and make ourselves so much miserable.

Feel grateful and feel good. When you feel good, everyone around you feels good. Feeling good is just so naturally infectious. One hell of a good infection that is.


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One smart financial guy

Shaym Pattabhi who writes at - - really impressed me. His blog is fairly new and has only few entries. But, the depth and analysis are really good. Read the post on when buying real estate makes sense. It really opened my eyes to  what really matters in investing - returns. Shyam seems got it all as far finance goes. He writes well, backs everything with data and explains his ideas clearly. One of the best financial columnist I have read in a long time. He writes for Indian news paper 'The Hindu'. I hope he comes up with many more such useful columns.


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Quiet reads for the stormy times

So, has the ride been rough in stock markets over last few weeks? No doubt. Time to take the money out? At the risk of repeating myself, answer is No. If you take money out now, you will probably incur great amount of irreversible losses. Stay put if you are already in the market. If you have money and believe that over the long term, market is going to comeback, it is time to buy. Do we know if the market has bottomed? No good answer here. Best strategy is to stick to investing basics.

There are some books which have impressed me quite a bit and made me a believer in investing in broad based well diversified stock holdings. I want to give their names here and also want to remind myself to read them or skim them over. I think they are really good books  to read especially during these difficult times so that we do not take some foolish decision in the moment of panic.

First book is 'Stocks for the long run' by Prof. Jeremy Seigel. Wharton biz school professor. Prof. Seigel has compiled tonnes of data over last century to write a compelling book which has been a best seller for last many years. This is the book to read and be convinced that historical figures are in favor of astute investors who buy diversified portfolios and hold them for a long period. The book analyzes stock returns and compares them to returns on other asset classes such as  precious metal, real estate etc. and shows how stocks beat all other asset classes over a long period of time.

Second book is 'A random walk down wall street' by Prof. Burton Malkiel. A highly respected Princeton professor. In this book Prof. Malkiel makes a strong case for sticking with index funds and shows that nobody can consistently beat market returns. If  well-paid and full time professionals can not do that, why waste time? Better it is to buy a whole bunch of low cost index funds in all sorts of areas and forget the ups and downs.

Both these books are written by academicians with tonnes of research and data for common man. Both books are fast reads and should be available in your library or for purchase for a few dollars. They have been best sellers for so long that you can find used copies for a couple of dollars or even free if you are willing to pay nominal postage. If your believe in the premise of books, then buy new copies. You are not going to regret. You may become a better investor too.

If you are disciplined investor, you are probably familiar with the concept of 'dollar cost averaging.' DCA is a method by which you put in fixed amount of money to buy stocks or mutual funds at a regular intervals of time. It has been found to provide nice returns because by putting in fixed amount of money at regular intervals, you automaticall buy low and sell high. When market is rising, you will buy fewer shares and when market is down, you buy more shares. What if this method can be further improved? That's where Value cost averaging comes in. VCA requires little more work on your part but studies show that VCA has potential return better returns than DCA. VCA requires little more work because you have to adjust how much you want to buy based on market performance. Also, if your expectation is not right, you may end up holding too much cash especially while markets are rising and waiting for markets to come down. One way to ensure that you always buy stocks, but still use VCA, is buy expecting more returns than market can possibly return. Expecting a return of 15% annually is a good expectation. So, if you are buying on monthly basis, it works out approximately 1.25% return month to month. For most accurate results, reverse the compound interest formula for 15% with period set to 12. But, 1.25% is good enough. To start off with VCA, buy some mutual fund the first month for $1000. If the share price is at $100, you will buy 10 shares. When you are ready to buy shares next month, remember that you expect 1.25% return. So, share price should be 101.25. So, by chance, if the share price is 101.25, you do nothing and hold on to your cash. When market has given you the required rate of return, you stay put. But, if stock has dropped to say $95 a share. So, your portfolio value is $950. Ideally it should have been 1000*1.0125 = 1012.5. So, you will buy shares worth 12.5 dollars to bring your portfolio to where it should have been. You will also adjust your reference to $95 a share and expect it to become 95*1.0125 = 96. 1875. Next month you expect your portfolio to be at 1012.5*1.0125 = 1037. 8125. If the value is less than this, you will buy to bring the value to this number or if the value is equal or greater, you will stick with cash or find other opportunities to invest. If you can not find better opportunities to invest, you go ahead and buy as much as you can. By following VCA, you are becoming disciplined at keeping an eye on the returns you expect. Holding cash for sometime is not a bad thing in VCA because next month stocks may fall quite a bit and you may need extra cash to make up for bigger difference between what your portfolio is worth and where it should have been. There are some variations how people do VCA. Some people do not adjust the reference price month to month at all. They make up a model, say with monthly returns of 1.25% on the starting price, and stick with it hell or high water. It is a good approach if stocks prices are stable but when they are quite volatile, what you can spare at the end of the month may not be adequate at all. By adjusting reference price month to month you are making it easier for yourself to buy decent number of shares. If you have a lot of extra cash and your model has aggressive expectations, you can leave the reference point fixed and just keep buying. Just bear in mind that during prolonged bear markets,you may need a lot of money to keep up if your expectations are quite high.

VCA is not very difficult although it may seem so. You can create simple Excel worksheet in no time. There are a lot of web site which describe VCA in better terms than I have done here.

VCA or DCA, disciplined investing must pay back. So, keep investing. Once you have set aside enough cash reserve to last you comfortably for 6-9 months, there is not much you can do about problems which may go longer than those many months. If it makes you feel better and if you can afford, feel free to hold up to 1 year worth of living expenses in liquid cash. But, do not get worried by temporary market swings and pull back all your money and hide it in your mattress.

Cheers to successful investing!

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Sunday, October 05, 2008

Motives & Judgements

"Feel free to question my judgments but not my motives." - Joe Biden, democratic party's vice presidential nominee said something like that in the recent debate. He was referring how he would approach bipartisanship. He was saying that regardless of party affiliation everyone who comes to US Congress comes with the same motive - doing something good for the people and country. You should never attack or question their motives. Judgments, of course, are a fair game.

It indeed left a lasting impression. How nice it would be if we make a similar statement while putting together a team? If we let every team member know that we would never ever question anyone's motives but judgments are up for debate. This will be  very reassuring. The very fact that you are part of the team means your motives are good and for the betterment of the team. Judgments are a different matter altogether. Motive to judgment is a long drawn process with many steps. With so many steps and details, it is possible that our judgments may end up being not the very best despite our motives being the most righteous and best.

Such approach goes a long way in making team members feel comfortable with each other. It also gives everyone in the team to stop someone who may start questioning the motives of another team member when he should be focusing on judgments. It hurts when someone questions and attacks our motives.

Of course, occasionally, you will end up with some people who do not share the motives you would like them to share. There is nothing much you can do about such people than getting rid of them as early as possible with least pain to everyone involved. That's why authors of 'Good to great' say - "First get right people on the bus. Get wrong people off the bus. Then put people in right seats. Then you can decide where to go." Only the people who share motives should be on the bus.

I never thought political debates also can contain wise statements. This one was a good one.


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