Wealth destruction Faster than Wealth Creation

You may think that it is true in general sense but i can prove in mathematically.

Say for example you invested 100 rupees and you lost 25 rupees 

Now you loss is 25% and the net available amount is 75 rupees

Now to grow 75 rupees to 100 rupees, you need to grow it at the rate 33.33%.

So if your Portfolio is down by 25% don’t think that you need to grow by 25% but you need to grow by 33 %

Now this is even more important if you are paying Fees for managing Funds(Mutual Funds, ULIPs, etc.). Below is a table given computing the returns taken just as fees over a period of time(assumed managing fee of 2%)

years	% return required
1	2.03
2	4.09
3	6.19
4	8.34
5	10.53
6	12.76
7	15.05
8	17.37
9	19.75
10	22.17

Simple way of Index Investing

Lots of experts agree that Investing in Index is better for naive investors but fail to look in to aspects of fine tuning their investment plan. We have earlier discussed  that Dow Jones over a period of 106 years has yielded better return for investors who have invested at lower p/e (Read that post here). I have used the same principle.

This is a rough table for those who do not have time to check markets every day. Since Index Investing is the best way for an Passive Investor. The logic behind this idea is to invest more when price is low but low prices don't come often so using simple mathematics. I have combined both historical chances of level occurred and probability of Higher valuation


// *This system is based on PE Investing theory applied for NSE - NIFTY 50 - Not to be applied on individual stocks or other indices * //

P/E/ Range	Allocation%
10.5-11.5	3.866561
11.5-12.5	12.64531
12.5-13.5	14.16665
13.5-14.5	23.1729
14.5-15.5	14.63966
15.5-16.5	7.574571
16.5-17.5	8.781656
17.5-18.5	7.956251
18.5-19.5	7.196429

Inferences:
The return in Buy and hold on index gave an return of 20.7% with index raising from 890 to 5884 i.e. about 6.6 time in 11 years. but returns in the above method in the above period were 29.71%. it might seem as not a great return because of compounding but the raise was 13.48 times i.e more than twice the buy and hold method another  positive for this method is for example the index has fallen after 6 years i assumed equal halves of money to be invested in 2nd case and i didn't add the bank interest you would earn for six years (atleast 3.5%). So total return would raise by few more % points but let us assume it as transaction costs.

you can check NSE p/e daily

Foot Note:
1)Data calculated for periods 1st January 1999 to 1st September 2010.
2)Changes in table might occur over a long period of time i.e. more than 11 years. The changes in  last 5 year period was observed to be small changes in % due to rise in expectation and higher valuation of Indian stocks
3) Practically a few % point might me shaved of as transaction costs of buying Nifty Bees(Index ETF) and their maintainance charges

Related threads
1) http://www.inditraders.com/beginners-section/3825-index-investing.html
2) http://www.traderji.com/exchange-traded-funds/45009-index-investing.html
3) http://www.theequitydesk.com/forum/forum_posts.asp?TID=2993

Portfoilo performance

We have summarized the performance from the past 1 year where we have exceeded the Benchmark S&P CNX Nifty 15 points. The performance is discounted by 3 points  to account for approximate dividends which these companies would have given. Portfolio Management companies do not discount this valuation which could cost you about 20%(overall compounded).

Please Note: Do not consider the performance of monthly or lower time periods

Performance till 1st September 2010

Present Market Scenario

They say that a picture says 100 words. Read the market yourself

P.S. Note Data as on 1st Sep 2010

Equity funds lag own benchmarks

CRISIL, India's largest ratings agency has observed that over a five year period majority of equity funds underperformed the benchmark index. Similar studies have been done in the US as well. And they have come to the same conclusion. Related Link

After all Fund Managers, Research Analysts, support staff with superior educational backgrounds are expected to exceed the benchmarks but 2/3 of Funds have failed. Don't blame them it is the fault of system. We see lot of Ads showing that funds give excessive returns then who is to be believed ?

You would be surprised that both are true. We see advertisements of specific schemes but rarely a fund house declares results of all its schemes. So chances are that you won't find aggregate results and the top 1/3 keep changing the probability that you reap returns above average are remote. We at least won't add schemes. So we believe that our task of continuously beating index is not easy but a lot tougher.

Taxes on Investing

short-term capital gain:  

If the investment is in the form of mutual funds/company shares, the time duration is one year.  But if the transaction was levied with Securities Transaction Tax (STT), your gain will be taxed 10%.

Long-term capital gains:
If shares are held by the tax payer for more than 12 months, then gains arising from their sale/transfer are treated as long term capital gains. If the period of holding is lower, then such gain is treated as short term capital gains.  But if the transaction was levied with Securities Transaction Tax (STT), your gain will be taxed 10%. 

All stocks you buy on exchanges are levied STT

Smartest !!

**** NOT JUST A JOKE IMPORTANT FOR INVESTING ***

There once lived a great mathematician in a village outside Ujjain . He was often called by the local king to advice on matters related to the economy. His reputation had spread as far as Taxila in the North and Kanchi in the South. So it hurt him very much when the village headman told him, "You may be a great mathematician who advises the king on economic matters but your son does not know the value of gold or silver."

The mathematician called his son and asked, "What is more valuable - gold or silver?" "Gold," said the son. "That is correct. Why is it then that the village headman makes fun of you, claims you do not know the value of gold or silver? He teases me every day. He mocks me before other village elders as a father who neglects his son. This hurts me. I feel everyone in the village is laughing behind my back because you do not know what is more valuable, gold or silver. Explain this to me, son."

So the son of the mathematician told his father the reason why the village headman carried this impression. "Every day on my way to school, the village headman calls me to his house. There, in front of all village elders, he holds out a silver coin in one hand and a gold coin in other. He asks me to pick up the more valuable coin. I pick the silver coin. He laughs, the elders jeer, everyone makes fun of me. And then I go to school. This happens every day. That is why they tell you I do not know the value of gold or silver."

The father was confused. His son knew the value of gold and silver, and yet when asked to choose between a gold coin and silver coin always picked the silver coin. "Why don't you pick up the gold coin?" he asked. In response, the son took the father to his room and showed him a box. In the box were at least a hundred silver coins. Turning to his father, the mathematician' s son said, "The day I pick up the gold coin the game will stop. They will stop having fun and I will stop making money."

The bottom line is...

Sometimes in life, we have to play the fool because our seniors and our peers, and sometimes even our juniors like it. That does not mean we lose in the game of life. It just means allowing others to win in one arena of the game, while we win in the other arena of the game. We have to choose which arena matters to us and which arenas do not.