Stock Markets Demands Patience

Extraordinary returns follow extraordinary discipline. Discipline in buying and selling, and maybe the most important one of all, holding. Developing the conviction to hold is something that I’ve learned over time. It didn’t come easy. The basis of this article is to give some insight on how to develop the conviction to hold your winners. It is very tempting to sell along the way, and its okay to take a little off the table, but the big money is made by holding.

“It never was my thinking that made the big money for me. It always was my sitting.” — Reminiscences of a Stock Operator

Many of us, me included, look at stocks that have made big moves and think to ourselves, “If I would have only knew about that company and bought it back then.” But would you really have developed the conviction to hold during the run up? The problem is that to achieve a multi-bagger in the portfolio, you have to hold a multi-bagger. And if you want it to change your life, you need to hold a lot of it.

Don’t bother finding the next multi-bagger if you aren’t going to develop the conviction to hold it.

Over the last decade, I’ve been lucky enough to be invested in a few stocks that have gone up 5-10-20-30x over a multi-year time horizon.  From my experience, the only way to hold onto a big position after it makes a big move is to know the underlying company better than anyone else. Greed and fear will test your resolve, so you need to learn to keep these emotions in check. You need to believe in your due diligence and form an unwavering conviction.

So how do you develop the conviction to hold?

  

A lot of due diligence is on the front-end of a buying decision, but it certainly doesn’t stop there. The maintenance due diligence following the buy decision is even more important. For me, I talk to management regularly and keep close watch of all the ancillary forces and trends that are driving the company’s business. My “edge” knows my positions better than anyone else. This doesn’t mean I’m going to be right, but the more I know the better.

I think many misperceive high conviction for close-mindedness, ignorance, and arrogance. The conviction I’m talking about is quite the opposite. You need to constantly assess your positions and openly listen to counter arguments. Only then will you have the conviction to hold multi-baggers because you will understand all sides to the story. You also need to develop a thick skin. If you are not ready to be criticized for your convictions then you aren’t ready to make real money.

I believe most investors focus too much on selling strategies and not enough time on knowing what they own. Selling strategies such as, “Sell half after a stock doubles” or “When a position reaches 10% of the portfolio, sell it down to 8%” are meant for lazy investors. These selling metrics-formulas-strategies sound great in academia or when selling an investment strategy to a bunch of lemmings who can’t think for themselves. The truth is if you know what you own at all times, you’ll know when to sell.

In many cases the stocks I’ve owned were better buys after they doubled then when I initially bought them. In many cases when a position became 30% of my portfolio there was a reason for it.  The underlying business was doing really well, or institutions were just starting to nibble on shares, so why would I sell it. Just because a stock doubles, triples, etc, doesn’t mean it should be sold. Stocks should be sold when your maintenance due diligence shows something has changed. If you know the story better than anyone, you’ll likely get clues well before the rest of the market. When a company performs, and the story hasn’t changed, stop trying to change it. Enjoy the ride.

When a stock goes on a multi-year run there will be long periods of time when nothing happens. These are consolidation periods when old shareholders are selling and new investors are buying in

A big part of successful investing is becoming content doing nothing. If you are in great companies, a lot of times your biggest risk is boredom. Warren Buffett’s famous quote, “Our favorite holding period is forever”. If he likes where the business is headed, he’ll continue to hold it and probably buy more. Don’t be active for activity sake. Remember, there are no day traders on the Forbes 400 list. Learn to be content holding and doing nothing.

“Patience is power.

 Patience is not an absence of action;

 Rather it is “timing”

 It waits on the right time to act,

 For the right principles

 And in the right way.”

– Fulton J. Sheen

As a microcap investor who invests in companies with little to no institutional ownership, I want to hold for the institutional rally. When a management continues to execute on a great story, at some point it’s going to attract institutional inflows. You will see this when an illiquid stock all of sudden gets propelled by a sustained period of above average volume. Hello Institutions!

A multi-year run is made up of a bunch of mini-cycles that can last weeks or months. During these times the stock can become undervalued or overvalued. Quite a few professional investors I know like to trade 10-20% of their full position during these swings. For my psyche I’ve found it to be counterproductive. If I own a $5 stock and think it might go back to $4 before it goes to $10 in 12 months, I’m fine simply holding it through the mini-cycles.

I hope I’ve helped shed some light on a hard but lucrative topic. Many investors spend all their time trying to find great microcap companies only to sell them after quick paltry gains. If management is executing and the story hasn’t changed, hold on for the real money.

Find great companies, develop the conviction to hold them, and it will change your life.

Courtesy: Original Author Mr.Ian Cassel

What is Indexation benefit in FMP? - Great Opportunity to lock in Funds

As advisors, we all seek to maximize the post-tax returns for our investors. In this context, double indexation is a very important concept.

Currently as per market scenarios , we can expect approx 9% post tax returns in DOUBLE INDEXATION Schemes. But final figure can be communicate only once the issue is opened.

Double indexation simply means getting the benefit of two years of indexation when the holding period for investments has been substantially less than two years. Read on to gain clarity on double indexation.   

  

What is indexation?

 

It is adjusting purchase price of an asset to reflect the impact of inflation, primarily for the purpose of calculating capital gains tax. Adjusting purchase price implies scaling it upwards based on the inflation during the period.

Now let’s explore these terms one by one

In very simple terms inflation is price rise. It implies that more money has to be shelled out for the same set of goods. For e.g. the price of 1 kg sugar has increased from around Rs. 20 in 2008 to Rs. 40 in 2012. Inflation reduces the value of money i.e. Rs. 20 was more valuable in 2008 than it is today because today it can buy only half a kg of sugar.

Capital gain essentially means profit on sale of an asset. For e.g. If Mr. X invested Rs.1000 in a mutual fund and sold it for 1200, then Rs. 200 is his capital gain.

Depending upon the duration for which the asset was held with the investor, the capital gains are categorized as short term capital gains and long term capital gains. For equity mutual funds if the units are sold within 1 year of purchase, the return is considered as short term capital gain.  If the units are held for a period exceeding 1 year, the returns are called long term capital gains.

What is the need for indexation?

Apples can’t be compared to oranges. If return on investment has to be calculated then cost price and the selling price should be at the same scale.

Let’s take an example

Mr. ABC invested Rs.1000 in 2008 and sold it for 1500 in 2012. The Rs. 1000 of 2008 has to be increased to reflect the inflation during the year 2008 and 2012, brought to the scale of 2012 and then compared to the Rs. 500 of 2012 to calculate the actual capital gain.

How is indexation done?

Cost inflation index (CII) numbers are released every year. To adjust cost of purchase of the asset to reflect inflation the index numbers for the year of sale and year of purchase are required.

Let’s take an example

The CII number for 2001-2002 is 426 and for 2011-12 is 785. Mr. ABC invested Rs. 10000 in May 2004 and sold it for Rs. 20000 in July 2014. 

The inflation adjusted cost of purchase is calculated as:

10000 x (785 / 426) =18427 

His actual return for the purpose of taxation with indexation will be (20000-18427) Rs.1573.

What is double indexation?

To understand the concept of double indexation let’s assume two cases:

A)    If Mr. ABC had bought 10 units of mutual fund for Rs. 10000 on 1^st April 2009 and sold them for 12000 on 1^st April 2010. (Holding period- 1 year).

B)    If Mr. ABC had bought 10 units of mutual fund for Rs. 10000 on 31^st March 2009 and sold them for 12000 on 1^st April 2010. (holding period- 1 year and 1 day)

Year	CII Numbers
2008-09	551
2009-10	582
2010-11	632

In the two examples given above, the information is same except the year of purchase, which differs by just one day.

The difference in one day changes the financial year

of purchase for Mr. ABC, which changes the CII numbers to be used for indexation.

Case A: Single indexation

Particulars	Amount (Rs.)
Cost of purchase	10000
CII- year of purchase (2009-10)	582
CII- year of sale (2010-11)	632
Adjusted cost of purchase	10859.11
Taxable return- without indexation	2000
Taxable return- with indexation	1140.89

Case B: Double Indexation

Particulars	Amount (Rs.)
Cost of purchase	10000
CII- year of purchase (2008-09)	551
CII- year of sale (2010-11)	632
Adjusted cost of purchase	11470.05
Taxable return-without indexation	2000
Taxable return- with indexation	529.95

Mr. ABC’s taxable return (with indexation) varies in the two cases explained above because of the indexation number. His taxable return (with indexation) comes down drastically in Case B which reduces his tax liability (absolute terms) as well.

Mr. ABC can claim indexation for two years but he is actually holding the investment for just a day over 1 year.

Hence double indexation benefit is, enjoying indexation benefit for 2 years when the investment is not held for a substantial part of second year.

The Destruction of Savings and the Threat of Old Age Poverty

The Destruction of Savings and the Threat of Old Age Poverty

By not investing in equities for the long term, too many Indians are setting themselves up for old age poverty

From an investment perspective, India is a fixed income country. An overwhelming proportion of financial savings and investments that Indians make are in fixed income avenues. These are dominated by bank deposits and various government small savings schemes like PPF and National Savings Certificates (NSC). Even the money that we invest in mutual funds is overwhelmingly (70 per cent of it) in fixed income funds.

Interestingly, our love for fixed and predictable returns has somewhat lessened in recent decades. Till about thirty years ago, the very idea of investing in anything else was literally unknown to people outside a limited set who were involved first hand with the stock markets. In fact, the only time some more investors dabbled into equities was when they filled out an application form for an IPO, or just 'issue', as it was then called. This changed to some extent from about the mid-1990s onwards. There arose a small but distinct equity culture where individuals started investing in equity mutual funds in reasonable numbers. Unfortunately, this nascent equity culture is now in full retreat. In the last few years, the number of investors in equity funds as well as the inflows into such funds has been weakening. Last year's (2012-13) data from industry body Association of Mutual Funds in India (AMFI) shows that even among richer investors (HNIs, in the jargon), fixed-income is the preferred asset class.

People who are pulling out of equity--and those who are advising them--try to find some justification for these numbers. Sure, equity returns have been below expectations for some time now. Three-year returns of an average large-cap equity fund stand at 5.4 per cent while five-year returns are also about the same. Meanwhile, fixed-income funds yield in the region of 8 to 10 per cent, depending on the type and the time horizon. However, this is a short-sighted view which inevitably leads to the returns-chasing behaviour. When equity will start going up sharply, then investors will rush in.

However, this kind of self-destructive investor behaviour arises out of not appreciating the fundamental difference between equity and fixed income.

Fundamentally Different

 

Equity and fixed income are not merely two sides of the same coin. They play fundamentally different roles in the economy and in businesses and this difference means that in the long run equity is far superior. This superiority is not incidental to some particular economic situation or to some businesses. It is an inherent characteristic.

Let's examine the differences from the basics. What is the best way of earning money? If you look around, you will realise that for anyone who is good at running an enterprise, the best place to invest is in your own business. However, not all of us can be businessmen. Fortunately, because of the existence of the equity markets, any one of us can become an owner (or rather, a part-owner) of a business. The stock market is basically a way for all of us to reap the financial advantages of being a business-owner with very few of the challenges that a real owner or manager of a business must face. This is the way to get real growth of your money: growth that can beat long-term inflation, and equity is the only option.

To understand why this is so, one should understand what is the source of equity profits. The ultimate source of profits in equity is the growth of the economy. On the whole, stocks grow at a rate that is at least equivalent to the growth of the economy. And the inflation rate is built into the growth of the economy. If inflation is 5 per cent and the real economy grows at 5 per cent, then stocks on the whole will at least match 10 per cent. And that's the average. On top of that, as an investor, if you are able to select stocks that are better than average (through a good equity mutual fund, for example), then you can beat the general rate of economic growth by a larger margin.

If you look at the past trend, then this characteristic is evident. Over a long period, you can expect stocks as a whole to grow about as much as nominal GDP does. The GDP figure that you read about is adjusted for inflation, that is, the GDP is measured and then reduced by the inflation amount. This makes the GDP comparable across years. However, the rupee value of the GDP has increased by the non-adjusted amount, which is called nominal GDP. This is the actual value by which business and other economic activity increases.

If you compare the average GDP for five years ending 2000 with the average of the latest five years with the Sensex, then the GDP is up 5 times and the Sensex is up 4.6 times, which is good enough for most. There may be some caveats to this--like the Sensex is not all stocks but it's a rule of thumb and is an excellent rough guide to the long term growth potential of equities. Of course, this relationship doesn't actually hold if one goes back past 1993--but India was a very different kind of economy at the time and economic growth was not well-connected to business growth. Therefore, what this relationship shows is that broadly, equities will deliver to you what the economy grows by, plus what the businesses grow by.

Fixed income is a different kettle of fish. Fundamentally, fixed-income investing means lending money to someone. When we say lending, it actually includes activities that you may not normally think of as lending. Lending just means giving someone money and getting interest income in return. For example, depositing money and getting interest on it is lending. When you make a deposit in a bank (it could be a fixed deposit or a savings account), you are lending money to the bank. When you make a post office deposit or PPF deposit, you are lending to the Government of India.

However, the scope of gains is sharply limited compared to investing in shares. When you lend to a business (by making a bank deposit, for example), your gains are limited to the interest rate that the business has agreed to pay you. No matter how successful that business may become, you are not going to get more than that. Of course, the risks are limited too. In most such lending, the risk of losing money or not getting your interest is rather limited. The rewards are predictable and so are the risks. Fixed income mutual funds do deliver a twist on this lending theme by trading in bonds, but for the purpose of this article, they principally amount to lending.

We now have the basic principles on which our argument is based. Equity has the potential to deliver growth which is over and above what the inflation rate is, while fixed income (or debt or bond) investments can deliver only same rate of return that is inextricably connected to the inflation rate. Let's take a step back to understand why inflation is such an important factor. Inflation is the effectively the reverse of compound interest, it's like decompounded interest.

Each year's inflation occurs on top of the previous year's inflation, it means that the effect is just like that of compound interest. Consider a situation where you invest Rs 1 lakh in a deposit which earns you 8 per cent a year. At the same time, the prices are also generally rising at the rate of 8 per cent a year. In such a situation, your compounding returns will just about keep pace with inflation.

The actual amount will increase, but what you can do with it won't. So, for example, over ten years your Rs 1 lakh will become Rs 2.16 lakh. However, at the same time, on an average the things you could buy for Rs 1 lakh will also cost Rs 2.16 lakh. In effect, you have not become any richer. The purchasing power of your Rs 1 lakh is still Rs 1 lakh.

But inflation may not be so kind as to stay at the level of the interest you are earning. What if it's more? And what if this goes on for a very long time. Suppose your returns are 8 per cent but inflation stays at 10 per cent and twenty years go by? Your investment would grow to Rs 4.66 lakh but things that used to cost Rs 1 lakh would now cost Rs 6.72 lakh. Now, the purchasing power of your Rs 1 lakh is just Rs 69,000. Your investment has actually made you poorer! This is not a theoretical problem, it's happening all the time to crores of Indians. Our propensity for using bank deposits and other fixed-return investments is the cause of this problem. The problem is especially severe for retired people who depend on long-term deposits for income.

So coming back to where we began--why is India a fixed income country? Despite being a relatively high inflation economy, why don't investors switch to equity more enthusiastically than they have done so? The first reason is that this is actually a circular problem. Because inflation is high, fixed income returns are also high. We can get 8, 10 or even 12 per cent from different kinds of deposits. In earlier times, one could even get 14 or 15 per cent from a bank FD. These returns are low in real terms but the headline number is big. It creates an illusion, a false impression, that you are earning a lot of money. In reality, getting 10 per cent when inflation is 9 per cent is no different from getting 5 per cent while inflation is 4 per cent. Thus, paradoxically, higher inflation makes fixed income look more palatable.

Source : www.valueresearchonline.com

Income Tax Planning

Franklin D. Roosevelt said; "Taxes, after all, are dues that we pay for the privileges of membership in an organised society." Tax is a compulsory payment made to the Government for services it provides us, though people may not be completely satisfied or convinced with these services.

Eligibility

• Any individual or group of Individuals or artificial bodies who or which have earned income during the previous years is required to pay income tax on it

• When companies pay taxes under the Income tax Act it is called Corporate Tax
• The IT Act recognises the earners of income under different categories
• Each category is called a status, which includes: Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of individuals (BOI), Firms and Companies, Local Authority

Entry Age

• No age is specified

• Income arising or accruing to minor is to be included in the total income of that parent whose total income (before such inclusion) is greater

• Income arising to the minor child as a result of some manual-work done by him or from such activity involving application of his skill, talent or specialized knowledge and experience is not to be included in the hands of the parents. For example, income of a child actor or singer derived from acting or singing is not covered by this clubbing provision

Other Aspects

• Need a PAN (permanent account number) to file returns

• Need to have adequate income to file returns

• Condition of residency

Tax Payee

• Individual

• Hindu Undivided Families (HUF)

Income tax is an instrument used by the government to achieve its social and economic objectives. Simply put, tax is duty or tariff that income earning individuals pay to the Government in exchange of certain benefits such as law and order, healthcare, education and a lot more. With proper planning, your tax liability can be reduced and optimized effectively, leaving you with a greater share of your income in your hands than being paid out as tax. Income earned in the twelve months contained in the period from 1st April to 31st March (Financial Year) is taken into account when calculating income tax. Under the Income Tax Act this period is called the previous year.

Assessment Year: It is the twelve-month period 1st April to 31st March immediately following the previous year. In the assessment year a person files his return for the income earned in the previous year. For example for FY: 2012-13 the AY is 2013-14. You are required to pay tax if your income in a particular year is above the minimum threshold in the category of taxpayer that you fall in. There is however, certain other criterion that decides that you need to pay income tax depending on your residential status in India.

The three different residential statuses' are: 

• Resident Indian

• Non-Resident Indian (NRI)

• Not Ordinarily Resident (NOR)

What is Gross Total Income?

The gross total income is the sum of all sources of income that an individual has or the total income he earns in a financial year. It can fall into one of the five heads:

1. Income from Salary

2. Income from House Property

3. Income from Profits and Gains of Business or Profession

4. Income from Capital Gains

5. Income from other Sources

Tax Deductions

Deduction is the reduction that one can claim under different heads to reduce the tax liability, thereby reducing the income tax that pays.

Section 80C

Section 80C offers a window of investment opportunities on up to Rs 1 lakh investment in each financial year. This benefit is available to everyone, irrespective of their income levels. For instance, if you are in the highest tax bracket of 30 per cent, the investment of Rs 1 lakh under this section will save you Rs 30,000 each year. The various financial products that qualify for Section 80C benefits are as follows:

• Life Insurance premium payment

• Home loan principal, wherein the principal portion of the home loan EMI qualifies for deduction under Section 80C

• Employees Provident Fund (EPF) where 12 per cent of your salary is deducted every month and an equal amount is contributed by your employer and put into a fund maintained by the government or your company’s provident fund trust. Only your contribution towards the fund is eligible for deduction from taxable income of the basic salary towards EPF

• Tuition fees up to children can be claimed for. However, any payment towards any development fees or donation to institutions is excluded

• Contributions to the public provident fund

• Investments in the senior citizens savings scheme

• Savings in notified term deposits in scheduled banks with a minimum period of five years under the bank term deposit scheme, 2006. Savings in post office time deposits with 5-year lock-in

• National Savings Certificate, six-year government-backed security available at post offices

• Investments in tax planning mutual funds, popularly known as Equity-Linked Savings Scheme (ELSS)

• Investments in pension plans

Other Deductions

• Section 80D: Premium payments towards medical insurance for self, spouse, children and parents qualify for deduction. The limit is Rs 15,000 for self, spouse and dependent children up to Rs 15,000. Additional deduction up to Rs 15,000 for the parents going up Rs 20,000 if the parent, for whom the policy is bought is aged 60 years. Preventive health check-ups up to Rs 5,000 within limits qualify for tax deductions under section 80D.

• Section 24: Interest on home loan with a maximum deduction of Rs 1.5 lakh as interest payment on home loan for self-occupied property and unlimited for property that is let out.

• Section 80E: Interest on educational loan qualifies for deduction on full-time studies for any graduate or post graduate course. However, there is no benefit on principal repayments.

• Section 80G: Donations to funds and charities from 50 or 100 per cent of the donated amount, depending on the charity, is deductible from income. But this shouldn’t exceed 10 per cent of your gross total income.

• Section 80DD: Deduction up to Rs 50,000 or Rs 1 lakh on the medical treatment of a dependent with a disability, certified by a medical authority.

• Section 80DDB: Deduction up to Rs 40,000 for assessee under 65 years and Rs 60,000 for senior citizens on costs incurred for treatment of specified illnesses such as malignant cancer, chronic renal failure, Parkinson’s disease and other listed diseases.

Source: www.valueresearchonline.com