MoneyTantra-Zen & The Science of Investing


Friday, March 31, 2006

Sensex or NonSensex? Part I: Is the Indian Stockmarket Overvalued

Since in earlier postings we have been very bullish or atleast very enthusiastic about becoming Crorepatis or even Billionaires, we would like to balance that a little with the idea of risks. Any potential wealth-building process would face certain risks. We are talking about very high returns (~15 to 35%), these are available mostly through investing in the equity market. We have suggested that a passive and easy way for one to do that would be through a well-chosen equity mutual fund. You do the choosing once and then let the fund manager sweat it out.

Another way is, of course, to do it yourself by directly investing in the appropriate equities or company shares in the stock market. That requires lot of time, efforts, skill-building and monitoring on your part.

In either path of investing in the equity market, you would encounter market and security risks. We would like you to understand how risky the current Indian stock market looks. Please don't jump in where angels dare not tread.

The Sensex is an index to signify the overall position of the stock market on the Bombay Stock Exchange. Right now it is at an all-time high of 11000+. Are these market valuations justified?

Lets consider a few indicators to see if we can judge the relative riskiness of the market. The GDP of the Indian economy is somewhere about Rs. 27 Lakh Crores. The current market valuation is somewhere about Rs. 35 Lakh Crores or much more. (I am not vouching for the preciseness of the numbers here. But if you see a fat man you can know he is fat. A couple of pounds here or there will not make him less fat. ) This means that the Market Valuation to GDP ratio is >100%.

Now Market Valuation/GDP ratio is a macro-level ratio that is analogical to Price/Sales ratio. Typically, when Price/Sales <> 1 the attractiveness of the stock becomes suspect. Most likely all the future value it is going to create has been factores into its prices. Certain high-growth stocks do command Price/Sales ratios >1. However, a Prices/Sales ratio > 1 for the aggregate market is very difficult to be sustained. It is a clear case of overvaluation.

Earlier crashes in the US stock markets have happened at Market Valuation/GDP ratios of 83% for the 1929 crash, 80% for the 1968 crash, 71% for the 1987 crash and of course the mother-of-all bull runs the 1999 peak was at 190%! Of course, the 1987 to 2000 was one of the longest over-valued bull run ever seen. There have been several bulls runs across world markets and many of them have been fair-valued bull runs. But this one was definitely an overvalued bull run but it went on and on for nearly 13 years!

So definitely, we are in the overvalued regime as far as the Indian market is concerned. Consider added issues like, agriculture and not industry accounts for a greater portion (~50%) of the Indian GDP. So that part of the GDP is not mirrored in the markets. In that sense we might be very close to 200% of the Industrial+service contribution to GDP that is reflected in the Sensex.

We will continue these investigations with other indicators that can throw light on the overvaluation issue.

How to become a Billionaire!: The Beauty of Sec. 80 C

If you look back over the previous posting MathMagic-of-compounding-iii
you will see that a person could reach to INR 46,696,038,480 by the age of 60. At current Indian Rupee and US Dollar exchange rates that is more than a Billion Dollars. So is this a recipe for "How to become a Billionaire"?

It sure is! Starting with investing Rs. 100000 every year under Sec. 80 C for added tax benefits and ending up with 1 Billion US Dollars by just investing in appropriate mutual funds is definitely an easy pathway to Wealth.

Of course, real returns might be much lower in the longer run. But the Goldman Sachs BRICS report gives me confidence that someone starting out just about now might be able to really achieve this.

So much for article we will look at some of the risks...Who said you can get all those returns without risks...Otherwise everyone would be a Billionaire or a Crorepati!

Thursday, March 30, 2006

Mathmagic of Compounding III: Kaise Banoonga Crorepati

We left off the earlier post to see what would happen if we continued the investing forced on the young Ms. Crorepati at age of 32.

INR 13,848,476 33
INR 18,795,443 34
INR 25,473,848 35
INR 34,489,695 36
INR 46,661,088 37
INR 63,092,469 38
INR 85,274,834 39
INR 115,221,025 40
INR 155,648,384 41
INR 210,225,319 42
INR 283,904,180 43
INR 383,370,643 44
INR 517,650,369 45
INR 698,927,998 46
INR 943,652,797 47
INR 1,274,031,276 48

Is that Rs. 127 Crores! Isn't that mind-boggling? And that too at age 48! Lets continue...

INR 1,720,042,223 49
INR 2,322,157,000 50
INR 3,135,011,951 51
INR 4,232,366,133 52
INR 5,713,794,280 53
INR 7,713,722,278 54
INR 10,413,625,075 55
INR 14,058,493,851 56
INR 18,979,066,699 57
INR 25,621,840,044 58
INR 34,589,584,059 59
INR 46,696,038,480 60

That looks like 4000 Crores at age 60! Maybe there is something wrong with me? Please check my calculations and tell me... I have heard about good governments and benevolent dictators and benevolent economic dictator governments (oh i go again) but 4000 Crores? Give me a break...tell me what is the catch...or is this real MathMagic of Compounding...I knew there was something to Tantra and Mathematics...should I have paid more attention in Std. 8th...

Mathmagic of Compounding II: Kaise Banoonga Crorepati

How the Government of India forces you to be a Crorepati! (and that too while you are young!)

Since most of you did not have a father who invested Rs. 100000 for you at your birth at 10% returns on investment and hence cannot expect that amount to compound mathmagically to a Crore by age 50; or rather more likely, since most of you would not want to wait till you are 50 to become a Crorepati we are going to discuss other paths to reaching the magic figure of a Crore.

As we mentioned we will discuss how the Goverment of India forces its law-abiding, tax-payers or tax-return filers to become crorepatis. Is this the case of the benevolent economic dictatorial benefactor? Leave that mouthful, lets explore how...

Sec. 80 C of the Income-tax Act of India allows you to invest upto Rs. 100,000 in certain investment avenues. These investment avenues include ELSS schemes of Mutual funds. Suppose that you start trying to do tax-planning and investments under Sec. 80 C from age 21 onwards. So each year you are investing Rs. 100000 in ELSS mutual funds. Given the past track record of mutual funds (please note, SEBI Warning: Past performance is not indicative of future returns. Now that the token warning has been administered, back to mathmagic...) some of them have returned more than 35% for the last ten years or so. Given the expected boom in the Indian economy as suggested by the Goldman Sachs BRICS report and other similar studies it is to be expected that equity mutual funds with a long-term horizon and some intelligent investments in chosen companies at opportune moments (i.e. when the stocks are relatively cheap) will provide returns of 35% or so.

Assuming these we can show the following mathmagical returns:

Rate of Return - 35%
1 INR 100,000 21
2 INR 235,000 22
3 INR 417,250 23
4 INR 663,288 24
5 INR 995,438 25
6 INR 1,443,841 26
7 INR 2,049,186 27
8 INR 2,866,401 28
9 INR 3,969,641 29
10 INR 5,459,016 30
11 INR 7,469,672 31
12 INR 10,184,057 32

Is that Magic or what? I think it is maths and finance and economics and discipline and ... etc. etc. but you get the picture.

It is basically:

  • Starting early (at 21 or earlier if possible)
  • Sec. 80 C
  • Choosing the right Mutual Funds or other investment avenue
  • Waiting for Magic to happen!
At age 32 a person could become a crorepati by just going about doing his job and by legally not paying taxes!

Who says the Government of India is not interested in Social Justice? Of course, it is social justice to make Crorepatis out of ordinary people!

Now lets suppose our young Crorepati continues his investments. (I seriously doubt that our benevolent economic dictatorial government would be content allowing him to invest only Rs. 100000 per annum in future years. I can visualize in the long-term that the investment amount would be raised to Rs. 150000 sometime in the next 5 years.)

We will see the results of that in the next posting. Until then, happy dreaming and planning to save Rs. 100000 per annum under Sec. 80 C and also try to explore some good Mutual Funds which provide returns of 35% or more long-term. Hope you readers will post some of these...


MoneyTantra-Zen & the Science of Investing

MoneyTantra-Zen & the Science of Investing

Read this to get an insight into the MathMagic of Compounding and to understand ways to achieve the Great Indian Dream to become a Crorepati!

The MathMagic of Compounding or Kaise Banoonga Crorepati:

The Great Indian Dream is to become a Crorepati. The deep-seated nature of the Crorepati phenomenon can be judged from the popularity of the TV program hosted by Amitabj Bachchan titled, "Kaun Banega Crorepati".

Kaun Banega Crorepati provided a pathway to become a Crorepati. However, it was more like playing the lottery followed by answering some esoterica and the chances of many people becoming a crorepati was very small.

In this article we will try to elaborate upon an simple, easy and ethical pathway to become a crorepati. We will use the MathMagic of Compounding to get there.

Consider that you start with Rs. 100,000. If you put into an investment that returns 10% per year you will get Rs. 10,000 as the return in the first year. If you put this return into the same investment then the starting amount for next year will be Rs. 110,000. If you get 10% return on this amount then it will be Rs. 11,000. Now we can start seeing that the return every year is getting larger. If we keep adding these returns to the initial investment the return on returns will keep adding to our initial investment and the amount invested will grow.

Please note that we are not adding any more money from our pocket except the initial investment. The initial investment itself is providing more and more money to provide returns on. Of course, most of you learnt this sometime in highschool or earlier mathematics classes. The point is have you started applying this?

Lets apply it and see.

Years Money Return @ 10%
1 INR 100,000 INR 10,000
2 INR 110,000 INR 11,000
3 INR 121,000 INR 12,100
4 INR 133,100 INR 13,310
5 INR 146,410 INR 14,641
6 INR 161,051 INR 16,105
7 INR 177,156 INR 17,716
8 INR 194,872 INR 19,487
9 INR 214,359 INR 21,436
10 INR 235,795 INR 23,579
11 INR 259,374 INR 25,937
12 INR 285,312 INR 28,531
13 INR 313,843 INR 31,384
14 INR 345,227 INR 34,523
15 INR 379,750 INR 37,975
16 INR 417,725 INR 41,772
17 INR 459,497 INR 45,950
18 INR 505,447 INR 50,545
19 INR 555,992 INR 55,599
20 INR 611,591 INR 61,159
21 INR 672,750 INR 67,275
22 INR 740,025 INR 74,002
23 INR 814,027 INR 81,403
24 INR 895,430 INR 89,543
25 INR 984,973 INR 98,497
26 INR 1,083,471 INR 108,347
27 INR 1,191,818 INR 119,182
28 INR 1,310,999 INR 131,100
29 INR 1,442,099 INR 144,210
30 INR 1,586,309 INR 158,631
31 INR 1,744,940 INR 174,494
32 INR 1,919,434 INR 191,943
33 INR 2,111,378 INR 211,138
34 INR 2,322,515 INR 232,252
35 INR 2,554,767 INR 255,477
36 INR 2,810,244 INR 281,024
37 INR 3,091,268 INR 309,127
38 INR 3,400,395 INR 340,039
39 INR 3,740,434 INR 374,043
40 INR 4,114,478 INR 411,448
41 INR 4,525,926 INR 452,593
42 INR 4,978,518 INR 497,852
43 INR 5,476,370 INR 547,637
44 INR 6,024,007 INR 602,401
45 INR 6,626,408 INR 662,641
46 INR 7,289,048 INR 728,905
47 INR 8,017,953 INR 801,795
48 INR 8,819,749 INR 881,975
49 INR 9,701,723 INR 970,172
50 INR 10,671,896 INR 1,067,190

In fifty years time you are a Crorepati! So if your father had invested Rs. 100000 on your behalf when you were born you would be a Crorepati when you were 50! Of course, that might not excite a lot of you. Who wants to be a Crorepati at 50? You want to do that much earlier. Also you father did not invest that kind of money for you when you were born. Finally, which bank today is going to give you 10% returns on your FDs? Agreed!

So we will explore other ways to become Crorepati. But keep in mind the above mathmagic of compounding. With compounding and time on your side any roadpati has a chance to become crorepati. Keep watching this space for Kaise Banoonga Crorepati, Part II...

MoneyTantra--Zen & the Science of Investing

MoneyTantra--Zen & the Science of Investing

Welcome to MoneyTantra--the spiritual Zen way to wealth creation and management. Today is Gudi Padwa which is considered the day the Universe was created by Brahma. We think it is an ideal time to launch this finance portal that will provide information on how to create wealth and value.

As instructed in ancient scriptures of India, the 4 major goals of a human being are: Dharma--Righteous Conduct, Artha--Creating Wealth, Kama--Attaining Desires, Moksha--Attaining Spiritual Freedom.

Artha or wealth creation is a very important aspect of life and that is what we will focus on.

Although ancient scriptures in India have spoken of Artha or wealth creation through Dharma or righteous conduct as an important component of life, in the intervening dark ages of India, the doctrines were of fatalism and the evils of materialism. The focus was on leaving everything to destiny and giving up personal will and control and let fate execute life--pun intended.

We think it is time to go back to using our freedom of will and creating a balanced life by creating wealth through righteous deeds and taking control or building destiny itself.

Welcome aboard the MoneyTantra Train...