Investment Objectives & Advice

Path to Financial Independence: Power of Investing

While sitting and working in office, on our Independence Day, I was thinking what is the freedom we looking for. As I understand we got the freedom to live life as we want, definitely we have to adhere to some rules of society which are enforced on us but they are for our benefits to make our society worthy to live. But then suddenly I got one question in my mind are we actually free, the second thought was the statement of “3idiots” that from the time we are born we start running. Running for race of life in school to get good marks, then for getting admission in good institute and once you pass from still the race never stops there.

You join one company enjoy the work and also enjoy the new found freedom of spending at your will. You do shopping and start buying things for your wardrobe but suddenly after 6 months you start feeling the work pressure and start suffering with your monotonous job responsibilities. By the time you complete one year in the company, you are already frustrated and want to shift your job sometimes it feels like you can’t take it and should leave the job immediately but. But, then you realize that you can’t leave the job as how will you pay your house rental, phone bill, food and travel expenses. Then you start struggle to get a new job which pays better and you move to new city. With better pay you fulfill your dreams like buying car you always wanted to or renting big place or buying new house with more regular expenses for yourself. All these expenses brings in more slavery and if you get married in between, you can’t even afford to shift job or city so easily and then you became the slave of finances by being dependent on your salary all the times.

In most of the cities, where ever we live for job, INR 8,000 – 20,000 is the minimum monthly expense we make to live a decent life as unmarried guy and with marriage the amount becomes INR 18,000 – 30,000. If I want to remove dependency on my salary, I should have at least 80% of this amount coming from other sources. Did you think about what can be other such sources?? I know at least 60-75% of my acquaintances want to start something of their own but either they do not have time or they do not have money to start their own. I asked them how much money they require to start their own venture and in most of the cases 70-85% times it is not the money to start business but the money to sustain their expenses is missing. If you lose your job, can you sustain your expenses for next 2-3 years?? In most of the cases the answer is no.

In today’s world when most of us are working in MNCs and international companies, its difficult to assume that your job is secure. Education does provide some security in your job but does not guarantee it and it is not possible to get govt. job for everyone because some of us dream big to earn more or some of us do not want to work in just 9-5 job without any troubles. So what is the way to reach your financial freedom?? There are three ways to generate regular source of income apart from salary:

  1. Part time Professional Services: There are bunch of opportunities in this area, what you have to do is just keep yourself acquainted with the current happenings and know your field of interest. Get in touch with organizations who will give opportunity to work part time with them and earn your income. It can be teaching, consulting, Marketing anything which you are interested in, but this requires you to take some extra-time out for such activities. One should practice to do at least one such profession for 3-4 hrs a week so in case of misfortune of losing job those 3 hrs can be increased to 30-40 hrs.
  2. Owning a business: Owning a business is an easy to say but difficult to achieve proposition, but not impossible. What you have to do is create a system in which your involvement is less and it still generates the revenues/ profits for you. You can buy a franchise of something or can start something of your own and then appoint some managers to run that and make profits for you. It will require some investments for sure but after few years it will become a self sustained system without your funding and you will reap its benefit for long.
  3. Investing: Investing is something which is an available option for all of you and affordable to. It takes hardly 3-4hrs a month to decide and manage your investments. You can minimize your time more by hiring an educated dependable financial planner/manager to do so on your behalf with nominal charges. It can generate you regular income and contingency funds also.

 All salaried persons should always participate in option 1 and 3 to create a big corpus and aspire to become a business man. It is not only the path for entrepreneurs, who have high risk taking capability but it is for all simple individuals like us.

Let us see if someone saves 40% of his salary how much will he take to make other 60% of his salary from it. So if Rajesh earns INR 10,000, he will require 110 months (<10yrs) to become financially independent while earning 10% return on his investments. If he earns 12% return he will take only 103 months (<9yrs) to reach his independence. Below table indicates the various scenarios, if his expenses are more or less.

It is definite that expenses are going to increase every year but so is your salary due to which we neglected its consideration. So if you save more and earn better returns, even in 5 yrs you can start meeting your expenses with your investments. But do you save at all?? If not then start investing.

Calculate your financial freedom requirement here.

Happy Independence!!

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PE Ratio: Essential or Controversial Method

Most of the time, in the stock market investments we hear about PE ratios of like: for company X PE ratio has come down to make it more attractive or PE ratio of company Y has gone extremely high to make it overvalued. Do you understand what they mean? If not, Let us try to understand what this ratio is and then we will decide do we need to bother about it or not.

P/E Ratio is nothing but Price to Earnings Ratio. It explains the relationship between the stock price and company’s earnings. It is calculated as below:

                P/E Ratio = (Market Value per Share)/ (Earnings per Share)

Market Value per Share = Current market price of the stock

The earnings per share is the net income of the company from the most recent results published by company divided by number of outstanding shares of the company.

Annual Earnings per Share (EPS) = Net Income / No. of Shares

Example: Canara Bank is having a share price of Rs. 440/- and its EPS is Rs. 84. Then the P/E Ratio of Canara Bank would be 5.24 (440/84).

But what does P/E Ratio explain?

First thing, P/E Ratio gives you an idea of what the market is willing to pay for the company’s earnings. It helps an investor compare the valuations of a stock to that of its peers and in the same industry.

Some Interpretations are:

Higher P/E:  it means that stock is overvalued but market, in expectations of higher earnings growth, is willing to pay that extra money. But, some investors look at it in a different way. They will say company is overpriced as compared to its peers so it is not advisable to pay higher price.

Low P/E Ratio: It indicates “Sign of no-confidence” by the market which means the investors have undervalued the stock due to lack of confidence in its future growth. However, it could also mean that this is a stock which has been overlooked by the market and does possess strong future growth potential.

A low P/E ratio stock can become a “Value pick” before the rest of the market discovers its true value.

Do not depend only on P/E Ratio, but use this as a very directive tool. The PE Ratio should match the growth rate of company. If it is matching the growth rate then you can call it as fairly valued stock. If Growth rate is more than PE Ratio, means the company is undervalued. If Growth rate is less than the PE Ratio, then the company is overvalued.

Let’s try this learning in identifying some value picks based on PE ratios, in the below chart: we mapped the PE ratios of various banks in Increasing order.

 

The average PE ratio of the banking industry is ~10.3 but it does not men all the banks with PE ratio less than 10 are attractive or all the banks with PE ratio more than 11 are costlier to buy. One thing you can notice that most of the banks with PE ratio >11 are private sector banks. intuitionally you can say that the private banks are more nimble in its operations and better managed so their earnings growth is better than public sector banks, so its justified.

Now the issue is how to select our value pick? Let us see in PE ratio chart we can see among Private sector banks Indusind bank and Yes bank had the strongest performance yet the Yes bank has the Lowest PE multiple and Indusind does not have the highest multiple. This indicates that the upside opportunity in Indusind bank and Yes bank is more likely than any other private bank in list. But one should also read and make sure that the strategy of these banks should be aggressive for next few years to sustain their high growth.

Happy investing!!