Suggested Reading – August 31, 2009

Blogosphere is an interesting place where you find various bloggers expressing their viewpoints. I am listing some of the articles that I enjoyed reading.

Economy, Finance, Investing.…..

My Article in Blogosphere

These are some diverse set of articles from fellow bloggers and business magazines. I hope you enjoy reading all or some of these interesting posts.

A question to readers: We see analyst and experts analyzing markets and predicting performance. But then almost all of them go on and start recommending few stocks. Isn’t this intriguing and bizzare? If one is analyzing an index, why not recommend ETF, the cheapest of all?  What’s your thoughts?

Dividend Investing – Few Tidbits

1133804_sign_success_and_failureIn my last post, I discussed about two important but overlooked aspects about dividend investing. Today, I am discussing few tidbit that I have learnt over the years.

Dividends provide stability in your portfolio: Companies that are generating profitable cash and sharing with shareholders are the ones that do not go bust. Even in down market they give you cash dividends. While your portfolio’s capital values go down, your dividends are positive return to you portfolio. I crave for such a scenario. I position myself to make sure I have enough cash to buy such companies at lower valuations. I see downturn such as early 2009 as an incredible buying opportunity.

Dividends to investors cannot be manipulated: Companies demonstrate profit in their books which fuels the market price. But can you as an investor spend company profits? Profits can be generated from financial engineering, ROC or ROE can be engineering, but cash flow from operations or dividends to shareholders cannot be manipulated. As an investor you need cash to spend, and not company profits. The company you work for gives you cash (and not profit statement). Will you be willing to work for profit statement? Probably not!

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Overlooked Aspects of Dividend Investing

investingThere are many different styles, approach, and methods of investing. Many individual investors focus on trading (swing, positional, momentum, speculation, technicals etc.), while many others focus of investing (value, growth, blend, etc), and still many others on special situations (opportunistic, arbitrages, etc). In addition, there are quite a few individual investors that attempt at combination of trading and investing. Similar to glass being half full or half empty, I believe every style has its own pros and cons’ depending upon in what context one is looking at it. Individuals have to figure out what works best for them.

Readers are already accustomed to my approach of dividend investing. I am a long term buy and hold investor and prefer to buy my positions at fair values (fair value calculation methodology). The reason I use fair value is because, I do have enough expertise to determine the tangible book value. While I still use book value based on Graham’s method, it is not the only one on which I base my decision.

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Indian Corporates Offering NCDs

question1In very simple terms, Non Convertible Debentures (NCDs) are a loan to the company issuing it. This loan, or NCDs, cannot be converted into equity. Public or Private companies issue NCDs to fund many activities such as growth plans, corporate expenses, pay out earlier loans, working capital, etc. I consider NCDs as a form of  private or public sector bonds, depends upon who issues it.

The key attractive aspect about NCD is they are fixed income vehicle with capital being secured. In general, NCDs offer returns that are 2% to 4% higher than savings, CDs, or some of other government bonds. For example, the current L&T offers interest rates in the range of 9.51% to 10.24%, while Shiram Transports offered NCD upto 11.5%.

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High Dividend Yield – Good or Bad?

As always there is no simple answer and it depends on many factors. For me, it does not matter whether it is high yield or low yield. One of the key aspect that I look for in dividends is its sustainability.

Focusing on high initial dividend yield may be good for someone who wants to harvest only dividends and get out of the stock. This is a high risk preposition. The dividend cash you receive may or may not cover the stocks price fluctuations. Since I look for longer term, high yield is acceptable, if I am able to understand how the company is sustaining it. Let us take few examples.

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Number of Stocks in Long Term Portfolio

portfolio-makeupThere are two questions that will always haunt any long term investor. One is about what is a right asset allocation, and second is how many stocks one needs in a long term portfolio. I do not think there is any boiler plate type of answer to these questions. I believe while it is absolutely necessary to have an optimum asset allocation and multiple number of stocks, the actual percentage allocation or number of stocks will depend upon individuals risk profile, willing to learn, willing to spend time reading about companies, etc. In addition, these two aspects cannot be generalized and it cannot be a static numbers. These have to be dynamic and should change with the investing time period. Having said that following is my thought process for my long term portfolio.

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Five Good Stocks for Long Term Investor

I am a believer that our environment, surroundings, and our education shape our thought process. Knowingly or unknowingly our thinking will demonstrate what we have been through in past. It is applicable to every living being including us humans and present Indian population. Still there are very few who think and visualize beyond their surroundings. And it is these few who evolve and succeed over long term.

Our present 20s and 30s generation, of which I am part of, is very vibrant, inquisitive, and very progressive and has a desire to succeed in one way or the other. As they say, life is very fast in today’s India! The IT generation is very impatient which reflects the IT domain’s continuous changes in short one year. What is new today is considered to be obsolete in 2 years. Unfortunately, we fail to understand it is not same in investing.  Here are few interesting tidbits:

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