Don’t buy “Return of Premium Term Plan”

Don’t buy “Return of Premium Term Plan” – It does not make sense!

Posted on December 22, 2020October 22, 2021 by Jagoinvestor

Does it makes any sense to buy “Return of Premium Term Plan”?

The one-line answer is “NO – it does not make sense”

A “Return of Premium Term Plan” or TROP as its called – pays back all your premiums at the end of the period, whereas the plain term plan doesn’t return back anything. Before we get into the analysis further, I want you to know why these return of premium term plan came into existence!

Term Insurance with Return of Premium

Why the Return of Premium Term Plan came into existence?

Term plans have become very popular in the last few years. We are seeing so many advertisements screaming about term plans importance. However, a lot of investors who don’t understand term plans fully, still feel a pinch that their premiums get “wasted” if nothing happens to them.

They equate “paying premiums” as “losing premiums” if they dont die. They compare it with an investment policy (read traditional insurance plans) where they get back there a sum assured towards the end of the policy.

Insurance companies sensed this behaviour and they introduced something called “Term Plan with Return of Premium” which can now proudly tell customers that they have nothing to lose. They get claim money on death, and if they don’t die, they get back all their premiums paid. Many investors who do not understand the time value of money concept fall for a product like this, as to human mind “getting back all your premiums” sounds very attractive offer.

Now, let’s talk about why it does not make sense as a product.

Return of Premium Term plan has an extremely low return

The premium for the TROP (return of premium term plan) is higher than the plain term plan and it can be 2x-3x times the normal premium in some policies.

So basically, you are paying an extra premium for getting your premiums back after 30-40 yrs!

Let’s look at an example of a 30 yr old male, who wants to buy a 1 crore term plan till 60 yrs of age (for 30 yrs tenure). In which case the premiums are as follows (Example is of Max Life Term Plan as on 21st Dec 2020)

[su_table responsive=”yes”]

Type of Plan	Yearly Premium	Details
Simple Term plan	Rs 9912	One has to pay Rs 9912/yr for 30 yrs for Rs 1 crore cover. You don’t get back anything at the end on survival
Return of Premium Term Plan	Rs. 17,969	One will have to pay an extra amount of 8057 for 30 yrs (apart from 9912) and will get back Rs 5.01 lacs (this is all premiums paid excluding the tax amount) at 60th year

[/su_table]

If you look at the example above, you can see that in both the plans you are paying Rs 9912 for the Rs 1 crore cover. Only difference is that in second policy, you are paying an extra Rs 8057 to get back Rs 5.01 lacs (excludes the taxes part) at the end. This is the only difference between the two versions.

So internally, the term plan with return of premium is simply a bundled product of a normal term plan and an investment policy. If we ask what is the return of this investment policy where you are paying Rs 8057 per year and getting back Rs 5.01 lacs after 30 yrs.

The answer is 4.05% CAGR.

Yes, its barely above saving account rates and a little below a normal fixed deposit interest.

I did the same analysis for the tenure of 40 yrs and 50 yrs policy (read why you should not take such a long tenure term plan) and the IRR return was 3.92% and 3.00% respectively, which means that if you buy the policy for a longer tenure, the return gets lower and lower and the product becomes even worse.

Below is the IRR return calculated in an excel sheet for your reference

return of premium term plan irr return

Note : The above calculations are done in Excel for just one company plan, however similar kind of numbers are expected from other companies return of premium term plan. Please do IRR calculations yourself if you looking at other companies plans.

Return of Premium Policy ties you up with the product

What do you do, if you want to stop a “Return of Premium Term plan” in-between? Let’s say after 10 yrs?

It will not be as simple as a normal term plan, because, with the return of premium policy, your mind will tell you that you just have to continue it for another 20 yrs and you will get back all your premiums. Very smartly, the insurance company has converted a pure term plan into an “investment policy cum term plan” with very bad returns.

so the better alternative than a “term plan with return of premium” is to buy a simple term plan (here are 20 checklists before buying term plan) and invest the extra amount in another investment products like PPF, FD’s, Equity mutual fund or debt mutual fund and you will have better flexibility and returns.

Check out this video from Subramoney talking about this product

What happens if you stop paying a premium for Return of Premium Term plan?

There is an option to get a surrender value if you stop paying the premiums in between. Just like traditional plans, there is the concept of “Guaranteed Surrender value” in these kinds of policies which comes into picture once you have paid 3 yrs premium. However, the amount you get back is a fraction of what you have paid. There is a percentage assigned for every year which tells what part of the premium paid will you get back if you surrender the policy in a year. Below is a snapshot of the chart taken from Max Life Brochure

Surrender value chart of the max life insurance return of premium term plan

So, as per this chart – if one wants to surrender the policy in 10th year, they will get back only 55% of the premiums paid (excluding premiums).

Some other Info

The TROP gives you income tax benefits as per sec 80C
There is an option to pay premiums on a monthly, quarterly or yearly basis
There is also an option for limited pay (pay in 10 yrs) or in one single premium

Conclusion

So TROP is a very carefully designed product which favours the insurance company but makes the product look very good and works on the psychology of the investor. Better stay away from it. The best idea is to buy the simple term plan with the lowest premium.

If you have already invested in this kind of plan, then you need to evaluate what will make sense for you!

Do let us know if you liked the article and does it make sense to you? Share in the comments section!

How to use Support and Resistance to Buy or Sell Stocks

Posted on April 2, 2009July 21, 2019 by Jagoinvestor

This is Part 2 of the How to become a better than average Investor series, see Part 1

In the last post we discussed the importance of Fundamental and Technical Analysis. Now we will see one of the most simple, easy and powerful thing called Support and Resistance.

This is for people who have no idea about what is it and have at most heard about it.

Let us see both of them one by one.

Support :

Support for a price is a price area where there are lots of buyers ready to buy the stocks rather than sellers. At that price point, the general perception is that its a good buy, and lots of buyers come to buy it. Hence buyers outnumber sellers and there is a higher possibility that prices will bounce back from that point . This is a point where Buying has less risk.

In other words, at support levels demand is thought to be strong enough to prevent the price from declining further. Please understand that Support point is not a place from where it will for sure bounce back, Its only the higher probability that it will bounce back.

Also understand that its not exactly a fixed price which should be considered as Support, generally its a range like 98-100 or 560-570 ..

Which point is Support point : Every Low made by the price can be considered as Support Area.

Let see Example :

Support Example 1 : Below chart is for Jaiprakash Associates (click to enlarge), It made a low of Rs.53 (closing price) on 27th Oct 2008 and then bounced up from there.

Now Rs.53 is the support point, Prices went up from that point and after reaching Rs.90, it again started heading down, You can clearly see in charts that it reached Rs.53 levels, but could not break down from that point and again bounced back from there.

It was a very good “BUY” around Rs.53. Understand that buying around Rs.53, is only a less-risky trade, not a “no-risk” trade. Prices can break down from there also.

Support Example 2 :

Below is a chart of RPL. Here you can see that prices made lows of Rs 70 around Dec 1, 08. That became a support point, and then prices reached thought levels around first week of Mar 09, It bounces back from that point, It was a less risk trade around Rs.70.

Resistance : Resistance is just opposite of Support, At this price levels there are more sellers than buyers and with high probability prices reverses from this point. At this point there are enough sellers in the market to prevent it from rising further.

Resistance point is the High made by a price. All the high’s will act as some kind of resistance points.

Lets see examples :

Resistance Example 1 :

Below is Reliance Charts, You can see that reliance made a high of Rs.1400 around Dec 2008, After that you can see how it reversed from that point 2 times in Jan and Feb 2009. It was a wise decision to sell at those points.

You can also find many examples like this if you investigate yourself. Try to see other charts if you are interested, you can look at charts at ichart.in or https://www.bazaartrend.com/index.php , find yourself)

Important Note : When prices are near Support or Resistance levels, you should be more alert. It does not mean that you just jump onto market and buy or sell, Be patient to see the actual price reversal, Though you will loose some part , that would be a better trade.

Also there are several other factors which should be considered, but for now lets not touch upon them. lets keep it simple for readers.

Lets also look at some important points

Break Down :

Always remember that when prices don’t hold support and break them and fall further, it tells that buyers are not strong enough and Sellers have taken over them and prices will make new lows, When support is broken, Sell further.

Example : Below is the chart of RPL, which shows how it broke down its support point and then made further lows.

Break Out :

When prices don’t hold resistance points and break them on upside, prices then indicate that they are going to make new highs. Better to buy at that point.

I have put a post on my analysis blog for Reliance Break out : please see it :
https://manishanalysis.blogspot.com/2009/04/reliance-break-out-target-1800.html

Some Other points to remember :

1. Support and Resistance points are places where you should be more alert and look for other signals to buy or Sell, just don’t buy because prices have reached near support, buy it when it starts rising and there are positive signals.

2. Support once broken becomes Resistance for next time, and Resistance once broken becomes Support point for next time, use this knowledge. See : https://candlestickmania.blogspot.com/2008/07/resistance-becomes-support.html

3. Many times there are false breakout and breakdown, So it will many times happen that you get out at important levels and miss the large movement, that’s fine, you can always enter after getting out.

4. This is most important point, Everything I talked about in this article can increase your chances of making more money in trading, but remember that you are dealing in Markets, and if you don’t control your GREED and emotions, your failure is guaranteed.

Use strict Stop losses and use Money management techniques (it means not putting all your money at once, if you have 10 lacs, put only 1 lac, don’t be greedy enough, else someday you markets will punish you badly, then no Technical analysis or any thing will help. have good amount of cash with you always ).

All technical Analysis and knowledge are of no help if a person cant control his greed and emotions in Market. TA and your knowledge will contribute not more than 20% of your success in long run.

This was end of Part 2 of this series, In next port (Part 3) we will see how to find support and resistance levels using TRENDLINES. wait for it.

Comments please, Its sometimes disheartening to see no comments after I put up a post after some hard work. I don’t want “good post or Great Article kind of comments, but at least share what you have learned and ask questions, make it little interactive please.

Question for you all :

Question 1 : Do you think this support or resistance thing works , or can you add anything else how to buy or sell and what things to observe at support and resistance levels , which can make buying and selling more successful?

Question 2 : What do you think about Chambal Fertilizrs at this point , see the charts at : https://www.bazaartrend.com/index.php?symbolname=CHAMBLFERT (click on the upper left button to make it full screen).

Suggest what should be done at this point of time ?

I came across very nice video, about difference between winning and success, a worth watch. See it below

Note : All the things discussed here are available on net with great detail. learn more of it yourself.

Fundamental Analysis and Technical Analysis , What and When !!

Posted on March 30, 2009March 4, 2020 by Jagoinvestor

I am starting a series of articles that will deal with “How to invest in stocks efficiently”. This post is Part 1.

There are two important questions which you have to answer when you want to buy shares? They are “What to buy” and “When to buy”?

Fundamental analysis

You may be familiar with Fundamental Analysis, Fundamental Analysis answers the question “What to buy” ? . It a study of companies Financial statements, cash books, markets study to find out the future prospects of a company. It answers the question “Will this company is a good buy for long term”? , “Will it be more valuable than what it is now ” etc, etc ”

But !!, Even though you have picked up some excellent companies for your long term investments, That’s not the end of the story. Now the biggest challenge and question you have is “When to buy it”?

You should not just go the next day and buy the share, that’s not the right approach. There can be a price area where buying is best in terms of risk/reward .

Technical analysis

Technical Analysis is the study of charts, price and volume patterns and other indicators derived from price and volume. Technical Analysis gives us hint on what can happen in the future, understand that it only gives you chances, not a guarantee.

So everything should be taken with crossed fingers, Decisions are taken on the basis of TA only increases your risk/reward scenario.

I will give you an example :

Reliance is a very good long term Investment (do your own analysis to find out why, but it is :).

On Feb 1, 2009, Ajay and Robert want to invest Rs 1 lac in Reliance for the long term. Both of them understand that Reliance is a truly long term buy. Ajay invests in Reliance on Feb 1, because share is going up and he feels its a good time to enter others. He buys the stock at Rs 1360.

After some days Stock starts falling and reaches around Rs 1,150. Roberts buys the stock at that time.

see the chart here

Here you can see that Robert has got the stock at a 15% lower price, which means his profits will always be more than Ajay’s by that much. What did Robert do? Robert used simple Technical Analysis concepts and entered in the stock with better prices, It does not mean it will always happen, but there are good chances for getting a better price.

In the above case of Reliance, there is no significant price difference, but there can be cases, where there can be drastic differences, and it would be really worth using basic Technical Analysis.

Don’t be scared, I will tell you some very basic things of technical Analysis in some of the next post.

I will talk about

Part 2: Support, Resistance
Part 3: Trend Lines
Part 4: Simple Oscillators to use for short term investments.

Watch out for the second part soon.

Please share any real-life example which happened with you, May be we all can try to find out what could have been done to make a better entry or exit from the stock.

cheers 🙂

Investment mistakes by retail Investors and how to avoid them

Posted on March 28, 2009July 21, 2019 by Jagoinvestor

“People who take some pain eventually Gain”

Have you invested in the peak of bull run (Nov Dec 2007 or Jan 2008) or in middle of this downturn (Mid of 2008) and now sitting on heavy losses.

In this article we will discuss how and why should we avoid it. This article mainly covers investors who invest there money in some share for relatively short term like 6 months to 2 years, even though its applicable for all kind of investors.

Robert bought 100 shares of Jaiprakash Associates around May 2008, at Rs.300. His reason was simple, The stock has fallen “a lot”, “how low can it go? “, ” What if I don’t buy it and it goes up again, I will miss the profits”.

Does it sound similar?

Then stocks moves upto 350, and he is so furious that why he didn’t out more money. within some days stock comes down to 250. Now he feels that he probably made a mistake and made investments at right decision. He was sad that he is now in loss , he says to himself, that he will get out at cost once it moves up to 300.

Now it comes down to 200, He is not thinking why didn’t he get out at small loss? He is not ready to get out at 250, and he is determined to get out. But it never happens and stock tumbles down to 160, Now he tries to play a trick with market, and wants to prove his point that he is also smart.

He triples his shares by buying additional 200 shares by buying the share at 160 and averages his price to Rs.207, He can now get out once shares move to Rs.200 or 210 and he can get out at cost price or may be he can make some profits also.

But stocks still goes low and reaches low of 45-50. At the time of writing this article, the price for the share is around Rs.90. Probably it will take at least 1-2 yrs for this share to reach Rs.200 levels and that will happen once overall markets stabilizes.

Does all this sound similar to you?

What are the wrong decisions Robert made?

1. Trying to Time the Market :

The one reason was that he was trying to find out if share has made a low. He believes that share has lost a lot of value and will not go further.

Learning : There is an old saying, “Dont catch Falling Knives”, When a share has started its down move, the chances that it will move more down is more than its going up. The overall mood is bad. There is no MRP of shares, there is only market value. Prices are governed by emotions and sentiments, Don’t try to get in middle buying them. Rather short sell it or wait more.

2. Patience :

The other problem was no patience, Just imagine if this person had more patience, What if he waited for stock to go as low as possible and then start its journey upwards and then buy it. I am not saying, its a right time to buy, but current scenario provide much better risk/reward ratio.

Learning : Don’t go against the trend, if markets are falling like hell. don’t mess with it by buying in between. Have patience, No profits are better than losses I guess. Always try to be with the trend, A stock has more chances of going in the same direction of the trend rather than counter trend.

On the day Satyam bad news came in, I don’t know why people bought shares in between it was falling, It fell from 170 to 40-50, But people bought it in between around Rs 120 levels, thinking, “How low it can go”. Eventually some people bought it at 20-25 levels and many have doubled there money in weeks.

Patience helps.

3. No Stop loss or Targets set :

Often people emotions come in between there trading or investing. “If only it comes back to Rs XYZ I will get out”, Once it goes up by Rs PQR more, I will get out”.

People invest without knowing there risk capability, They don’t invest with some target, once your shares rises by 20% in 1 month, you may often think, what if it goes up to 50%, then I will miss out those profits.

They also don’t want to take losses, they only want profits, once prices go against them, they are not ready to get out at small loss. They want there money back. Then prices move a little more down and then this vicious circle of “If only it comes back to this point, I will get out” continues

Learning : Do you invest to be right or to make money. What is your goal? I guess its to make money. So don’t feel bad if you are wrong some times, it happens with everyone. The most important thing is to not let it become so big, that it becomes pain.

Have a stop loss, When you buy something at 300, say to your self that if it comes down to 250, I will take Rs.50 loss and accept I was wrong and move on to find out a new opportunity. And also tell yourself that if it moves to Rs 500, I will get out, take my “excellent profit” and then find out some thing else. Don’t be too greedy.

It hurts in long term. “just a little more” is a not a good idea.

You can read a similar article where I discussed 5 mistakes of my First trade.

Watch this video to know why no Retail Investors make money in the Stock Markets:

Conclusion :

The main idea of investing is to make money, don’t try to prove market that you were correct and no one can make you wrong, keep your emotions at home, If you are wrong, you are wrong, Just accept it, take small loss and try to find out new opportunity. Don’t waste time with the losing trade and give all your time and effort in that.

Know some rules and stick to it. Mainly this is applicable to traders whose time horizon is very less like day or a week, but this also applies to investors. Even if you are investing for long term like 10-20 yrs. Buying a share at low cost can have dramatic affect on your corpus. Just imagine this :

Ajay invests 1 lac in Unitech at Rs.150 just after it fell from 900 levels in Jan 2008. His investment after 30 yrs was 66 lacs.

But Robert waited patiently to let this share go as much down it can be and after markets shows some strength and signs of recovery bought it at Rs.30, His corpus would be Rs.3 crores.

Just imagine the difference of having some patience and respecting some ground rules of investing. It pays .. believe me.

Keep coming to the blog as in coming days I will post an article about how a common person can use basic technical analysis to make his investments more powerful and less risky.

Question for readers : What do you think Robert could have done better? Or How what are the other mistakes which I have not mentioned?

Please post your views/comments/questions. Make it interactive.
I hope you have read my article on : How to use your losses to reduce your taxes

That’s all for now.

Akruti crashes by 50% , Finally it happened

Posted on March 26, 2009July 21, 2019 by Jagoinvestor

Akruti crashed by almost 45-50% today . This happened inspite of strong global clues and strong rally in markets which touched 3100 levels on nifty .

From the levels of 2250 some days back , today its near 900-950 levels .

This crash was due anyways … Some days back I had warned that there was a Evening Star seen on this stock charts and It should be seen as a shorting Stock on every rise . read it here : https://www.jagoinvestor.com/2009/03/akruti-city-plunges-25-in-early-trade.html

Read my previous post how to invest in this market

Evening Star shows you the shift of power from bulls to bears . Markets were near expiry and all the punters who were holding the stock from the time of strong rise which started , had to clear there positions and hence a sharp selling was expected . No Surprise that it happened today , As markets were rising , every short term long holder wanted to clear his positions , this resulted in panic selling and stock went down so much .

Now it has come to its normal levels and with this strong rally , it has good chance to move up in coming weeks . Dont over invest incase you want to invest .

You can put 10% of your capital in this and liquidate half position after you are in 20-30% profit . It can give some quick gains later . Dont be greedy , sell in profit once you are in 50%+ profit . otherwise one fine day again it will drop heavily and you will be left crying .

Why am I now suggesting to invest in this , last time I said stay away ?

Investing or trading should be done on high probability trades . This stock went up heavily and then corrected a lot to come back to normal levels now . This is a ideal time to take calculated risks , The risk/reward of this trade would be worth taking .

It does not mean , you cant loose from here , why not !! , but its worth taking that risk , because profit potential is very good . Have a logical stop loss and once its hit , get out with loss .. first loss is the best loss .

Did any one make profits or loss on Akruti ? Share it with other readers , so that everyone comes to know about it .

Read my previous post how to invest in this market

How to use losses to reduce income tax?

Posted on March 23, 2009July 21, 2019 by Jagoinvestor

Are losses good? Do they have any benefit?

When you make a loss, do you feel it has nothing to provide or not at all beneficial. The answer is NO! Losses are bad, but our tax laws gives us a way to utilize them in such a way that we can reduce our income tax liabilities.

reduce tax

Let’s see how 🙂 , don’t worry, we will start from scratch and will explain in detail so that everyone can understand .

Let us talk about capital gains in detail today and let us understand how should we utilize it to minimize our tax liability. Things we will discuss would be stocks, mutual funds, Gold , Debt funds, Real Estate etc.

Understanding Terms and Rules

Capital Gains and Loss : Any profit or loss arises from the sale of capital assets is capital gain or loss. Capital Assets Include Shares, Mutual funds, Real Estate, GOLD etc.

Short Term Capital Loss and Profit : STCL for Equity (shares and mutual funds) is when you sell them at loss before 1 yr, for Real estate, GOLD its 3 yrs.

Long Term Capital Loss and Profit : LTCG for Equity is when you sell it after 1 year, for Real estate, GOLD its 3 years.

Following is the chart showing the tax treatment and time frame for short term for each asset class. Click on the chart to enlarge it.

General and Carry forward Rules :

Short-term capital loss can be set off against any capital gain (Long-term or Short-term)
Long-term capital loss can be set off only against long-term capital gain.
A long-term capital loss will have no value in a case where the long-term capital gain is exempt from tax. For example, In case of shares or mutual funds after 1 year, LTCG is exempt from tax, so If you hold a share for more than 1 year and then take a loss, That LTCL will have no benefit. This loss cannot be set off against any other income.
A capital loss can be carried forward for next 8 years.

How can you utilize the losses ?

As we know that capital losses can be offset with capital gains, we can utilize this advantage to reduce the tax liability.

The main idea is to create losses to offset any profits. There may be the cases where there is an investment on which you are losing, but still you have not booked the loss, but you can book it and use this loss to offset a profit on which you may have to pay the tax.

Let us see some examples

Example 1 :

Ajay had invested Rs.5 lac in GOLD in 2005 and currently in 2009 he sold it for Rs 10 Lacs, Now he made a profit of 5 lacs and it will be considered as a LTCG, as its after 3 yrs. and it will be taxed at 20% indexed (If you don’t know what is indexed, just forget it, don’t worry ). The tax would be around Rs 1 lacs.

Now Ajay also had invested Rs.10 Lacs in Unitech Shares in Apr 2008. His investment has come down to Rs.4 lacs now. But he thinks that it will go up and he wants to keep it and not sell.

Good !! I appreciate his belief that it will go up again. But what is stopping him from selling it today and then again buying it next day.

Watch this video to know 7 ways to save your tax:

What will happen if he does that ?

If he sells his shares and takes a loss of Rs.6 lacs, He now has made a STCL of Rs.6 lacs and law says that he is allowed to offset it with any STCG or STCL. So now he can offset his 5 lacs profit with this 6 lacs loss and hence, he can save his tax of that 1 lac which he had to pay, also he can carry forward a loss of remaining 1 lac which was not offset.

He can again buy his favorite Unitech share the next day. The only loss he will make is the brokerage charges and any fluctuations which may occur in prices, which will not be much, may be it has gone down and he can buy them later at better prices.

So the point is to generate the loss by selling a losing investment and again buying it back in some days. This will help you cook up the loses which then you can offset with existing profits and hence reduce your tax liabilities.

Example 2

Robert had invested 5 lacs in mutual funds in early 2008 or end of 2007 and currently has a good loss of 2.5 lacs (1 yr is still not complete). This is currently every one state, most of the people have burnt their fingers and made huge losses.

Now he is sad that he made losses, He also had bought some shares before some months and made a profit of 50k. Let us also assume that next year his mutual fund will rise to 4 lacs from current 2.5 lacs, which he sells next year.

Now he has 2 choices to make, let us see 2 cases.

Case 1 : He does not book the loss and holds it .

In this case, he will have to pay profit of 15% STCG on his profit of 50k, and next year he will have his current investment at 4 lacs. When he sells it, it will be a loss of lac which will be LTGL (because he had held it for more than 1 yr).

Case 2 : He books the loss of 2.5 lacs and then again buys it back the same day or next day .

In this case, he has made a STCL of 2.5 lacs (bought at 5 and sold at 2.5), Now he can offset his 50k profit with this loss. Then he would not have to pay the tax and he can then carry his loss of 2 lacs carry forward.

Next year, he sells his mutual funds for 4 lacs and makes a STCG of 1.5 lacs (because he has re-bought this mutual fund and 1 yr is still not complete) .. But he can offset this profit of 1.5 lacs with the carried forward loss of 2 lacs, and still carry another 50k worth of loss forward.

So what’s the advantage of case 2 ?

The advantage is that you can save tax on the existing profit and also generate STCL which you can take forward and save tax on future profits.

There are many people who make losses and don’t bother to show it in their returns, if they don’t show it in returns then they will not be able to use it for offsetting purpose in future. Note, The way I have shown the examples have their own benefit and problems, Its you who have to decide what you want and how to utilize the tax rules to your advantage.

Its smart use of knowledge, not cheating 🙂

I wish you have got some knowledge out of this article, please put your comments/corrections/suggestions so that we can do more discussion.

Also, don’t forget to put your vote on the poll at the top of this page.

Akruti City , Have you gone Mad !!

Posted on March 18, 2009August 6, 2019 by Jagoinvestor

Double in a week ?

If you are watching Markets , you must have seen the movements of Akruti City . This company is a Mumbai based Company . The shares of this company is on the roll from last 10 days . In just 1 week it has zoomed from 994 on march 9th to 2145 on Mar 18th , that’s roughly a week .

Note : Please vote on the question asked on the upper – left hand side of this blog .
Also see the update on Jaiprakash Associates after todays markets action on my analysys blog , click here

So, Now the company market capitalization (13421 Cr) is second highest in Real estate sector , just next to DLF (29229 Cr) . Its suddenly 3 times more valuable than Unitech !!

see list of real estate companies with market capitalization

My God !! , whats going on !!

90% of the equity is with promotors , and a very small fraction is with retail public , you can understand that everything going on is just the “kartut” (hindi word) of minority public .

Agreed that anyone who has entered the stocks some days back or 2 days back or 1 day back has made exceptional profits , But is it a right decision to invest in this as of now for short term gain or to ride the trend . A big NO!!

For sure some insider trading is going on with company , that’s the reason why stocks has gone mad . Retail Investors must not get very excited with these kind of things , These kind of sharp moves are not sustainable , to move in a healthy way , the stock must form a base (spend some time in a range ) and then start its up move slowly and with some corrections in between .

These kind of mad up moves without any pauses and slowdown are nothing but a bomb ready to explode .

If like someone who just entered the trade 1 week back and made 100% gains , other person can also loose 60-75% in just 1 week from now onwards . If you put money in this , Its not investing now , its Gambling !!

Suggestion : please stay away , Dont forget the mantra of “Not loosing money” rather than “Trying to get fast money” in stock markets . If you are bothered about lost opportunity , I can bet there more opportunities in market every day than all the combined opportunity in the world in all other aspects of life . Wait for just 1 day and you will get thousands of opportunities again .

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Margin Of Safety Principle

Posted on March 17, 2009July 21, 2019 by Jagoinvestor

Came across a good article. Just reproducing the work here. This post talks about the Value and Price difference of some investment .

Margin Of Safety Principle

In his book, The Intelligent Investor, Benjamin Graham describes the concept of margin of safety as being an essential part of any true investment. He goes on to say that margin of safety is an element of investing that can be demonstrated quantitatively with sound rationale and from a historical perspective.

Graham’s definition of margin of safety is essentially the gap between price and value. All else being equal, the wider the gap between the two, the greater the safety level. Graham also explains that the margin of safety is important because it can absorb mistakes in assessing the business or the fair value of the enterprise.

As Graham says – “The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments.

For in most such cases he has no real enthusiasm about the company’s prospects…If these are bought on a bargain basis, even a moderate decline in the earning power need not prevent the investment from showing satisfactory results. The margin of safety will then have served its proper purpose.”

From its origin, the calculation of margin of safety was never related to the volatility of the stock price of a company. The focus of most value investors has always been based on the intrinsic worth of the company in question–a bottom-up process that should be done without regard to current market valuation (which very few analysts are willing to do).

Even with a margin of safety, an investment can still go bad. This is not a failure of the concept of margin of safety principle, as the concept only provides assurance that the odds are in the investors’ favor that they will not lose money. However, it is not a guarantee that the investors will not lose money.

There are and have been many adjustments to Benjamin Graham’s margin of safety concept in the modern era. The way that Benjamin Graham calculated margin of safety years back was very asset-based, and probably quite different from how analysts today would make the calculation.

It is the inclusion of the concept that is important in one’s assessment of an opportunity, rather than the actual mechanics and particulars of the safety calculation.

Some value investors use a variety of measures in determining a firm’s safety levels. They are as keen on asset values as on earnings and cash flow, and may even consider intangible asset values like brands, reputations and intellectual property.

They also use a variety of measures just in case one of them does not hold up–the objective is never to be caught off guard. Based on these criterion, these value investors look for several different measures, such as break-up value, favorable dividend yield, price to cash flow, and discount to future earnings as supporting casts to Graham’s margin of safety principle.

Buying companies with a margin of safety prevents owning companies with a high burden of proof to justify their stock valuations. When a stock trades at a high valuation level, the expectations are so great and often so specific that a slight disappointment or an adverse change in expectations could be catastrophic. Buying shares with ample safety means buying stocks with the lowest possible burden.

Value investors also believe that margin of safety should incorporate an investor’s appetite for risk. The disparity of safety levels among investors is based on the amount of volatility they are willing to tolerate, the mistakes they are willing to accept, and perhaps the financial pain they are willing to endure.

The margin of safety principle essentially asks the question: What is supporting the stock price at its current level? or, Why shouldn’t the stock fall significantly from today’s current price? The Graham margin of safety is heavily conscious of what can go wrong, and not what the discount is to its fair value–the safety is thus purely based on the liquidation value of the current assets.

WallStraits uses the concept of margin of safety, with a debt of gratitude to Professor Graham–but we shift the primary focus from asset valuations to discounted future earnings. Our method is less tangible today, but more valuable as a predictor of tomorrow.

Because our DCF method entails making several important predictions 10-years into the future, we require a large margin of safety–perhaps 50% or more. Luckily, in a bear market environment, such as Singapore is currently experiencing, there are several fine businesses discounted by over 50%.

Upon satisfying the 50% discount to future earnings, WallStraits moves on to evaluate dividend yields (after tax), payout ratios, cash and debt levels, brand values, sustainable competitive advantages, management capability and other fundamental aspects of each business being considered for our portfolio.

We place rather equal emphasis on quantitative and qualitative issues. This differs from Graham’s search for pure quantitative net-nets (a price equal to the firm’s current assets less all liabilities–placing current value squarely on the value of property, plant and equipment).

Graham’s most notable student, Warren Buffett, demonstrated how vital it was to consider both the quantitative asset valuations and the qualitative business assessments to find true value stocks.

Buffett favored the discounted cash flow valuation because it included both the ability of a business to generate cash flow from tangible assets, as well as the ability to create value from intangible assets–like brand strength, intelligent management, and consumer monopolies. Buffett made famous the expression–I’d rather pay a fair price for a good business than a bargain price for a fair business.

WallStraits agrees that the ultimate investment is one undervalued versus its ongoing ability to produce profits and reward shareholders.

You can use your own logic and creativity to make personal assessments of the qualitative and quantitative forms for any business you consider for your portfolio–but regardless of your methodology–don’t forget to always think from the perspective of seeking large margins of safety.

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