Understand the Emotion in Your Financial Decisions

In a perfect investing world, we’d all respond like robots. The markets go up, we’d know it’s time to sell. The markets go down, we wouldn’t have any problem buying.

But because we aren’t walking, talking algorithms, we’ll almost always need to take emotion into account. We’ll almost always need to weigh financial decisions by both the numbers and how we feel.

Seeing the emotion in our investing decisions may seem like a small thing. Learning to understand it though is huge for future goals.

For instance, think about the reasons you own the investments you own. I suspect more than a few of you have at least one investment, maybe more, that makes no sense. Unless you consider your emotional attachment to that investment.

Maybe it’s stock from an old employer. Maybe you bought Apple because you really love your iPhone. Whatever the investment you bought, you’re probably holding on to it for emotional reasons.

When you step back, you have a really hard time identifying how this individual investment fits into your bigger plan. But you can’t bring yourself to let it go — at least not yet.

We also need to understand how emotion can stop us from making smart decisions. We need to be aware that liking an investment a lot may not be enough to justify owning it. On top of that awareness, we need to remember how our strong emotions may lead us to make a mistake.

Pause for a minute and think through a big financial decision you made based mostly on emotion. Maybe it turned out great, but for sure you made more mistakes than you expected.

Think it through in two steps. Weigh how you feel about an investing or financial decision. Then, ask someone you trust, with no direct connection to the outcome, what they think.

If the person you trust suggests the opposite of what you want to do, take a deep breath and work through the reasons why. You may still end up doing exactly what you planned to do. But having this check-and-balance in place can help you see potential issues.

You are most definitely not a robot. That said, there’s no reason for emotion to stop us from making good financial decisions.

Boost in overseas fund expected as NRI investments will now be considered domestic

Aiming to attract overseas funds, Indian government has decided that non-repatriable investments by NRIs, OCIs and PIOs will be treated as domestic investments and will not be subject to foreign direct investment caps. The Union Cabinet, chaired by Prime Minister Narendra Modi, had approved amendments, including changes in definition of NRIs, to be incorporated in the FDI policy.

Investments by NRIs under under Schedule 4 of FEMA regulations will be deemed to be domestic investment at par with the investment made by residents, an official statement said. The Cabinet’s decision is expected to result in increased investments across sectors and greater inflow of foreign exchange remittance leading to economic growth of the country, it added.
The government had earlier raised the FDI limit in sectors such as defence, insurance, real estate, railways and medical devices. During his foreign vists, Prime Minister Narendra Modi has been reaching out to NRIs to invest in India. Non-resident Indians too have been demanding that their investment be considered as domestic investment.
A committee, set up to look into the possibility of treating non-repatriable NRI funds as domestic investment, had earlier said that NRIs might prefer investing through corporate entities.
Facility of investment on non-repatriable basis was introduced primarily with the intention of providing NRIs an investment option for utilisation of their domestic resources, which were not freely repatriable. It was intended to provide NRIs an incentive to bring funds into India without repatriation rights, at a time when foreign exchange reserves were limited and capital inflows were modest, the statement said.
According to PTI, the provision should continue to incentivise investments by NRIs, including OCIs and PIOs, resulting in increased investments in the country. Since the investment made under Schedule 4 are on non-repatriable basis, it needs to be clearly provided that such investments, for the purposes of FDI policy, are domestic investments, it added.
“This will enable investments by NRIs, OCI cardholders and PIO cardholders under Schedule 4 on non-repatriation basis, across sectors without being subjected to any of the conditions associated to foreign investment,” it said.
During the April-February period of the previous fiscal, FDI rose by 39 per cent to USD 28.81 billion as against USD 20.76 billion in the same period last fiscal.

Are we equipped to deal with an unexpected calamity?

A calamity can come in any form – earthquake, hurricane, flood or fire. The recent Nepal earthquake left many homeless and resulted in a huge loss of property. It is only after a disaster strikes that we think about the loss.

How we can prepare  in advance to protect ourselves and our  loved ones from any calamity ?

Emergency fund

One must have an emergency fund equivalent of six months of our normal household expenses to tide over any contingency arising from the calamity such as hospitalization, loss of business.

Documents

Make sure that we have easy access to important documents like insurance policies, driving licenses, identity card, birth/death certificate and even bank account numbers if they have to vacate their house immediately. It is advisable to keep such documents at a place where they can be easily located. We can also keep such documents in bank lockers.

Get insured

People must first do insurance audit, which means calculating how much insurance is needed to protect their family from any tragedy.

If you already have earthquake or fire insurance, it is best to review it once. Finding out the latest value of the property and belongings will help you estimate the quantum of insurance required.

Life and accidental insurance policies

A calamity can claim people’s lives or can leave them disabled. Getting insured removes the financial burden from the people to a large extent when they are affected by any tragedy or in case of any emergency. They must buy four policies - term policy, health insurance, personal accident policy and critical illness policy. 

Home insurance

One of the biggest losses which occur in a calamity is the loss of a property. For Indians, home is associated with the sentiments of the people. Therefore, buying cover for fire insurance or any cover against earthquake is necessary.

Maintain records

It is advisable to keep a record of all belongings which will help us settle insurance claims fast. 

When time comes to settle a homeowner’s insurance claims, it helps to have a thorough record of your home’s contents. There are two ways to maintain your inventory - using photography or videotape and maintaining a written list. Of course, if you want to be thorough, you can do both.

Taking photos of your possessions or videotaping them is the easier of the two methods. If you choose to videotape, use the soundtrack to describe each of the items. Be sure to include shots of your cars, the contents of your garage, closets, drawers and basement as well as of the outside of your home. The photos, negatives, tape or computer disk should be stored in your safe-deposit box or emergency kit. 

The more difficult method is to make a list of your possessions, including brand names, model and serial numbers, and purchase prices and dates to make it easier to estimate their values for insurance or tax purposes. You may find it easier to keep your list organized by room. Computer software is available to help organize the job. Some items, such as jewelry and collectibles, may require a professional appraisal. Your insurance representative can help you determine which items to have appraised. Again, the physical list or computer disk and copies of any appraisals should be kept in your safe-deposit box or emergency kit. 

Think of  examples

Generally, we are not inclined to buy insurance unless a tragedy strikes. To educate a child, we give examples to make them understand better. Similarly, people are to be enlightened with examples .

It may be time to redefine retirement.

Traditional retirement possibly becoming a thing of the past

A new survey of American workers from the Transamerica Center for Retirement Studies found that 82% of the respondents age 60 and older either are, or expect to keep working past the age of 65. Among all workers, regardless of age, 20% expect to keep on working as long as possible in their current job or a similar one.

The days of the gold-watch retirement where we have an office party and maybe some punch and cookies and never work again are more mythical than a reality.Very few workers actually envision that type of retirement and many plan to keep on working part-time even after they retire.

It even raises the question is retirement the right word.

Across all ages, many workers worry that they will be unable to save enough to last their lifetime. Outliving investments and savings was the top retirement concern for 44% of all respondents. And one-third of all workers believe their standard of living will diminish once they stop working.

Forty-plus age  represent the critical mass of Generation X. They're in the sandwich years, the time of life when most are likely juggling work, kids, and aging parents. They probably don't have a lot of free time and they also were very affected by the recession.

Only 10% of respondents in their 40s said they were confident they would be able to fully retire in comfort.

Many younger Gen Xers doubt they'll get the Social Security payments currently forecast in their benefits statements.

The only option is to save more to make up the difference.To identify money that they can save, they have to track their spending, and using apps on their phones fits perfectly with their lifestyle.

 For Gen Xers who are closer to traditional retirement age, and who have grown children have the wonderful opportunity to shovel money into their retirement accounts once the kids are out of college and out of the house. But, people seem to want to remodel the kitchen and buy the fancy car they have been putting off, but this is the final hurrah for retirement savings and they really need to make the most of it .

There are some rules of thumb whatever a worker's age.

For instance, they should stop guessing how much they need to retire and actually run the numbers. From there you can build a plan.Factor in everything from everyday living expenses ... (to) taxes and inflation.

Such strategizing is necessary, even if you never plan to stop working.

Planning not to retire is not a viable retirement strategy.At some point in our lives we'll all stop working.

The Ben Graham Way

We tweak Benjamin Graham's simple formula for finding approximate valuations for growth stocks to make it work for Indian investors

Every investor faces the question whether a scrip is overpriced, underpriced or fairly priced. It's generally not possible for retail/lay investors to carry out long, intensive mathematical calculations using various valuation models to figure this out. So, what should he do? Benjamin Graham's simple formula for finding valuations of growth stocks comes to the rescue. Benjamin Graham mentions the formula in his famous books Security Analysis and The Intelligent Investor.
Following is the Benjamin Graham formula:

Intrinsic value = Earnings per share x
[(8.5 + (2 x Expected annual growth rate, g)]

The earnings per share is the trailing twelve-month earnings. 8.5 is the P/E base for a no-growth company. Expected annual growth rate is the estimated growth rate over seven to ten years.
In 1974, in the revised edition of The Intelligent Investor, Graham revised the formula to

Intrinsic value = [EPS x (8.5 + 2g) x 4.4]/Y

In this formula, 4.4 is the then prevailing (1962) rate on high-grade corporate bonds listed on the New York Stock Exchange. Y is the current yield on AAA-rated corporate bonds.
Graham thought that as the investor had the choice between putting money in common stocks or bonds, it was appropriate to take into account the rate of interest paid on a high-grade bond - 4.4 per cent- in determining the intrinsic value of a stock.
Dividing by the current yield on the AAA-rated (Y) corporate bonds normalises the 4.4 per cent bond rate to today's environment. The reason for the inclusion of Y is that Graham wanted a minimum required rate of return for investing in stocks. As you test the formula yourself, you will notice that bond rates affect valuation. The lower the yield the higher the price. This fact goes back to bond basics. If the yield is low, the price is high. If the yield is high, the price is low. Graham designed the formula to replicate this line of thought.
Since all intrinsic value calculations and formulas are based upon the opportunity cost relative to the risk-free interest rate, the modified formula has incorporated the same.
Tweaking the formula as per Indian markets
The formula requires minor tweaking to make it work as per the Indian market and to match it with the current time and scenario.
Instead of using 8.5 as the no-growth P/E, we will use a P/E of 7 in our version of the tweaked formula. This is because even if a company has zero growth prospects but it is able to maintain cash flows and distribute dividends, its P/E is generally higher than 8.5.
Instead of using a single figure for growth rate, calculate the average of five-six years of growth experienced by the company. If a company has only three years of operating history, then take the average of the three years.
Next is the '2' multiplier, which is too aggressive. This is understandable if you take things into perspective. Graham never experienced companies with growth rates of 15-25 per cent, which is common today. Instead of '2', you can reduce the multiplier to 1.5 or 1. From all the calculations we have performed using the Graham formula, we have found that using 1 is completely satisfactory and still yields an optimistic value.
Instead of multiplying by 4.4, the interest rate prevailing on high-grade bonds, which is basically the substitute of the risk-free return, we use five-year fixed deposit rate of 8.5 per cent.
The modified Graham formula is:

Intrinsic value = [EPS x (7 + g) x 8.5]/Y

Let's look at SBI's intrinsic value using the information mentioned above.
SBI's TTM EPS = 22.57
Annual growth rate = 9.55 per cent
Current yield on the AAA-rated
corporate bonds = 8.3
SBI's intrinsic value = [(22.57) x (7 + 9.55) x 8.5]/
8.3 = R377.53
Margin of safety
The difference between the intrinsic value and the current market price is the margin of safety. The greater the margin of safety the safer the investment. Warren Buffet recommends at least a margin of safety of 25 per cent.
Word of caution
This simple, easy-to-do calculation is no substitute for intensive, long and complex valuation models used by analysts. This formula won't give you a 'true' value but a value close to the valuation model. Do not follow it blindly.
We have compiled for you the intrinsic valuation of select Sensex companies and their margin of safety.

Overvalued sensex shares

Company	CMP (R)	Intrinsic Value (R)	Margin of Safety(%)
HDFC	1244.75	1243.8	-0.08
NTPC	150.15	144.73	-3.74
ITC	347.15	329.1	-5.48
GAIL (India)	369.1	339.24	-8.80
Tata Steel	370.15	330.35	-12.05
Oil & Natural Gas	315.8	275.25	-14.73
Maruti Suzuki India	3539.8	2303.97	-53.64
Hero MotoCorp	2352.55	1417.52	-65.96
Larsen & Toubro	1679.6	985.53	-70.43
Hindustan Unilever	889.55	460.7	-93.09
Cipla	637.8	190.44	-234.91

Undervalued sensex shares

Company	CMP (R)	Intrinsic Value (R)	Margin of Safety(%)
Sesa Sterlite	205.05	856	76.05
Tata Motors	515.3	1225.11	57.94
ICICI Bank	308.1	594.87	48.21
Axis Bank	527.55	967.01	45.45
Sun Pharma	947.8	1644.24	42.36
Bajaj Auto	1996.85	3207.44	37.74
TCS	2496.9	3944.88	36.71
State Bank Of India	275.65	377.53	26.99
Reliance Industries	879.4	1178.07	25.35
Wipro	650.25	783.43	17.00
HDFC Bank	1244.75	1480.93	15.95
Infosys	1996.25	2364.11	15.56
Mahindra & Mahindra	1170.45	1374.23	14.83