An Excellent article on equity risk on Moneycontrol.com
http://www.moneycontrol.com/india/news/mf-experts/is-equity-investing-really-risky/16/59/327825
Many a times when individuals say that they want to refrain from investing in equity because it is risky, it seems little amusing. These are the same individuals who ride two wheelers without a helmet or drive a car without the seat belts. What is more risky - investing into equity or riding a two-wheeler without a helmet?
Firstly it is important to note that all forms of investment have inherent risk. The reason we get returns on our investment is because we take the risk of parting with our money. There are some risks, which are transparent while there are few which we do not see.
Equity investing seems risky because the risk is transparent. Investor in equity can see the gain and/or loss made by them based on movement of stock price on the stock exchange. If an investor had purchased stock of Tata Steel at Rs 568 and if the price falls to Rs 523, he/she can see and calculate the loss. This is unlike an investor of fixed deposit who does not see his gain in interest and also does not see the loss he has suffered due to rise in inflation. Simply because fixed deposits are not traded on any exchange and its price movement is not transparent, they seem to feel safer.
Another reason people find equity investing risky is because returns from equity are not linear. Suppose we have invested in bonds yielding 8% p.a., our bonds would generate a fixed 8% returns year on year. In case of equity, it does not work like that. Here, the returns could be 40%, 33%, -3%, 17%, -10% and 2% year on year. Since the returns are not linear it is difficult to predict them and because it is difficult to predict, we find equity investing risky.
Usually we are fairly certain about events that are likely to take place in our lives in near term. We know what we will be doing in next one minute, one hour, one day etc. We also have a good estimate of our activity schedule for the next week or so. However as time horizon increases, our certainty about events in our life decreases e.g. most likely we do not know what will happen in our life after one year. In business it is reverse. Ask a corporate how much goods they will sell in next one minute and they are clueless. Give them an hour and still the same reply. They even cannot guess their daily sales. However ask them to guesstimate their yearly turnover and they would be able to predict almost accurately. As human beings we seek near term certainty. Since that is difficult to come by in equity investing, we find it difficult to absorb the reverse behavior.
Each asset class has different behavioral pattern of return and risk. There isn’t anything like risk-free investing. Just because in equity measurement of risk is transparent, returns are not linear, and it is difficult to predict in short run, it should not be construed as risky.
Lastly, there is a famous line, which says ‘Rome was not built in a day.’ It takes years to build a business. Sometimes, even after the business is built and settled, it can face turbulence. Unfortunately we are not willing to wait for long to earn our returns. In many cases people are not even willing to wait for 2/3 years to get returns. Here I would like to quote legendary investor Warren Buffet who once said “If you aren’t willing to own a share for ten years, then don’t own it for ten minutes.”
If your financial goal is more than 7/9 years away always give consideration to equity as well.
Wednesday, February 27, 2008
Friday, February 01, 2008
Indian Financial Budget 2008
It should be an election budget. So, expect higher exemption limits for income tax, cuts in corporate tax and customs duty, selective cuts in excise duty, and big spending on welfare and social schemes in the coming budget.
Expect huge provisions for higher government salaries in anticipation of the next Pay Commission award. And expect a continuation of gargantuan off-budget subsidies for oil (and possibly, fertilisers and food), in an attempt to obscure the sad fact that the fiscal and revenue deficits are way above the limits ordained by the Fiscal Responsibility and Budget Management Act.
Finance ministers are politicians first and economists only second or third. The next general election is due in May 2009, so Mr Chidabaram will not be able to present a regular budget in 2009. Hence his 2008 budget will be his last. It will come too long before the next election to really have a significant electoral impact. Yet it is politically necessary for him to satisfy Madam that he has done his bit to get her re-elected.
Mr Chidambaram is blessed to have revenue pouring out of his ears. Four years of 8-9% GDP growth have yielded a cascade of tax revenue, with direct tax collections rising by over 40% for two years running. This gives him the flexibility rarely available to finance ministers. He will be able to provide for a stiff increase in government salaries (after the Pay Commission award) without creating a huge fiscal hole.
India’s corporate tax rate, including surcharge and cess, is 33.9%, over and above which companies pay dividend tax. The corporate tax rate is much lower in Malaysia (27%), Taiwan (25%), Singapore (18%) and Hong Kong (17.5%). However, finance ministry officials are quick to point out that, because of many exemptions, the effective corporate tax rate is only 19% or so. So Mr Chidambaram may opt for a lower tax rate — possibly by abolishing the surcharge — combined with a pruning of exemptions.
India’s income tax rate is not high by Asian or global standards. But the exemption limits are very low. So, expect a significant rise in the exemption limit, from Rs 1.1 lakh for individuals, Rs 1.45 lakh for women, and Rs 1.95 lakh for senior citizens above 65 years. Technically, raising the exemption limit after years of inflation simply corrects for “bracket creep” without really reducing the tax burden in real terms. But on budget day this always looks like manna from above, and so this looks certain to be on the agenda.
Back in his dream budget of 1997, Mr Chidambaram said he would aim to reduce customs duty to ASEAN rates. The average ASEAN rate is around 8% , and he is likely to reduce the rate on many items to this level, and declare that a visionary goal has been reached. For this he will get much-merited applause.
He will extend the service tax to new areas, and make preparations for its integration into a Goods and Services Tax by 2010, another major milestone in tax reform. With luck, he may still be finance minister on that date. Mr Chidambaram has long claimed to be on track on reducing the fiscal deficit to 3% and revenue budget to zero by 2009.
Indeed, given revenue buoyancy, he may claim that he has already achieved the fiscal deficit target this year, and will hit the revenue deficit target next year. But these claims are based on smoke and mirrors. Because of political difficulties in raising the price of petroleum products, fertilisers or grains in the public distribution system, the public sector entities involved have suffered huge shortfalls of 2% or more of GDP, which are being financed by the government.
But instead of showing these are explicit subsidies, Mr Chidambaram has been showing them as off-budget bond issues. His budgets provide only for the interest payable on the bonds, not the value of bonds themselves. Such creative accounting is exactly what led to the collapse of Enron in 2001. Governments, unlike corporations, do not go bust. But the fact is that the bond issues make a mockery of FRBM targets. It is a major blemish on his otherwise outstanding record as finance minister
Expect huge provisions for higher government salaries in anticipation of the next Pay Commission award. And expect a continuation of gargantuan off-budget subsidies for oil (and possibly, fertilisers and food), in an attempt to obscure the sad fact that the fiscal and revenue deficits are way above the limits ordained by the Fiscal Responsibility and Budget Management Act.
Finance ministers are politicians first and economists only second or third. The next general election is due in May 2009, so Mr Chidabaram will not be able to present a regular budget in 2009. Hence his 2008 budget will be his last. It will come too long before the next election to really have a significant electoral impact. Yet it is politically necessary for him to satisfy Madam that he has done his bit to get her re-elected.
Mr Chidambaram is blessed to have revenue pouring out of his ears. Four years of 8-9% GDP growth have yielded a cascade of tax revenue, with direct tax collections rising by over 40% for two years running. This gives him the flexibility rarely available to finance ministers. He will be able to provide for a stiff increase in government salaries (after the Pay Commission award) without creating a huge fiscal hole.
India’s corporate tax rate, including surcharge and cess, is 33.9%, over and above which companies pay dividend tax. The corporate tax rate is much lower in Malaysia (27%), Taiwan (25%), Singapore (18%) and Hong Kong (17.5%). However, finance ministry officials are quick to point out that, because of many exemptions, the effective corporate tax rate is only 19% or so. So Mr Chidambaram may opt for a lower tax rate — possibly by abolishing the surcharge — combined with a pruning of exemptions.
India’s income tax rate is not high by Asian or global standards. But the exemption limits are very low. So, expect a significant rise in the exemption limit, from Rs 1.1 lakh for individuals, Rs 1.45 lakh for women, and Rs 1.95 lakh for senior citizens above 65 years. Technically, raising the exemption limit after years of inflation simply corrects for “bracket creep” without really reducing the tax burden in real terms. But on budget day this always looks like manna from above, and so this looks certain to be on the agenda.
Back in his dream budget of 1997, Mr Chidambaram said he would aim to reduce customs duty to ASEAN rates. The average ASEAN rate is around 8% , and he is likely to reduce the rate on many items to this level, and declare that a visionary goal has been reached. For this he will get much-merited applause.
He will extend the service tax to new areas, and make preparations for its integration into a Goods and Services Tax by 2010, another major milestone in tax reform. With luck, he may still be finance minister on that date. Mr Chidambaram has long claimed to be on track on reducing the fiscal deficit to 3% and revenue budget to zero by 2009.
Indeed, given revenue buoyancy, he may claim that he has already achieved the fiscal deficit target this year, and will hit the revenue deficit target next year. But these claims are based on smoke and mirrors. Because of political difficulties in raising the price of petroleum products, fertilisers or grains in the public distribution system, the public sector entities involved have suffered huge shortfalls of 2% or more of GDP, which are being financed by the government.
But instead of showing these are explicit subsidies, Mr Chidambaram has been showing them as off-budget bond issues. His budgets provide only for the interest payable on the bonds, not the value of bonds themselves. Such creative accounting is exactly what led to the collapse of Enron in 2001. Governments, unlike corporations, do not go bust. But the fact is that the bond issues make a mockery of FRBM targets. It is a major blemish on his otherwise outstanding record as finance minister
Buzz, Boos and Bomb as 'Pup' leads a rout
There's still two days to go for the action to kick off in Arizona but Australia's version of the Superbowl was one mad evening. There was noise, fireworks, boos, cheers, flags, and Mexican waves in a gigantic arena where Andy G and Hank led a rout. Batsmen constantly hesitated with the quick single and fielders collided. No-one could hear much out there. The G went bananas; Oh G.
There was a buzz around the ground from 4pm in the evening. England were playing Australia and the ground was filling up [the women were playing and the crowd were coming in for the men]. Simon Taufel's might have never walked out to a Mexican wave before and Gilchrist, while batting, said, "If anyone is making their debut out here, it's going to be quite a boring career ahead".
This was a mighty din. Rogue Traders blared out their funky pop mixes in the half-time. There were rumours doing the rounds about the Indian team being welcomed with 'Leaving on a Jet Plane' but the batting performance that followed suggested that a chartered flight was somewhere in sight. There's no limit to the regions for scoring in Twenty20 but India's three fours were all behind the wicket. Dinesh Karthik's top-edged pull appeared like a lucky escape but when Rohit Sharma followed it was clear that this was a clear plan. Get them in edges.
Michael 'Pup' Clarke got things going with a sensational direct hit before Brett Lee tore into the tension like some cricketing Chuck Yeager. So quick was the ball that crashed into Karthik's stumps, it must have broken the sound barrier. So adrenalin-fuelled was the atmosphere that Nathan Bracken - nicknamed Andy G because of his resemblance to the Australian Idol television host - realised slower balls would work best. India's batsmen were half-way through their shots before the ball came out.
Adam Voges, Australia's latest left-arm spinner, will remember this night. Not only did he pick up two wickets in as many balls but was probably the first bowler to have eight fielders around the batsman in a Twenty20. The chase was a formality, especially when Gilchrist walked out with the squash ball and Clarke with his bat. Harbhajan Singh and Irfan Pathan couldn't hear each other when Clarke skied one and the show was over with the light barely on.
Harbhajan was trying his best to smile but it must hurt when you're booed for every move. Gilchirst, for his part, was enjoying cult status. "Now I know what it feels to be Sachin Tendulkar in India."
Sreesanth started with an appeal but was soon looking over his head, when Clarke waited for a slower ball and howitzered it over long-off. By the end of the game he wasn't surprised or elated. "Just speechless". Australia unveiled yet another Hussey, though he wasn't required to bat. He took a wicket and pouched a catch but the best news was he had an alternative nickname, Bomber. Little Mr Cricket appears more suited to a nursery rhyme
There was a buzz around the ground from 4pm in the evening. England were playing Australia and the ground was filling up [the women were playing and the crowd were coming in for the men]. Simon Taufel's might have never walked out to a Mexican wave before and Gilchrist, while batting, said, "If anyone is making their debut out here, it's going to be quite a boring career ahead".
This was a mighty din. Rogue Traders blared out their funky pop mixes in the half-time. There were rumours doing the rounds about the Indian team being welcomed with 'Leaving on a Jet Plane' but the batting performance that followed suggested that a chartered flight was somewhere in sight. There's no limit to the regions for scoring in Twenty20 but India's three fours were all behind the wicket. Dinesh Karthik's top-edged pull appeared like a lucky escape but when Rohit Sharma followed it was clear that this was a clear plan. Get them in edges.
Michael 'Pup' Clarke got things going with a sensational direct hit before Brett Lee tore into the tension like some cricketing Chuck Yeager. So quick was the ball that crashed into Karthik's stumps, it must have broken the sound barrier. So adrenalin-fuelled was the atmosphere that Nathan Bracken - nicknamed Andy G because of his resemblance to the Australian Idol television host - realised slower balls would work best. India's batsmen were half-way through their shots before the ball came out.
Adam Voges, Australia's latest left-arm spinner, will remember this night. Not only did he pick up two wickets in as many balls but was probably the first bowler to have eight fielders around the batsman in a Twenty20. The chase was a formality, especially when Gilchrist walked out with the squash ball and Clarke with his bat. Harbhajan Singh and Irfan Pathan couldn't hear each other when Clarke skied one and the show was over with the light barely on.
Harbhajan was trying his best to smile but it must hurt when you're booed for every move. Gilchirst, for his part, was enjoying cult status. "Now I know what it feels to be Sachin Tendulkar in India."
Sreesanth started with an appeal but was soon looking over his head, when Clarke waited for a slower ball and howitzered it over long-off. By the end of the game he wasn't surprised or elated. "Just speechless". Australia unveiled yet another Hussey, though he wasn't required to bat. He took a wicket and pouched a catch but the best news was he had an alternative nickname, Bomber. Little Mr Cricket appears more suited to a nursery rhyme
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