Category: Investments

My dad used to joke that the only person who reads annual reports in the entire country is my grandpa. He used to read a lot of annual reports. He had a large stock-holding (still has quite a bit), and he was the one who got me introduced to the world of investing.

He has made more money in stocks than most people I know, and knows a lot about the markets and investing. His eyesight is really weak these days, and that makes tracking price quotes or just general reading quite difficult. He stopped following the stock market altogether for the past couple of years, but I met him yesterday and he said he has started a new thing.

He has given a small sum to a “business associate” of a big broker, and that guy trades on his behalf. At the end of every day, he sends a report of the money made or lost during the day and the list of trades.

I showed interest in this, and didn’t say anything because I know it keeps him busy and interested, and that is a small price to pay for the loss this business associate will eventually incur on my grandpa’s behalf.

Make no mistake about it, there will be a loss, and it will probably be all of his capital. I say this because of the huge conflict of interest coupled with the frequency of trades. There are so many trades that it is quite apparent that this guy is doing it just for the commissions.

Of all the conflicts of interest that exist in the investing world, a broker / sub – broker / business associate trading on behalf of their customer has got to be the worst one.

There is very little correlation between how much money the broker makes their customer and their own remuneration in the short term.

The broker makes their money by trading as much as possible, and incurring as much brokerage as possible, but at the same time – the brokerage is coming from the pocket of the investor. On the other hand, if the broker just buys once every month on the behalf of their investor and keep accumulating stock for a longer horizon, they’d make very little commission for themselves, even if they increase the chances of spreading out risk and making money for their customer.

If your  broker or business associate or whatever the heck they call it sends you a daily report of the trades they made, you are most likely getting screwed.

You need to compare your returns with the Nifty or Sensex returns and see how they are performing. You will be better off buying low cost index funds if the guy is not even making you as much as the Nifty, which you can replicate just by buying a Nifty mutual fund yourself.

If you have handed over money to someone to manage, you should seek returns that are at least higher than the returns of the stock market, which you can yourself easily replicate. If that is not happening, then it is time to move on.

This is not to say that all brokers who trade on behalf of their clients are crooks, there are plenty of good brokers too, people who advise you not to trade, and people who highlight to you how much you have paid them in commissions while making very little for your self. I have met such people and if you have to have someone manage your money, you should look for someone who will ask you to stop trading even if that means less commissions for him.

I wrote about NSE introducing options on GOLDBEES a few days ago, but I just saw this news article from Business Standard that states NSE has deferred launching this. There seems to be some sort of an issue on who gets to regulate this product.

From the NSE circular about this:

In view of the concerns raised by another regulator, the Exchange in consultation with Securities and Exchange Board of India (SEBI) has deferred the launch till further notice.

When you think about buying gold coins – the first place that comes to your mind is probably the local jeweler, but there are a lot more options than that at your disposal, if you want to buy gold coins.

In this post I am going to look at some of those options.

1. Buy gold coins at the bank: A lot of Indian banks sell gold coins these days. The benefit of buying gold coins from a reputed bank is that you have a lot more peace of mind, as far as the quality of the gold coins go. The disadvantage of buying gold from a bank is that they normally charge a premium on the gold coins, and you might be paying extra than what you would have otherwise paid at a jeweler. Another disadvantage is that normally banks don’t buy back gold from you. If you buy gold from a reputed jeweler, then in most cases they will buy it back from you.

2. Buy gold coins at the post office: This might come as a surprise to some of you, and it certainly surprised me, but it is true that the Indian Post Office sells gold coins.  They too charge a premium on the gold coins they sell, but it seems that it is less than that charged by the bank. I am not sure about this though, and it is best to check this point yourself. Like banks, the Post Office will not buy the gold back from you, and only a few post offices are allowed to sell gold coins, so this option might not even be practical for you.

3. Buy gold coins online: I saw at least a couple of websites that were selling gold coins online, and that seemed to be legitimate. I am not linking to them because I couldn’t read any reviews on them, and do not know any one who has bought gold coins online in India. Further, when I checked the price of a 2 gram gold coin on their website and compared it with the gold coins SBI is selling, – I found that the online store is charging a higher price. The online store was asking Rs. 3998 for a 2 gram 99% purity gold coin, whereas the price I saw at SBI was Rs. 3,760. This doesn’t make much sense to me, and personally, I would rather go to a bank and buy gold coins, rather than pay extra to an online retailer to buy gold coins.

4. Buy gold coins from nation wide retailers like Tanishq: You can go to a reputed nation-wide jeweler like Tanishq, and can buy gold coins or bars from them. This offers you peace of mind because they have a strong reputation, and their good distributions means that this will be a convenient option for many of you.

5. Buy gold coins from your local jeweler: Most Indians will have a family jeweler, and if they sell gold coins or bars, then you might just find that this is the cheapest option. Furthermore, they will be willing to buy – back the gold coins as well, so that is an added benefit of buying from them.

These were five options that I could think of where you could buy gold coins in India, and I’d like to hear if there are any options that you know of and I missed out on.

A few days ago I wrote about buying gold coins in India, and in that post I wrote about banks selling gold coins. What I didn’t know at the time was that even post offices have started selling gold coins in India!

The post office sells 24 carat gold coins of the denominations of 0.5 grams, 1 grams, 5 grams and 8 grams. Right now, this service is quite limited, and not every post office sells gold coins.

In fact this option is available only to people living in the following cities:

• Chennai
• Trichy
• Madurai
• Coimbatore
• Salem
• Delhi
• Ahmedabad
• Surat
• Vadodara
• Pune
• Nagpur
• Nashik
• Mumbai

This link has a list of all the post offices within these cities that sell gold coins. I read somewhere that post offices in Jharkhand have also started selling gold coins, but didn’t find them in the postal department’s website.

There are several similarities in buying gold coins from the post office and buying them from a bank; for one – if you are buying gold coins worth more than Rs.50,000 – you will have to furnish a copy of your PAN card. For another – you will pay a certain premium because the post office says that it charges a commission of 4% on the gold coins. However, this premium might still be less than the one charged at a bank.

If you are looking to buy gold coins – then this opens up one more option for you – it might not be the cheapest option, but it is probably cheaper than buying from a bank, and offers much of the same confidence.

Image by Motoyen

Although most shares are in dematerialized form these days – there are still some investors who have share certificates from the pre – demat era.

If you have not dematerialized your shares yet – you should do it as soon as possible because that eliminates a lot of hassles  – which can range from selling the shares to replacing the share certificates if you lose them.

A lost share certificate can mean a lot of trouble, and I think most small investors will not take the trouble to replace a lost share certificate because of the cumbersome process involved.

If you lose a share certificate then you have to notify the company and furnish necessary documentation in order for them to give you a duplicate. I received an email inquiring about this, and that’s how I started looking for information about it.

So far, whatever I found indicates that you need to file an FIR with the police when you lose the share certificate, get an indemnity bond, file an affidavit, and also take out an ad in a newspaper indicating that you have lost the shares. If you do all these things, and no one refutes the claim – your company will issue you duplicate share certificate.

This process sounds really cumbersome, and I don’t know how many small investors would like to go this route. I have not found an alternate to this, but if anyone knows a better way – please share it here.

Also, if you want to get a quick understanding of this process then I found this Dabur link to be the best source for this type of information.

Image by Lodig

I have written about investing in gold through gold ETFs, and gold monthly income plans in the past, but there is a more direct way to invest in gold, and that is by buying gold coins. I use the word direct because you buy physical gold, and don’t have to pay fees to the middle-man, thereby eliminating at least one layer in between.

The flip – side is that you will have to store physical gold with you, but most of you would have bank lockers to store jewelery anyway.

Here are a few things you should know about buying gold coins in India:

1. Reputed banks sell gold coins: The most important thing to me is that reputed banks like SBI also sell gold coins, and that reduces the chances of fraud, and someone selling you something which is of less purity than they claim. A lot of banks have entered this space, and they sell gold coins through their branches. Not every branch will sell you gold coins, so you need to go to the bank’s website and find out the closest branch that will do so.

2. Different sizes: Gold coins are available in different sizes, so you can buy the ones that suits your needs the most. The usual sizes are coins of 2, 4, 5, 8, 10, 20 and 50 grams. The coins are 24 carats, and the banks guarantee their purity too.

3. PAN needed if you are buying gold coins worth more than Rs.50,000: If you plan to buy gold coins worth more than Rs.50,000 then the bank will ask you for your PAN details. I don’t think a jeweler will ask for similar documentation, and that might be one reason to go to a jeweler to buy a gold coin.

4. Banks won’t buy – back your gold coin: I have not seen any banks that you can sell your gold coins to. They are happy to sell you their gold coins, but you can’t go to them and sell it back to them. You will have to sell the gold coins to the jeweler, and this is probably another reason for buying gold coins from jewelers in the first place.

5. You might pay a premium for buying gold from a bank: Now, I started off extolling the virtues of buying gold coins from reputed banks, and I will end this post by mentioning that if you compare prices between your local jeweler and some banks – you might find a difference. There will be a difference even when they guarantee the same purity. A lot of people think that this premium is worth it because the price is higher when you go to sell the gold, but that is not always true. You don’t get this premium while selling off your gold coin. In effect, buying gold coins from your jeweler might turn out to be cheaper than buying it from a bank. It is up to you to decide whether the difference in price is worth it to you or not.

These were just some points that you should keep in mind while buying gold coins – I am going to write more about this topic in the future because a lot of people are interested in this, and would love to hear if any of you have had any experience with buying gold coins.

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When we invest, we need to be realistic about our investment returns.  We should begin investing by assuming that our gains will be minimal.  When you do find yourself losing money, cut your losses before they become overwhelming.  Don’€™t be a perfectionist about each investment decision you make, but do a reasonable amount of homework so you know what you are getting yourself into.  There may even be times when it’s best not to invest.

One fallacy to consider is whether or not you treat your money like poker chips.  Are poker chips an asset?   They aren’t because they have almost no value outside of a casino.  A stock certificate only has value on the stock market — that is true, but its value is universally recognized.  Everyone in our society recognizes the value of a stock certificate. Anyone would recognize the value of your stock if you offered to sell it to them.  Now try taking your poker chips across the street to another casino, or better yet try selling your poker chips to your neighbor at your next BBQ.  It would’n€™t work because an asset is generally an item which can be bought and sold, whereas poker chips can only be bought and then cashed in, at one particular casino.

Depending upon the size of your bets, you can lose all of your money when gambling.  Investors can also lose all of their money.  However, a stock has three possible directions, up, down, or staying the same.  Has there ever been a time when a bet you made at a casino remained the same value?  When gambling, you either win or lose and the result is immediate.  An investment may go down, and then recover its value and climb beyond its initial value.  Investments are less likely to leave you with a total loss of your money, unlike a slot machine.

You can put coin after coin into a slot machine and lose all of those coins.  On the other hand, the same money saved up in an account at a discount broker that’s placed into a stock investment can yield a large return.  A win on the slot machines is not a payoff from an investment.  You bet a dollar and receive tens of thousands of dollars in return… that is a chance occurrence, and not a return on your investment.  The proportion is wrong.  When investing, proportions make a difference in the size of your return, usually.  In gambling, the payoff is out of all proportion to what you would expect from an investment return.  Consider what happens to a lottery ticket winner who wins millions of dollars by purchasing a ticket that only costs one dollar.  Is that return in proportion to the investment?  I don’t believe so.

All casinos offer games of chance for entertainment purposes.  While there is the possibility of a return on your money when you bet in a casino, your winnings cannot be considered an investment return.  Simply put, you cannot calculate your return on a casino bet, especially in a randomized game.  You don’t know how much you’€™ll make when you gamble.  Neither do you know for sure what you’ll yield from your investments.  The reason no investment is guaranteed is because no stock broker or financial advisor knows what the outcome of any investment you make will be.  But your return can be calculated with a reasonable guess.

Since there are 52 cards in a deck, any astute gambler can figure the odds of certain cards being played during the course of a game.  This poker probability is well known to those who take their gambling seriously.  Many players will take this knowledge into a casino, and win money at blackjack or poker.  Yet, is that kind of foreknowledge comparable to the types of foreknowledge an investor uses to approach the investment spectrum?  I would argue no.  Like gamblers who play their cards poorly, investors are at the whim of human fallacy and greatness, but that is where the similarity ends.  Casinos are run by wizards behind curtains, and in the end, the money you spend is only for fun.  Any returns you receive are by chance, and so cannot be considered investment returns.

Gambling, and not investing, is like an arm wrestling match; once the contest is over; there is a clear winner and loser.  Investment brokers house countless investors who are matched against hundreds of other investors just like them, who are also vying for the best returns they can get for their money.  The contest is only over when the investor sells their stock certificate (property.)  Their wins or losses are due to the investors’ efforts and not chance: how well did they choose their stocks, and did they have the fortitude to stay with that investment until the returns were positive?  The win or loss in investing is not necessarily immediate as in gambling.

Stock market wizardry is generally a mirage, with most investors finding that they are more human than magician.  Your gold rush will come from your own efforts, rather than by chance, and another hard day’€™s work of investing feels pretty satisfying.

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With all the snow this winter, we can be sure of one thing – people who live where it is cold will be getting cabin fever. Traditionally, people go outside to go sledding or participate in various snow sports. More so these days, the video game industry is taking hold of our idle hours and keeping us indoors while still providing for our need to let our hair down and relax –- thus there is no need to go outside and be cold. Video games have come a long way since their humble beginnings to the point of virtual reality in our family living rooms.

An industry leader in video game retailing is called GameStop. This Texas based company went through several transformations from its beginnings in the 1980’s. Today, the company is a $4 billion dollar company with 6,400 stores. That is pretty impressive for a specialty retailer. Sure it has some hefty competition… well known retailers with big names, none of which specialize in video games, but happen to sell games as a smaller part of their overall business. Which begs the question of any investor: which type of company would you rather add to your online stock brokerage account — a large sprawling retailer which sells many things including video games, or a focused video game retailer with small stores full of all types of video games? Interesting question, right?

GameStop, ticker symbol GME, is nearly the only company of its kind and scale which sells video games exclusively. I was in one of these stores over the holidays and I have to say, it was packed to the gills. The service was a bit slow, but that may be due to their policy of keeping the actual game discs behind the counter. Sounds like a recipe for not much shoplifting if you ask me — all the better to send the profits back to investors instead of thieves. This is a bricks and mortar retailer which also has a phenomenal website store.

GameStop is the only player in an industry which is in its relative infancy because video games only came on the market about a quarter of a century ago. Here the potential for growth lies in ever expanding technology, not in taking market share away from its competitors. Although with so many stores, and a strong grip on the video game market, GameStop has the potential for a near monopoly. In 2005, the company merged with a competitor –- EB Games. Two additional smaller competitors are Game Crazy and Play and Trade, a franchised store network. What makes video games a growth industry is the unrealized future potential of video games development. Plus virtual reality has applications outside of video gaming, creating other possibilities for technologies developed in the first industry to cross over into other industries.

As someone who comes from a family of video gamers, I’m intrigued by GameStop and will be keeping an eye on it. It may very well become part of my stock portfolio one day, after I assess its potential even further.

I requested Mark from Options for Rookies for an interview while I am away, and he very gracefully accepted. In this interview Mark explains how options can be used as insurance for your portfolio. If you have any questions, please leave a comment here, or at Mark’s blog. As far as I can tell, Mark responds to each and every comment, and your answer will very likely get answered.

1. You have often said that options are a good way of insuring a portfolio. In your opinion – is buying Put options or selling Futures a good way to do this for a rookie? Is there a better way?

Conservative option strategies allow for earning substantial market profits – with reduce risk.  As a trader becomes more conservative  – and increases portfolio protection (insurance), stricter limits are placed on potential profits.  The ideal situation is a good balance between minimizing losses and earning profits.

The problem with buying insurance – as a stand alone strategy – is that there is always the negative side.

1) Buying put options is just too expensive.  It does it’s job very well and protects the investor from all disasters.  As with any insurance policy, the individual can choose his/her own deductible.  For example, when a stock is $52, you can buy a put option that gives you the right to sell shares at 50 (The most you can lose is $200 plus the cost of the puts); 45 ($700 max loss, plus put cost) etc.

Put options cost so much, that there is usually little chance to profit when the market continues to rally.  Expect to pay at least 15 to 20% of the stock price – per year – for this type of insurance.  I do not recommend it.  Too expensive.

2) Selling futures does provide a good hedge.  If that’s not bad enough, there is a big correlation risk.  If an investor’s portfolio under performs the futures contact, then significant money can be lost on rallies.  That is not the purpose of owning insurance.  It’s best to avoid correlation risk by owning insurance on the specific investment that you already own.  Do not sell futures as a stock market hedge.

3) The method I prefer costs very little (sometimes you can be paid for owning this insurance) cash, but there is an opportunity cost.  This strategy is the collar, in which you do buy the put option per #1 above – but you also collect cash for selling a call option.

This is the mixed blessing.  Selling the call often provides sufficient cash to pay for the put option – with cash left over.  But, your upside potential is limited.  When you sell the call option, you sell someone else the right to buy your shares – if those shares are priced above the call strike price when option expiration day arrives.  Thus, profits are limited.

I’m willing to trade the ‘potential’ upside for the ‘guaranteed’ protection.  Many investors are not willing to make this trade.  Being afraid to miss a rally, they prefer to take the risk of getting hurt in a down market as long as they have the possibility of earning unlimited upside profits.  Who is to say that’s wrong?  It’s far too risky for me, but each trader makes his/her own decisions.

2. How does one go about evaluating the cost for such insurance?  At what time do I need to say I will just sell my stocks instead of buying (or selling) these options or future positions to protect my portfolio?

To evaluate the cost, take a look at option prices.  If you plan to buy puts, pick the strike price, look at a 3-month put and see the cost.  Then multiply by 4 to give you a reasonable estimate of what it will cost to insure this position for one year.  Most of the time you will discover that the price is just too high and the stock would have to undergo a huge rally for you to earn any money.  Although some people recommend buying puts for protection, I am adamantly opposed to that idea.

Selling your holdings represents the perfect insurance policy.  There is no cost and there is no risk of loss.  But there is an opportunity cost.  You fail to prosper if the market rallies.  When to sell stocks is a major discussion all my itself.  A reasonable hedge is to sell a portion of your holdings when you deem it to be appropriate.

In general, most investors only know how to buy stocks and if they would learn to sell part of the time, they would do much better.  I’m not suggesting timing the market.  No.  Just taking some profits when prices rise ‘enough.’  And add to holdings when prices decline sufficiently.  But traders are subject to emotions and the majority cannot sell when prices are rising.  That’s a major problem for investors.

Collars are easier to analyze.  In most cases, the cash outlay is minimal.  Thus, ask yourself:

Am I willing to cap my profits if my stock reaches the strike price of the call option?  Or must I earn more than that?

Is the protection (the most I can lose on a decline) acceptable?

Am I willing to guarantee a maximum loss – at an acceptable level – in exchange for the possibility (note: that’s all it is – a possibility) of extra profits?

If ‘Yes,’ the collar is for you.

If ‘NO,’ you and collars are not well-suited for each other.

3.  As far as put options are concerned, do you have any preference on – out of money or – in the money put options to hedge positions? Does it make any difference because of the time decay or any other factor?

a) The purpose of these options is to buy insurance.  It is NOT to earn a profit.  Thus, there is a very big difference in approach.

b) The options should be out of the money.  That’s enough protection.

c) If you want to buy in-the-money put options as insurance, then you should sell stock instead.  There is no need to pay such a high premium for a stock that you are afraid will decline in price.  Insurance is protection against ‘being wrong.’  You do not want to own stock you suspect will decline in price.  And if you do not expect it to decline, there is no reason to buy in the money options.

Bottom line: Insurance is not for everyone.  In my opinion it is far better than depending on proper asset allocation and diversification to protect your assets.  In a very globalized economy, there is a good possibility that all asset classes can move in tandem.  If that happens in a debacle, you can be severely hurt.  I’d rather trust in owning collars (with a guarantee) than depending on out-of-date investing guidelines.

On Saturday I received an email from ICICI Direct informing me about a new choice in their brokerage plan.  A brokerage plan is a set of terms and conditions about the commissions you pay ICICI Direct for your trades.

Till now, there was only one plan, and everyone using ICICI Direct used to pay fees according to that plan. However, from January 1^st 2010, ICICI Direct has introduced a new plan, and now you have an option of selecting the plan which makes most sense for you.

The two plans are called:

• I-Saver
• I-Secure

The main difference between the two plans is the brokerage commission on cash. The – I-Secure — plan charges a flat brokerage of 0.55%, while the – I-Save plan has a tiered rate, where the more you trade, — the lesser commission you pay.

I switched my plan from I-Saver to I-Secure, because the new one will work out cheaper for me. I will never trade the volume necessary to get my rate lower to 0.55% under the I-Saver plan, so the flat rate plan is best for me.

Here’s a look at the two plans for cash:

ICICI Direct I-Saver Plan

Total Eligible Turnover (per calendar quarter)	Brokerage %	Second Leg of Trades	Effective brokerage on Intraday Square-off
Above Rs. 5 Crores	0.25%	Nil	0.125%
Rs. 2 crores to 5 crores	0.30%	Nil	0.150%
Rs. 1 crore to 2 crores	0.35%	Nil	0.175%
Rs. 50 lakhs to 1 crores	0.45%	Nil	0.225%
Rs. 25 lakhs to 50 lakhs	0.55%	Nil	0.275%
Rs. 10 lakhs to 25 lakhs	0.70%	Nil	0.350%
Less than Rs. 10 lakhs	0.75%	Nil	0.375%

ICICI Direct I-Secure Plan

Total Eligible Turnover (per calendar quarter)	Brokerage %	Second Leg of Trades	Effective brokerage on Intraday Square-off
Irrespective of turnover	0.55%	Nil	0.275%

For someone who predominantly trades less than 50 lakhs in cash in a quarter, the flat rate option is going to be cheaper. I fall under that category and so I selected that plan.

Apart from this commission, there are other charges that apply. Here is a list of those other charges:

• Service Tax (ST) will be charged at 10.30% on total value of brokerage.
• Securities Transaction Tax (STT) at 0.125% on turnover.
• SEBI turnover charges at 0.0001% on turnover.
• Transaction Charges will be charged @ 0.0031% for NSE and 0.0035% for BSE on turnover.
• Applicable State wise Stamp Duty charges as per delivery and non-delivery would be levied on turnover.

The minimum trade value accepted is Rs .500.  The minimum brokerage for transactions upto Rs 3335 is Rs 25 or 2.5% whichever is lower. All statuary charges would be levied over and above minimum brokerage.  Brokerage rate mentioned above would be levied for trade value exceeding Rs. 3335.

The charges for options, futures and margin trading for both plans are same, so that doesn’t come into play while selecting a brokerage plan.

If you use ICICI Direct for trading, then take a look at your investing habits, and select the brokerage plan that works out cheapest for you. This will be applicable from 1^st January 2010 onwards.