Guru Mantra 16- Competitive Advantage: Racing for Uniqueness (The Second Part)

thank you for effort & time you putting here .
great work !
it will be nice if your cover this all concepts as per same sequence .
i m really eager to learn this concept
once again thank you

1 Like

Thanks again Suvi. Personally I would be most interested in learning on
"investment Philosophy (Personal Financial Planning"

Great work again, take a bow. I would love to learn on similar lines, as to how to dig for info and get more closer to management accounting. I agree 100%, that management accounting is what gives us inside (owner’s) view of business which is what we need to get under the skin. How to get info for building our own management accounting from reported numbers.
Vikas Kukreja

Thanks Suhas for kind words.

My practice book over the years do capture quite a few information I have captured earlier. Hence its becoming slightly easy in collating. Packaging, content withe examples…a bit of effort is required.
I must confess the reason for doing so:

  1. I am learning immensely, driving me back to check notes, check books and extrapolate the reasons.
  2. Till 5 days back I was not aware about ValuePickr (now you can understand why I am so incredibly stupid!). I was refreshing one of stock Premco Global and getting information from retail sources almost was becoming watertight. Then catch word “Premco Global” in Google get me into value pickr. The level of information was crisp, to the point.

I couldn’t believe my eyes at sharing of information by so much genuine souls out there. Every bit of information comes handy.

@Donald thank you for putting up such a valiant effort.

I will continue to contribute in my own little manner in educating, offloading what ever I learnt all these years.




@Suvi sir…Your mantras are a great help for us who are novice and have only miniscule knowledge about accounting.Articles are very thoughtful .Thanks a lot again for your help.


Guru Mantra 5- Understanding Financials

Part II of Financials

Power of Simplicity

Simplicity is most the sophisticated thing, friend of Guruji (investor of course) made a point to me over a discourse. This was a reference when I wanted to show a seedbed of ideas (or mental model what ever we call). He quipped why you make things maddeningly so unhelpful?

Simplicity is the ultimate sophistication – Leonardo Da Vinci.

One of major pillar of value investing is finding out a competitive advantage. Warren Buffett coined a word moat to look out for companies having unique product, unique service or a better-cost producer. But some one who has invented the broader word “Competitive Advantage” is none other than legendary Management Guru Michael Porter. And guess what, his landmark book “Competitive Strategy” provides a formula for sustainable growth. Yet no one use, but strangely it’s a very simple formula. Want to try?

Asset Turnover X After Tax Return on Sales X Asset/Debt X Debt/Equity X Fraction of earnings retained.

No one dares to ask Prof Porter whether it’s right or wrong. Even if it’s true still we will not follow it. We all have a habit of liking strong vocabulary and complex things.

But does simplicity creates knowledge and wealth? Of course yes, simplicity is adaptive, enduring and transmitting!

Accounting Principles

We can’t build a paper box without setting up few principles, accounting does have few. They run through every financials, these are basic rules and assumptions which decide the what, when and how to measure. The principles have serious impact on preparation of financials. Let us understand them:

First is accounting entity. Every company builds a chart of accounts (this is a list of accounts going to be used by company e.g. Trade payable –Number 10000, Raw Material- Number 20000). Accounting entities are different sections of business for which management need financials. For example ITC have Cigarette and FMCG. Both Cigarette and FMCG becomes accounting entity. Now trade payable will be linked to both accounting entity.

Second is going concern. Accounting by default believes unless there is an evidence otherwise every company life is for long time. Now no one can say this for sure but we need to assume. If you believe the company is sick (not commodity type, a company where net worth has eroded completely) auditor will point in their report (called as qualification).

Third is measurement, everything under the sun has to be quantified to be accounted. This has also become biggest pitfall for accounting as well. Unless we have agreed upon value we can’t record in financials. For example if a mine value can not be estimated it would be shown as either nil value or purchase price what ever is available which may not reflect true value.

Fourth is reporting currency, due to foreign operations every company deals with multiple foreign exchange rates e.g. US dollar, Euro, Yen etc. But Indian companies need to report only in Indian rupees as it will file financials with Indian authority.

Fifth is historical cost, meaning everything is recorded at original cost with no adjustment for inflation. Now take a land bought in Andheri back in 1955 at 1000 Rupees will still show as 1000 in 2016 even. This sometime understate asset value and depreciation grossly.

Sixth is materiality, this is basically relative importance of financials. We don’t have to break our head for 100-200 rupees. We will record big ticket items only when small ticket information are not available.

Seventh is** estimate**, assumptions and judgments, things change here as we move to unknown territory. What best you can do when we don’t have exact information and at the same time not much expected error will come. But estimates etc should be consistent across the years.

Eighth is consistency, now one year say 10000 is materiality next year 1 lac. Or tables or chairs are not assets, next year they become assets.

Ninth is conservative, we accountants are downward looking not because we wear specs. We don’t like to over value anything; hence we will recognize loss even at slight hint, wont record gain even with a big hint.

Tenth is periodicity, financials are prepared for a particular period. Say a financial year (Jan- Dec). Regulators enforce most of the time periodicity.

Last is substance over form, this means we want to book economic substance not what looks to our eyes. Long shot to claim☺.

There is something also called restatements, the moment we recognize mistakes we rectify and restate the financials. But it has a heavy implication for regulation, audits etc.

And pillar of all these is accrual accounting, this means recognize the moment you use the asset or liability rather waiting for payment. For example the moment your raw material is accepted vendor becomes liability and raw material cost is recognized. This time difference between actual usage and payment has resulted another statement Cash Flow Statement. This is the key reason why profits are not cash. Accrual concept includes matching principle, this means if you recognize revenue you cant say no to costs incurred. You have to record both. Allocation, lot of costs are not associated with a specific product e.g. though insurance is paid in full at beginning the expenses are recorded as they arise.

Who is making all these rules?

First foremost The Institute of Chartered Accountants makes all accounting standards for India. The institute is empowered by constitution through Companies Act. What you know them otherwise as CA or Chartered Accountants. Accounting standards are the rules, guidance to recognize asset, liabilities or any other item related to financials.

Next are Tax authorities, in few cases they don’t believe certain practices adopted by financial accountants. For example depreciation rates are different for tax purpose and other purpose. Many says tax accounting is more realistic. A fresh set up of books is not written, what happens we create another accounting entity for tax and pass the differences as adjustment entries to main financials.

Creative Accounting Practices

As we saw accounting principles are not straight forward, a good amount of estimation, fit for purpose application some times lead to creative accounting practices to suit management need. When creativity becomes manipulation with a mala fide intention fraud occurs. Fraud practice is popularly called as forensic. Forensic is a special subject, lot of people focus their career on this. Three famous books you can go through to understand. I will try to create a separate subject on this, I am not aware of forensic much!

Quality of Earnings by Thornton Glove

Financial Shenanigans by Howard Schilit

Creative Cash Flow reporting by Charles Mulford

But for basic foundation to analyze a stock, at least let us understand how accounting principles can be misused.

  • Concluding a going concern is estimating future. Auditors and management use a yardstick of net worth erosion (this means liabilities exceed assets). But negative net worth may not always be a bad factor e.g. this negative comes with a sharp provision entry for non collectability of receivables. We should be more worried about negative net worth with more interest bearing third party liabilities (debt from out siders).
  • Quantification or measurement is done is based on available information on a particular date. Now just because information is not available we can’t give a guarantee for accuracy of these measurement (for individual also its called as availability bias- park this behavioral finance).
  • Currency usage can lead to confusion as well, say fluctuations in foreign currency while buying an asset is charged off to P&L account. Earlier in India it was capitalized. Any of these application will create a understatement (lower profit than actual) of over statement (higher profit than actual) of profit.
  • Historical cost is one of biggest reason for not relying balance sheet valuation. As I said earlier assets like land, mines purchased long time back must have become a fortune over the years. Sometimes management does a revaluation of assets but again discretionary practice.
  • A decision towards estimates, judgments can have far reaching impact on financials. For example I was depreciating an asset over 5 years, suddenly changed to 10 years, this would mean my depreciation will come down by certain amount which will overstate the profit. Auditor does qualify in his report, then how many times people go back and normalize this for calculating net profit margin!

Indian Financial Accounting Structure

All of us are familiar with two things at least:

One is quarterly financial report submitted to stock exchange. But more importantly annual report, this is a package of many things (we will touch them sometime else) including financials of company. Schedule VI is the key format where company’s financials are presented and what you see in annual report as well.

But even before we take a stab at Schedule VI, we must understand underlying ethos of management behind financials i.e. otherwise called financial statement assertions (FSA). These are claims by management saying we are responsible for preparation of financial statements and they are appropriate. You may why do I believe so, here may be why:

Many ways you will find management talks about assertion. Let us not confused by these internet sites and blogs. There are only FIVE fundamental FSA, which are certified by COSO (the biggest body for accounting committee) and testified by Auditors (something called key controls for financial reporting under Sarbanes Oxley Act, Indian name is IFC or Internal Financial Control).

Five FSA tell us management believes and it is tested that:

  • All the transactions recorded are complete and nothing is missed out (Completeness).
  • Transaction has been recorded in right period i.e. 2015 transactions recorded in 2015 not 2016. (Existence or Occurrence)
  • The accounts are disclosed and presented in right place i.e. cash is suppose to be part of current assets , its not included within fixed assets. (Presentation and Disclosure)
  • Accounts and transactions are valued accurately, 100 purchase is shown as 100 not 200 (Valuation or Allocation).
  • Asset means I own, liability means I owe. My rights on asset or obligation for liabilities is fool proof and supported by evidence (Rights and Obligations)

Despite of management assurance there is no guarantee that management wont do any other things which you and me don’t want☺.

Now Schedule VI

In lay man’s word format of Balance Sheet, Profit & Loss Account, Cash Flow and associated items. Let us not get into individual elements, it wont help. Rather look at holistically to have a view, we have loads of chance again to look at individual items when we get into actual methods of stock analysis.

Balance Sheet

It tells us basically what I own (assets), what I owe (liabilities) and this is my worth (equity of net worth). Equity is the one we own as shareholder in any given company.

At any point of time assets will be equal to liabilities as for every debit there is a credit somewhere.

View balance sheet as a snapshot of history, a financial picture on a particular day when its written.

Balance sheet boasts mainly these items:


  • Assets are the one we got like cash in bank, inventory, machines, building- all of them.
  • Assets are also rights we have on monetary value, for example we can collect cash from customers if sold on credit.
  • Assets are valuable and must be quantified in reporting currency

What assets tell us further about their characteristics:

  • liquidity meaning can be sold easily like cash, investments etc.
  • productive e.g. plant and machinery.
  • Assets for sale e.g. inventory

Trade receivables is the obligation of a customer to pay whom we sold on credit.

In our Indian financials Assets are shown in order of safety i.e. first fixed asset followed by current asset. Where as in US you will find reverse, first liquid asset then fixed asset.

Current Assets

Are the ones which can be converted to cash within next 12 months. This includes cash, trade receivables, inventory etc.
Inventory includes raw material for to be used in manufacturing, finished goods to be sold, work in progress inventory, other spare parts and consumable which will be used for manufacturing.

Prepaid expenses are the ones where we have paid already in advance like insurance premiums, rent, deposits etc. This means we don’t have to pay in near future.

Cash is required to buy inventory which gets manufactured to become finished goods, once sold called receivables, on collection we get cash again! Cash is king and please always ultimate motto is to see cash.

There are few other categories of assets, we have enough opportunity to discuss in future.

Fixed costs are stated at cost value, they are used over again and again for making goods and produced. Cost means original purchase price. On balance sheet fixed cost is shown as original cost minus depreciation.

Depreciation is the decline in value of asset due to wear and tear and the passage of time.

Patent, copyright, software have a value but not tangible (cant touch or feel). These are valued by management according to various conventions bit complex for now.

Liabilities are categorized mainly:

  • to whom the money is owed
  • when the money is payable (current and long term liabilities)

Current liabilities are the one which needs to be paid within a year. Chief inclusions are accounts payable or trade payables owed to supplied. Accrued expenses owed to employee and other service providers, current debt owed to lenders, taxes owed to the government.

Working Capital

The amount of money left over once you subtract current liabilities from current assets. This is the money company has to work with to manage day to day operations.

  • every increase in current asset increase the working capital or every decrease in liability does same thing.

Shareholder equity

This has two component, one is capital i.e. the original amount we contributed as investment in company. Second is retained earnings which are earnings earned and retained but not paid as dividend. Retained earnings is critical component of value investing.

Now one may think capital is shown as 1,2, 5, 10 rupee per share but I pay 2000 to buy. Where is the rest money! Your share is capital and retained earnings, if you pay high you have to justify some reason why are you paying high.

I will cover Profit & Loss, Cash Flow next time and much more.

I have attached a Schedule VI for further understanding, please feel free to raise questions if any.

Now, without application theory is of very little use. All of us will disperse if these theories doesn’t create a wealth (money or knowledge), knowledge getting acknowledged by self becomes wealth.

I will take a live example and simulate , so that we keep on going with these mantras together to have a better view.

Here it is: the company name is International Travel House (ITH here onwards). Why I selected this, and what is there let us discuss in a separate thread or topic. As that would be stock specific information it will not be appropriate to club along investment learning. That will also keep me going, as I need to survive from investing as well. :relaxed:

Kindly note I don’t know even whether ITH is a good company or bad company. It’s a completely live simulation, please make it interactive. Allow all of us to learn from each other. As usual no buy or sell, nothing. Owning a stock is congregation of multiple decisions, ultimate outcome of which significantly vary from person to person. So when someone says buy or sell, its nothing more than entertainment, don’t fight….just take a bow and pass. All will be happy☺.

A stock analysis results:

  • certain positive points about business, industry and management, importantly the characteristics of element there.
  • Certain negative points on the same line as above.
  • Unanswered questions and points, of course same as above.

Happy investing tribes!Format_of_Financial_Statements_under_the_Revised_Schedule_VI.xlsx (311.7 KB)

This file I have collected from Google, not developed by me.


Guru Mantra 6- Case Study of International Travel House (The Battleground)

I must repeat again. No buy, sell and nothing. This is a live simulation and discourse around it. I even don’t know much about the company. Hence I am not even declaring this stock as hidden gems, opportunity etc. The idea behind simulation is to take you through Guru Mantras and apply them so it is easier for me and you to understand.

Why this company?
An opportunity for investment is sourced from several sources:

  • Financials indicating a moat
  • Low valuations at first sight
  • Thematic (secular trend, growth stories you are convinced at)
  • Borrowed (from web, advisors etc, where to borrow and not to)
    Opportunity sourcing needs good bit of understanding, better one take it up after doing few investment documentation. By that time one gets acquainted with nuances of investing world.
    To explain why I choose the company, I some time use a combination of Financials Moat and First Sight Low Valuations . What are they, will come to you in a while.

Circle of Competence
Before that one must understand whether a particular business falls under their Circle of Competence. How to do a circle of competence, just few days back I posted a topic in VP. Here is the link:

No one expects you to be master of a particular business. If you can do a mastery nothing like it. What is expected from an investor is:

  • Do you have a prior experience in such business either as employee, acquaintance or interest or even education?
  • Can you spend time in understanding business and allied stories?
    Quite subjective, isn’t it? The moment the preaching starts just like I am doing now, always ask the inverse questions:
  • My portfolio consists of Pharma, FMCG, and Financials. Just now we described the three biggest tenets of academics i.e. Engineering, Doctor and Accounting/Finance. Do you really understand such diverse characteristics?
  • Have I known or heard or customer, supplier, lender of business?
  • Have I seen the product, services or used?
  • Can I think like CEO of business?

We need to document the circle of competence, will come to you in a while, a cursor before that:

  • There is no “certified” words called as Large Cap, Mid Cap and Small Cap.
  • Emerging trends, potential multibaggers are either wish list or debate topics. Don’t mix them with circle of competence.
  • Good financials, a strong moat are characteristics of a business, not yours. So when someone says company have strong financials, you ignore ask yourself do I understand this business?
    Understanding circle of competence is a big step before you start. A brief reading of business is required before concluding. The sectors given on stock exchange may be too abstracts.

What I saw International Travel House (ITH)?

Revenue growth- it picked up during 2010 and 2011, otherwise a muted growth.
EPS Growth- flat for last two years, before that slumped to negative.
Free Cash Flow- somewhat stable barring couple of years.
Equity or Book Value Growth- started from 67 in 2007 went up all the way to 297 in 2013 before nose-diving to 159 in 2014 and stagnated at 176 in 2015.
Return on Invested Capital or ROIC- almost in the range of 13-15, except couple of unusual bump ups in 2011 and 2012.
Well what we just saw is confusing state of affairs, flat revenue and margin with a downward bias recently. Book value and free cash flow somewhat stable. ROIC is a number so far looks positive.
Is this the kind of number of I am looking for? Low hanging fruit? For me no, I would prefer 10% revenue, EPS, Free cash flow and book value growth at minimum. ROIC more than 10 are ok for me to start with. I rejected at first sight and closed the opportunity-sourcing file. What caught my next attention will come to you in a while.

You may ask, why these five things…. there are another twenty ratios. Why not them? This is my explanation:

ROIC- this is return a business makes on cash, which it invests in business every year. This means that portion of earnings reinvested to business. This indicates the confidence of management in business and how? I will only invest in my business only when I am confident of getting higher return than risk free rate i.e. say fixed deposit. Now lets not carried away, this is management confidence basis their past history. Future is uncertain other wise ITH wouldn’t have a reported flattish result. And ROIC doesn’t differentiate between borrowed money or owners money unlike ROE (Return on Equity) which tracks only equity or owners capital. If you have a consistent ROIC it gives some sort of indication that business is protected from constant price from competitors. I don’t want to see ROIC going down or at least stable…no sharp decline. If you look ITH they may not be super ROIC but it’s somehow ok type.

Sales or Revenue Growth- I would love to have a billing number than revenue. Remember you can still bill and collect money yet accountants do not allow you to recognize revenue because delivery is not made, work is not completed etc. Many of the times these are more academic reason than business necessity. Imagine you are collecting cash before delivery, ecommerce☺. Yeah, but icing on cake is when you own the product and freely pricing it.

EPS growth- how much business is profiting per share of ownership. The basic reason is the price of a stock is on expectations of current and future earning and that’s an undeniable truth. Though value investors will chop my head off if I say PE ratio is the one to rely!
Equity growth rate- now business earn money and spend in Bahamas in dine and wine. How would I know that? Equity is portion of my money or called as book value also. This means management has kept the money within business either investing within business or outside. Think about a scenario where earnings are growing but equity is not. What can happen, perhaps management need lots of money to maintain assets, spend in advertisement etc or blown that off in Bahamas.

Free cash flow growth- eventually this is the cash available from business. Free cash flow is Cash Flow from operations minus Capital expenditure. This would tell us whether profit also brought cash or just paper profits through creative accounting practices. Now there is a caution, free cash flow negative may not be bad always. A company at growing stage may have to spend tones of money in capital expenditure. Even the cash flow from operations include expenses like Research, Advertisement which is possibly using for creating a competitive advantage.

All five done, hopefully I could convince you.

As I said initially I booted this stock out of my file. Again it popped up during low valuations. What is the definition of low valuation? My apologies, PE ratio is just a psychological valuation for me….use when you just returned from a pub to brush up whether market is behaving same as fundamentally. Which they will never do in short run.

What is valuation based screening for me?

I use Graham and Dodd at purest form to dig the first hole. By spending X amount how much earnings Y I will get?
If I have to buy ITH today I have to spend 142 Cr that is the current market capitalization of company.
During last nine month ITH have made 11 Cr profit , if you full scope to 12 months it would around 15 Cr.
What does this mean? By spending 142 Cr, I can walk out with 15 Cr that gives a return of 10.56%. Sounds a small mark up on fixed cost, isn’t it? I mean one will say I get 9% in FD, even 11% in bond what’s the big deal? May be yes may be no, let us check out this same factor:
Cox and King appear to be the big daddy in listed space. Let us find out what Cox and King is up to:
It made 360 Cr profit in last nine months, say a full scope of 480 Cr and Market Cap is 2800 Cr, this is a whopping earnings yield of 17%. That to for a brand name.
Let’s find another one, Thomas Cook …another big daddy. Nine month profit 54 Cr, full scope 72 Cr. This is the earnings I will get if I pay 6836 Cr, which is market cap, a miniscule percentage of 1.12.
Another confusing story, I have one who is making lot earnings, another one who doesn’t and they are all big boys. Then I have this ITH, which is in middle. What should I do?

Here is my conclusion:

  • I didn’t see any one else other than this three survived business at least in listed space.
  • Earnings yield of 5% and more can be a case of price value mismatch. Simply because our index earning yield is 4-5%.

I am not very happy in selecting the stock but again not the best way to conclude.

Documenting the circle of competence
This is one step if I fail will simply pass the stock.
Question 1: What is the business category of company? What is my first reaction?
Consumer Cyclical Leisure, all about entertainment and travel. This something you and I do. May not be in same scale, I think can understand further.

Question 2: Did I look at the “about us “ section on web site? Can I explain they’re what are written without referring to other sources including Google?
ITH is travel and tourism service provider offers air ticketing, car rentals, inbound tourism and holiday packages. Plus official event management. Sounds super!
And this is an ITC Company☺.

Question 3: Did I check the products and services sold by the company? Have I seen them or known before? Can I write down 2-3 lines about each product and services?
All about services, when you hire car or go abroad you need these guys.
Business travel- requirement to execution, I have been part of such entourage. I am sure all of you.
Car rentals- taxi services.
Holiday package- complete package of fun, wine and dine.

Question 4: Who is buying the products or services and what is the usage? How does the product and services generate money in business?
Anyone of us, who wants to travel for need, for leisure.

Question 5: What is required to make these products and services? Have I seen them or known before? Can I explain in 2-3 lines about requirement?
We need chiefly people and infrastructure. For example we need a car and driver.
For holiday package we need network, people and technology.
This is kewl! I have see them and I have used ITH car hires in Gurgaon as well.

Question 6: Who (nature of) are the suppliers of the requirements as mentioned in question 5?
Suppliers are hotels, air line carrier, individual drivers. Long rope of value chain.

Question 7: Do I think the business or company is unethical at first go?
ITC is well trusted name in India, parent company is one of index company.

Question 8: Can I mention one more competitors for the company (which are listed)?

  1. Thomas Cook 2. Cox and Kings

Question 9: Do I think I will get right resources to analyze the company further? What is the edge of circle?
Plenty available, right from pricing, consumer preferences and trending. There may be a problem of plenty here.

Question 10: What all I need to move from CAN to CONFIDENT category?
None, confident category stock.

Conclusion: Confident category, I do understand the business…can document and maintain analysis on earnings, risk, operation, and finance.

The Initial Impression

Forming an initial impression is very important aspect , if you don’t feel good no point being associated with company. The problem is behavioral finance needs to practiced not read. How, write a small paragraph with your current understanding:

“When I check the key financials number somewhat I found stable or even flattish results. It didn’t not excite much. At valuation side apparently numbers do not meet the eye. Even two biggies earning yield behaving differently. Circle of competence is a positive, plenty of information available. Associate company of ITC add to the curiosity. I am sure it’s going to be fun reading about the company”.

Preparation for battle

All that is required a checklist which is flexible but no so flexible☺. This will ensure we don’t forget anything. Checklist doesn’t come easy, takes some time and study to build a mature checklist. What all I need before starting investment documentation, I can share with you:

  • Annual reports (10 years is good)
  • Links to major websites, forums etc.
  • Books and books (hard copy, kindle , pdf anything). Keep those books which are required for practice.
  • Conference call transcripts, all other BSE communications
  • Templates of investment documentation (we will go through sequentially)

What to avoid at this stage:

  • any analyst reports including buy and sell
  • price movements like DMA etc
  • getting overwhelmed by advertisement and name, fame etc (already we have one here ITC!)

Next step is information gathering, after covering financials and investment philosophy we will get into that. By that time I will collect the annual reports etc.

I sincerely hope I may be able persuade few people who will start believing in value investing or those master investors to encourage me more in value investing. Either way this will enlighten me!

Thank you so much for reading my rants.


Guru Mantra 7- Profit is NOT Cash

PL provides the most important health of a business that is profitability. Remember it does not tell you the financial health (a combination of income statement and balance sheet will tell us about financial health).

Please note PL doesn’t tell anything about cash either.

In other words PL is what is sold in a particular reporting period minus what is the cost to make these sales minus other expenses required for sales is equal to profit for the period.

Sales are recorded when company delivers the product or remit the services. Customer will have an obligation to pay and company will have a right to collect. When a company sends a bill company establish a right to collect but may be or not record sales. Simple reason sales is revenue which is recognized by accounting principle, and invoice is a contract note enforce a execution of negotiable instrument.

Costs are expenditure for raw materials, salary, overhead expenses, these are necessity when you a buy a products for inventory. When you ship the inventory, the total cost taken out for inventory and recorded as costs of goods sold. Cost will result lower bank balance and increase inventory values in balance sheet.

Gross margin is the amount left from sales after cost of goods sold is subtracted. It is also called gross profit, you can call the “manufacturing margin”. Helpful to analyze when a seller, manufacturer , buyer are all different people.

Expenses for selling, developing products or even general and administration aspects of the business. Few example would sales people salary, advertisement, legal feels, Research and development etc. Expenses reduces the income. Profit and income are same thing.

Operating expenses are those expenditures which company need to make income. E.g. sales and marketing, R&D, G&A. In US they called it SG&A, and in India very difficult to find easily. You need to calculated your own, so for same reason do not rely much the numbers published by various websites.

Operating income is gross profit minus operating expenses. Operating will exclude all other income like dividend received, interest etc.

Non operating income and expense are like paying interest on loan, receiving interest. They are not shown under revenue from operations.

Net profit is operating income minus non operating expenses plus non operating income.

We spoke about accrual accounting earlier , this means the timing between raising a bill and receiving cash differs and our financials is recorded on accrual basis.

Cash flow statement tracks the movement of cash through the business. Imagine your good old cheque book, where you use to write cheque number, money in and out. Cash flow is exactly the same.

Cash on hand at start of a period PLUS cash received MINUS cash spent EQUALS cash on hand at end.

Cash transactions all we know like paying salary, paying loan, purchasing goods. All these will reduce cash. On other hand we collect from customer, take loan which will increase cash.

Non cash transactions are those activities where there is no movement of cash. Like receiving goods or making goods (raw material and inventory), charging for depreciation.

Positive cash flow means company has more cash in end than beginning, negative means the reverse.

Cash comes to business either from operations (payment from customers etc) or financing (borrowing money, selling shares).

Cash goes out of the business when you spend for operations (buying raw material), financing (pay back loan, pay dividend), capital investments (buy shares, dividends, productive assets), paying income tax.

Cash from operations is the cash generated from day to day activities. This is a good measure of how well the enterprise is management operations.

However it’s just a element of cash flow.

Cash flow from investing activities is buying fixed assets, lending, investing. This indicates the usage of money generated from operations. If you take out fixed asset spend we call that as free cash flow which belongs to shareholders.

Now if you can not invest from operations you need to finance it somehow. That is called cash flow from financing activities like selling bonds, shares, paying back the loan taken earlier for financing, dividend payment. A company with negative free cash flow paying dividend is actually borrowing and paying you. Can be very dangerous.

Connecting Balance Sheet (BS), Profit & Loss (PL) and Cash Flow (CF)

The beauty of financials statements is New Delhi☺, snow fall in Shimla, Delhi becomes cold. Loo in Rajasthan, Delhi suffers. All financial statement items are connected to each other.

Let us understand these connections:

Just keep two things on mind: The flow of cash and flow of goods, services.

Remember the basic equation of accounting which is total assets is equal to total liabilities. So when you subtract anything from asset you need to either add into another asset or subtract from liability.

Net income (PL) is added to retained earnings in BS.

When sales is made on credit net sales is shown in PL, collectible amount becomes trade receivables on BS.

When sale is made product is moved from INVENTORY (BS) to Cost of goods sold in PL.

When a customer pays off money trade receivables reduced and in turn cash receipts increase the cash balance.

When a sale is entered in PL, net income is generated and added to retained earnings (general reserve) to BS.

Expenses when incurred and added to PL becomes trade payable on BS.

Expensed when paid reduces trade payables and reduce cash balance (both within BS).

There are lot more dots, suggest you start connecting and ask questions if any. Al lot of these we will cover during analysis of an investment.

The last piece for now, lets get into how did financials constructed:

Journals and ledgers: every event having a financial impact is known as financial accounting. Accounting summarize and track these events through journals and ledgers otherwise called “books”.

Ratio analysis: the relationship between the accounting number are established with the help of ratios. For example net profit to net sales tell us what is the ultimate margin we are getting. When we plot it over several years it tells us how we are doing, or check with competitors to know are we better off.

Common size statements: if we split PL to a common base i.e. say sale 100, cost of goods sold becomes 65, operating expenses 10, other expenses 10, net profit becomes 15. All in percentage, we can compare this year to year, this will give us a edge avoiding absolute number which can be distorted by a base effect. E.g. 100 to 120 is 20% rise, 1lac to 1.02 lac is 2%, if we read absolute number we may get carried away between 2 lac and 20. However both situations can be dangerous, we need to put our thinking hat on and on.

Not to worry, what type of common size statements or ratios are required…we have loads of time to analyze.

Thanks again for reading me out, I will touch base on investment philosophy next. Meanwhile you can go through financials and it’s good and bad to understands in detail from several sources available on net.


Guru Mantra 8- Investment Philosophy (Know Yourself First)

The powers should be

I often come across a generic question from my nears and dears, I have such and such money……which stocks should I invest in. Or someone says like this “boss equity is not for me, gambler’s paradise”……I am better off with fixed deposit. Another one who boasts about one of colleague/relative who made a fortune out of real estate. I am also searching eternal answers for these questions since long time without success.
Honestly if we provoke our thoughts (we may never do) we must answer questions before even investing in anything.

So, what are these questions?

  1. What exactly you want? Employee who is looking for extra finance cushion or serious investor who wants to spend substantial time and money.
  2. Are you aware of risks lying with market instruments, prudence suggests gather them……say for example in India 90-95% of retail investors do not survive a market cycle of even 5 years. :slight_smile:
  3. How much time you can spend after each asset class? knowing them, maintaining and updating them. Time meaning passion not hours, madness not intelligence, enthusiasm not Methodist, heartfelt not articulated.
  4. What infrastructure you have to support research? Or what you think can garner of resources. Always together we stand divided we fall.
    Investment is individual specific, please don’t try to replicate from others. Remember one would beg, borrow or steal than telling a sure shot multibagger. All one should do if interested in equity investment find out a method unique to them, can be sustained and tracked.
    It’s been almost 20 years of my investment practice I saw lots of failures at each cycle/stage. Eventually we hang on to our nerves for better tomorrow, remember these are not simple things. It requires time, effort and sometime a huge risk of losing everything.
    Here is what I been doing or changing all these years:

Personality Traits

Psychological attributes, strong feelings and too much intelligence is often recipe for disasters. Even before you think about market linked instruments strip your inner sense at least for the time when you put money to stocks.

What can be they? Well no definition, here are few pointers:

  1. India is corrupt, nothing can change, politicians are pedophiles, policing is maniac and hence forth. Not bad to some extent but not to so that it affects your decision making. If you think you can attain nirvana somewhere please feel free, India is not the place for you neither we don’t need you.
  2. I am IITian, CA or MBA from IIM; great so be it. It does not work in market neither anywhere else, good to have such deep routed qualifications but only for stepping stone----nothing less nothing more. For centuries these so called intelligent fellows are employed by much less educated guys. Very few entrepreneurs are highly educated.
  3. I am a hero at office; continue to win accolades from all corners. Congratulations!, that does not work in market either. Market defines an employee as the one who is averse to risk, narrow minded idiot and good for nothing. Please shred the goodie skin and start fresh.
  4. My company processes are in jeopardy, we do not have a great ERP system, repetitive complaints etc. Don’t apply these logics and look only for those companies which have implemented say SAP that’s absolute madness. Well market does not know them neither they care all these without looking at a totality. You might be changing whole world sitting inside well , for outsiders shark stays in seas not well. Rubber Company with 5 rooms corporate head quarter commands 2500Cr market capital as their productivity is far superior to others.
  5. I am the best, excellent my friend….you just won the Nobel Prize. This attitude does not work anywhere so also market. The difference in couple of years same attitude can pack you off to mental asylum!

Many more you can keep deriving; my intent is not use to strong word and demoralizes one. Most of the folks who come with such arrogance have been properly stripped off and vanished to their 10-15% salary increment lifelong cliff syndrome!

Base Investment Philosophy

To me philosophy is study of mind, reasons connected to a value and inner beliefs. Of course Greek says love of wisdom. Before even you start picking stocks or equity you should set out a philosophy in do’s and don’ts.

My prohibition list:

  1. Not to invest in companies engaged in direct education services (such as college, university) or imparting bedded hospital services.
  2. Not to invest in companies where promoters are found guilty of engaging child labor.
  3. Promoters guilty of women abuse, rape or similar criminal offence.
  4. Companies accused of funding religious biasness, propaganda or unconstitutional activities.
  5. Not to reinvest dividend received up to minimum of 50% and maximum of 75% of amount received. Earmark for a charitable cause such as upliftment of girl child.
    My Red flags: (reduce the weightage even before doing a financial evaluation)
  6. Corporate governance issues- SEBI, SEC.
  7. Employees not paid in time or not going up year to year despite increasing numbers.
  8. Company accused of money laundering specifically or anti national activities but not convicted.
  9. Promoters convicted of sexual harassment, diversity issues, and accused of insensitiveness towards physically disabled and so on.
    If you ask how do I know all these exist, well answer may not be simple. Till that time promoter or associates are convicted my philosophy does not change. Many can say Indian courts never convict anyone rich and famous, so be it……punishing the innocent is not preferred.

Market Objectivity

Market is made of people, processes and technology like any other profitable or non-profitable institutions with a huge difference i.e. entry and exit points are not sealed. It’s a combination of so much of emotions coupled with decision making with massively diversified intent makes one investor extreme nerve wrecking and we look incredibly stupid in front a towering financial tsunami.

Successful investors have been trying to study behavior of market over century now without any success. But what we could do is identify common stupidity, which proves costly with time, some of them are:

  1. Boy, granites are boring industry….what these guys can do. Let’s focus on new industries fad technology etc. Market fundamentally immune to any type of industry…it only knows two things. Punish the non-performers and reward the performer. Easier said than done, selection of performer keeps varying with time, expectation……putting them to single cauldron becomes extremely difficult.
  2. Price so low, tempting! Always remember market recognize those who performs, so who had already performed catch the fire soon than those ones under the carpet for long time.
  3. India has a population of 125 Crores, even they sell one vada pav to 25% every day its staggering 25*365 Crores vada pav every year. That’s figment of your imagination, sale of vada pav may not have been calculated properly in GDP as most of these are un organized sectors.
  4. My CEO looks so glamorous and flashy, well that’s actually warning bell for investors. Market likes imperialism where CEO is down to earth. The moment your CEO goes to Bahamas for holiday investors get edgy…what is he doing with my money!
  5. Have you seen the real estate company posses, even if they sell 5% it’s three times more than book value. Firstly you don’t know why would the company sell , secondly why they should pay you?

Create your own environment

What one need perhaps is good people around….be it bosses at office, Samaritans in society, reasonable near and dears, friendly colleagues……The pill we need to pop is we may not get all of them, but bigger question are we fitting into some of these criteria before we demand? I guess if we are good we get good, life may not be measured always by measurement yardstick (either success or failure). Small sacrifices, little endeavors, integrity and simplicity can be achieved of course with bit of flaw. Trust me value is just outcome of these parameters, rest all is history as they say! Value for some is wealth, wisdom , and knowledge and for some its progression….also for few eternal battle of conscience against will. Who is bothered about evils, they been losing, decimated for centuries……some time with a good mask or sometime………?
Believe in plain and truthful speaking. Personally I had been flipping flopping in initial years in against my encounter with truth…. Tell the truth when there is no harm……turn as a diplomat when truth is “MANAGABLE”, “STAY AWAY” from truth when it is harmful. But the fact is TRUTH is ALWAYS REQUIRED AND CAN NOT BE MANAGED, I understood unfortunately in unceremonious circumstances ….but indeed more than self sure the value of truth is intrinsic , the same value we continue to search in equity investments on multiple occasions. Truth alone can create enormous wealth and success, it always triumphs….evil and falsehood are momentary and may create wealth or success for temporary phase and” NOT” at all enduring.

(From Thoughtful Investor by Basant Maheshwari)- QUOTE, MINOR AMENDMENTS

Most of Indians confuse stocks and shares to be synonyms of shocks and stares: Chandrakant Sampat

Most of Indians consider investment is an extension of gambling, those traditional minded Indians assume stock market exist only as a “get rich quick” scheme . In reality the game of uncertain outcomes is the road to bankruptcy.
“ The traditional Indian household has thus land, gold and fixed deposits may be because it requires lesser skills to do so than buying a stock. Personally I have all my money equities and have not bought any gold and real estate (except one for staying) because I feel more comfortable making investments with open ended dream of monumental gain and that can only happen only by either you are entrepreneur or investor!
As a consequence to this traditional mindset the percentage of Indians who think wealth can be created through stocks via fundamental analysis remains abysmally poor. Corporate profits, free cash flows, dividends and growth rates mean nothing to the traditional Indian household who mostly considers numbers are manipulated and meaningless. This strange belief in orthodox thinking process is that there are only two things that can make money in market , one access to Mumbai based operators who can give a tip before the event happens or secondly you need to be lucky ….only a stroke of chance.
When I say traditional Indians, don’t get me wrong ; sometime we carried away as these are people who do not read and write. Actually they don’t bother about flats or equity, what I meant by traditional Indian is “padha likha (educated) middle class Indian”.

(From Thoughtful Investor by Basant Maheshwari)-UNQUOTE

Guruji’s employee days

After post graduated from one of so called knowledge house (IIM !) I was pushed to a place where I want to be i.e. heart of investment….Wall Street with then famous Lehman Brothers. After five years of working with one investment bank and management consulting firm I could gather what I learnt and not to repeat them in future.

I don’t have much roadmap to share as I came out after five years of employment. I wanted to forge my instincts with unknown faith for a meaningful relationship. At the same time I must pay tribute those few thousand employee who relentlessly work for company’s objective , worldly growth and so on. Employment is not meant for only money, it’s a way for expression of freedom and knowledge, building better ties with society and families at same time a Good Samaritan!


When I quit my job with a terrible calculation of funds, eventually I landed in India with few thousands. A house to take on rent, an wife and daughter to survive with……I wasn’t sure fully whether that it was brightest idea to quit the job.

When you are in confusion go to the person who is best if possible……well during mid 1980’s we never had a confusion who is the best. I took a taxi to Hindu Gymkhana club in evening….to my luck I found my mentor in full speech gathering address of fifty around. Of course the person was Chandrakant Sampat…….the magician of the investment street!

Chandrakant Bhai was more than helpful when he agreed to walk with me till Kala Ghoda from Gymkhana club . Knowing his running skills I thought I have at least 15 minutes, if I can slow him down it may went up to 20 minutes. To my luck Chandrakant Bhai spent 30 minutes on walk, 30 minutes of pure knowledge changed my thoughts ever and forever! He asked how much money you have, I said gross 42000 INR, and leaving expenses for few months it will be 20k max.

First line he said if you invest 100 Rupee when British invaded India in 1757 AD , at 3% annual compounding it would have grown to 3.11 lacs, at 4% 25.80 lacs , 5% to 3.08 crores and 9% would be 121795 Cr and at 15% it is (some value investor gone high beyond that) it is eye popping 88582 Cr of Cr! Unless investor can bet enough he does not get rewarded for being right as normally ought to be. There won’t be many right moments so whenever right you should try to make maximum out of it. Personally more than 90% of my wealth has been generated from less than ten stock ideas only. Making meaningless and insignificant investments do not have power to change the balance sheet of wealth creation. The CAGR is the only distinguishing feature of an asset class and varies from one asset to another.

Sampat continued “there isn’t just one winner in the investment game”. Unlike rabbit and tortoise where one will win, in stock market there can be multiple winners and losers. It gives all participants a chance to win and loose.
Compounding works well when we keep the negative years minimal so that we don’t give away the returns we made in good years. In market speed overrules size, most people look for the quickest money making stock and not the ones which will give them biggest gain. The best investment is the one, which generates higher return on an initial large amount over longer period of times.

In equity you make money in bunches in few years and loose in rest all years. Investors who run away from bear are generally aren’t around to receive the gains when bull comes back.

After 30 minutes Chandrakant bhai hopped into a BEST local bus to his home much like I heard before. I couldn’t board BEST bus for years also now……perhaps that differentiates all of us with Chandrakant Bhai. Last line he mused before he disappeared was “to be investor all one has to do is dream”- one of his favorite lines.

Chandrakant Sampat till today to me as the man who made me a “may be” good human being if I am not an investor. His investing prowess was legendary, commendable virtues. To him money was merely a unit of account, it never changed his demeanor in any manner. He continued to live his life of simplicity till death. The chains of habit are too light to be felt until they are heavy to be broken. He was a regular in marine drive in joggling attire and inter mingling of teachings of Bhagvad Gita. (Parag Parikh tribute)

Guruji like other market fans can go on hours about Sampat. He goes on, Chandrakant Sampat may have been no more but his intellectual integrity have not died. We all disciples promised him, we will keep it alive for centuries to come. He sums up, “Chandrakant Bhai is not like riches of today, and his philosophy was how many things you can do without”. May his soul in rest peace.

Sanity Check

We all spend life time in earning money with all our effort. We move different company, places, and domain so that we can retain some of these savings for our future. It is also essential we spend some time managing our savings, most of the time laziness result someone is taking us for a ride. On 10 year time band 1% change in compound annual rate will result 6% addition to final corpus. 2% incremental change for 30 years career plan will result to a staggering 42%! Imagine successful investor earns a tax free return of 15% against debt income of 6-7%, compound for you over 30-40 years. Perhaps you will get a shock of your life!

I found it extremely “remiss” for a well-studied and healthy person in mid and late twenties who keeps on burning midnight oil for years to shape their career do not even spend 1% of time what insurance they buy, what fixed deposit they need and so on! In fact George Soros said less than five percent of people spend more time while buying a refrigerator or television than buying a financial product. Friends of mine after working for than 12-15 years of corporate share a story, which is almost, generalized, “I do not have “other than” a house which is on EMI, a car/vehicle again covered under EMI”. And the line always ended with “though I could have done much more”. Honestly I am not anyway better off, somehow I never felt like losing the financial track. During 2002-03 I kept saying my friends we can buy a house on own money with a proper financial plan rather than inviting the debt monster. No one was ready to wait, it was unending pursuit towards getting a banker, a property and finally who can forget tax benefits! During the same period my portfolio was not going anywhere, classic case of market sideways. By end of 2004 I started developing a doubt whether the burning equity passion can really help me achieving the basic of “Makan-House”. And again on top of alary you have tiny spots of growth i.e. tax benefits. The battle ended with the rampant bull run of 2004-07, by 2006 end I was sitting pretty with enough “disposable” cash flows to buy a 2BHK flat somewhere in Bangalore or Pune with pure “cash”. I am not trying to advise anyone to adopt the approach but I guess we must know what is good for us, what we can digest and not and finally we must enjoy our life in the way, which we want!

Thanks for being flipping through, all your reading immensely give me strength to move forward and keep the flag of value investing high!

Next let’s talk in length about Personal Financial Planning.


Know yourself First - Brilliantly expounded suvendurath .

waiting for next one

this is called tsunami of knowledge…thanks a lot suvi for sharing all this…

Dear suvendurath,
This is absolutely pure Gold! Really loved the recent chapter of Investment philosophy, thoughts of your Guruji on wizard Mr Chandrakant Sampat, your own journey between time period of 2004 to 2007 where you tasted the success. I agree with the thoughts and situation of many white-collar salaried-class people who are very smart, individuals however largely not applying themselves to equity markets and missing the opportunity to create wealth for themselves, their near-dear ones and ultimately for the society. Again, one needs to have a passion and belief to take this path.
Really looking forward to hear from you on the topic of Personal Finance now!

Great and Selfless Work !!

Thanks a lot.


Guru Mantra 9- Personal Financial Planning

Have we ever thought if we try to sell :

  • life insurance policy to Warren Buffett
  • credit card to Mukesh Bhai (Ambani)
  • medical insurance to Devi Shetty of Narayana
  • mutual fund units to Rakesh Jhunjhunwala

The good part is we can argue still there is a chance these folks can buy all the products listed here.

Point is why would Warren Buffett need a life insurance when he doesn’t need 99% of wealth he has created, or Mukesh Bhai swiping credit card for purchasing a Boeing private jet or Mr Shetty who has hundred plus sprawling hospitals when he fall sick, and Rakesh Jhunjhunwala who has regrets buying flats than shares.

It tells us two stories, One our objectives are customised, Second objective changes as time and situation progresses.

Now let us apply these situations in our day to day life with a hypothetical situation:

  1. I started at 23 years with a salary of 30K (all take home) and have a life insurance policy of 10 Lac.
  2. I am now 30 years and my take home is 75K, increased my insurance policy to 50 Lacs.
  3. I have become 40 years, my take home is 2 Lacs now. My insurance policy is 2 Cr.
  4. I am 60 and retired, I am sitting with a insurance policy of 10 Cr expired at age of 65-70.
  • Insurance is term insurance only.

Why don’t we apply a tedhi soch first.

It looks our objective in life is to get insured only, if we die our dependents will get some money. I just found out my kids are turned out to be genius and well off. So the importance of money has gone down than I thought.

  1. I lived till 85 and my wife till 90. Who needs money, grand children?
  2. I got hypertension and diabetes at age of 40, land up spending more than 50 lacs till death, yet no one came to pay that money.
  3. If i invest that 30K premium every year, after 30 years at the age of 53 I will get @8% compounding 40.50 lacs. If I give it to super heroes of mutual fund they can compound 14% and takes me to 1.56 Cr. If we sugar this 30K with 60K it becomes 81.07 Lacs and 3.14 Cr by age of 53.
  4. Let’s think you die at 85, after 53 years insurance company doesn’t ask you money for next 32 years (unlikely) and you are sitting with 10 Cr insurance policy. Your 1.56 Cr (compounded at 8%) goes to 18.31 Crs and at 14% results to 103.30 Crs. Isn’t that a eye popping amount?

I told the same story when I stopped one horrible money back policy last year (I was drunk perhaps when I took such policy). As expected immediately he responded sir insurance is for security, safety. What if you die tomorrow?

I said good, so you agree this is not an investment product. Then why money back in first place? So we call its safety product, security product, let us check out what safety or security it gives?

My death depends on act of god which I can not control anyway or a bad life style which I called my self. So first thing is I need to change my life style. Can we say entire portion of security and safety is mitigated? He kept silent for sometime, but if you die now your wife will walk away with XXX amount. I said very valid point, thats what insurance policies are meant for.
Now twist the scene, say Mr ABC is a value investor who is sitting 10 Cr, considering 1 lac expenses a month 1000 month stack is there. We are ignoring compounding, any further increase etc. Now add one more scenario, out of 10 Cr, goal driven discounted value are 5 Cr, hence I am left out with 500 months. What I need to do is increase my wealth at a speed higher than increase in spend.

Is still insurance is bad? I didn’t say either, its both yes or no. If some one says walk five kilometres a day to kill diabetes I would do that rather taking a medical insurance which anyway will not kill the problem.

But some clear bold lines, what are they:

  1. The value of money is not same what it will be after 30 years. Hence someone say 1 Cr now, it would be few thousands equivalent value after 30 years.
  2. Risk doesn’t go away by performing one act. Risk transfer is least mitigation like insurance.
  3. We are taking steps for the risks we know of, but what about the ones we don’t know?

Understanding risk management

Identification of risks:

Risk depends what is my objective is? If I want to wanna be Ramesh Damani then permanent loss of capital is my risk like any other investor. Now if you want to be a cricketer, make sure your legs, limbs are ok. We will touch upon objectives soon.

Quantifying Risks:

Every risk needs to quantified and this is the toughest part. Fortunately financial plan deals with financial goals and hence it can be measured. But imagine if you want to be Mr Damani its not all about financials. Infant finance plays a minuscule role for an investor or entrepreneur. We will cover this when we discuss more about value investing later. For now yes our financial goals can be measured.

Mitigating Risks:

There are four ways to mitigate a risk:

Treating the risk, taking appropriate step to reduce the risk like running 5Km every day to reduce diabetes problem.

Tolerating the risk, I cant do anything but accept. Say there will be an accident tomorrow and I will die.

Transfer the risk to someone who can manage for you.

Terminate the risk, stop doing the activity like I don’t need a Mercedes Benz hence I don’t need fund for that.

Mute points on risk further

There are two components of risk called as inherent and residual. It is a general convention risk CAN NOT be mitigated fully. What does this mean?

Risk Definition: Untimely death which has emotional impact, financial impact, regulatory impact may be (all these are called inherent). By taking a insurance policy or even lot of money wont solve your emotional or other problems. Those problems which can not be solved or easily as called residual risk like emotional etc.

How do we identify risks for objective we will talk through next time along with objectives

Those who conquer residual risks are mostly through brain and heart than money.

For everything right or wrong is given a context, isn’t it? The big question is how do we know what is right or wrong?

India post 1991

Who can forget 1991, country bow down to “hats off” to a person who ironically cannot wear hats. Our dear ex- Prime Minister then Finance Minister among amidst cheers, applaud, huge tapping on table passed the most historical budget setting the highest paradoxical body (Parliament) into frenzy for few days. A beaming finance minister then thundered from dias “time has come to drink coke, to wear Burlington, to spray Avon and munch pizza. Behold; dhotiwalas should watch their malpractices, you have looted enough, time to go Ganges and wash your sin.” The common Indian rise from rugs and “straight stared dreaming” in Avenues, Salwar clad wife swiftly get into Midis. Enough of pakodas and dosas, we are going global, with a size a billion plus we are going to embark imperial socialism” Older generation got amused, some embarrassed, some got flattened. India has rolled its dice; dark side of moon is no more revolving, static from oblivion and straight falling to feldspar of carpets like golden dew drop.

One generation of reforms gave away to second generation, glory brought gloom with it……inflation, and consumer behavioral pattern has changed forever since then. Growth, uncertainty, opportunity, threat crashed our homely door almost like unbroken symphony. Time we must acclimatize with them before they started gulping us. Cutting story short one must know what he does, what he wants to do financially and that’s precisely a financial plan in a rapidly changing society.

Financial plan is a buzz word for a planner, banker, and asset management company who provokes you, tease you, scratch you till the time your loose purse strings. Few years back I spoke to financial planner while I was trying to count leaves in oracle of finance. He sent me a brochure where first paragraph was like this “Uncertain economic times intensify the importance of wise personal financial decisions. Each year, more than a million people declare bankruptcy, and Americans lose more than a billion dollars in fraudulent investments. Both of these common difficulties result from poor personal financial planning and incomplete information. Your ability to make wise money decisions is a basis for your current and long-term well-being.” Without even reading further I paused and asked myself “Am I American?” Why are we obsessed with something which we haven’t seen neither work for us. Though my stupidity continues, wisdom tells us count your purse before putting into drawer at night before sleep.

A personal financial plan simply speaking consists of following:

  1. Know your current financial position: includes income and expenses, net worth (assets minus liabilities), cash assurance.
  2. Know your goals and achieve them: what are your key objectives and how do you achieve them including when and how(of course financial objectives)

For today let us focus on how do we track income and expenditure, net worth and its classification.

Please see attached file for “1”.

Kindly note, items may or not resemble my expenses pattern. Customise to the extent you can track and do it.

  1. Tab Budget: Budget of income and expenses you expect for the next year. Side by side track actual to know where you exceeds budget.
  2. Tab Live cash flow: to understand your position at each cycle. Our income is monthly hence cycle is monthly. It shows whether you have enough cash to ensure meet expenses and meet the commitments before next income comes in to your bank.
  3. Tab CC Tracking: how much you are spending on different credit cards. Also know the percentage of expenses you are routing through credit cards.
  4. Tab Debt Investment: list of all debt instruments including fixed deposit, recurring deposit, bonds etc.
  5. Tab Net worth: includes liquid balances, EMI, debt and equity instruments, fixed asset.
  6. Tab IE summary: track of income and expenses month wise for the year
  7. Tab Yearly track: track of income and expenses over years
  8. Monthly tab files: records monthly income and expenditures

Take your own assumption for a meaningful data, e.g. fuel I split between office and local conveyance. Not accurate but some sort of estimation.

Few important points while using the data:

  1. Fixed asset and equity shares (buy and sell) are tracked on opportunity basis, lets discuss sometime else.
  2. Add your own income and expenses category.
  3. Direct income- for the purpose the stable income comes in every month e.g. salary or rent etc.
  4. Finance charges: the charges paid as bank interest and charges are shown. You can add interest portion of EMI if you have. The principal cost gets knocked against liability, not added to bank charges. For cash flow you need to include the entire amount principal and EMI.
  5. Imprest money- the cash you don’t want to know the details. One you give it to spouse and don’t track. Second count your purse in morning and before sleeping, if you don’t know any balance where it is spending put it in “imprest” category. Unexplained spend should be restricted to changes and coins only.
  6. Don’t track coins and chillars for gods shake. Record in round figure of 10’s only.
  7. Never forget deduction from salary such as provident fund, it’s an investment for you!
  8. Split the income tax under finance charges to TDS on salary, TDS on interest if you have fixed deposit etc where tax is deducted at source.

Key indicators you must not miss:

  1. The operating expenses should be less than direct income meaning day to day expenses are supported by stable income or GOD SAVE YOU. You must immediately plan for super natural profit to increase the coffer or at worst case bank dacoity!
  2. The higher the indirect income percentage of total income more you become cash surplus and debt free. This can only achieved through discipline, systematic investment, continuous tracking of them. Trust , many employee files regardless of nature of job income tax return higher than their Vice presidents even. FP Demo.xls (302 KB)
  3. The power of compounding remain a miracle, it means younger you start more time to spin the money for re-investment and hence growth.
  4. Track expenses on a regular basis and control them, make sure entertainment and travel expenses are supported by “other income”.
  5. Read the percentages very carefully- between direct income and indirect income, between expenses month to month basis including capital expenses. Fixed expenses should not vary except escalation meaning if rent is going up by 10% you anticipate only 10% rise next year. But fixed expenses this year 100 become 140 next year needs to be investigated.

Don’t want to complicate further……lets talk about asset class, goal setting, financial objectives and allocation next time.

You will amaze to know a proper financial plan helps in:

  1. Monitor cash flows and reduce waste expenditures
  2. Holding sufficient cash and cash equivalents when needed
  3. Boosts savings and wealth creation
  4. Reduce tax liability
  5. Reviews insurance needs

Last not but most important it brings “discipline and method” which make your life consistent.

Next episode lets discuss about goals, measuring them and achieving them including tracking mechanism.

Please drop me question, will try to answer to best of my abilities.


suvi if you can share your thoughts on risk specifically one has to take risk to reach a stage where he need not take risk.So someone with a small pf can not think of risk as much as he must think of return.but if his risk turns bad he has to take a bigger risk to break even ! Second que what is your suggestion of PF size where one must play safe with safer stocks

thanks for sharing…this is super detailed and shows the incredible thoughts put in it!

Guru Mantra 10- Bring back the horizon (Goals and Asset Planning)

Setting the Horizon

16 September 2015, sleepy town of Puri, an eastern part of India; more known for Sri Jagannath temple; one of holiest shrines for Hindus. Unusual rain washed the city in evening, it was half past in night. My retired father shook his head and got up from chair with a loud murmur, “ I always thought mathematics is to learn not practice”. That was biggest compliment from my father, if I have to draw up five best moments of my life it was definitely one of them.

So what made him to say those words, here it is:

Chartered Accountancy was a paradox for my father who always believes the world is dominated by science, mathematics and all other similar forms. More so if it is taught at renowned schools and universities. He always felt I was pursuing something because I was not capable of reading science and mathematics. I don’t dispute even his words of wisdom now, without an iota of doubt I was not capable of cracking state level engineering colleges forget the mighty IIT.

We continue to debate science against accountancy for long years as he believes value investing is about finance and accounting. I wish he could have met Benjamin Graham or red The Intelligent Investor. Last year on my daughter’s birthday I pulled out a calculation and showed to him, he just said owo, looks interesting; but hang on this is not finance and accounting I know, definitely not. I said of course it’s not finance and accounting, when did I said so? Father said well for so many years I thought you are practicing accounting and finance. I said for so many years I kept telling I am just trying to get values, if you understand value as finance and accounts then what can I do. Fine what’s the calculation that put my father to awestruck position!

Here it is: values calculated on 20 Sep 2015

The above table shows the gift me and father gave to my daughter since 2008 on her birthday.

I am not trying to underpin my father’s abilities, he was revered and always stay that way like every father/parents. What this picture tells if you remove sentiments,

  1. Compounding has been phenomenal on my assets across the year. That’s the power of equity, it can outsmart even celebrated mathematician like my dad.
  2. My father was confused between asset and spend, he bought one bi-cycle thinking its an asset. In realty most of financial statements are full of such perceptions accounting.
  3. Equity is only asset class with underlying business, none other asset class demonstrate diversity. Look at my purchase- one private bank, 3 top notch pharma company of country, one MNC auto ancillary manufacturer, one real estate and another engineering firm. I told see father my business interest is so wide spread (of course not!).
  4. Stock is only thing appreciate, no other asset class always appreciate. You may argue market is in bear and side ways. That is true, but unless you are aligned with market completely you can still can out perform it by your own stocks subject to they have chosen carefully and researched.

Back to Malabar hills Mumbai, another rainy evening of October 2011, Guruji got up from a chair and said can you see this article. ISKCON claims they are feeding a child with 6500 Rupees a year, and we are buying one square feet of apartment at 65000 Rupees. Are you trying to say we barter 10 year of food for a human what kind of world we are leaving. That would mean a poor child can eat for 10 years by bartering ONE square feet of Malabar hills! Again I got outsmarted at his skills, a man who made build a castle from walking in blazing sun, created a envious wealth by sheer skills and intelligence……telling all that I build is actually falsehood, fragile. Indeed, this country need more barter whether Malabar hills in Mumbai or Golf links in New Delhi!. Rest all are momentary obscurity of money, finance and hyperbole………! I realised when my mobile alarm started screaming that another day has arrived. The alarm continue to roar, morning sun streamed in and I turned to look outside only to realise residual dream still slipping away……!!

Paradigm shift of changing priorities

For millions of years mankind has lived just like the animals, then something happened…….which unleashed the power of our imaginations , we learned to talk (Stephen Hawking). From talk to think and foresee human life cycle has seen it all. Verbal expression becomes clarity which turned to vision and changed the perceptions to thoughts and principles. Every living species is defined by certain objectives, for a human be it unborn baby or dying person needs a reason to survive or perish.
Whether science or arts they all teach us we must have objectives and must be supported by charadrius vociferous language to remind and track them. That brings us to second step of personal financial planning, “Know your goals and achieve them: what are your key objectives and how do you achieve them including when and how(of course financial objectives).”

The activities broadly cover the following:

  1. What are your key objectives
  2. Measurement of objectives or THE GOALS
  3. Define an action plan to achieve the goal
  4. Track and monitor the status of goals


There is no straight jacket definition to objective of a human being, wiser sense tells us to start as early as possible but seldom wiser sense itself comes after god’s given moratorium period when we do understand the realities and resolutions. Objective can be different for each individual, can vary with genders, emotions also inheritance.
Let’s take one example and walk it through till the end. 22 year old Aftab (imaginary) is in last year (2015) of engineering with famous Indian Institute of Technology who happens to join a multinational company at end of degree. What he could or should think:
“ Lead a generalised life and retire family surrounding with well cushioned finances”.
Objective is like vision and mission statement, if you have too many objectives perhaps you are confused. If you feel there may be many more you need to consolidate them, at the end of trackless seas it’s only a port sailor wants, rest is commentary. Objective can drastically differ from person to person, take the same example of Aftab: “ Enlighten inner self, lift the poor children from poverty, and make a difference to society”. Here individualistic pretend is over ridden by philanthropy, it may not come naturally to everyone. Accordingly the goals will be completely different than previous one. As we all are materialistic creatures stick to the first one, let me repeat the line one more time; “ Lead a generalised life and retire family surrounding with well cushioned finances”.


Goal is embedded within objectives, you need not hire influential management consultants to define goals for you. Let’s split Aftab’s objective:

Generalised life: comfortable life and up keep of the “comfort”. Reading between it will mean the basics i) Decent food ii) A reasonable place to stay iii) Loving spouse and associated redemption of “promises” iv) good education for child/ren v) Fine entertainment and leisure vi) access to amenities including electronics, automobile etc supporting sustainable generalised life. Vii) wellbeing of health-medical support
Retire with a family surrounding: i) corpus to ensure retirement life is trouble free ii) accommodation which can be maintained ii) Extracurricular activities such as travel or other hobbies.

Well cushioned finances: though it sounds like part of “1” and “2” it actually refers to something extra which you always aspired long ago like Mr. Samapth or Mr. Jhunjhunwala. Cushioning can occur at any time , not necessarily post retirement.

If we see 1 to 3, all of them may not need equal importance. Some of them desirable and some are essential. Let’s burn these down further:

Decent food: no question of debate, must to have food at least. You need not create a goal for same, should be covered under annual budget where you keep track of yearly expenses as discussed last time.

Spouse and redemption of promise: well promises to bring star through gig to earth may not work in real life. Define explicitly extra territorial expenses through annual budget only unless asset being created through promise.

Cushioned finances: human wants are unlimited, you keep dreaming everyday only to realise there is a residual dream still slipping away. My suggestion to classify as desirable and wish list.

Every component you ponder over you would come to know what’s must have and what’s good to have.

Goal Setting: one man or woman doesn’t run a family even if both or one earns. You must to do housekeeping before finalising goals. Those may be:

Include your spouse and children, parents who can participate and contribute. Detailed discussions required before coming to amicable conclusion, sounds easier than what it is. When I was newly married after few convincing sessions I asked my girl friend turned wife, “we must set our goals mate”. She asked me spontaneously what you mean by goal, I said it’s something you or me want. Oh, (she exclaimed) that way….well I need a piece of jewellery and few goodies. I thought myself maddeningly unhelpful, further I probed well goal I meant not shiny or glossy; something tangible we need . After a pause she said well then we can go to my parent’s house four times a year. Well that’s even more than unhelpful, I pursued further ok what if you have to stay in my house after some years permanently. That stabbed her heart for sure, no way have we needed our own house soon! Keep thinking………….

Goal does not mean kid will become engineer or doctor. You need education cost to cover up and support, ambitions and goals move into different tangent. Goals ask you to prepare yourself , not dictate other’s choice and wisdom.

Always cut out “early bird” period for all goals, meaning if you feel it’s required in 2020, prepare yourself for 2018 or even 2017.

Money doesn’t grow in trees, do not expect you will beat everyone and continue with 50% hike every year to amass wealth. Be realistic and conservative, plus is always easy to manage its negative which creates flutters in heart.

Your materialistic want should not over ride heart and mind, open for charity and philanthropy. Remember in a country like ours many goes to sleep without food, it’s our fundamental responsibility to do whatever is possible.

Identify goals only what you know or can do: I want to be Mukesh Ambani, good goal to have mate. Only problem Mr. Ambani may not like other people to have the goal.
So what would be Aftab’s goals:

G1. Own a vehicle worth by end of 2018
G2. Get married in 2019
G3. Plan for child in 2021
G4. Own a house by 2024
G5. Child preliminary education by 2025
G6. Child education by 2037
G7. Child marriage by 2046
G8. Wish to retire by 2048 and corpus by 2045 (age of 56)
G9. Refresh key retirement decisions- house, medical and extracurricular activities by 2047

You can add/modify goals according to suitability, age and inheritance.

Know your risks

You cannot get to goal post unless you break opponents defence. That brings us to a subject we must know risks which can majorly distort the goals you have set.
Untimely demise: life and death is not in our hands, make sure you have sufficient insurance. What is adequate insurance let’s talk some time else.
Medical coverage: have sufficient medical coverage for family.
Employment or source of income: you must not ignore what and where you are working. Emoluments will largely depend the sector you choose and the city where you live in. Or else over expectations will dent your corpus than you planned.
Would prefer you to identify your risks before its being too complex.


Indian’s are always good planners but bad executioners. Seldom plan gets executed as we over plan and then get frustrated. Keep your goals simple and let’s try to achieve them.
The key steps in achieving a goal:

  1. Classify the goal in terms of value and period
  2. Understand your risk appetite
  3. Know the ways (asset class) and means (ranking) to achieve goals
  4. Allocate funds to asset class
  5. Classify the goal in terms of value
  6. Priority teaches us what to look first, then second and so on. Hence prioritize the goal to
    High and Medium only.

Say G1- Medium G2- High G3- High G4- Medium G5-High G6- High G7- Medium G8- High G9- Medium

The goal does not fall into same time bracket, they occur at different intervals leaving us for a planned management to achieve them. Easy way is to classify goals to medium term and long term goals. Short term goals should be managed via annual budget exercise. Say any goal between 3-5 year is medium term goal and beyond 5 year is long term goal.
Setting goal without knowing worth is like catching fish which are not saleable. Each goals we stated above (G1 to G9) needs to quantified in terms of money. The money is expressed herein as expected value to be paid during the realisation of goal.

Take G2: Get married in 2019. How to get into a valuation:

Know the current cost : ask parent how much it cost to get married in 2014. Either he would have experience of your sibling or he can talk to his friend. Otherwise you can ask even your known person who has recently gone through same ordeal☺

Visualize expenses trend till goal period , say you want to achieve the goal by 2018. Inflation is an indicator to apply, it may not work at all time. Better to give buffer and cushion yourself.

Risk Appetite

One of the most contagious subjects of an Enterprise-Wide Risk Management program still debated by who’s and who’s of industry. For a person its knowing what is the psychological pattern while spending and saving. This can be achieved via standard set of questionnaires which takes the route of psychometric. The questions are more directed to understand your willingness to take risks; e.g. if you win 10k from lottery whether you will put that to fixed deposit in bank or buy another lottery. If you answer fixed deposit then you are someone not willing to take risk and classified as cautious, conservative , risk averse or similar phrase. If you answer 10 questions in same pattern the tool will suggest you are well off with fixed deposit and advise you to invest 80% in fixed deposit and 20% in mutual funds. If someone is smart in defeating psychometric the whole exercise can be punctured.

After dabbling years and years in the subject I felt the questionnaire and tool can be highly misleading. As a person who answer theoretically may do the exact opposite practically, momentary lapse of reason cannot be treated as lifetime servitude. I would look at other way around:

Your expenses pattern tells you what kind of person you are. If you are someone do not mind a United States trip from salary I have no reason why can’t be your risk appetite is high.

If your indirect income outsmart the direct income there is no reason why will not take risk with surplus money. Say a bonus issue touches back to original level making the bonus shares free and it’s a complete cash gift where you have nothing to lose.
Invest in risky areas such as equity or market linked instruments and assess yourself whether you can absorb risks. Better to have moratorium period than coming to dead conclusion on day 1.

Asset diversification is closely tied up to risk appetite, traditional theory suggests asset must be diversified meaning you should not invest in one asset than several assets. My wisdom tells me few thousand Reliance shares in 1997 do not need diversification further as by 2014 they are few millions floating cash, you need not any other asset at all!

Asset Class and Ranking

Asset is defined as a resource where you expect some kind of return immediately or in future. No one buys asset for loss. In personal financial planning asset class is defined as an unequivocal place where you want to invest to achieve the goals.
What is different type of asset class (not exhaustive):

Real Estate: properties, land and building, apartment

Gold/Platinum: jewellery in readymade or raw form such as coins, biscuits.

Debt Instruments: with advent spanning of banks, debt instrument is now wider than it was. It includes government bonds, bank fixed deposits/recurring deposits, debt mutual funds, Public Provident Fund etc.

Exotic Assets: New age of asset can include paintings, coins or even antique collection.

Equity Shares: market linked instrument where company’s ownership is traded for a value based on performance. Equity assets also managed by experts known as fund managers also called as units of mutual funds for the vested amount.

It’s not the asset class which earns rather your intelligence which deciphers knowledge in advance and unlocks the future wealth. Hence no asset class is bad or good, they all been going through various cycles over centuries. You may wonder debt instrument like fixed deposit why would require intelligence or knowledge. At the time of economic disaster when market linked instrument crashes debt instruments become sought after investments. If you can predict catastrophe earlier you can very well choose safer instruments before those time set in.

Irrespective of asset one should know the ground rules such as:

Know the asset class: rather than herd mentality use your common sense and find out information before buying or selling. For example it’s the land value which get appreciated not building which becomes cheaper day by day because of depreciation. People who bought Lokhandwala in Mumbai or Whitefield in Bangalore have generated far better returns than folks who bought high rise apartment with very little undivided land.

** Know the tradability and liquidity:** Bank instruments and equity are now bought and sold with a click on internet. However same logic does not apply for real estate or exotic assets. It might take months or years before you get cash back . Hence if you have bought illiquid asset against medium term goal of 3 years may fire back.

Ownership: Ownership play a crucial role in asset buying and selling. You must be wondering once you buy you become owner, legally yes however market dynamics may not allow the fruits you could have enjoyed otherwise. For example when you buy a flat along with another 1300 owners, price move by adjacent developments or even other owners may drag down the price.

Callous approach: thinking you can beat your lenders is the most foolish way to buy asset. For example I take loan from bank @15% interest per annum and make 30% return from equity shares. Wishful thinking, all these guys have either disappeared as bankrupt or perpetually paying the loan. Trade is different from investment, trader comes with years and years of market study and analytics. Don’t forget bank also manage brokerage and funds, they know better than you at any time!


Once we short list the asset we want to buy we need to rank them in order. The criteria for ranking must be: a. Safety b. Liquidity c. Risk d. Debt position against the asset. Either you can assign equal weight or disproportionate weight. However weightage should not be changed now and then, change them only when if you are empowered with information.


Goals are bound to be wrong in some aspect, perfection only comes with years and years of practice and discipline. Important you refresh goals every year to take a stock of it, don’t change them too often unless you are sure about the situation being changed. For example you had planned 10% as indirect income, it went up to 40% with some luck and discipline. Or you wanted to buy Mercedes but you settle down for Honda City.

Monitoring primarily includes:

Performance of goals every year-return, funds infusion to align with goal.

Bring opportunity cost for market linked instruments (for equity shares as example sale minus buy is not key point for decision making. Funds blocked in equity would have earned interest in banks. Hence Sale value minus cost price minus interest cost plus dividend earned minus tax advantage gives us the real return on investment. Lets cover buy and sell of fixed asset or equity shares as a separate subject.

Lets talk more about bit of risk management, prosperity tracking from applied thoughts on few of these objectives or goals listed. Next time, thank you again….Happy Investing!

MAY be we can sum up Aftab case like this: Please see attached file- kindly use the calculator……haven’t done a sense check.


I track three ratios to track growth, safety and prosperity.
Growth is portion of indirect income (passive) against direct income (active income). A figure of 20-25% in 3-5 years shows I am growing.
Safety I measure by net worth days , how many days I can survive without any income. I look for a figure of 8 years onwards.
Prosperity for me is when your indirect income exceeds direct income for continuously 3-5 years.

I will talk in detail in next episode. My answer now to your second question would be:

  • PF is part of net worth calculation (though I would take 50%)

First question is bit tricky, what I can say perhaps is:

My risk appetite is comes from concentration bands than asset class. I only understand a little about equity markets, nothing else. I wont invest anywhere else. But as a general suggestion every asset class has its risks and cardinal rules.

At any stage I would define risk in equity for any company business by looking at:

  • Competitive advantage of company
  • Quality of management
  • Risk Management capabilities (financial, operational, strategy, compliance)
  • Margin of safety (more on intrinsic value)
  • Special situation like demerger, hidden etc.

I am sure every asset class has its own risks, if one understand overcoming fear and greed even with small net worth at any age shouldn’t be a problem.


Suvi - Its really a must go through read. Thanks for sharing it with the larger crowd.