One Cage, Two Birds

One Cage, Two Birds

This is a fable about two birds, both caged with food and water.

One bird rebelled against his conditions, rejected the food and kept knocking his head against the caged door. He was sad and frustrated. “We are doomed to die living this miserable life in this prison,” it said with a hopeless sense of accepting his circumstances.

The other bird said, "Let’s us enjoy the food and water and fly into freedom at the first opportunity to escape.”

The chance to escape seemed negligible to non-existent, but the bird remained optimistic and alert to the chance to escape.

The unexpected opportunity came in the evening when the master came home in a changed mood. He decided to set the birds free.

But while the bird that remained optimistic and alert to the chance to escape fled the cage into a life of freedom in the skies, the negative bird kept wondering if he will get food out in the open and if he will be able to survive. “It may not be such a great idea to go out and search for food and water when the master is providing everything free,” the negative bird said. Even as it was wallowing in doubts, the master’s wife came and admonished the master and quickly shut the open door before the remaining bird inside could escape. Influenced by his wife’s thoughts, the master thought that he may have erred in his judgment. The master and his wife were happy that they were to keep at least one bird in the cage.

While the opportunistic bird grabbed the first available chance to a life of freedom, the negative bird paid the price for procrastination to live and die a life of continuing misery in the cage. After years of staying in the cage, life was not easy at the beginning in the outside world, but with passage of time, the free bird truly enjoyed the many joys that were beyond even his imagination inside the cage. The caged bird, on the other hand, led the same drab life and continued to wallow in misery till his very end.

Many of us, too, find ourselves trapped in a cage. Most of us are like the negative bird: Keep cursing our bosses, our companies, our colleagues and wonder if we ever will get to free ourselves from the hell we find ourselves in. But, like the procrastinating bird, when an opportunity does come our way, we are filled with self-doubts that prevent us from taking the flight to freedom to chart out a life that we dream about. We tend to fool ourselves by thinking that we are in a comfort zone when in reality we are enduring the pangs of survival in the discomfort zone.

4 Best Words of Investing Advice

The 4 Best Words of Investing Advice

There's some great investing advice out there, but plenty of bad advice as well. Like, oh, this pearl of wisdom: "It doesn't matter how high the price is -- buy all the Enron you can."

While you can spend all day listing smart and useful investment advice, I got to thinking about great advice that's no more than four words long. Here's what I came up with:

"Buy what you know"
This is probably the second-most-famous four-word piece of investing advice. This advice comes from, or is at least most popularly attributed to, Peter Lynch's One Up on Wall Street. In a timeless article published several years ago, Jeff Fischer wrote at great length about this phrase:

[I]t is most often read to mean buy the brands that you know, buy the companies that make products that you like, and buy the company names that you always hear in daily life.

When large-cap stocks are soaring, this strategy, simple as it is, appears brilliant. "If I just buy IBM, General Electric, and Hershey, I could double my money every three years!" Of course, when large caps go into long periods of rest or retraction, the strategy requires patience and offers less than blistering returns, especially if you "bought what you knew" as it was hitting a seven-year peak.

"Buy what you know" is one-dimensional advice for three reasons. First, what you know may not be worth investing in. Second, the practice of buying what you know is rarely interpreted to mean buy the business model, the cash flow statement, and the balance sheet that you know backwards and forward. It too often is seen as "buy your favorite brand." Period. If you happen to know and love Kmart, but you didn't learn about its financials, you [were] in a sorry situation because you were an uninformed investor. Third, I've never heard the term "buy what you know" coupled with anything regarding valuation. It seems to be "buy what you know -- at any price."

Thank you, Jeff. "Buy what you know" may help new investors get comfortable with the process, but it simply won't help you pick particularly good stocks if you don't get into the valuation side of the equation. Plenty of people bought Krispy Kreme (NYSE: KKD) because they knew it, and that was a disaster. Plenty of others have bought Harley-Davidson (NYSE: HOG) because they knew it, and that's worked out fantastically. Simply put, acting on "buy what you know" doesn't lead you down any path in particular.

"Buy low, sell high"
I'm pretty sure this is the most famous four-word piece of investing advice ever. As guidance, the phrase is inarguable -- yet largely useless. By definition, if you succeed in buying low and selling high, you've made a profit. Any purchase is made with the expectation -- or at least hope -- that in absolute dollar terms, you're going to be selling at a higher price than what you've bought for. But since the advice itself gives no guidance as to what is "low" and what is "high," it can't be used without a whole lot of addendums. Buy stocks with low P/Es, or at 52-week lows, or during bear markets, or any number of other interpretations of "buying low." Selling high might or might not be useful advice. After all, as Philip Fisher has famously written, and as adopted by Warren Buffett, the best time to sell a stock, if it's properly researched, may be almost never.

We can all tell plenty of stories about someone selling a stock at a quick profit that seemed high but turned out to be several hundred or thousand percent below what they could have made, had they only held on. Tom Gardner frequently mentions Whole Foods and Daktronics when confessing his own bad calls. Not to pick on Tom -- his results speak for themselves -- but these were mistakes that came out of the "buy low, sell high" mold.

"Buy an index fund"
This is the most actionable, most mathematically supported, short-form investment advice ever. If you look up The Motley Fool in the encyclopedia -- or at least on Wikipedia -- you'll find that we are "famous for [our] view that, for the majority of people who have little time to keep track of stocks, the best investment strategy can be summed up in four words: 'Buy an index fund.'"

And that remains true. If you've got little time to keep track of stocks, this really is the best investment advice around. It's not perfect -- after all, you might be asking, "Which index fund?" And then you'd want to specify certain characteristics, such as:

• No load
• Low annual cost
• Low turnover
• Broad index

That means a fund like Vanguard 500 Index (FUND: VFINX), which coincidentally may allow you to "buy what you know" because it holds a lot of what you know, including Intel (Nasdaq: INTC) Coca-Cola, Altria (NYSE: MO), and Wachovia (NYSE: WB), each of which is in the fund's top 25 holdings.

When cornered at cocktail parties for investment advice, this is the one piece I usually provide. After all, barely 25% of mutual funds over time beat the relevant market index. I don't think that you can really improve on this advice if you're stuck using four words or fewer.

But you can spend more than four words on investment advice, and like the other four-word mantras above, doing so usually yields even better advice. Like the classic index fund, a managed fund can have no load, low cost, low turnover, and well-diversified holdings. It can, on rare occasions, be managed by someone or some team that has the ability to properly allocate capital and value businesses, thereby adding value beyond what the market average provides on its own. When you combine all of these factors, you get the potential to find a mutual fund that improves on the index fund and becomes something that will help you make money.

Partnership for Inclusive Growth

Indian Prime Minister Manmoham Singhs's address to the CII on 24th May 2997.

Besides other things he touches upon an the Social Responsibility of Corporates and laid down a ten point social charter.

Industry leaders including the president of CII, Sunil Mittal and other leaders have reacted in a positive manner.

Lets hope the ugliness in the corporate arena is reduced by individual agendas set by industry organizations - like CII.

Prime Ministers Sppech

Some endorsement

The endorsement article is also interesting because it talks about capping of corporate salaries...which I am sure most of us would like to follow.

The Market Function of Piracy

The Market Function of Piracy

In marketing the most effective way to introduce new products is the free sample. In 1978 Lever Brothers spent $15 million ($47.55 million in today's currency) delivering a free sample of Signal Mouthwash to two-thirds of all US households. The strategy was a success and the product remained on the market well into the 1990s.

The significance of the free sample is product trial; it gets the product into consumers' hands. If consumers use the sample and like it, they may go on to buy the product and buy it again and again, that is, become repeat purchasers; they may even spread the good word to others. When repeat purchasing and favorable word of mouth kick in, the product's sales will experience a shift from slow to rapid growth and management will consider the product a success.

Free sampling is the best method of introducing new products, but it is also the most expensive. Not surprisingly, then, Forbes ASAP magazine[1] reports this alternative way to practice free sampling:

One security manager for a major manufacturer, who asked not to be identified, says she is sure some companies actually view being counterfeited as a boon to their efforts to build brand awareness. After all, she says, if some companies give away merchandise to expand market share, what's not to like about having someone else take on the expense of manufacturing and distributing the goods, as long as they're high-quality copies?

Imitation is a universal trait of human behavior, ranging from the use of phrases and mannerisms of admired others to the reuse of hummable themes in music, recognizable images in paintings and well-known plots in literature and Disney movies. Imitation is a normal part of the competitive process in growth markets. As the sales of an innovative new product takes off, competitors enter the market with their own, often cheaper, versions.

If the innovative product is patented, competitors make minor design or functional changes to secure their own patents. Knock-offs are unauthorized, usually cheaper copies. And, of course, the innovative marketer often produces its own cheap version, sometimes called a fighting brand, to fend off the competition. Over time real prices in the product category decline and quality improves.

Knock-offs are pirated products. Because they are usually cheaper than the original, knock-offs tend to appeal to a more price-conscious segment of the market; that is, the buyers of pirated products are probably not legitimate prospects for the innovative new product, either because they cannot afford, or do not want to pay, the higher price. Message to the innovative marketer? Either drop the price of the new product or produce a cheaper version — or be the first to exploit a new technology, something the movie and recording industries chose not to do.[2] Many, including these two industries, would rather sue than practice good marketing.

One study found that users of pirated software sufficiently influenced — by word-of-mouth communication — eighty percent of the software's prospects to buy the legal product and another described several scenarios in which piracy can help increase the sales of legal products.[3] The pirated product functions as a free sample that the innovator does not have to fund.

So what about free copies? How do you compete with free, to state the battle cry of the new Luddites who fear digital technology? It's done all the time. One of the most dramatic recent instances of this was the strategy of science fiction writer Cory Doctorow who, over the course of three years, gave away 700,000 electronic copies of Down and Out in the Magic Kingdom. Sales of the hard copy went through six printings and surpassed his publisher's expectations. Many of the downloaders, Doctorow said, did not buy the hard copy and probably would not have regardless, but the giveaway created considerable buzz and a significant minority did buy the hard copy. Free — no matter where it comes from — can help sell.

---

our desi makkadman in trouble...

http://www.makkadman.com/

Ancient Wisdom applied to modern investing

There was a wise man in a smallish town on the banks of a low-profile river. He had (as usual) three sons whom he wanted to teach, among other things, the time-tested principles of managing money.

So one fine day, he summoned all of them and gave them Rs 100 each (this was in old times, so the money was worth quite a lot!). He asked them to 'invest' the money as per their best judgment and report to him.

The first son went to the local representative of the kingdom's treasury and deposited the money there -- which promised to give him Rs 105 after one year.

The second son lent money to a farmer who promised him a 50 per cent share in the farm produce, along with the principal, at the end of the year.

The third son, usually the most enterprising of the lot, had a trader friend who had recently told him about the fortunes to be made by trade in Baghdadi goods in the town and its surroundings. The third son gave his money to this trader with the agreement that he would get half of the profits the trader makes.

As usual, they reconvened to discuss their experiences. The second son was whispering to the first son that it was not fair that third son always wins in these learning-the-profound-principles-practically matters. The wise old man however had a different line of argument!

"You have done well. All of you!"

The third son was taken aback a bit. He was expecting the usual pat on the back and was looking forward to the opportunity of booing his brothers. The sons typically did not interrupt or question the wise old man, for, he was wise as well as old and, not to forget, he was also their father. This, however, was not a 'typical' time. He ventured,

"My investment is most remunerative. The trader is likely to make Rs 80 on each Rs 100 invested. How can you put that in the same league as BigBro's pathetic Rs 105 and MiddleBro's mediocre Rs 140 at best?"

The wise old man smiled his wise old man's smile and spoke in his wise-old-manly manner,

"Agreed. However, your trader may have an accident due to bad weather or his goods may go bad by the time he reaches here or might simply be rejected by the people here because they don't like the goods. On the other hand, MiddleSon's investment is lot less likely to have many of those issues. The farmer he has invested in has been cultivating land and selling his produce for more than 15 years now."

"In that case, why is BigBro's investment at par with MiddleBro's?"

The wise man was still undisturbed. He had expected these questions. It was all falling in place like an unravelling jigsaw.

"Although the farmer is more reliable than the trader, this year's crop may be not as good as an average year's. Or there might be too much of the same crop and people may pay less for the produce or there might be an attack of locusts and so on. On the other hand, the promise of Rs 105 in case of BigBro's investment is certain. The treasury of the king is the most reliable investment, at least in our kingdom."

The three sons nodded in understanding. The elder two were happy to have finally done something which was not inferior to their youngest sibling. Encouraged by this the second son gathered enough courage to ask an intelligent sounding question.

"Then how do I decide whom to give my money?"

The wise man was now smiling from ear to ear. The last piece in the jigsaw had fallen in place. The crore-rupee question (in those times, dollar and millions were still not very popular) had been put forth.

The wise man spoke, "That is the essence of sound money management. You need to ensure that you do not focus excessively on any one extreme in terms of reliability and attractiveness. Do not put all your money with the treasury because you do not need to have perfect assurance on all your money. Do not put all your money with the trader either, because you do not want to be left without any money at all in pursuit of attractive returns. Understand that there is trade-off in attractive investments and their reliability. Find your own level of reliability and attractiveness that you are comfortable with. That, my children, is how you will make the best use of your money. Now, who is cooking supper?"

Thus, the wise old man successfully imparted to his three sons the basic principle of risk and returns and they had a decent supper afterwards.

We would, however, like to expound on the matter a bit further for it to be of practical use to you.

One of the most important assumptions of Modern Portfolio Theory is the relationship between risk and returns. Higher risk is expected to be rewarded with higher returns. While this principle has been at the heart of portfolio allocations of most institutional investors, individual investors have thus far used risk-return tradeoffs only intuitively at best or not at all at worst.

A number for risk!

An objective measure of risk is what is known as standard deviation. It is a measure of the variability of returns on an asset. Simply stated, it means how much wide off the returns can be from the expected average. It is typically calculated over a specified period -- say a year or 10 years.

Once you have the price of an asset for a given period, you can calculate the standard deviation fairly easily. Broad market indexes such as Sensex and Nifty have annual standard deviation of 20-25%, while mid-cap indexes or sector specific indexes have a higher standard deviation of 25-35%.

Single stocks can have annual standard deviation ranging from 30% to as high as 100%. Gold is less volatile and has standard deviation of 10-15%.

The fixed income investments have zero to very low standard deviation, i.e. 0% for FDs (you have fixed returns) or 3-5% for debt mutual funds (almost fixed returns).

Equity mutual funds being diversified across multiple stocks have lower standard deviation than single stocks although amongst them, there is a wide variance.

Better managed funds have lower standard deviation for a given level of annual returns. It is thus imperative to check a fund's risk profile before concluding on the basis of returns alone that it is a good fund.

Return for each extra unit of risk!

Modern Portfolio Theory argues that to take on risks without having adequate returns from an asset is irrational and wasteful. What you need to be aware of is that you are not committing this folly in designing your portfolio.

Often enough we purchase some stocks and mutual funds when we find out from 'sources' that the returns given by them have been high in the last 1-2 years. This is only half the story. You also need to find out if the risk involved in your proposed investment is not too high.

Otherwise you would be left wondering like the third son in the story above why the so-called investment opportunity is not the only one you should wholeheartedly pursue.

http://www.rediff.com/money/2007/may/17money.htm

Golden share - addition to my CF and FA vocabulary

Financial news and information provider Reuters Group said on Friday it had received a preliminary takeover approach from an unidentified suitor, sending its shares up more than 25 percent.