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Sunday, November 6, 2016

As Indian Economy is Improving is it Good Time to Invest?

There is no good time or bad time for investing. We have to find good stocks at the right price in the market and invest.
Honestly speaking, as the economy is turning around, the stock market is rising and stock have become expensive to buy and I am unable to find enough good stocks at the right price.
Contrary to what most people think, when the economy is in the upswing is NOT the right time to invest. The right time to invest is actually when the economy is in doldrums or shattered - that is when we should have the courage to make massive investments - they will payoff handsomely!
So what shall a person do when economy and markets are booming?
  1. Search, find and make humble investments every month in good stock priced right.
  2. Deeply and carefully study and shortlist great companies, which are expensive right, to make investments in future, when the market crashes.
  3. Accumulate cash - keep ready a war-chest - for that doomsday.

Further Related Reading:
Market is a pendulum with booms and busts, One should invest always
Slide explaining that stock market swings like a pendulum
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The Consequences of an Economic Upswing

Example of Splurging during an economic boom when people pay 38000 dollars for one way flight
When economies boom, people splurge - an example

When the economy is in upswing, following things happen:

  1. Businessmen will earn more profits.
  2. As a result businessmen feel more generous and reward their management, staff and workers - who, in turn have more cash in their pockets.
  3. Having surplus cash people start spending more - on essentials, luxuries, entertainment, travel, etc.
  4. Such spending a large section of people will create more demand for goods and services - will increase the income of many more people.
  5. Price of goods, real estate start going-up. None will bother about the slight price-rise as people are relatively comfortable.
  6. Companies profits will increase - share prices in the market go up - PE and P2BV ratios will go up.
  7. Slowly situations develop for an economic as well as stock market crash.
This is an economic cycle that keeps repeating itself both locally and globally. The length of an economic cycle like this last anything between 7–15 years.
What I said above is very well known - there is nothing great about it.
Knowing this what are we going to do?
This is a more important question!


Do the following:

  1. Prepare yourself to ride the boom.
  2. Make good money.
  3. Don’t Splurge!
  4. Be aware that good times do not last for ever.
  5. Invest wisely but in small quantities (for shares will be expensive and will be trading at crazy valuations), preserve cash for the eventual crash, and when that happen, unleash the cash to amass all the great companies shares that you wanted to buy but could not because they were expensive.


Conclusion:

The consequences of an economic upswing are more money in the pockets of people, who tend to splurge. Wisdom is in conserving cash and investing wisely for the rainy day and for progress towards financial freedom.

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Major Break-up of Assets and Liabilities in the Balance Sheet - Slide

Pie-chart shows the the three major break-ups of assets and liabilities
Pie-chart depicts the major break-up of assets and liabilities

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What is a Balance Sheet?

Meaning and Definition:


Balance Sheet, also known as the ‘Statement of Affairs’, is the first and the most important of the three financial statements, the other two being the ‘Profit and Loss Account’ and ‘Cash Flow Statement’. It lists the assets and liabilities of a business as on a particular date.

The assets and liabilities in the statement of affairs balance-out each other and hence the name ‘Balance Sheet’.

Picture explains the concept of assets and liabilities balancing-out
Picture shows a weighing scale where assets and liabilities balance-out each other

Example:

The Great Eastern Shipping Company Ltd.
Balance Sheet as on 31st March 29016
Liabilities
Rs. in Crores (Rs. 10 million)
Assets
Rs. in Crores (Rs. 10 million)
Current Liabilities:
Current Assets:

Short-Term Borrowings
0.00
Cash And Bank Balances
2,624.98
Sundry Creditor (Trade)
 1,223.62
Current Investments
877.97
Other Current Liabilities
 1,057.59
Sundry Debtors (Trade Receivables)
320.56
Short Term Provisions
 1,098.62
Inventory
113.23


Short Term Loans and Advances
90.15


Other Current Assets
114.96
Total Current Liabilities
 2,379.83
Total Current Assets
4,141.85




Term Liabilities:
Non-Current Assets:

Debentures
0.00
Fixed Assets:

Term Loans
 4,930.21
Tangible Assets
10,652.35
Long Term Provisions
37.61
Intangible Assets
0.63
Other Term Liabilities
0.00
Capital Work-in-progress
365.34
Total Term Liabilities
 4,967.82
Total Fixed Assets
11,018.32
Total Outside Liabilities
7,347.65 
Non-Current Investments
0.00


Deferred Tax Assets (Net)
0.57
Net Worth (Shareholders’ Funds):
Long Term Loans and Advances
44.51
Ordinary Share Capital
150.78
Other Non Current Assets
426.30
Reserves & Surplus
8,133.12


Net Worth or Net Assets
 8,283.90
Total Other Non-Current Assets
471.38
Total Liabilities
15,631.55  
Total Assets
15,631.55

Major Break-up of Assets and Liabilities:

Pie-chart depicting major break-up of assets and liabilities
Pie0chart depicting major break-up of assets and liabilities

When total outside liability, that is money owed to outsider or people other than shareholders, is deducted from total assets, we get the net assets or shareholders’ funds. It is also called net worth and belongs to the shareholders who have invested their money in the business.

In the balance sheet of the company or business it is shown as a liability because the shareholders and the business are technically different and separate and the business owes the net worth to the shareholders.

The net assets or the net worth primarily grows out of profits generated by the company.

More the assets and lesser the outside liabilities better it is for the shareholders, as the net assets or the net worth belongs to them.

Conclusion:

Balance Sheet is the most important financial statement. All others support the balance sheet. It lists the assets owned by liabilities owed by a business.

Further Related Reading:

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