Time-tested method to grow money

The most commonly accepted notion regarding wealth creation can be summed up as follow spend less than what you earn and then invest what remains wisely to grow your wealth. While there is a perception in this thought, over some time you might realize that executing this idea of wealth creation is not that simple.

Time-tested method to grow money

In fact, over time, most of us realize that the greatest obstacle we face in building our wealth creation is often our behavior and investment biases. There are some golden rules to wealth growth derived from years of general patterns and tendencies, that, if you applied appropriately, then can make you wealthy beyond your dreams. Having a Passive Source of Income Most people failed to realize that the ability to free up time and not have to spend 7-10 hours working every day is an accurate measure of wealth. The only way you can accomplish this is by generating sources of income that generate wealth by themselves without linking any work. One of the ways to create a passive income lies in asset investment. Educate yourself financially When it comes to finances, the utmost people incline to favor the easy route and get attracted to get-rich-quick schemes. They blindly trust experts, don’t strategize, make emotional decisions or start believing that making more money is difficult. You can such stathe te of affairs by becoming financially literate. Educate yourself and stay up-to-date with financial matters. Set objectives and plans Furthermost people aren’t able to achieve their financial goals due to poor planning. The accurate method is to take a piece of paper and write down the amount of money that you want, how you plan to raise it, and how you aim to utilize the money you earn. The more your objectives and goals are clear and focused in the plan you are about your approach, the easier it is to follow your plans. Managing Surplus Income Efficiently Creating wealth is not about how much you earn, it's about how you manage your surplus income. A surplus is the amount of money you have obtainable for investment over and above your expenditures. A shortfall will exist if there isn’t enough income. You can increase cash flows by eliminating unnecessary spending and increasing income.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

What is the margin of safety?

The margin of safety is the difference between the fair value of a stock and its market price.

Margin of safety

Warren Buffet says, ‘price is what you pay, and value is what you get.’

The margin of safety is the difference between the fair value of a stock and its market price. If you are paying a price that is less than the fair value of the company, then you can cover any missouts. This miss-out could be related to prospects of the company, industry prospects, or any other variable which probably you did not consider.

What should be the margin of safety? There is no right or wrong answer, it depends upon the business you are trying to understand. If you are looking at not a high-quality business, you ought to have a high margin of safety say 50%. And in case you’re looking at a high-quality business that produces cash flow regularly and there is a long history to validate it, the margin of safety can be less.

So, what can go wrong?

An adverse change in the competitive landscape

The competitive landscape tends to be structural however the occasional change in the competitive landscape can significantly affect a company’s future. For example, Airtel's leadership position in telecom was challenged by Reliance Jio.

Technology

Digital disruption virtually impacts all kinds of businesses. For example, brokerage firms such as ICICI Direct, Hdfc securities, and Kotak securities were challenged by Zerodha which gained almost 10% of the market share. This was possible only due to a better and user-friendly tech-based trading solution.

Adverse change and regulatory framework

Regulations can have a serious impact on sectors and companies. So, any price control imposed by the government on pharma companies or agriculture, etc. can ruin these companies overnight.

Management risk

There can be capital misallocation by the management. It is a major risk for the minority shareholders since they don’t have any control over the working of the company. Management can use the excess cash flow towards making a big acquisition or putting a new plant without understanding the implication of that plant.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

What should be the price?

After you have studied the business and industry, you understand the prospects. Once you are confident of the prospects of the business, you understand the range of the price you may be willing to pay.

Everything has a price, you need to know it

After you have studied the business and industry, you understand the prospects. Once you are confident of the prospects of the business, you understand the range of the price you may be willing to pay. On one side the past data, which may or may not be replicated in the future, and on the other side, there is the completely unknown future. With this challenge, the investor is left with more of an artwork rather than a simple mathematical calculation. After my years of experience, I have realized that valuation is a reference point rather than a sacrosanct number. As an investor, you should understand whether the range is a buy range or a selling range. Any price which is in the middle will not lead to any conclusion. Although there are investors who prefer complicated valuation models, I suggest simple reference points. In the case of a financial company, you can refer to the price to book. A financial company’s book value is a more current number rather than the historical cost. In the case of a non-financial company, you can refer to enterprise value divided by net operating profit after tax. This comparison must be made with the company’s history as well as with the company’s peers. Another ratio that I prefer to at is FCF yield, a high yield indicates buying range. I do not like using discounted cash flow (DCF) model because it uses a lot of assumptions about the future. No one knows what the future looks like what we know is only the present. Another way to use the DCF model is to reverse it. The purpose of reversing the DCF model is to understand what the market expects. This is called market expectation or implied growth. If the implied growth is unusually high or low, it is an indication of a buy or a selling range. As an investor, you should never fall into the trap of ‘paying any price’ for quality. There is a price for everything, the purpose of understanding these ranges is to figure out whether it is worth entering or waiting it out.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337