Universal Life

Insurance companies are committed to fund death benefit claims as and when they occur. Therefore, they tend to use low-risk conservative investment styles in order to preserve principals and maximally guarantee returns. There are times, however, when the prevailing market interest rate is higher than those of insurance products. At times like these, investment public tends to move their capital resources from insurance products and invest in higher yielding assets elsewhere. To meet this challenge, insurance industry refashioned whole life policy into interest rate-sensitive policy. There are three types, namely: adjustable premium whole life, variable life and universal life. Among these three, universal life is the most popular interest rate-sensitive insurance product.
Buying a rate-sensitive policy requires the owner to share some of the short-term investment risks. For example: if the current investment returns have gone up then one of two things can happen, either the sum insured increases and the premium stays the same or the sum insured stays the same and the premium will decrease. And when the current yield goes down the adjustments to the premium and the sum insured will be made accordingly.
Premium is used to pay for the cost of insurance and other expenses in whole and term life. With universal, there is an investment aspect added. These three aspects are revealed to the policy owner (Called unbundling) so that s/he can make necessary changes in any of these aspects if there are good reasons to believe that those changes will positively impact the yield of the policy.
In my opinion, investment choices provided by universal life is quite limited. For someone serious about building wealth through investment, it is not the best way to invest. S/he would do better by opening an investment account with one of the brokerage firms.
Like whole life, universal life also has cash surrender value. Account value of the investment account in universal life forms part of cash surrender value. With whole life, cash surrender value becomes part of the contracted death benefit. Whereas with Universal life, the policy owner may choose to receive it in addition to the death benefit. There are four types of death benefits available with universal life. Each has its positives and negatives. Also, the size of premium depends on the type of benefit chosen.
I must add here that these are not the last words on the types of life insurance policies available out there in the market. Buying insurance is a long-term financial commitment. Therefore, one couldn’t possibly overemphasize more the importance of a good homework before making a decision.

of Life and Insurance

As I began to feel the need for a life insurance, I began to wonder if there were very many insurance options available to me. My idea about insurance policy at this point in time is at its most elementary level. It goes something like this, “One signs up a policy contract for a certain face value, at certain premium for a lifetime of the life-insured. And when the life-insured passes on, the beneficiary receives the benefits.” With this level of knowledge on the subject I did not feel confident to contact an agent. So I decide to poke around, do some research before I sign up a contract. With that in mind, one evening, I picked up a few books on insurance from my neighborhood library. To be honest, the stuff made a boring read. I found it difficult to plough through the thick and thin chapters of the book, especially for a person such as myself who do not have any prior knowledge of the industry. But then who would expect that from a book about life insurance? Anything important is intrinsically boring, I believe. Anyway, as the onus being on me, I kept going at it and finally managed to extract some information about life insurance.
First thing I noticed was the advice that anyone considering buying a life insurance policy should request for a Guide to Buying Life Insurance, a booklet produced by the regulatory body of the industry. For Canadians, that body is known as Canadian Life and Health Insurance Association or CLHIA in short. The idea is to familiarize oneself with industry so that one can ask questions and understand what the agent is talking about to help make an informed decision. It seems to me that insurance industry has designed quite a few types of life policies to suit the taste buds of consumers of such financial products. I found that while my rudimentary understanding of life insurance policy still holds good, there are several variations on the theme.

Term Insurance: It is the least expensive way of getting insurance coverage. As the name indicates, the period of coverage could be anywhere from 1 to 100 year term. It is cheaper to buy this type of insurance product because it does not have what is called Cash Surrender Value (CSV). I will describe what CSV is in the Whole Life section. While buying limited term insurance policy, one might think about adding renewal and conversion options. Having these options is beneficial in case one decides to continue the same policy or convert into another type at the end of the initial term. During conversion or renewal, premium will be most likely higher than the one you have been paying. To note, if it is not term-to-100, this type of policy covers only a limited period.
Whole Life Insurance: Whole Life is more expensive than term policy. It has something called Cash Surrender Value. In the initial phase of the policy, it seems, one pays more than the actual cost of insurance resulting in the build-up of extra cash. This accumulated cash is paid out to the policy owner when the policy is terminated prematurely; therefore the name cash surrender value. At death, CSV forms part of the face value of the contract. It is not paid out separately. There are quite a few things one can do with it. One can borrow from the insurance company against CSV. Interest rate fixed by the company will have to be paid though. Also, in the event that premium payment is delayed due to whatever reasons, the accumulated cash can be used to keep the policy in force. Again, this is essentially in the form of policy loan and will have to be paid back to the company with interest. Otherwise, it will affect the amount of benefits received at death. There are myriads other options and riders that can be added to a basic policy to suit anybody’s insurance need. An in-depth discussion with the agent should thrash out those needs.
Universal Life: This is the most expensive policy to own and its features are very flexible. This one requires an in-depth look and I will do that in my next post. Till then, happy reading!

Building a House (Financial)

Insurance is a tool to manage financial risks of magnitude and proportion that one does not want to settle with one’s own money. It allows the policy owner to transfer major amount of the risk to a third party. It was designed as a vehicle for creating a win-win situation. Agreed, the system is not the most perfect, but still it works.

For a couple with children, buying a life insurance policy with appropriate coverage is a good place to begin with. Life insurance is critical in building a sound financial house. Additionally, one could also think about income replacement strategy during periods of disability. This is covered by a category of insurance called disability insurance. This type of insurance can be purchased by an individual who is either employed or generates income by means of self-employment. There are various other types of insurance products to cover any number of situations. Anybody considering purchasing an insurance contract should do some good home-work before signing any contract.

I do not like buying any insurance product beside the one I have for my car. I think it drains money from bank account. I hate it. But I would hate it more if I have to settle any large insurance claim with my own money.

The Day Sun Forgot to Rise

O night, silent and dark!
O night, without sky!
From the vast labyrinth of darkness,
From a land of unuttered words,
The night of unknown race and creed arrives
Among criminals and righteous,
Amidst poor and rich homes,
Temples and brothels.
O night of the peaceful rivers
And furious wartime,
You unfold yourself effortlessly
Upon water, space, time and trees.
With your nocturnal wings,
You disguise as dawn
The harsh sun of the noon.
Also, you give us a refuge,
Though fleeting,
In the lands of strange thoughts
And violent images.
Someday,
If I should chance upon
My own self crossing,
As a nation,
The last bridge,
The last river,
Let me look back
Through the cracks
In the door
Which is closing already
To watch you
Release
My restless spirit
Of wild immigrant ancestry
From the dark pages
Of your unedited diary.

O night, silent and wise!
O night, without limits!
O dark night of the brilliant rays of hope!
I shall not forget what you taught me.
See,
I can walk on the turbulent waters!

Not to Name

Under a cloudy sky of dreams,
My voice is made of water,
And my spoken words are the waves.
Song is rhythm and conflicts,
Like the ocean.
But I am not the ocean.

In a moment, man is conceived,
Out of endless undulations
Of ecstasy.
Thus, a creature of rhythm is born,
In a moment of limitless agony,
To toil endlessly
Under a cloudy sky of graying dreams.
He is simply a phoenix, laughing in delirium
While the insomnia of songs scatters him
Amidst the ashes of random thoughts,
Wondering how far beyond the horizon
He can expand his chaotic vision.
But I am not the vision.

I am simply someone
With an immeasurable longing.

Like Ivy on a brick-Wall

Yesterday, I saw a willow tree,
Happy under the diamond-lit sky.
It was all by itself, humming,
Humming a song I had long forgotten,
And I remembered you.
I remembered you as you were,
When you came charging,
Charging on a chariot of fire
Against my defenseless shoreline.

You conquered my country,
You demolished my freedom.

Just as suddenly as you came,
Without giving a second thought,
Without giving another look,
On the first signal, you left,
You left my impoverished country,
Impoverished by your absence.
From time to time, I wonder,
As I am wondering now,
Where you are and
Where you would be.
Perhaps, you are busy,
Busy raising stone butterflies,
Or reading lost letters of history.

As I walk these abandoned streets,
Streets abandoned by Sunday afternoon,
I remember watching you,
Watching you what you do to your movement,
Your feminine movement of the Pacific gracefulness
And Mediterranean brilliance.
But, I , most of all,
Remember wanting to do to you,
What Ivy does to the brick-wall.

Is that You, O Lord?

Someone beside me,
Someone in my mind,
Someone entangled,
A face among
Uncollected thoughts.
I can not see you with clarity.
Memory: a river that returns to gather
What it left behind.
Memory is a mirror of remembrance.
On the other side of remembrance is forgetfulness.
In forgetfulness, we remember,
The shadows passing -
Lovers, strangers, friends and foes, life
And death.
I can not say I remember you.
And I can not say I do not.
Between remembering and forgetting,
My thoughts are like a multitude of sunflowers,
Detached from the stem, suspended in the vast sky,
Looking for a sun of umbra and penumbra.
In my infinite recollections,You stand,
Opaque, transparent, very much human, full of irony.

In this field of uncollected remembrances,
Through all these layers of shadows,
I can not see with clarity,
But is it really You,
O Lord?

Revisiting the Balance Sheet Analysis

In the previous blog titled “So, We Ask”, it was mentioned that a good management team of a company on the right side of the business should be able to increase market value of its company by an amount equal to or more than the retained earnings. Another way to arrive at the same outcome is to look at the “net cash” position of a company. Roughly, net cash is obtained by subtracting the long-term debts from the sum of cash, cash equivalents and other marketable securities. Next thing to do is to divide net cash with the number of outstanding shares. This would give how much net cash is available per share. So, if you bought a stock at X dollar when the net cash was Y dollars per share, it would not be unreasonable to expect the share value to appreciate to an amount close to X+Y.

P/E Ratio

This expression combines two important company variables. This establishes a relationship between stock price and earning for the past twelve months. This ratio is normalized value for per unit earning. In other words, it tells us, for every dollar earned, how much the market is paying for one of its shares. Therefore, if one is considering investing in a company, an examination of its historical P/E values would readily indicate if the current price is more or less than what others have paid for the shares of the said company in the past. P/E also reflects investor perception of the future earning potential. During periods of economic boom, general P/E ratios tend to be high. And the reverse is true when economy does poorly. Fast growers tend to have high P/E ratios as compared to mature companies which tend to grow at slower rate. While looking at multiples, it is good to keep things in perspective. There is no hard and fast rule that says that a particular company ought to have a certain multiple. If there is, then is it two, five, twelve or what? Here, I have not seen any compelling argument to convince me with a number. Therefore, I think it is a good idea to compare a specific P/E ratio with industry standard. If the number is too high, then it would be safer to touch the face of a Royal Bengal tiger than to invest in it. The stock price is bound to come down sooner or later. P/E ratio can also be viewed as number of years a company will take in earning an initial investment, assuming that it will maintain the current rate of earning. Stock price (P) is very strongly influenced by fluctuations in earning (E). One does not change without changing the other. I would consider it a great investment opportunity, if I came across a company having a low P/E multiple while its earning-growth is red hot. Sooner or later, its P/E is bound to catch up. One can say that a company is fairly priced if P/E is more or less equal to its rate of earning growth. If the P/E is less than the growth rate of earning, it is a bargain!

Inseparable Under Mesopotamian Sky

Under the blue Mesopotamian sky
There is a land where barefooted raindrops
Dance on the bloodstained leaves of grass.
Some call it homeland.
For others,
It is a battlefield
Where ravens of war devour the expanse of the sky
Where every lintel is marked with blood of impossible peace
Where stray dogs greet dwellers in the morning
And vultures feed on their lifeless bodies in the evening.
How did we, after having traveled so far, after having learned so much,
Arrive in a nightmare such as this?
Where can one find that neglected hope?
Will God raise wise children of Abraham
From the exploded remains of conscience?

It is true that we have fought bitterly as foes.
But let us not forget, we have also lived together long
In this parenthesized geography.
It is time we realize,
How inseparable we have become
Under the blue and beautiful Mesopotamian sky!

Something Beautiful

I want to share a poem titled “Where the Mind is Without Fear” with those who enter the blog world. It is a poem written by Rabindranath Tagore who lived and died in pre-independent India. You would find that this poem tends to leave its footprints in the mind of those who read it.

Where The Mind is Without Fear
WHERE the mind is without fear and the head is held high
Where knowledge is free
Where the world has not been broken up into fragments
By narrow domestic walls
Where words come out from the depth of truth
Where tireless striving stretches its arms towards perfection
Where the clear stream of reason has not lost its way
Into the dreary desert sand of dead habit
Where the mind is led forward by thee
Into ever-widening thought and action
Into that heaven of freedom, my Father, let my country awake.
Rabindranath Tagore

I am dreaming

You invade my thoughts
With your eyes closed.
I visit you with bouquets of dream.

Your eyes illuminate my dreams!
And your face decorates my thoughts!
Together
We arrange and rearrange the stars
Into constellations
In the sky of my imagination.

Your shadow would, so often, fall on my dreams
And become a flower in my hand.
And your name,
A love poem that I recite in my dream.

Only in dreams, this is possible,
And only in dreams, you are real.
My beloved, reality is a circle inverted many times!
And inside this circle, I am.
And the circle has its center
On the other side of the horizon.

It is all about performance

One may not always be able to control what one earns, but one can definitely do something about what one spends. This can make a great deal of difference both in corporate and personal financial health. A company which judiciously practices cost-cutting without hampering the productivity is the company that can deliver strong financial results. As many of us have seen while reading annual reports of various corporations, some companies seem to bring in revenues from sales that increase year after year and yet the net profit margin remains stuck at the bottom of the chart without showing much sign of gathering any steam anytime soon. That is depressing. While others operating in the same sector seem to produce much better net profit margin from a comparable levels of sales. To arrive at the net profit margin figure, several deductions have to be made from sales. They are: cost of goods sold, administrative expenses, marketing costs, taxes etc. Therefore, a management team that promotes and integrates company-wide cost-cutting efforts into the psyche of its company is a team that would go far. Net profit margin is simply obtained by expressing the earning after tax as a percentage of sales. Return on invested capital and return on equity are also important performance measures. All these ratios and numbers are readily available in any of these financial websites. Therefore, it would be worthwhile to look at these numbers and see where they would fit in the scheme of things. When investment analysis enters meditative phase, you begin to see all the parts assembled into one whole structure – a company represented by pure numbers.

Is money the root of all evils today? Do you agree?

Interests and Dividends

There are those who like the periodicity and predictability of interest and dividend income. Financing philosophy varies from company to company. Some like to use debt as a leveraging tool. I personally do not like debt of any kind. They say debts are good during good economic times, because, they accentuate returns. Debts magnify losses during bad years too. However, anybody considering investing in corporate debt issues purely because of the attractive yields and expected constancy in payment, one would do well to consider whether the earnings are large enough to back the interest payments of all the debts (Bank loans, short- and long-term and any other cookie jar of loans the company has put its hand into). This information can be simply obtained by dividing the Earning before Interests and Taxes (EBIT) by total annual interests payable. A ratio of three or higher together with a good past records, say five years, of continuous interest payment is considered good investment candidate. However, there are exceptions one may make from time to time. For example, there are companies which are able to pay interests and continue to do so without ever meeting the theoretically determined margin of safety. One could invest in the debt issues of such companies and still expect the predictability offered by companies with iron-clad finance. Also, most companies try hard not to default on the interest and preferred dividend payments. They would rather hang by the skin of their teeth than default. Unlike interest, preferred dividend distribution, on the other hand, is made after taxes have been paid. Therefore, when calculating adequacy of dividend coverage, it is grossed up to its pre-tax value. Tax rate can be calculated from the company income statement. The grossed up dividend is then added to total interests payable. This value is then used to divide EBIT. The ratios so obtained from past five or more years can be plotted and see if the trend is improving or declining. Records of interest and dividend coverage can be made more meaningful when examined in the light of company fundamentals. If the company fundamentals are expected to remain comparable to or improve upon those of interest and dividend paying years, then one can assume with high degree of confidence that interest and dividend payment would continue.

Some feel that life is a terminal disease. Do you disagree?

An Experiment In Progress

To spread the chromatogram of thoughts across
A meadow of electricity.
To rearrange the bisected hemispheres of the earth
Into time without its days and nights, and
Into space without dimensions.
To transform the evening moon into
A butterfly, luminous and flying across the sky of dreaming.

Imagination, a bird of prey, hunting for an idiom,
In the vertigo of riddles and paradox, and to resurface
As a chameleon with crown of flame amidst darkness.

Two Birds

Two birds flying side by side,
And love becomes the wind.

Two birds flying side by side,
The sky is the storm, and
Time - the violent clouds.

Two birds flying side by side
In a sky sometimes vacated by
The silent absence of wind,
And
God becomes the wind beneath their wings.

For those who toiled all night in vain

Luke 5 (from the New Testament - New King James Version)
1 Now so it was, as the multitude pressed about Him to hear the word of God, that He stood by the Lake of Gennesaret,
2 and saw two boats standing by the lake; but the fishermen had gone from them and were washing their nets.
3 Then he got into one of the boats, which was Simon’s, and asked him to put out a little from the land. He sat down and taught the multitudes from the boat.
4 Now when he had stopped speaking, He said to Simon, “Launch out into the deep and let down your nets for a catch.”
5 But Simon answered and said to Him, “Master, we have toiled all night and caught nothing; nevertheless at Your word I will let down the net.”
6 And when they had done this, they caught a great number of fish and their net was breaking.
7 So they signaled to their partners in the other boat to come and help them. And they came and filled both the boats, so that they began to sink.
8 When Simon Peter saw it, he fell down at Jesus’ knees, saying, “Depart from me, for I am a sinful man, O Lord!”
9 For he and all who were with him were astonished at the catch of fish which they had taken;
10 and so also were James and John, the sons of Zebedee, who were partners with Simon. And Jesus said to Simon, “Do not be afraid. From now on you will catch men.”

Instead of Words

With clarity in my vision I step off the cliff-edge
To ride on the back of a beam of light

My head explodes inside my mind
I am thinking and my thoughts have no voice
To speak is human I speak a language
And my language has no vocabulary

Where I am the space is filled with sky
And I fill the sky with invented words

My body is inside another body
Which is not mine
Her lips spell me out
And it is the silence

With silence I erase all the other words
Instead of words
Silence
Silence like the crystals
!

Liquid

In a balance sheet, there are sections labeled as current assets and current liabilities. Anything that is achievable in a period of one year is termed as current. Readily available cash or cash equivalents that can be converted into cash within a short period, inventory, account receivables are included in the current asset section. While, interest payable, account payable, and interest on current portion of the long-term loans are included in the current liabilities section.
If anything is left after subtraction of current liabilities from current assets, that leftover is called Working Capital or net current asset. These numbers can also be rearranged in the following manner:
Current Assets/Current Liabilities = Current Ratio.

Both Working Capital and Current Ratios are used to examine if the company has source of cash to meet its day-to-day expenses, and if it has what its comfort levels are. The recommended levels of comfort in the cash position vary from industry to industry. An industry with quick inventory turnover can afford to work with lower levels of cash comfort than a company in an industry that takes long time to convert raw materials into product. Two things that require closer attention in the current assets section are account receivables and inventory. Sizes of these two items over a period of time, say five years, should be looked at. Increasing account receivables over a number of years will indicate that company has a problem in collecting its sale revenues. And increasing size of inventory without a concomitant increase in sale will indicate that the company has a problem in selling its product(s). If such problems do exist, then are they chronic or temporary? That can be judged using data from the past years. Inclusion of unsellable inventory can distort the actual levels of comfort. Therefore, a more stringent quantity called Quick Ratio or Acid Test is developed simply by excluding inventory from current assets. Boy, this ratio is really acidic! It burns! It is sulfuric or nitric or whatever else that burns!

Operating Cash Flow Ratio

I like a company with solid operating cash flow. When it comes to cash flow, start-ups generally do not have much to show. Because, they are start-ups. They generally fund their operations by means other than income generated from their own operations. Beg, borrow or what have you! At some point, they have to turn into a self-perpetuating entity. That is the whole principle behind origin of life. Self-perpetuation! Generate, preserve and replicate faithfully, still leaving enough room for innovation, the information required for organization of an entity as complex as life itself. That has been the modus operandi of life on earth. A business venture, if it wants to survive and thrive, has to follow the course what evolution of life has followed on earth. Or else, it would turn into dinosaur in a couple of years. Therefore, it is a great occasion to celebrate when the first dollar of profit shows up in the company wallet. It has arrived though not quite! It has begun its journey towards independence – a step towards self-perpetuation! Cash flow ratio will provide a glimpse into the financial soul of a company. In business vernacular, cash flow is expressed as Cash Flow (from operation)/ Current Liabilities. It simply tells us if it generates enough cash to pay for its day-to-day expenses, or it needs to borrow.

Absence

Between the departure and arrival,
From one home of disfigured fortune to another,
You have barely lived your shortened biography.

On the water were your footprints
And some unreadable names written in your blood.
In that geography of brilliant sunshine and endless searching
We discovered the excavated landscape of your fragile anatomy.

Ah, Angel!
With your innocence, you faced the monster.
With death, you paid the price!
And in return, we admit in shame,
We could not give you
The justice you so deserve.
We failed you!

Oh, child of imaginary parents!
To be left so high and dry,
Is it to be your fate always?
Oh, those imaginary parents!
Are they real only in a hallucinated world?

Rise, Angel, rise from the belly of the beast.
Rise from your deep eternal slumber.
Rise with the rising sun and the freshness of morning.
Let the ripples of flowing water cry out.
Let the stones of river also cry out in protest
Till absence itself rises with the elemental mist
To unriddle the enigma you left us.

In your memory, I plant a drop of ink
In the center of this vast and blank page.
May it become a witness to the horror you saw
In the twilight hours of your frightened eyes.

"Who Ever Loved, that Loved not at First Sight?"

“Who Ever Loved, that Loved not at First sight?”
Ah, love at first sight! Most of us mortals would like to fall in love, if possible the one at-first -sight variety. If love is not love-at-first-sight, is it still love? May be not quite. Therefore, we say, “Whoever loved, that loved not at first sight is a bogus love.” True, I have twisted the Christopher Marlowe original from “Hero and Leander” into something almost vulgar. I did not mean to be crude and offensive. But I am. So let me try rephrasing it. Here it goes, “Whoever loved, that loved not at first sight is a love after due diligence.” Hope it sounds more acceptable. Gurus of all stripes warn that we perform due diligence before we sign on anything resembling a piece of paper with fine prints on, particularly those that are likely to produce big waves on the Richter scale of finance.
Looking at company ratios goes towards fulfilling that duty. Ratios represent signs and symptoms of company health. There are four types of ratios. They cover most aspects of company affairs. They are: liquidity ratios, risk analysis ratios, operating performance ratios and value ratios. It is worthwhile spending some time on these small calculations. Because, it is like signing a prenup.

A Poem for a Harlot

In the evening,
Clad in your diaphanous skin,
You walk the streets
which have no name,
Not knowing where they will take you.

Tlok, tlok, tlok,
These are
The sound of your feathered footsteps.

With the sound of your heartbeat,
You time
The passage of epochs and eras.
And your walk becomes
The unalterable rhythm of living.

In your gait,
All the elements of life are woven
Into a seamless piece of fabric: your skin of gold.
Epithets of shame, when sewn onto
Your skin of ether, become stars
And your skin is the limitless sky.
And you, dear lady!
You become a constellation.

Beyond Belief

If I believed, would the sun rise
In the west tomorrow?
Or if I believed, would the lilies bloom
On the dark side of the moon?
Truth,
Here stands truth,
Unconquered and unsubjugated,
Beyond belief and disbelief of man.
And in our knowing and unknowing
We are bound to it irreversibly.

So, We Ask

Not all retained earning is reinvested in the company. A company may decide to maintain part of it as highly liquid cash equivalents. Or, some companies simply may decide to buy half dozen airplanes to ferry their executives on the weekends to their homes in Bahamas or wherever and back. Just kidding!! The point is the practice of investing in itself is necessary to maintain or increase productivity. Therefore, whatever portion of the retained earning that is reinvested into the company should result in a measurable increase in the market value of the company. The range of this increase varies from company to company. Some companies are more able than others in this regard. Let us assume that a company has established an old habit of converting the retained earning into corresponding market value of equal proportion, assuming that the number of outstanding shares remains unchanged. Then, by expressing the retained earning as a percentage of the market value, we find the percent increase in the size of the market value of the company. Therefore, an investor in the said company can expect to see his investment grow by the same percentage in the future. Let us say, this figure is 10 percent. Now then, an investor who desires a return of 15 percent would not meet his expectation by investing in such a company unless he buys the stock at an appropriate discount. At this point, one asks, “Is the stock price cheap, fair or expensive?” To find an answer to this question, one needs to find the intrinsic value of the company. The intrinsic value is calculated using “Dividend Discount Model.” It is a theoretical value obtained using very highly probable assumptions. A comparison between intrinsic value and the actual market value gives you an answer to the question asked above. Robert Hagstrom Jr.’s book (I bought a previously-enjoyed copy of this book for C$6.00 from amazon.com) very ably describes how to derive a company intrinsic value. There are other numbers which are also important indicators of company health and prosperity. I will deal with them, one at a time, in the days to come. Knowledge is the intrinsic value. Application of knowledge is the real thing.

Man, Must You not Look before Taking that Quantum Leap?

I ask myself, what is the single most important element of financial statement that can tell all, well almost all? I realize it has to be growth in earning. Anything and everything good or bad about the company will certainly reflect on the earning, assuming that it consistently uses one method of accounting only. If a company generated good earning-growth consistently over the past five years, we could assume that it is run by an efficient team of businessmen. We could further assume that it will deliver the same result in the future, too. Nothing is guaranteed, of course. There is always a certain amount of risk that can never be completely excluded. But then, without the risk, can there be a reward, really? The other factor to look at is the relationship between the company market value and the retained earnings. Some investment veterans feel that for every dollar retained there should be a corresponding increase by the same amount in the company market value. This is a sign that the management is efficiently using the retained earnings to increase the market value of the company. Increased market value equals increased share value. A company can be considered a good investment candidate if its growth in earning approaches the certainty of bond coupon payment. When that happens earning becomes a predictable feature of the company, year after year. And that, in turn, helps estimate its intrinsic value far into the future. Companies with such features together with next to nothing debts should not only be able to tide over some rough economic times but also increase shareholders’ interests in the company in the long-term. Finding such a company is, indeed, priceless!

Suggested Reading:
The Warren Buffet Way: the investment strategies of the world’s greatest investor, Robert G.
Hagstrom, Jr

Perhaps, So

I like the sound of your warm summer voice,

Tender, and organic.

Also, I like the golden threads of hair, falling

On your face of soft marble.

Your eyes of oceanic blue filled with fire and new day.

I am

A heart of flesh and blood implanted in a statue,

A heart of flesh beating in the vortex of dark nights,

A heart of flesh wondering:If love has a fragrance, flavor or a color;

If love were a happy melancholia;

If love were an untamable beast

And if it spoke in tongues.

Perhaps, love is a note of exclamation

In the systolic and diastolic heartbeats,

Or just a dream full of questions.

Perhaps, so

Perhaps, it is so.

But when it arrives,

Even a soul saturated with dirt and soil turns into

A newborn butterfly spreading its wings of fire and nights.

Man, Look before you Leap! p3

One, perhaps, may not have to go the extra mile to ascertain the investment merits of a company under consideration. Some industry veterans are of the opinion that most information one needs for analysis are contained in the company Annual Reports. These days, it is so easy to get company annual reports. Most self-respecting companies maintain websites. And annual reports are presented in a downloadable PDF formats. So, annual reports are just a mouse-click away. Here, one might like to go through a real business school textbook which describes the nitty-gritty aspects of understanding Balance Sheet and Financial statements etc. You might find it boring. But very important! Remember, you want to grow wealth! “No pain, no gain.” “One Up on Wall Street” by Peter Lynch will also tell you what to look for. But this book is not intended for in-depth analysis. As you would notice that, balance sheet, income statement or cash flow statement are built logically in a way one can easily follow. And knowledge of high level math like nonlinear partial differential equation is not required. Simple arithmetic will do! You still find it difficult to grasp? I suggest you take a course in securities analysis. In Canada, Canadian Securities Institute (www.csi.ca) provides online education programs. For the US, you might visit the website http://www.investopedia.com. It will cost you some money, though. A thousand bucks at least. But then, building wealth is a serious business. One can not afford to be amateurish! One can retain the label of an amateur without being amateurish.

Man, Look before You Leap
p2

We all want our wealth to grow. That is why we invest. Even an investment strategy, designed with emphasis on safety of principal and certainty of regular income, should include growth. Big and mature company shares tend to move at snail’s pace both in good times and bad times. Also they tend to pay dividend on a regular basis. Therefore, they are considered safe investment vehicles with potential for steady income. While we are interested in the safety of principal, we would like our principals to multiply many times over. For such kind of investment objectives, we would be better off looking at small and mid-cap companies. Because, they are the ones with maximum possibilities. Here, the investment can go both ways. Therefore, it is vital to study the business, financial, management aspects of the target companies at length. It is vital to know the business. This is done to minimize as much investment risk as possible. The astute investors who have made fortunes in this business take their time to understand the company and its products. Some go the extra mile in trying to ascertain investment merits of a company. They would go so far as to interview its competitors and their opinions are then incorporated in the analysis of the said company. They are not interested in the price increase that occurs in a week or ten days time. They are thinking long-term and big payoff. They are thinking four-, five- or even tenbaggers. Ten baggers do not happen in a few months. It takes years. Therefore, by minimizing the risk factors, you are able to increase the margin of safety. By increasing the margin of safety, you are able to give your investment a chance to become tenbaggers. Buying shares of a company with good earning record at bargain price will almost ensure a hefty return on invested capital!

Man, Look before You Leap
p1

While making an investment decision, one is confronted with the question of choosing the right industry sector or company to invest in. The choice one makes in this initial step of investing is critical in the outcome of the investment. There are many industry sectors and subsectors. And within each sector or subsector, there are several companies doing business. A look at the list of companies traded at any of the major world stock exchanges tells us that there are always some who see investment merits in any given company in any given sector traded in these exchanges. Choosing the right company is more critical than choosing the right industry sector. The airline industry was once a growth sector. But most airline companies, during that time, apparently did not really make much money for their shareholders. On the other hand, one can still find growth company with good earning power in a declining industry sector. Having said that, it is not, however, totally right to be unmindful of the industry sector while making investment decision. Commodity cyclical, for example, has the tendencies to rise higher than most during economic upswing and fall lower than most during downturns. Therefore, understanding point of time in the economic cycle will be an important factor. Besides, it is the supply and demand constraint which is the major price determining factor in commodity industries. Anybody in fossil fuel business will tell you that. Anyone paying attention to oil and gas industry would have noticed the roller-coaster ride of the crude oil price in the last few years. Talk of a hurricane developing in the Caribbean Sea, sightings of Nigerian rebel troops in the Niger delta, or rumor of OPEC cutting or increasing oil output, or some bare-chested president thumping his chest and for that matter anything and everything that is perceived to have the potential to disrupt supply can affect price of crude oil. As for me, the kind of company to kill for is a company which operates in an unregulated sector; it is the sole producer of an essential item; it has an effective cost cutting policy in place; it has the right to set product-price at will (Without ripping off the consumers, though); it has a little or no debt; it has innovation in mind; it is a company whose executives do not get unwarranted hefty bonus while neglecting the interests of the shareholders (if I left out any other points, please leave a comment). Ready to jump? First, look for a spot to land.

Castle in the Air

We, humans, like to populate our linguistic landscape with pairs of mutually antagonistic objects and emotions. In doing so, we recognize the inherent duality in our own nature and the things that surround us. The contrast helps us see the difference with clarity, helps us feel undeniably. When we see an object rising in the air, we also see the obvious in it. That, it will fall. One invariably follows the other. Thus, Shelly's writes, "When winter comes, can spring be far behind?" Likewise, we ask, "When investment returns seem too good to be true, can the risk of losing be far behind?"
Although, I am far away from any of the world's financial centers, I felt the tremor due to the recent subprime rate tectonic movement under the financial districts of the world. Boy was that scary!
How did it happen? With all the smart analysts doing their job, it shouldn't have happened in the first place. Or, did the wizards of Wall Street believe too much in themselves that, for a brief moment, they thought they could build a castle in the air?
Greed is good. Do not spoil it.

Virgin Mary

Is it too much to say that in the center of every great story, there is a heroine, or, without a heroine, no great story is ever truly great?
Without Mary, would New Testament story be the same? Or, was it that, it did not really matter who it was, so long as mother to be was a virgin? Or, was Mary the only virgin available, at the time, in the whole of Israel? Or, was it an act of random choice that fell upon Mary? Or was Mary specially intended from the very beginning to be His mother? In other words, was Mary conceived without sin?
“Good fruits come from only good trees.” God created Mary good so that she could be His mother.
Though, scantily mentioned in the New Testament, in a span of few centuries, she emerges as the feminine face of the church, as Mother to those who call her mother.
In obedience, she presents Him, in flesh and blood, to the world. And in obedience, she participates in the story of sacrifice to redeem the world.
It would not be wrong to say that Mary is, indeed, the heroine of the story of human redemption through Christ.

Peptidomics of Really Small Peptides

Small sized RNA molecules, known as microRNA or miRNA in short, play vital physiological roles in cellular metabolism. These miRNAs do not have to be exact complementary sequence of their target messenger RNA (mRNA), thus, expanding the range of target mRNAs that a single miRNA can control. There are over 300 miRNA known to be coded by the mammalian genome. And they collectively regulate the levels of 25 percent of the genetic messages.
Having seen the formation and function of miRNA, I ask if it is a far-fetched idea to think of a naturally occurring peptidome in a cell, either as a result of protein translation from short but genuine ORFs or as a result of general protein degradation?
We know that majority of the protein-coding ORFs carry the canonical start codon, ATG. But, now and then, we do run into ORFs which use translation initiation codons other than ATG, although, at less frequency. Most transcripts carry extra nucleotide sequence (UTR) of varying lengths both at the 5’ and 3’ ends. What if these UTRS, beyond serving as stabilizing sequences, also carry hidden short ORFs with non canonical start codon that might be translated into small peptides?
We know that proteins have life-time. The span is dependent upon their susceptibility to the protein degradation machinery. So, during degradation, particularly the proteins with closely spaced arginine or lysine residues, very small peptides which might have vital biological function(s) may be generated.
A Japanese group did publish an article on this issue. They could find very small numbers, less than ten, of naturally occurring peptides in the cell. I think it was more due to their technical limitations. I think there is more. The field of peptidomics of really small peptides is definitely worth pursuing. Because, peptides can work wonders.

A Mystic in our midst

A new book on Mother Teresa of Calcutta (Kolkata) is just out. Who would have thought that a person of faith like Mother Teresa would experience such spiritual vacuum or absence of God from her day-to-day life? She seemed to have gone through a long part of life feeling distanced by God. And yet the experience is not uncommon among people who seek union with God. St. John of the Cross described such feeling as “dark night of the soul.” St. Francis of Assisi went through periods of such spiritual turmoil. This feeling of being far from God usually comes later in the spiritual journey of an individual. I can not say why it is so.
I can offer a crude analogy to this experience. The earth is integral part of our existence. From the passing time of the day and changing season, we know it is moving ceaselessly. And yet, none notices its movement. Likewise, when one achieves higher degree of union with God one feels less and less of Him. An inverse correlational effect, so to speak. Possible? I am neither a mystic myself nor an expert in mysticism. These are only random thoughts of mine. However, for those who would like to read the articles written about this aspect of Mother Teresa’s faith based on the new book, links are provided.

For Mother Teresa, a Profound Darkness
The Washington post
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/25/AR2007082500836.html?hpid=sec-religion

Mother Teresa's Crisis of Faith
http://www.time.com/time/world/article/0,8599,1655415-1,00.html

To note
“Government policies alone will not do.”

Efforts of several luminaries to get the rich nations to write off the debts of the poor nations are a wonderful gesture. In spite of these efforts, poverty will prevail if people do not have access to financial and business management knowledge. To give alms to the poor is a noble thing, but it is never enough to cover the face of poverty. Not even for one short single day. It will show up again soon. It is sadly true, as someone wise once said, we will always have our poor. But we can reduce it to a manageable level. Western missionaries provide valuable social, educational and medical services in the poor countries of the world. Perhaps, these missionary teams may also consider including team members with financial and business skills who can teach, the people they are trying to help, how to run profitable small business and even make microloans to help them change their economic conditions. When given such knowledge, people tend to be more enterprising. Entrepreneurial spirits, together with good government-policy, can result in a vibrant economy. Therefore, I wrote in my previous post, “Like charity, eradication of poverty also begins at home.”

To note
Like charity, eradication of poverty begins at home. And no amount of alms will ever cover the face of poverty.

Baby-Steps on Bay Street

Bay Street is the Canadian equivalent of Wall Street. In Canada, most affairs financial happen here. I live in Canada. So, I tend to write in Canadian context. That being said, the news that one does not require university-level math skills to understand financial statement is very comforting. With the rudimentary knowledge of math, one could, then, look at various facets of a company, namely: profitability, debts, cost of goods sold, management efficiency, return on invested capital, price/earning ratio, dividend pay out ratio, growth of earning etc. One looks at these numbers not just for one year but for several, say, 5 consecutive years, at least. The objective is to assess consistency of company prosperity or lack of it, in a fairly large window of time. Records of the past do not guarantee future performance. Very true! However, one can assume with certain degree of confidence that the company may repeat its past. A good deal of research and understanding of the business are also essential for making a sound investment decision. There is no substitute for that. A company, with robust growth in earning and happens to be selling at undervalued price, could be considered a bargain. When searching for undervalued stocks, turn-arounds are a good place to look at. However, as the wise ones would say, "Remember, turn-arounds do not usually turn around." Instead, "Look for boring businesses with solid growth-potential which manage to stay below the competition-radar. They, usually, are good investment candidates."

To all visitors,
Well, now that you have strayed into this site, please take a few moments to read my posts and leave a comment or two.
Thanks

I would like to share this interview of John Rogers of Ariel Capital by Jason Zweig of Money Magazine with my visitors. This man has adopted a very novel approach to enriching the society at large and his community in particular. It is a brilliant example of what one can do in one’s own neighborhood. I believe that it is an innovative model for inculcating a sense of responsible financial management in a profitable manner among the participating students. Who knows, some of these students may even go on to replicate the model in other schools. If that happens, this model will surely find a place in the school systems of the nations. Here it is, Enjoy.

Buy. Hold. Profit. Give Back.
Ariel Capital's John Rogers built an outstanding record investing in a few "great ideas" for the long run. Then he had his own idea: to launch a school to teach inner-city kids about money.
Interview by Jason Zweig, Money Magazine senior writer/columnist July 6 2007: 4:38 PM EDT
(Money Magazine) -- John W. Rogers Jr. is a patient man. The head of Ariel Capital Management in Chicago and manager of the flagship Ariel Fund (Charts), Rogers typically holds a stock for four or five years, an eternity compared with the 14-month holding period of the average mutual fund.
In the past decade his fund has earned nearly 14 percent a year, beating the market by more than five percentage points annually and outperforming three-quarters of all similar funds.

Rogers has pulled off this feat while investing much of his own time in two problems that many other leaders have long since given up on: improving inner-city schools and encouraging African Americans to save and invest more.
Rogers donates a hefty share of his firm's profits, helps design teaching curriculums, meets with children and educators, and brings students along to board meetings. Here too, patience is paying off: 80 percent of the eighth-graders who graduate from Ariel Community Academy have been accepted to elite high schools in the Chicago area.
Recently, Rogers spoke with Money Magazine's Jason Zweig.
Question: You were in your mid-twenties when you started managing money. Most people aren't very patient at that age.
Answer: I really did believe that the most successful investments were the ones that you could own for the long run. I remember reading about the great stocks of a generation ago - McDonald's (Charts, Fortune 500) and Coca-Cola (Charts, Fortune 500) - and Warren Buffett talking about how great brands would just multiply and multiply.
I wanted to buy companies where I could look back 20 years later and say, "You know, I bought this at $2 and now it's at $200."
Question: Easier dreamed than done.
Answer: I also believed that there were not that many great ideas out there. So once you found one, you really wanted to hang on to it. You didn't want to be constantly trading and searching for something better -because it's probably not there.
Question: So tell us a couple of those great ideas right now.
Answer: We like McClatchy (Charts) and City National Corp. (Charts) We think McClatchy's local newspapers will be successful in capturing local readership and advertisers in a way that national Internet giants simply cannot.
City National Corp. is the parent of City National Bank, a premier private and commercial banking franchise based in California. The bank was hurt by the rise in short-term interest rates, but we consider it best-in-class, and the market is beginning to appreciate the company once again.
Question: Where did you learn the patient touch?
Answer: [At Princeton] I played basketball for Coach [Pete] Carril [legendary for his painstaking "four corners" offense]. He made us work the ball around and around until we could get a shot we were pretty sure we could make.
Back then, you know, we didn't have a shot clock. Coach Carril taught us if you took your time, eventually the great opportunity would show up.
Question: Why don't African Americans save and invest more?
Answer: I think it comes down to public education. The "three Rs" need to be the three Rs and an I: reading, writing, arithmetic and investing. Financial literacy is just as important in life as the other basics.
Question: How have you tackled that problem?
Answer: We wanted to start with very young kids. So we adopted a public school on Chicago's South Side and made investing part of the curriculum.
We give a $20,000 class gift to the first grade and manage it, with John Nuveen & Co., until they are in sixth grade. Then the kids take over and pick real stocks with this real money.
When they graduate in eighth grade, they give the original $20,000 back to the incoming first grade. They donate half of any investing profits to the school and divide up the rest.
With that money each student opens a 529 college savings account, to which we donate another $1,000. So they leave with something tangible. And the investment curriculum helps these kids with their math skills; the test scores are really high.
Question: Thanks! Can I follow up by e-mail? [Silence.] John?
Answer: [Pause.] I don't have an e-mail address.
Question: You manage $16 billion without e-mail?
Answer: I don't even have a computer in my office. If I had e-mail, I'd never take the time to read research or absorb information. I want to think about what I'm doing, and that takes time.

To note
“A penny saved is a penny waiting to become a dollar. I am certain, someone before me had already said that. But, I am yet to run into him or his writings.”- Anonymous

Of MBAs and Cancer Researchers

I have two friends; both are intelligent, hard-working and devoted to their own lines of work. Harry is a researcher. He does cancer research. Richard, on the other hand, is an MBA, works for some multinational corporation. We are good friends. And,when we get together, we make fun of what each one of us does for a living. This, in a weird way, has not affected our friendship, rather strengthens our relationship. Among three of us, we could speak out our mind to one another without worrying about offending. One evening, we decided to get together for some food and beer in a neighborhood pub. It was like any another evening with usual bantering and boss-bashing ramblings. Richard, during the whole evening, looked somewhat ill at ease. Noticing that, I asked him if things were fine. He said, “No” and turned towards Harry and asked him pointedly, “So, when are you guys going to cure cancer? You guys have been wasting tax dollar on fancy research projects with no potential for pharmaceutical applications. Tell me, what progress have you guys made so far? Or, are you guys just a bunch of no good Morons?”
Both Harry and I were a little taken aback by that subdued-outburst. Generally, Richard is more absorbed with his plan of accumulating money for himself and his as yet unborn children. But, not today. This evening, he was not quite himself. Something was troubling him. As it turned out, something more serious was troubling him. His father was diagnosed with and dying of terminal glandular cancer. We certainly empathized with him. When faced with such news, most tend to lose balance. Despite the bad news, however, Richard was calm. Well, almost! I would have been rattled. Harry explained that cancer is a complex disease. “It is not like malaria. With malaria, you complete a course of chloroquine, stay warm in bed to ride out the gripping fever, and in a week or two, you are up and about. Cancer, on the other hand, is not just one type of disease. True, some types of cancers when detected early can be cured, but, as of today, most still remain untamable. If we could control even only a few of them in a decade or two, I would think that we made good on the promise.” With a twinkle in his eyes, Harry added, “Alright, you are an MBA, right? So, when all the MBAs, economists, businessmen, traders and bankers of the world work together and eradicate the world poverty, that day, that day I will single-handedly cure all types of cancers. I promise you that.” Richard looked up not quite believing what he just heard and said, “Ain’t no time for joke, but is it that impossible?” “That impossible, Harry?” Harry looked away without answering.
But, I thought his reply was brilliant. And the field of cancer research definitely needs people like Harry to reach milestones. But then, it is my humble opinion only.

Something About Business Math

I have heard people talk about Peter Lynch that he was a veteran of the American campaign in Korea, a graduate of Wharton Business School, a Wall Street tycoon who bloated a small mutual fund into a mega fund called Fidelity Magellan or something quite to that effect. So, when I came across a book titled "One Up On Wall Street" written by Mr. Lynch himself in a discount bookstore, I just couldn't afford to pass it up. I had to buy it. The book was priced at C$19.90 and I bought it for C$ 1.90. Considering the wealth of knowledge I have gained from the book, I realized that I bought the book at a value much less than its intrinsic value. The book is an interesting read replete with Lynch-humor. It convincingly makes the case that even a guy with no Wall Street DNA can make money in the market. This book successfully demystifies the process of investment analysis. I recommend anyone reading it. Not quite sure if it is still in print, though.
Anyone managing one's own investment ought to be able to beat the benchmark index. If not, the wise ones advise to leave it to the pros. But then, pros are also not infallible.
You don't need to be an MBA to be able to analyze business financial reports it seems. These financial reports and balance sheets are constructed with certain logic behind them. Understanding the dynamic relationships among the numbers used in the reports is an important part of company analysis. When it comes to math skill needed for the job, Mr. Lynch says that knowledge of high school math is all one needs.

One step at a time

In the beginning, my knowledge of the art and science of investment was limited to “Buy shares at cheap prices, then hold them for long time, when the prices are up, sell them for a profit.” That’s the length and breadth of my knowledge in investment. Sounds very simple but as it turns out, it is also fundamental in any profit-seeking business enterprise.
Stock price Index and average were even more nebulous concepts. I only knew them as a bunch of numbers that went up sometimes and went down at other times. And I did not have the faintest clue why the market is called bull market sometimes and bear market at other.
Subprime market meltdown of recent days led me to take a look at this complex world of investing. It seems DJIA had its beginning in the 1890s and its early days the average was in 40s. By 1987, it managed to rise up to only in 1000s. Its phenomenal rise to its current levels, however, happened only in the last twenty or thirty years. Just prior to the dot-com bubble burst, DJIA was in 11000s and during the bust, it went down to 6/7000s. And the number has been creeping up to its current levels ever since. Also, I noticed that, never in its history did the average ever go below zero. In order for that to happen, the world probably has to come to its end. And what are the chances for that to happen? It is true, during such economic downturns companies with weak financial structures do go out of business. And companies which survive such bad times usually manage to pick themselves up and move on and up. Historically, economy and therefore the market always bounced back. Most investors know that. They are not spring chickens. And yet, I was very surprised to see these seasoned investors rushing out of the market at frantic speed during the recent market turmoil. My guess is, on the way out, some definitely sold their perfectly good stocks at whatever price they could get, thus violating the basic tenet of profitable investing. That tenet is buy low and sell high. If they invested in good companies, wouldn’t it be better to have simply stayed in the market? Good stocks seem to take care of themselves in the long run anyway.