Hi,
Just realized that due to settings problem, it wasn't possible to comment on previous few posts.
Kindly share your comments now on this post. Thanks. :)
Tuesday 26 July 2011
Sunday 17 July 2011
Asset-Liability Mismatch
In accounts classes, we are taught that Assets and Liabilities are always equal.
But we, middle class, can make any accounting principle look absurd.
Recently, a known brought a Four Wheeler.... A Car. Great. But....
Is it an asset or a liability? In my book, Asset is something which gives you cash flows in the future; while liability is something which eats cash in the future. ( I believe most financial advisers would agree on this). Robert Kiyosaki explains this difference beautifully in his book Rich Dad Poor Dad.
Now, Car will have have running expense, maintenance expense and depreciation.
Petrol is already touching sky and is not expected to come down... Hence running expense will be much higher as compared to a two-wheeler. Same can be said about maintenance. And Resale value of car will go only in one direction with time .... And you already know that direction.
So, in nutshell, car is a liability. Let me know if you disagree.
So, basically, we are purchasing a liability. To make matters worse, the concerned person has taken a loan for purchasing this liability. If you think a bit more, isn't it like taking a liability (loan) for taking another liability (car)? Asset= Liability. Ohh really???? Where is the asset??
What are the possible reasons for buying a liability (car)?
(1) Comfort (2) Social proof {Everyone is having one} (3) Pavlovian misassociation {Car= Status symbol} (4) Envy {big brother of social proof, in this case}.
So, should one never buy comforts? No, one should. But, first, one should add assets. And secondly, not by taking another liability, at least.
Plz share your views on the same.
But we, middle class, can make any accounting principle look absurd.
Recently, a known brought a Four Wheeler.... A Car. Great. But....
Is it an asset or a liability? In my book, Asset is something which gives you cash flows in the future; while liability is something which eats cash in the future. ( I believe most financial advisers would agree on this). Robert Kiyosaki explains this difference beautifully in his book Rich Dad Poor Dad.
Now, Car will have have running expense, maintenance expense and depreciation.
Petrol is already touching sky and is not expected to come down... Hence running expense will be much higher as compared to a two-wheeler. Same can be said about maintenance. And Resale value of car will go only in one direction with time .... And you already know that direction.
So, in nutshell, car is a liability. Let me know if you disagree.
So, basically, we are purchasing a liability. To make matters worse, the concerned person has taken a loan for purchasing this liability. If you think a bit more, isn't it like taking a liability (loan) for taking another liability (car)? Asset= Liability. Ohh really???? Where is the asset??
What are the possible reasons for buying a liability (car)?
(1) Comfort (2) Social proof {Everyone is having one} (3) Pavlovian misassociation {Car= Status symbol} (4) Envy {big brother of social proof, in this case}.
So, should one never buy comforts? No, one should. But, first, one should add assets. And secondly, not by taking another liability, at least.
Plz share your views on the same.
Sunday 10 July 2011
A Graham kinda Stock...
I have just came across a cheap stock based on Graham's criterion. This stock passes the following Graham's tests-
Let see each criteria in detail-
Cash Bargain- As of latest Balance sheet, Cash is 339 crs. Add investments of 92 crs. Subtract debt of 34 crs. And we get a Cash per share of 103 Rs/- (I have taken investments at 60% of Book Value to arrive at Cash/ share).
Net Net Bargain- Net Working Capital minus debt comes out to be Rs 225 per share.
Book Value Bargain- Being a financial stock, comparing Price with Book Value makes sense. Book Value stands at Rs 226 per share. Hence, P/B is less than 0.4
Hence, current stock price looks very low on Graham's scales.
Mr. Market should be having some reason for this low valuation. Yes, there is a reason. Some top executives are involved in a bribery case by CBI. Stock has fallen 90% from its highs due to that CBI case. But company has no liability due to that.
I would not like to name the stock here to avoid Endowment Bias. But I expect it to go up by 100%.
P/B less than 1 for a financial stock which is not a cash burn looks absurd to me!!!!
- Cash Bargain
- Net net bargain
- Book Value Bargain
Let see each criteria in detail-
Cash Bargain- As of latest Balance sheet, Cash is 339 crs. Add investments of 92 crs. Subtract debt of 34 crs. And we get a Cash per share of 103 Rs/- (I have taken investments at 60% of Book Value to arrive at Cash/ share).
Net Net Bargain- Net Working Capital minus debt comes out to be Rs 225 per share.
Book Value Bargain- Being a financial stock, comparing Price with Book Value makes sense. Book Value stands at Rs 226 per share. Hence, P/B is less than 0.4
Hence, current stock price looks very low on Graham's scales.
Mr. Market should be having some reason for this low valuation. Yes, there is a reason. Some top executives are involved in a bribery case by CBI. Stock has fallen 90% from its highs due to that CBI case. But company has no liability due to that.
I would not like to name the stock here to avoid Endowment Bias. But I expect it to go up by 100%.
P/B less than 1 for a financial stock which is not a cash burn looks absurd to me!!!!
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