Will buyback trigger appreciation in Reliance Industries stock?

Reliance Industries has announced a buy back of upto 12 crore shares at a maximum buy price of 870 per share. First of let’s understand what the implications of buy back is on the share price of the company:

1. Total number of outstanding shares reduce to extent of shares bought back by the company
2. Due to reduction in total outstanding shares, EPS (Earning Per Share) and BV (Book Value) per share will increase
3. Additionally, the buy back instils confidence in the stock of the company to some extent as management of the company is willing to re-purchase the stock at a higher price which improves overall sentiment for the stock

Having said that, buy back announcement is just the willingness of the company to buy back of the mentioned number of shares. As per law, the company has to buy at least 25% of the quantity announced and buy back can happen at any price below 870 that is declared by the company.

One argument can also be that just to prevent its stock price from falling drastically on announcement of results that were below expectation, management might have come up with a buy back offer to improve the negative sentiment in the stock and preventing it to fall drastically.

As such, just because Reliance Industries have come up with a buy back does not mean the stock would quickly rally up to the maximum buy back price. Movement in stock price will depend on fundamentals of the stock, its growth outlook, news of lucrative business opportunities pursed by management which improves future outlook of the company. Stock price is ultimately slave of its earnings. A buyback alone will not lead to rise in the stock price.

Managing your Asset Allocation Smartly

There are different types or category of assets (investments) in which you can invest like Equity, Commodities, Debt (Fixed Income instruments), Real Estate, Alternative Investments. Each asset class or category varies in terms of degree of risk, liquidity, volatality and expected returns on investment.

The minimum objective of any long term investment of your money is to earn a return on investment that is more than the rate of inflation. If your investments are earning less than the rate of inflation then your wealth is getting eroded in real terms as the cost of goods and services that you will be able to purchase will increase faster than rate of growth of your money.

Before making any investment it is important to consider your current stage of life, your age, number of dependents, your current accumulated surplus, your short term liquidity requirements and your long term financial objectives. Based on this information, one needs to plan asset allocation which basically means deciding what percentage of your money to be invested in which asset class. Also the most important factor to consider is market conditions in each of the different asset classes. For e.g. you might have a bigger risk appetite but if the markets are in strong bearish mood then it is not worthwhile to start making investments in a bear market. So the market conditions at the time of investing is a very critical factor while deciding your asset allocation.

A dynamic smart allocation helps you control risk by reducing your exposure to an asset class when risk is high and increasing your exposure when the risk is low. The key to maximization of returns on investment is to focus on keeping your risks low.  An astute financial planner can help you do such smart asset allocation and ensure that you have the right asset allocation to maximize your return on your investment given your appetite for risk and degree of expected volatility.

Time to switch your Fixed Deposit investments to G-SEC’s

Government Securities (G-SEC’s) are excellent investment option in the current environment for those who only keep their money in fixed deposits. Primary motivation of Fixed Deposit investors is safety of capital and they are highly risk averse. G-SEC’s do not carry any default risk as they are Government Securities that come with soverign guarantee. The ROI (Return on Investment) in G-SEC’s depend on interest rate movement. There is an inverse relationship between interest rates and bond prices. So as interest rates fall,  the return on G-SEC funds will rise. Every 1% fall in bond yields will lead to rise in bond prices by about 6.5%. So if in 1 year bond yields fall by 1%, the return on G-SEC funds will be close to over 15% (around 9% coupon + 6.5% appreciation in bond prices).

So recommend all fixed deposit investors to switch to G-SEC’s. This will dramatically improve your ROI in next 1-2 years. The only risk in G-SEC’s is continued rise in interest rates as increase of more than 150 basis points in interest rates can lead to marginally negative returns on G-SEC’s. But in the current economic environment, interest rates seem to be peaking out and not much hike in interest rates is expected further.

Concept of Value Buying

Raju goes to a Mall to shop for a vase as a gift for his wife on their anniversary. He spots a beautiful vase there. The moment his eyes fall on the master piece, they get glued to it. He loves it and wants it badly. He knows how excited his wife would be. But the price tag of 5,000/- is way beyond his budget. He gets very disappointed and decides to postpone his purchase plans. Being the holiday season, he goes to his village to visit his parents. One evening, he decides to visit the village mela. Suddenly in one of the many colorful stalls, he spots the same vase which he had wanted to buy at the city mall. Over here, at the Mela, the same vase was being sold at a “believe it or not” price of just 500. Now Raju was no less than a doubting Thomas. “How could the same master piece be available for one tenth the price?” he thought to himself. “Was it a defective piece?” So Raju started examining the vase from every conceivable angle with a single minded determination of spotting some defect or the other. To his utter surprise he could not spot even a minor aberration. It simply looked perfect. Raju’s joy knew no bounds. He had discovered something that he would remember throughout his life. He had just been introduced to the concept of “VALUE BUYING”. When one has the patience to buy the same product at a much lower cost, it is called “VALUE BUYING”.

Which way are you attracting wealth?

An interesting question came to the mind – What is the combined Net Wealth of the World? Is new Wealth created or does wealth only gets transferred from one nation to another?

Following logical thoughts come to mind to answer the above question.

Wealth in the World is constant. Only Wealth gets transferred from one nation to another. There is no new Wealth creation that happens. So you can not create wealth but you can attract wealth.

Wealth was there when the World originated. Earlier wealth was in the form of natural resources. As population increased people got hold of resources in the form of land, minerals, oil, crops etc. Barter system was formed earlier when the goods used to be exchanged. Today barter system has taken the form of currency but ultimately only exchange takes place. No new wealth gets created. One nation has OIL which it exports, another nation exports something else….and so on. You only attract wealth by creating products and services that are unique and provide utility to people. Hence demand gets created and people are ready to transfer their wealth to you in exchange of those products or services.

So you attract wealth either by producing something of value or by investing in companies that do the same or by trading financial instruments in an organized manner.

Which way are you attracting wealth?