Topsy-turvy markets: Do I invest or do I exit?

Markets dancing up and down: do I invest now or do I exit? This question is in the minds of almost all investors small or big; short-term or long-term. This is a problem because nowadays the markets are fluctuating so much that a 1 per cent to 2 per cent change per day has become quite common.

If one thought the market was weak two weeks ago and going down, this week the markets are looking up. So where does a salaried individual put his/her bet on? This article is to give some ideas particularly for the small investors.

Market fluctuations

The stock market fluctuates, that too when the overall economy is not that stable, it fluctuates a lot. This is true not only for India [ Images ] but across the world.

Again this is true not only in our times, but in all known history. To fluctuate is one of the basic characteristics of the stock market.

However, research -- or for that matter any five-year chart of the indices (Sensex or Nifty) -- shows that there is always a significant gain. The same is the case even for the 5 years ending December 2008, when the market has fell almost 50 per cent during the year.

What are the implications of fluctuation?

There are a number of negative aspects/scenarios to the short-term fluctuations.

1. Investments are still in negative even after the markets have gained.

If an investor had invested his/her funds at the peak of the market and stayed there, the funds would not have still recovered from the losses that they suffered in 2008. Will the investment ever recover? Should I exit, taking the loss?

2. The planned financial goal is here. But the market is still low.

The planned financial goal could have been the daughter's marriage, retirement, a housing down payment. But if one had the misfortune of a fall in the market happening right when the withdrawal was planned, it is definitely a long postponement of the plan (if possible) or financial trouble (if it could not be postponed). A requirement like a daughter's marriage cannot be postponed for want of money.

3. I have got a one-time lump sum of money.

A loving relative's gift or an unexpected bonus or an arrear due for 2 years may suddenly land in an investor's hands. One can be sure that the same will not happen often.  So when does one invest this money in the market?

A better perspective

A better perspective to investments in the stock market is that the loss or gain is only on paper till the shares are sold. So the investment that has a lower value today as in scenario 1 has not lost its true value, unless one sells it. All that it needs is time to give a better value.

This perspective however does not solve the problem, when an investment is time bound as in scenario 2 or 3.

The question is thus not whether there will be returns or not but how does one time the market to get better returns?

Timing the market: Is it possible?

Is this the solution? Again the answer is 'NO'. Because we could find the right time to invest in the market only retrospectively. No one could guess to what extent the market would react to certain economical news.

So too no one could guess accurately in advance at what level and when a market would turn down or up.

So timing the market is not really possible. However, any five years' graph will show a steady gain as discussed earlier. So can we use time in the market to our advantage?

Time in the Market –The Solution

 By increasing the time in the market by being invested for a longer period and by investing in a higher frequency, we can overcome the problems related to the fluctuations in the market.

This is definitely a solution that can be used to tackle the problems faced by the small investors.

By increasing the time in the market (investment period), fluctuations are over come. This requires planning earlier and investing at least for a period of five years.

Even the one time lump sum of money, can be invested over a period of, say, five months in smaller chunks. This will take care of the market ups and downs during the investment period.

Those who have invested for their retirement and their daughter's (or son's) marriage can practice the same but in reverse order. Rather than wait till the date of retirement for the withdrawal from the market, they could withdraw over a period of 6 months before the marriage.

This will not only help them in the run up to the event but also prevent losses from any sudden fall in the market.

Fluctuations are a basic nature of the stock market. An investor cannot wish it away. Nor should one avoid the stock market because of the fluctuations.

Timing the market for its ups and downs for making investments is not possible as accurate prediction is in the realm of speculation.

The better option is to stay in the market. This is done by increasing the time period of investment and by increasing the frequency of investment and withdrawal.

Home loan: Benefit from prepayment !!

What is prepayment? Why and when do people opt for it?

It's just what the name implies: prepaying all or part of the loan amount before it is actually due. However, it is more complicated that it sounds! First, you will have to check your retail loan documents to find out if prepayment is allowed and the percentage of outstanding loan amount that you will paying towards prepayment penalty charges, if any.

You might want to prepay your home loan for two simple reasons. First, you could save on the net interest payable as longer loan tenure would mean more interest. The second reason is you can own the asset earlier than planned.

You could decide to prepay your loan if you have the capacity to make larger payment or if you have had a promotion or received a bonus.

Why do banks charge penalty for prepayment?

Well, banks and lenders lend money in the form of loans only to make money out of service fees and interest. And this requires the loan to be open for a fairly longer duration to give profits. They cannot stop your legal right from making a prepayment. But at the same time prepayment would mean upsetting their profit calculations from interests.

Hence, the banks and lenders impose a prepayment penalty to compensate a portion of the lost profit. Usually, your loan agreement would have a clause defining your obligations and interest in case of prepayment in part or in full.

RBI's current stand on this penalty

Recently, the Reserve Bank of India (RBI) hinted at drafting a policy to restrict banks from imposing prepayment penalty of retail loans.

The proposed move follows many such complaints from loan borrowers paying EMIs based on the floating rate of interest. They feel that they are missing out on the benefits of periodical rate cuts in interest.

The anti-monopoly body Competition Commission of India (CCI) is dealing with complaints from loan borrowers against collecting prepayment penalties on home loans from major lenders in the country.

Prepayment penalties by different banks in India

Public sector banks charge 1 to 1.5 percent as prepayment penalty on the outstanding loan amount and in the case of private banks it is between 2 and 4 percent.

Name of the bank	Prepayment penalty (in %)
Axis Bank	No prepayment penalties
ICICI Bank [ Get Quote ]	No penalty on part-prepayment 2% on foreclosure (+ applicable service tax) This will be calculated on the outstanding loan amount and amounts prepaid in the last one year, if any.
LIC Housing Finance [ Get Quote ]	2% on the principal amount prepaid
HDFC [ Get Quote ]	0 to 2% on loans If a prepayment is made within 3 years of the first disbursement subject to terms and conditions, 2% on the prepayment amount if the amount being repaid is more than 25% of the opening balance.
SBI [ Get Quote ] Home loans	No prepayment penalty if the loan is prepaid from own savings/windfall gains for which documentary evidence is produced by the customer.

How prepayment can benefit you?

Perhaps, the biggest benefit of prepaying loans is saving on the net interest payable. Usually you could find out how much you save on the interest based on the amortization chart provided by your bank.

Moreover you could own the asset bought on loan earlier than planned. Some banks also allow for part-prepayments say every quarter. This could effectively bring down the principle amount and the outstanding loan amount and subsequently the net interest.

Here's an example.

Ramesh took a home loan of Rs 20 lakh for 20 years as loan tenure and at an interest rate of 12 percent. At the end of 20 years the net interest would be Rs. 32.85 lakh. Instead Ramesh decided to pay two additional EMIs every year, which would mean he could close the loan in 13 years time.

His bank loan agreement had mentioned that there would be no prepayment penalty unless he paid off more than 25 percent of the principal in a year. The table below shows two scenarios and how opting to pay extra EMIs in a year actually helped Ramesh save on interest.

Details	Scenario 1 – 12 EMIs/year	Scenario 2 – Two additional EMIs every year
Interest rate per year	12%	12%
Tenure of loan	20 years	Since two additional EMIs are paid every year the loan tenure is reduced to 13 years
Amount of loan taken	Rs 20 lakh	Rs 20 lakh
Net interest paid	Rs 32.85 lakh	Rs 19.58 lakh

Prepayment can be made in part or in full. If you have plans to make a full repayment read carefully on prepayment penalty charges on your loan agreement. Some banks might allow you to prepay up to a certain period without any prepayment penalty. So you can garner enough funds to foreclose before the expiry date.

If your loan agreement allows you to make part prepayment, then you could do so every quarter. This way you can save some money, reduce the principal and the outstanding loan amount and the net interest rate.

5 things to do to avoid the tax blues ... !!

It's a typical day in March when you see people running helter skelter to invest to save on taxes. And more often than not, they end up investing in products that are either not right for them or not worth investing at all.
You can, however, start saving on your personal income tax during the year, and make additional strategic moves as the year-end approaches. Here are some basic tips for saving on your taxes:

1. Invest and claim your deductions


Section 80C: There are various sections which offer you tax breaks, the most popular one being this one as you can claim up to Rs 1 lakh under this section and it offers you a wide variety of investment options. The options include Employee Provident Fund (EPF), Public Provident Fund (PPF) up to Rs 70,000 per annum, National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), unit linked insurance plans (ULIPs), school fees, and home loan principal repayment.
Section 80D: If you have taken a medical insurance plan for yourself, your spouse, dependant parents and dependant children, you can claim deduction up to Rs 15,000 (Rs 15,000 additionally for your parents' medical insurance is also available) under Section 80D for the premiums paid. The limit now has been enhanced to Rs 20,000 for senior citizens on the condition that the premium is paid via cheque.
Section 80DD: Expenses on the medical treatment of a dependent who is a person with a disability also qualifies for tax benefits under Section 80DD.
In this case, deductions up to Rs 50,000 can be claimed.
A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, certification by a medical authority is mandatory.

2. Interest component of your home loan

The interest component of your home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakh a year in case of self-occupied house.
One condition being that your house must have been financed by a housing loan taken after April 1, 1999.
It is also essential that the acquisition or the construction of the property is completed within three years from the end of the financial year in which the loan is taken.
The claim can be made even on loans taken for repair, renewal or reconstruction of an existing property.

3. Take a loss

If you've done well with your investments and are looking at significant short term capital gains, prior to year-end is the time to offset some of those short term gains by selling some of the losing investments.
If the stock is good, you could sell it on 31st March, say on March 31, 2010, and buy it back in the next financial year, say April 1, 2010; here of course there is the risk of price fluctuation.
Remember that you can carry forward short term losses from previous years' losses for the next 8 years.

4. Do some charitable donations

While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax.
You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act.
The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund. There is no restriction on the amount of charity.
However, donations must be made only to specified trusts and also only donations of up to 10 per cent of your total income qualify for such a deduction. Remember to get receipts.

5. Spreading your income

Normally, if you invest in your wife's or child's name, the income generated from such investments will be clubbed with your income and taxed accordingly. However, if you transfer money through a deed to a child who is over 18 years of age and invest in his name, then the income generated from such investment will not be clubbed with your income.
Instead, that will be clubbed with the income of your child/wife and taxed accordingly.
Cash gifts received from specified relatives are exempt from income tax and there is no upper limit.
Similarly, cash gifts of any amount and from anyone received during your child birth, marriage or any other specified event are totally tax-free. However, any cash received from a non-relative where the value is in excess of Rs 50,000 in a particular year will be considered as income in the hands of the recipient.
You should make sure that you have a record and valid receipts for all tax savings investments made in your name. You do not want to be running around at the last minute collecting all the documents required for tax filing.

Zero per cent schemes: How consumers get fooled

As a child when my first milk tooth fell, I was told to keep the tooth under my pillow at night. When I woke up the next morning, I was delighted to discover a one rupee coin instead of my tooth under the pillow. When I asked my parents about it, they told me that a tooth fairy had switched my tooth for a rupee coin during the night.

As a child the story had lots of appeal for me. Of course as I grew older I realised that there was no 'tooth fairy' and my parents placed that one rupee coin.

The stories surrounding zero per cent finance schemes are perhaps of the same genre. The old adage that 'there is no such thing as free lunch' aptly describes the zero-percent-interest schemes.

These schemes were widely popular till a few years back. RBI regulations advising banks to refrain from offering such schemes as well as the general withdrawal of major banks from consumer durables financing has meant that such schemes have not been in vogue for the last 2 to 3 years.

However there are several NBFCs (Non-banking financial companies) that continue to finance consumer durables purchase and also have zero per cent schemes. The main attraction of such schemes is that they influence you to purchase consumer goods that could be more expensive than your wallet size.

The lure of zero percent interest is an added attraction that makes you feel that 'YES' I am getting something free and thus I am able to buy a 'bigger and better' product. But that is just a smart way in which such schemes fool you. Here's how.

So how do these schemes work?

Unlike their names, most zero percent schemes have other costs in built. The biggest cost is that you forfeit the cash discount that you would have got otherwise from the retailer. Also you will be paying some processing/transaction fees and/or advance EMIs (equated monthly instalments).

So let us see how the costs stack up in a so called zero percent scheme.

Example: An LCD colour television costs Rs 48,000 and is available on zero percent EMI scheme for six months (thats is, there is a EMI of Rs 8,000 per month for six months). The consumer needs to pay a processing fee of Rs 1,000. If the customer had bought the same TV by making a full payment s/he could have availed of a cash discount of Rs 2,000 which s/he is not getting if s/he opts for the zero percent scheme.

So it works out like this:

Cost of television set: Rs 48,000

Amount paid/Cost incurred in advance:

Processing fees: Rs 1,000
Cash discount foregone: Rs 2,000
Total: Rs 3,000
Net finance received: Rs 45,000

Payment made by six instalments of Rs 8,000 each (aggregating in all to Rs 48,000 against finance received of Rs 45,000).

The effective interest cost works out to 23 per cent per annum.

Why consumers fall prey to zero per cent finance schemes

However the popularity of such schemes with consumers particularly in festive season cannot be denied. Market sources say that despite being costlier in some ways, consumers prefer to go for these staggered payment schemes and have been highly successful in pushing sales and expanding the market for the durables. This is primarily because of the fact that purchasing through credit cards is very expensive as compared to purchasing through these schemes.

Also, the success of these schemes can be attributed to the availability of credit at the point of purchase, minimal paper work, small ticket size and hence a not-so-stringent eligibility criteria.

So are there any true zero per cent schemes? Yes there are.

Some of them are available on the much-maligned credit cards. The credit card that I have allows me to convert specific spends greater than Rs 5,000 into three-month EMIs without any cost or fees. This is the closest that hard-nosed bankers come to offering true zero per cent schemes. Some other major credit card issuing banks also have similar schemes.

All said and done, the best way to check if a zero per cent scheme is really worth it ask the following questions:

Any fees or charges?

If I pay full amount do I get a discount that I am not getting if I take the zero per cent scheme.

If answer to both the question is no then you have a true zero per cent scheme! So you can now zero in on your zero per cent schemes and spare yourself from being fooled.

Of derivatives and their benefits !!

Generally, financial markets around the world are volatile in nature and hence always mean risk for the players involved!

To reduce this risk, the derivatives were introduced. For the uninitiated, a derivative is a financial contract the value of which is "derived" from a long-standing security such as a stock or a bond, or even an asset, or a market index.

In simpler terms, the value of a derivative depends on the value of something else, which is otherwise called the underlying of the derivative. Hence, the value of the shares of a company is the underlying in the case of stock derivatives.

Similarly, it is the value of the index the underlying for an index derivative, and the value of crude oil the underlying for a crude oil derivative.

The value of the derivative also changes due to demand and supply but the primary mover of the change in value of the derivative is the change in the value of the underlying.

Various underlying assets

Derivates cover the entire gamut of trade and services available in the markets, from equities, equity indices, to commodities such as crude oil, cotton etc, to bullion like gold, silver and even weather derivates among others.

Types of derivatives

In India, there are many types of derivatives such as forwards, futures, options, swaps, warrants, LEAPS, baskets, and swaptions. However, the most common of all is the futures and options derivatives.

Futures derivatives

As the very name implies, futures derivative is a derivative contract that enables the buyer and the seller to pre-decide the quantity, rate and date of a future purchase of an asset. For example, A agrees to sell to B a futures derivative contract of XYZ company's 300 shares valued at Rs. 5400 after the expiry of 3 months.

On the expiry of 3 months, which is the pre-decided date, A, the seller of the futures contract gives to B, the buyer of the futures contract, the delivery of the XYZ Company's 300 shares at Rs. 5400.

Thus, any difference, increase or decrease in the value of the shares on the delivery date of the shares will not affect the futures contract as the rate has already been pre-decided.

That is, both the buyer and the seller in a futures contract must honor their commitments to make and take the delivery according to the terms of the contract this despite the differences in the buying or selling price due to market conditions.

Buying a futures contract does not involve any upfront cost however there is brokerage charges.

Options derivatives

Another widely used derivative is the options derivatives, which are more flexible than futures and works more in favor of the buyer of this type of derivatives.

As the name hints, the buyer of the derivatives is not obliged to take the delivery of the asset on the delivery date. In simpler terms, the buyer has an option to take delivery of the asset on the agreed date.

Obviously, the decision to take or not to take largely depends on the market price at the delivery time. If there is an increase in the market price of the asset, the buyer of the options derivatives would obviously exercise it and make profits.

And in this case the seller of the options derivatives must honour the option to deliver the assets. However, if there is a drop in the market price of the asset, the buyer may not exercise his option thus allowing it to lapse.

The pre-decided price fixed in the case of options derivatives for the exchange of asset is called the strike price. However, this exchange of asset is not exercised by the buyer and is instead sold in the market to make profits. This is primarily due to the fact that when the option price goes up it only makes sense to make profit by selling it instead of exercising it to exchange assets.

Considering the fact that options derivatives favor the buyer more and exposes the seller to the risk of price movement, the buyer pays the seller an option premium or option writer simply a fee for the risk involved for the seller.

Two types of options derivatives

Options are of two types: American and European. American options are more flexible as it enables to exercise the option any time upto the settlement date. In India, only American options are traded.

Unlike the American options, the European options allow it to be exercised only on the settlement date.

Use of derivatives

Perhaps the main use of a derivative is hedging the risk. That is by buying a derivative the cash flow is ensured and losses limited.

For example, an exporter expects earnings in foreign currency after a period of time but since the spending is done in the local currency as well he would also prefer to keep track of the earnings in the local currency to know the exact earnings.

And only on till the expiry of the period of time and based on the actual conversion rate prevailing at that time can the exporter know his actual earnings in the local currency. Since then an ambiguity persists with regard to the actual earnings.

In this scenario buying derivatives could help predict the actual earnings even after the period of time and despite the volatile conversion rates.

Apart from hedging, which is the chief reason why derivatives are used in the markets, there are other participants using derivatives but only for investments, stocks derivatives for instance. This actually injects liquidity into the derivatives system and hence is considered good.

Protect your investments. Here's how !!

Anything done without proper planning will turn out to be a dud! This holds good for almost everything in life, from marriages to managing finances to running businesses.

Today, one of the most important things is managing finances. Going by recent trends almost everything else in your life hinges more on one huge binding factor called money!

Believe it or not, making money is no big deal, neither saving it nor cutting down on your expenditure for that matter. These are all important but above everything is mastering the art called investment!

It is the only sure way you could build on your wealth and protect it. Investment is a science. And a wise investment is about choosing the right scheme based on certain underlying principles and algorithms.

And unless we do our home work right even the effective steps of the regulators will not help us. So, let us see what it takes to turn into a smart and wise investor that will help you protect and multiply your investment!

To begin with, know your goal

Perhaps the first point to consider before investing in a financial product is to understand your goal! Are you looking at the investment for the long term or short term?

For instance, never invest in a product like Unit Linked Insurance Policy (ULIP), a long term product, if you have plans to surrender it after paying the premium for the mandatory first 3 years called the lock-in period in industry parlance!

When you finally decide on the nature of the investment scheme it is better to do a comparison of the similar products available in the market. Do not give in to selling pressure. After all, it is your money and investment.

Be disciplined

Don't try to do things that are really outside your purview, portfolio management for instance. Approach your financial consultant or a fund manager for expert guidance on these issues.

These areas and things like timing the market are expert zones that requires years of experience to understand and practice and not like simple investment methods like the public provident fund.

Also, misunderstanding does as good as not knowing a product at all and probably even worse! Just one ore two instances of making accidental profits don't put one anywhere in the vicinity of financial disciplines.

Proper asset allocation is important

Allocation of assets in a portfolio is very, very important. Simply put, it is deciding about the mixture of stocks, bonds, real estate, derivates and mutual funds you want to hold in your portfolio.

The fact is that most asset allocation is ad hoc but aims to minimize risk. Asset allocation begins with considering your objectives. This is perhaps one area where even the most seasoned investor might go wrong. Though there is no select formula for a perfect asset allocation, you can still try to do a few things that could help you build a safe portfolio.

Firstly, weigh the difference between risk and returns. For example, investors willing to take a higher risk should allocate more money into stocks. Do not fully rely on planner sheets.

Find out the real cost of your investment from the company. Timing is also important, the earlier you start the better but do consult an expert before you implement it.

Watch out for costs

The one area which many investors fail to decode is the breakup of the costs involved in an investment. Failing to see the hidden costs such as the brokerage costs particularly in a mutual fund or a life insurance company could actually hurt you real hard.

Mutual fund companies often subtract fees from your portfolio known as fund's expense ratio before their annual results are announced. These are expenses paid to the advisor as fees, marketing efforts, legal expenses and accounting and auditing costs.

According to statistics, every year on an average, the expense ratio for a U.S stock fund is roughly between 1 and 1.5 per cent. Apart from this there are other hidden costs like trading costs involved. Learn about the impact of this break up on your investment.

Fund managers often churn their portfolios to whopping per centages thus putting your investment at a higher risk by making your yield fall far below the index return.

Hence, as an investor it is very important for you to keep a watch on all costs, including the fund manager cost, churning cost and other associated costs.

The Ideal P/E Multiple For A Stock Is...

Warren Buffett’s fortune is enough to stupefy anyone. Starting from scratch, he has amassed a fortune of billions and billions of dollars. And the most amazing part of that feat is not even that – it is the fact that he has achieved so much wealth in his lifetime purely by investing in the stocks and bonds of companies.

As he has mentioned a number of times, he credits much of the framework with which he invests to Benjamin Graham, his mentor and teacher from whom he learned how to invest. Thus, it should be of immense interest to anyone who wants to invest wisely, to hear what Graham has to say on the subject of the maximum price one should pay for buying a stock. After all, this is a perennial question that comes to the mind of investors – What is the right price to pay?

For the purchase of a stock to be successful, every investor relies on future earnings of the company and not its past earnings. But at the same time, Graham was of the firm opinion that when evaluating a stock and its future earnings, one can be conservative only by basing this opinion on company’s actual performance over a period of time in the past. Thus, in most cases, the investment (and not speculative) value of stock can be arrived at by taking into consideration the company’s average earnings over a period of five to ten years.

The company’s profit in the most recent year may be taken as the base for arriving at the value in some cases, but only if it meets the following criteria –

(1) general business conditions in that year were not exceptionally good

(2) the company has shown an upward trend of earnings for some years past

(3) the investor’s study of the industry gives him confidence in its continued growth

And only in the extremely rare and exceptional case should one rely on the assumption of a company achieving higher earnings in the future while calculating the price one pays. Higher future earnings should be taken into consideration only if it is a 100% sure thing, which is very rarely the case.

The above was a discussion of Graham’s suggestion of which earnings should one take as the base when valuing a company by using a P/E ratio. Now for the second part – what would be the right multiple one should give those earnings to arrive at the price one should pay for the stock?

A conservative investor may rightfully give a very attractive company a higher multiple. This may be a company whose latest earnings are above its past average, which has extremely promising future prospects, or has an inherently stable earnings power. However, at the very heart of Graham’s argument was his opinion that there must always, in every case, be some upper limit of this multiple that is assigned to the stock in order to stay conservative in one’s valuation. He suggested that about 20 times average earnings is the highest price that can be paid buying a stock from an investment perspective. While this is the maximum one should pay for a company considered to have very good prospects, about 12 or 12.5 times average earnings would be suitable for the typical company with average prospects. This is because investment, as opposed to speculation, necessarily requires demonstrated value, which can be verified only by way of average earning power in the past. A P/E multiple of 20 in effect means an earnings yield of 5% (1 divided by 20).

It would indeed be very hard to conservatively justify average earnings of less than 5% of the market price of a stock without betting your money on an increase in earnings of the company in the future. Thus, according to Graham, a price to earnings ratio of higher than 20 times average earnings cannot by any means provide the margin of safety that an investor should have. It might be accepted by an investor in expectation that future earnings will be larger than in the past. But such a basis of valuation would then have to be termed “speculative”. That is because speculation derives its basis and justification from potential developments that differ from past performance.

By the above thumb rule of not paying more than 20 times average earnings, Graham did not imply that it would be mistake to do so. He suggested instead that such a price would be speculative. Further, it should also be noted that such a purchase can easily turn out to be highly profitable, but in that case it will have proved to be a merely fortunate speculation. And very few people are consistently fortunate in their speculation.

Hence people who habitually purchase stocks at more than about 20 times their average earnings “are likely to lose considerable money in the long run” according to Graham. This is all the more likely because if such a mechanical check were not enforced, investors have the tendency to time and again give in to the temptation and lure of bull markets, which always find some or the other deceptively pleasing argument to justify paying extravagant prices for stocks.