How much do you guarantee?

Friday 1

Just recently I went for a meeting with a potential client to introduce my services. We were having a brief conversation about the services provided which made him pretty interested in stocks. While discussing returns he asked me “How much do you guarantee on investment?” It brought me back to that finance class, where we used to use this question a lot. But back then it was easy, the answer was found using few numbers and calculations. As the reality struck, it is very well understood that it’s better said than done!

So, what is this guarantee investment or risk free rate as we term it in finance? Risk free rate is the rate which you can make on an investment guaranteed. To most Indians guaranteed investment is that fixed deposit interest that we make on our Banks FD’s. And who would argue that point? I mean who thinks that banks wouldn’t pay back the money? The RBI has gone ahead and declared a few banks like SBI and ICICI too big to fail. And probably they are! But what about the smaller ones?

In the Financial Crisis of 2008, 19 cooperative banks went bankrupt. Last year Fitch even warned about a debt default possibilities in certain mid-sized state-run banks. The point here is that many of these institutions do carry a risk of default. So what is truly risk free?

The answer to that would be sovereign bonds. A government would never default. They could just print more money, however even this notion was challenged by Greece in 2015 when they defaulted on their sovereign bonds.

In valuations, we have a way of calculating the number. When we talk about risk free rates, we talk about no re-investment risk & default risk. Depending on the valuation tenure, you should accordingly choose the sovereign. You cannot choose a 3 year government bond for a 10 year valuation. If your valuation is 3 years, you use the Treasury Bill yield. If your valuation is more than 3 years, use a government bond yield. The Gold Standard of risk free rates are the 10 year government bonds. Here’s a list of all the government bonds that you can use as well as the Treasury Bills. As of this writing the 10 year government bond yield is 7.468%

List of all sovereign bonds issued by our government

FINWEEK Initiative

FinWeek is an initiative to spread awareness about different aspects of Capital Markets. It is my belief that everyone deserves to know a few aspects about research which many MBA institutes fail to teach. The biggest aspect is Practical experience. I have seen people from some of these institutes become Equity Advisors who have no experience whatsoever with the stock markets. I’m sure most of them would do wellbut i would be a little hesitant to take advices about managing my money from someone who has no experience in doing so themselves. So what i wish to accomplish with this initiative is to bridge that gap of experience which every finance professional or aspiring finance professional should have. Let me assure you theory can only get you so far, out on the street it is instinct, numbers, stories, charts and things which you’ll not learn in B-schools.
The typical Finweek will be classified into 7 different topics for 7 different days :

  • Micro-Mid Mondays –
    Micro Mid Monday will see a series of stocks which belong to the MidCap or Micro Cap universe. One well researched Mid or Micro cap with my idea of the value of that stock and why it deserves your attention.
  • Trending Tuesdays –
    Trending Tuesdays will be all about things which are trending and what I think everyone should know about.
  • World Wednesdays
    In today’s world, the difference between developed and developing markets are fading away. Every Wednesday I’ll try to show you how.
  • Technical Thursdays
    Technical analysis in my opinion is one of the most intriguing subject in the field of finance. This study of charts will be covered every Thursday along with real life, real-time examples of Indian stocks.
  • Fundamental Fridays –
    Fundamental Analysis is the gold standard of Finance. Every Analyst out there must know how fundamental analysis works and should be proficient with it. So one well researched stock or a fundamental concept like DCF or Relative Valuation will be covered on Fridays.
  • Small Saturdays –
    Small Caps are risky but deserve our utmost attention as the growth today majorly is coming from the small caps of our market. So I will cover one small cap stock every Saturday from the big universe of Small Caps which deserves your attention.
  • Storytelling Sundays –
    Who doesn’t love a good story? Forget the good old number crunching for a day and lose yourself with me while I try to sell you a story. This will be the day where I’ll try to show you the magic of Numbers with Narratives.