MONEY

Money is one of the most controversial and yet the most important concept of our human existence .Yet your parents will never give you a lesson on this extraordinary concept. And I bet you must have heard everything on the religious issues, gods and mythical stories that are yet to proved. Most of the parents don’t know a dime about it and rest think it is the root of all evil, so they don’t discuss it. Unfortunately I was one of them. But fortunately I was inquisitive enough to find out myself most about it. I am writing this because of the basic misunderstanding among people, even people with extraordinary intelligence. This makes me sad. So let’s clarify few notions, which many know and those who don’t know will have an enlightening experience.
What exactly is money? Money is just a means to exchange goods and services. Goods and services that you can use in your daily life. What is the value of money? It is its capacity to buy goods and not how much you have. By money we refer to paper currency also called fiat currency but they are not the same thing, I will tell you about that later. Fiat is a legal binding command. The value of the currency is not a magic and certainly not arbitrary. Its value is legal binding command behind it. If the legal command behind it is weak and incompetent then the currency will be weak because a paper currency has no intrinsic value unlike gold. Legal command forces more and more people to use it thus giving it a status of an instrument of exchange. That is its value.
Let’s suppose you are shipwrecked at an island with two friends. Now one friend has 50 breads, you have a million rupees and the third person has lighter. Who is the worst-off? You will be worst off since they can just start exchanging goods with each other. Why they need your money, they can light a fire out of wooden logs rather than from your paper currency. So what I am trying to say is never just go on the amount of money someone has. But how much goods that amount can buy. This is a simple concept but this concept lies at the heart of inflation, foreign exchanges, investments etc. Many people just don’t understand why some countries have 1, 00,000 unit currency notes and some have only 100. It is just because overtime higher unit currency went through the shipwreck type conditions more than the other currency. Thus value of currency dropped and they have to increase the denominations of currency as it is awkward to give 100 hundred unit notes to buy bread. This is called inflation in modern terms. Inflation is just a process where too much currency is chasing few goods. That is the growth of currency is higher than the growth of the production of goods. This is what happened at the island (of course that is an extreme condition and something which we call hyperinflation, where the faith over currency just vanishes). Limited goods and increasing money supply. What happens to the value of the money? It takes a dip. That is Inflation for you.
Don’t think this is simple. This is just the start. When I was in my fourth year I was shocked to learn that one intelligent friend of mine mocked me. Why because I said that money is created and not produced, currency is produced. Yeah I know many people would have mocked me over this but hey am I writing. Since he was intelligent, he quickly understood my logic. Why this is so important? Creation or production. Production is manufacturing. You take input (paper and ink) and through machines produce the output (currency). That is manufacturing. Right. That is what we call printing money. Now I think it is simpler. Of course money is not printed. Confused? Bring back the shipwreck condition. If you had a money printing machine there, could you say that you are producing money? No, you are not producing money even if you are literally producing it. That’s what I am saying. So now what is the analogy of creation of money? Let’s assume that you have 1 million rupees with you at the island but your friends are not accepting it. So you don’t have money even if you have 1 million rupees. Right. So what if you start climbing the trees and bring coconuts. When their breads will run out you will propose an idea. To divide the 1 million rupees among one another equally. They are anyways useless. And start using it as instrument of exchange. So if they have to buy coconut they will have to give him rupees and take rupees to allow him to buy fire and whatever the other man has to offer. So they will think that they are getting 333 thousand rupees that can buy free coconuts without breaking a sweat. So they agree. Now what happened? You price your one Coconut as 1 lakh rupees and he priced his fire something. Suddenly you have money that can buy you fire. Did you produce money or created money? Creation is an act of bringing something into existence. Yes you just brought money into existence yet you never printed or produce money itself . How? By working hard, climbing trees and bringing the coconut and then using your brains to convert your useless 1 million rupees into money, an instrument of exchange. So what is money, is it the 1 million rupees or your hard work and your intelligence? Of course the latter. Phew! I think if you had any confusion, it is gone. So now you are poised to assimilate better and more complex issues relating money.

To be continued.....MONEY 2

Calvin & Hobbes : Best of Feb 1986.

This month was smoking hot. I think waterson was at his peak. I tried to pick five and ended up picking 10 and i was thinking of adding more to this but decided otherwise. I am sure you will enjoy. But i liked "what's this, just water" one quite a lot. :D. No i am not that kind.

Calvin and Hobbes: Best of Jan 1986

This was a tough month to take out Top 5.

Few of them were good because of the continuation. So i thought i can extend my list a little bit. I also clubbed all of them in one Jpeg file. So that readers won't have to click on each one to see them. But if anyone wants the previous format then they can leave a message in the comment section. I will try to see what i can do. As I said before I can't Zero down on the best strip in this month. If you have one then you can tell me.

Fundamental analysis 102

My every Blog is so heavy that I feel the readers will just run away. So i thought if I post a financial post then I should also post something of pure fun. I like a lot of things and I always research on those so that won't be a problem.
Now we start were we left the fundamental analysis 101. PE ratio as you remember. What is great about this number that comes in so handy? Let’s answer this question. As you can see Price of share divided by earnings is just a way of telling yourself how much time in years it is going to take for the company to earn as much money as its share price is valued right now, with no growth whatsoever. Say IBM has PE of 10. Then it will take 10 years with no growth to create money/earn net profits equivalent to the price at which it is quoted right now. What is the price quoted is same as what you see in the stock market. Since both the numbers in the PE ratios are also multiplied by number of shares of that company so there is a fundamental way of saying the same thing i.e. (Price of a share* No. of shares)/Net profit of the comapny. Price of a share* No. of shares is what we call market Capitalization. PE is nothing but Market capitalization divided by net profit. Remember in long term the "investors" determine the value and price of a share and not the normal people like us. And every good investor looks at the PE of a company as the first thing. It is just like if I ask you to invest in my cookie shop then your first question will be/should be is how much time will it take to get your money back and after you get it, how much profit you will be entitled to. Precisely what PE ratio tells you about a stock. Now an intelligent person reading my Blog will point out what about a company with growth. Growth makes PE harder to imagine and the calculations become cumbersome. Of course you are not going to calculate a Geometric progression and some other things for every other stock. So here is one of the most important trick you can receive from someone. I received it from none other than the great Peter Lynch. I read it in his book of course. Whatever the PE of the company is, that’s what people pricing it thinks will be the growth of that company in next 11 to 15 years. So if PE is 10 then Market as one entity is assuming that the company will grow at 10% for the next 11 – 15 years. Why a range because I don’t know the inflation of your country. 12 years for no inflation to low inflation (1% types) and 15 for moderate inflation countries (6%). Don’t worry about the exact value because you can’t predict the exact future growth, only thing you can predict consistently is a range and bigger it is the greater is the consistency but lesser its practical value. A paradox, I love paradox. So the part highlighted in BOLD, just remember it by heart. It is not an advice but a statement. If you know mathematics then try it out and you will arrive at the same conclusion. I tried it out after reading Peter Lynch and came to the same conclusion. If you don’t know math then just take it on faith, that’s all I can say. At least better than an astrologer I think. It is very powerful way to gauge the overpriced and under priced stocks. Trust me.
I hear this so many times from people around me that I thought that this is not a trivial question as I used to think. Many times I hear “hey that stock is selling at around 100 Rs and the other stock is selling at 1000, so the stock priced 100 has to be cheaper”. I hear this from normal people who are buying stocks and selling it. And when these people lose money, they blame it on the stock market. I feel so sorry about them. Little knowledge about something is dangerous but no knowledge about something can be disastrous. So let’s clear few things out.
As I said PE ratio is Price of a share divided by the earnings per share/Net Profit per share. So Lets see an example. Company A has a net profit of 10 million and company B also has a net profit of 10 million. They both are in the same industry and are almost same to the customers. Call them pair companies. (Actually there are quite a few of them in real world and there is one good strategy discovered by people of Morgan Stanley few decades back that can still be profitable. Technically it is called pair trading. Like Ford and GM, Infosys and TCS etc.) Company A has 1 million shares in the market and the Company B has 100 thousand shares in the market. Always remember that number of shares is arbitrary number and has no significance in determining the value of the company. It can be anything that common sense permits. Company A’s share is selling at 100 Rs/share and Company B’s share is selling at 1000 Rs/share. Profit per share for company A is (10 million) / (1 million), that is 10 Rs per share. Similarly for company B it is 100 Rs per share. We technically call this as EPS (earnings per share and is same as Net profit per share). So what is the PE of the stock? Company A’s PE is 10 and company B also has a PE 10. If both have the same PE and same growth rate in same industry then how come one is under priced and other over priced. It can’t be and is not. Both are priced same, that is Company A’s share price of 100 is same as Company B’s share price of 1000. Under priced and over priced in stock market has different rules and has nothing to do with what your pocket feels about it. If that would have been the case then Berkshire Hathaway(Warren Buffet’s company) would be the most overpriced share and all the penny stocks selling for few cents will be the most under priced. The truth is exactly opposite and that’s why people lose money most of the time. I hope it is understood by now. Just remember the statement highlighted because it will be used quite often. Infact you can forget everything in this post and just remember that nice statement higlighted in Bold.

If you have any problems then just leave a comment and I will try to explain your query.

Calvin and Hobbes: Best of Nov 1985

Remember in this Hobbes is same as Calvin, thats why he was not able to give the right answer as Calvin didn't know it, apart from the fact that this is funny. :D.

I wanted to jot down top 25 strips of calvin and hobbes, all time. But i realised it is extremely difficult and it won't be universal. When i choose a strip over the other and come back and read it, i feel no the other one is better. It is just futile to say that there are all time 25 strips of Calvin and hobbes because there so many of them that are so good that you can't differentiate it.The ranking changes every time you read it. It is paradoxical.How you differentiate between the best of the best. You can't, it becomes subjective. So I thought i should first take out the best ones from every month of its publication and then maybe i will be able to sort out a list out of it, if that is ever possible. :D.