Financial health of a company: some tips

We started off by eliminating all those companies that had recorded less than 15% growth in net sales and PAT in any of the past three years.

Further, we filtered companies on the basis of debt-to-equity ratio and return on capital employed (RoCE). While a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, a low leverage ratio increases a company’s potential to raise funds.

Hence, we selected companies which had a debtto-equity ratio of less than 1.5. In order to carry sustainable operations, it is necessary for a company to operate at an RoCE which is well above its cost of capital. Only those companies with an RoCE of more than 15% could make it to the next stage.

The final criterion was to do away with all companies whose three-year average net cash flows from operating activities was less than 50% of their reported cash profit.

Behavioral Economics Podcasts

To view some relevant podcasts for Consumer Behavior, visit:

http://www.marketingprofs.com/events/4/podcasts/?adref=emA24468

Ensure that you have enough bandwidth to see a smooth video.

Cheers,
Sachin

SIP + Insurance but Not ULIP

A number of mutual fund companies have tied up with insurance companies to offer long-term investment plans that offer you an insurance cover for the residual part of your entire investment plan. If you die part of the way through the plan, then your survivors will get not just the principal and returns of the amount that you have invested, but also the amount that you had not yet invested, but intended to.

Because this product is so unusual, it's probably not quite clear how this works, so let me explain through a detailed example. Let's say that a forty-year old person decides to invest Rs 20,000 a month till he is fifty-five years old. This amounts to investing Rs 2.4 lakh a year, or Rs 36 lakh over the entire fifteen year period. He decides to invest this money in a Systematic Investment Plan of an equity fund. Based on past experience, he expects to earn an average of perhaps 15 per cent a year on the investments he makes.

He starts investing and for five years, everything is fine. His has invested Rs 20,000 a month for five years, which comes to a total of Rs 12 lakh. His investments have yielded an average of about 15 per cent a year and are now worth a total of Rs 17 lakh. At this point, an unfortunate mishap occurs and he passes away. Normally, that would be the end of the investment plan. Of the Rs 36 lakh he originally intended to invest, he could invest only Rs 12 lakh before he died.

However, if this person had invested in the insured investment products that I'm talking about, then this would not be the end of the story. The 24 lakh that he couldn't invest because he died will be paid to his family by the insurance company. So his family gets the Rs 41 lakh which is Rs 17 lakh (the current value of the 12 lakh that he was able to invest), plus the 24 lakh that he intended to invest but couldn't because he died. His family could then invest the money and thus make sure that the financial plan is not disrupted. This isn't like a normal insurance where the amount you are insured for stays constant. Instead, the amount insured keeps decreasing. At any point, this amount is equal to what remains out of the original investment plan that the investor signed up for.

The obvious question is who pays for the insurance. After all, if the insurance company is covering the risk of the investor's death, then the investor must be paying the premium somehow. The answer is that this premium is paid in the form of an extra one per cent load that is deducted out of the money that is invested. Normally, fund companies charge a load of 2.25 per cent out of the investment you make. In the case of this product, this load is one per cent more. For Rs 20,000 a month, that comes to an extra Rs 200, which would strike most of us as a fair price to pay for the peace of mind that this product offers.

What is interesting is that there is no lock-in and there's no obligation. If you want to pull out of the scheme at any point then you can just stop investing and withdraw your money. Such product, with minor variations, are offered by a number of fund companies including Kotak, DSPML and Reliance.

The obvious downside is that this product ties one to a particular fund company for a long period of time. I think that's where one should spread the risk a bit by splitting one's investment across funds from different companies.

Few things to know before you decide your SIP + Insure

1. Is there a minimum amount that has to be invested in the SIP?

2. Must the SIP be of a certain tenure?

3. Are all equity schemes of AMC, eligible or is it offered only on certain schemes?

4. Will the insured amount be given to the nominee or be used to continue with the SIP so that the investment plan continues?

5. Will all the insurance expenses be borne by the AMC?

6. Is there any age limit to avail of this scheme?

How Big is Large -- Know your Home

The Milky Way's Astronomical Numbers

100,000 - Diameter of the Milky Way, in light-years. It's also around 1,000 light-years thick, and that's just the main stellar disk. One light-year is a little less than 6 trillion miles (10 trillion km), so we're talking about a very big disk. In fact, if our solar system was just the size of a coin in your pocket, the Milky Way would still be the size of the United States. 26,000 - Distance from our solar system to the Milky Way's center, in light-years. Astronomers think our solar system completes an orbit around the galaxy's center once every 225 to 250 million years. That means it was just one "galactic year" ago when the dinosaurs began to appear on Earth. 2.6 million - Low-end estimate of the number of suns it would take to equal the mass of the supermassive black hole that lurks at our galaxy's center. The sun is roughly 333,000 times more massive than Earth. So, it would take at least 858 billion Earths to equal that black hole's mass. Of course, no one can see the black hole. But astronomers theorize that such massive monsters lurk at the hearts of most galaxies. 200-400 billion - Number of stars in the Milky Way. That number is staggering enough. But consider this. Most astronomers say there are at least 100 billion other galaxies out beyond ours. Big as it is, our little corner of the universe really is just that. The Milky Way is but a drop in the bucket.
--Steve Sampson

Warren Buffett's 6 smart tips on investing

Not all businesses are created equal

Buffett is often heard saying that of the thousands of businesses around, there are only a handful of businesses that pass through his screen test. He calls these businesses 'franchises' and believes they should have the following attributes

Buffett says, "An economic franchise arises from a product or service that:
(1) Is needed or desired,
(2) Is thought by its customers to have no close substitute, and
(3) Is not subject to price regulation."

If the company under evaluation has enjoyed a long track record of greater than average returns on capital as well as profit margins then there is a good chance that the company qualifies for the definition of a 'franchise.'

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Price is what you pay, value is what you get

Identifying a strong Indian 'franchise' is one thing and valuing and investing in it is another. Even the best 'franchises' bought at expensive valuations will not do the trick. So how does one value a 'franchise'? Mr. Buffett has this to say on valuations.

He says: "The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset. Note that the formula is the same for stocks as for bonds."

The technique Buffett has mentioned about is also popularly known as the discounted cash flow, or the DCF.

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Ignorance is bliss

While DCF can be performed on all companies, the result the technique spews out may not be reliable in a lot of cases. So, what is the solution? Simple, ignore such companies! Don't trust us? Let us see what Buffett has to say on the problem.

He says, "What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistakes."

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Tackling the 'forecaster' in you

You've identified a strong Indian 'franchise' and you've performed DCF on it. Your DCF based valuation gives you a valuation that is 10 per cent higher than the current market price. Sensing opportunity, you are ready to take the plunge aren't you?

Yes, if you believe you are the perfect 'forecaster' of a firm's cash flows. However, Buffett thinks that he is not and, hence, he relies on a concept called as 'Margin of Safety' (MOS). What is this MOS? Let us hear in his own words.

He says: "We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success."

When you buy, please ensure that your DCF-based value per share is at least 50 per cent higher than the current share price so that even if your assumptions turn out to be little aggressive or something unexpected happens to the company, the loss of your initial invested amount is minimized.

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The all-important 'SELL' decision

That solid 'franchise' that you bought two years ago and the one that had a strong margin of safety has given you attractive returns and now you wish to dump it. Dump you should if you've found another equally attractive opportunity in another equally strong 'franchise.'

But that is seldom the case. Furthermore, selling involves transaction costs. For these very reasons, Buffett is against the concept of selling strong 'franchises' unless their performance looks weaker from a long-term perspective. This is what he has to say on the issue.

"If the work is done right while investing in a stock, the time to sell it is never." Furthermore, he adds, "Our holding period is forever."

In Buffett, we have someone who has walked the talk and has remained invested in business for years together. Indeed, the urge to sell is very high, but you would do your investment returns a world of good, if you continue to stick with good, solid 'franchises' for years together.

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The golden rules

Having taken you through the entire process of investing, which probably comes closest to the way Buffett does it, we would like to sign off with two of his rules that we believe can transform you into a much better investor.

They are:

Rule #1: Do not lose money; and

Rule #2: Always remember the rule #1.

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Stop Loss Trigger Details

With the introduction of compulsory Rolling Settlement from July 2, 2001 the trading period (T) has been reduced to one day. Obligations are netted and determined on the basis of trades done on the trading day (T). The obligations have to be settled on the second working day after the trading day in a T+2 rolling settlement scheme. Thus, there is a settlement everyday and all orders are good for day in the cash segment of the market.

With the Good For Day Tool, you can tell us for how long you want us to keep trying to fulfill your order during a trading day. If your order doesn't get executed before the close of trading today, the order automatically lapses. The order option is typically useful when you are placing a limit order to buy or sell, because you believe the price of a particular stock will fall or rise within a trading session. And needless to say, the "We will try" is merely an expression. In reality, everything is done seamlessly by the system, untouched by human hand.

Stop Loss Trigger Tool
The Stop Loss Trigger Tool is actually a bit of a misnomer.This tool is most useful in protecting your profits on an open position. The Stop Loss order is a conditional order to either Buy or Sell.The condition being that the order is activated only when that stock trades at a specific price defined by you. As is the case in any order, you will have to specify the quantity and the limit price (or market price) at which you want the order to be executed.And in addition you will have to specify a Trigger Price.

Only if the Exchange records a trade at the price defined as Trigger price by you, will your order will be activated.

In case you choose to use a Limit price (as opposed to market price) for your Stop Loss order, you must remember the following guideline :

- For a Buy order, the limit price must be greater than or equal to the trigger price.
- For a Sell order, the limit price must be less than or equal to the trigger price.

If, for a stop loss order to buy, the trigger price is 93.00, the limit price is 95.00 and the market (last trade) price is 90.00, then this order will be released into the system once when the market price reaches or exceeds 93.00. This order will be added to the order queue at the exchange with the time of triggering as the time stamp, as a limit order to buy at Rs95.00. Till such time that the order is triggered it will stay in a separate queue at the exchange which is not visible to other market participants.Remember even the stop loss tool is valid only for a trading day.

If your stop loss order is not triggered during the trading day, it shall lapse automatically at the end of the trading session.

When do you use a Stop loss order?

The Stop Loss order is a great way for a trader to manage his exposure in the market. Lets us say that a trader wants to buy ABC company at Rs100 because he expects the price to rise to Rs120 in a short time. But he does not want to take an unnecessary risk and hence he wants to exit the trade (sell his shares) in ABC company if the price drops below Rs95. So he first buys 100 shares at Rs100. Then to protect himself against an unexpected movement and limit his losses he would punch in a stop loss sell order for 100 shares of ABC Co. with a trigger price of Rs95. He could choose to sell with a limit price of his choice or at market price.

So if the shares of ABC drop to trade at Rs95 his order is immediately triggered and pushed into the queue for execution. This system finds similar application in the case of short positions.

EBITDA ratio explained

EV/EBITDA ratio is the Enterprice Multiple: A ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. A low ratio indicates that a company might be undervalued. The enterprise multiple is used for several reasons:1) It's useful for transnational comparisons because it ignores the distorting effects of individual countries' taxation policies.2) It's used to find attractive takeover candidates. Enterprise value is a better metric than market cap for takeovers. It takes into account the debt which the acquirer will have to assume. Therefore, a company with a low enterprise multiple can be viewed as a good takeover candidate.Keep in mind that enterprise multiples can vary depending on the industry.

Therefore, it's important to compare the multiple to other companies or to the industry in general. Expect higher enterprise multiples in high growth industries (like biotech) and lower multiples in industries with slow growth (like railways). P/E is the Price to Earnings Ratio, also known as the price multiplier: It is a valuation ratio of a company's current share price compared to its per-share earnings. Its formula is:Market Value Per Share/Earnings Per Share (EPS)It basically tells you how much an investor is willing to pay for a dollar of earnings. For example, if a companyés shares are traded at $25 and its last 4 quarters earnings per share was $2, then the P/E ratio is = $12.In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

P/E Ratio Simplified Contd...

Know what you're looking at.

• A P/E ratio represents a company's recent stock price, divided by its earnings per share (EPS). When you see P/E ratios listed for companies, they're often "trailing," meaning that the stock price is divided by the EPS for the four most recently completed quarters. So if a company has earned $1.25 per share over the past year, and it's trading for $40 per share, its trailing P/E would be 32 (40 divided by 1.25). Meanwhile, you can also often find "forward" P/Es, which use the expected EPS numbers for the coming four quarters. So if a company whose stock is trading at $40 per share is expected to earn $1.50 per share, its forward P/E would be 27.
  
• Check the difference between trailing and forward P/E numbers. If the forward P/E is lower, that means future earnings are expected to be higher than the recently completed annual earnings. If the forward P/E is higher, it means the company is expected to earn less over the coming year than it did in the past year -- not a great sign, in general.
  
• Remember that the P/E isn't everything. Other metrics are also worth considering. Many people would reasonably argue that the P/E isn't even all that valuable, since a company, via accounting tricks -- legal and otherwise -- can manipulate earnings to some degree. If you find a company with a low P/E, try to determine why it's low. See whether the company has encountered any problems recently, and determine whether those problems will likely be temporary or permanent. Many lenders, for example, are being pressured by issues surrounding subprime lending these days.
  
• Understand that P/Es vary by industry. Steelmakers, for example, will usually sport seemingly low P/Es, as will automakers and others, especially those in capital-intensive fields. Software makers and other "lighter" businesses tend to have higher P/Es. So don't assume that a steel company with a P/E of 18 is more attractive than a software maker with a P/E of 25.
  Compare a company's current P/E with its historical P/E. A glance at Nucor's historical P/Es, for example, suggests that this might be an attractive time to buy, with a relatively low price compared to earnings. (This is a good time to visit our CAPS stock-rating community, too, to see what others think of the opportunity.)
• http://economics.about.com/cs/finance/l/aa030503b.htm

P/E Ratio Simplified

The price-to-earnings ratio (P/E) is probably the most widely used -- and thus misused -- investing metric. It's easy to calculate, which explains its popularity. The two most common ways to calculate it are:
P/E = share price divided by earnings per share
P/E = market capitalization divided by net income
The share price is the market capitalization divided by the number of shares, so the results should be identical. Share price and the market cap are easy to find in the quote section of any financial website. The earnings are usually taken from the trailing 12 months (TTM) and can be found by checking the income statement for the past four quarters. A P/E using TTM figures is often called the current P/E.
Another variation is the forward P/E, which is calculated using analyst future earnings estimates, rather than actual historical earnings. Most financial websites give both the current and forward P/E. I find forward P/E a useful guide for cyclical companies, companies coming out of negative earnings, and those that have significant one-time charges embedded in current earnings. You may also encounter the dilutedP/E, which accounts for a company's diluted shares.
You'll often find slightly different P/E values for the same company on different financial sites. Why? Because some sites normalize earnings for one-time items, which distorts the P/E ratio. These small variations are immaterial.

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In essence, the P/E tells us how much an investor is willing to pay for $1 of a company's earnings. The long-term average P/E is around 15, so on average, investors are willing to pay $15 for every dollar of earnings. Another useful way to look at this: Turn the P/E ratio around to look at the E/P ratio, which when expressed as a percentage gives us the earnings yield. For instance: 1/15 gives us an earnings yield of 6.67%.

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Before you get carried away ... The "P" in the P/E ratio is determined at any given point by the market value of the company or its shares. Built into this market price are the future expectations of the company's growth. If Google (Nasdaq: GOOG) has a P/E of 54.8, and Motley Fool Inside Value pick MittalSteel (NYSE: MT) has a P/E of 8.2, does this tell us whether Mittal is a better value than Google?
Maybe, but maybe not. For starters, analyst expectations for Google's earnings growth over the next five years range between 23% and 62%; estimates for Mittal are currently hazy because the company is in the process of merging with competitor Arcelor. Mittal, or the combined Arcelor-Mittal entity, is unlikely to grow at more than 10% over the same time period. So clearly, future growth expectations significantly affect the significance of the P/E ratio.

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Apples to apples As you'd expect, different industries have different average P/E ratios. Mittal is in the steel industry, which typically has low P/E ratios. Other steel-industry giants like Korea's Posco (NYSE: PKX) and Japan's Nippon Steel generally sport P/Es in the single digits. Steel is a commodity, and the industry is highly cyclical. Clearly, it's important to understand the industry when comparing P/E ratios -- industries with higher perceived risk attract lower P/E ratios.

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Investment returns also affect the P/E ratio. If I can buy shares in a company with a return on equity (ROE) of 30%, then with all other things being equal, I should be willing to pay more per dollar earned than for a company with an ROE of 10%. Consider Hewlett-Packard (NYSE: HPQ) and Coca-Cola (NYSE: KO). Both currently have a P/E around 21, yet analysts expect Hewlett Packard to grow earnings at 13%, vs. 8% for Coca-Cola. Coke, however, has an ROE of 30.4%, vs. just 13.3% for Hewlett-Packard. In other words, in the past year Coke returned more than $0.30 for every $1 of shareholders' equity, while HP returned just over $0.13. Be careful in using ROE for companies with a high debt load, because it will be inflated. In that situation, using return on invested capital (ROIC) would make for a more accurate comparison.

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Counting earnings Earnings are an accounting figure that includes non-cash estimates. Since earnings are covered by U.S. generally accepted accounting principles (GAAP), you might expect all reported earnings to conform to the same template. This is certainly not the case -- companies have plenty of latitude under GAAP to manipulate earnings, employing either an "aggressive" or "conservative" approach. Some companies, such as General Motors (NYSE: GM), have massively underfunded pension and health-care obligations that aren't reflected in their income statements.

Companies sometimes have true one-time events that can affect net earnings either positively or negatively. If a company sells a division for substantially more than its book value, the difference will be recorded as a positive in net earnings. This will distort the P/E and render it useless as a measure of value. In this case, we'd adjust the net earnings to arrive at a more useful P/E. A wide gap between current and forward P/E is a good sign that there may be a one-time event included in net earnings.

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Follow the cash Many Fools (myself included) prefer to use free cash flow (FCF) for valuation. FCF can also be manipulated, but it's more difficult to fake cash. Over the long term, a well-run company's FCF should be approximate to earnings.
Just because a company has a low P/E does not mean it's a good value. Companies have a low P/E for a reason, and the trick is finding out whether that reason is likely to be short-term or permanent. Conversely, not all companies with a high P/E are overvalued. It may be counterintuitive, but a cyclical company will usually have a high P/E at the bottom of the cycle, where earnings fall much faster than the share price because the market accounts for the cyclical nature of the company.

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Fun with P/Es My favorite use of the P/E ratio is to compare the current P/E of a company with its historical averages. (To do so, I generally use a subscription service, Capital IQ, which gives me the past years' average annual P/E ratios. You can also use the free MSN Money Central 10-year ratio.) I then average the annual P/E figures (taking out excessively high or low "outliers") and compare this figure with the current P/E ratio. If the current P/E ratio is significantly less than the average, it could indicate that by historical standards the stock is undervalued. You can do the same thing with price-to-book (P/B) and price-to-sales (P/S) ratios.

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There are drawbacks in any historical comparison of P/E ratios. During market bubbles, P/Es can be inflated for extended periods of time. Caution should be used, particularly with average P/E values from the late 1990s. P/E ratios are also generally higher in a low-interest-rate environment because a company's cost of capital is lower, and also because investors are more likely to take on the risk of owning equities when bond yields and fixed income rates are low.
The price-to-earnings ratio is a useful measure, but it must be used with many other metrics to accurately assess a company's worth.

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Tips for buying Laptop

Planning to buy a laptop? However, don't know how to start hunting for the ideal notebook. One that meets your requirements and fits in best into your work regimen. Remember, while specs are what manufacturers tout -- dual core processor, large screen, size, and lightweight -- there's more you need to consider while zeroing on the laptop of your choice. These features though may not look obvious, will go a long way in making your purchase enduring.

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When you buy a notebook computer, pay special attention to whether the LCD display is "glossy" or "matte". Increasingly, manufacturers are offering glossy screens. While these are great for watching movies on your laptop, they're not optimal for doing traditional office work. The reason is that the glossy screens are highly reflective. In typical office environments, glossy screens can be hard on both your eyes and your concentration, as you'll have to work harder to ignore the ambient lighting and background objects that are reflected in your screen. Bottom line is that if you're buying a notebook primarily to get work done and not to watch movies or play games, avoid glossy screens. Also, glossy screens are more susceptible to scratches than matte screens. So if your laptop is likely to go through some rough and tumble daily, this is another reason to go for a matte

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Most notebooks in the market today come with built-in wireless network connectivity. The trouble is that many still include yesterday's technology. The wireless transmission standard is about to get a big boost in speed with the official unveiling of the 802.11n standard, which provides Internet and networking connectivity speeds that are about 10 times faster than the wireless standards currently in use. That's a significant speed boost, and it's one you want in your notebook computer, especially because changing the type of wireless connectivity that you have in a notebook is difficult or impossible once you buy the machine. Avoid notebooks that offer only the built-in 802.11b or 802.11g wireless cards. Even if the version of 802.11n offered in a notebook sold today is dubbed "draft" or "pre-release", it'll likely still be far faster than the 802.11g standard -- and you'll probably be able to upgrade it later, once the standard is finally ratified.

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How well a notebook computer is built will likely determine whether you still own it three years from now or whether it gets sold off for parts. The unfortunate fact is that as competition has forced manufacturers to offer notebooks at rock-bottom prices, quality of exterior construction has suffered. If you'll be doing a lot of travelling or will be buying a notebook for a youngster, think about buying notebooks that were made to take some abuse. The Dell Latitude series, the Acer TravelMate, or the Lenovo ThinkPad are all highly regarded in terms of durability.

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Combine a powerful processor, fast hard drive, and hefty battery, and what do you get? Heat -- and lots of it. There's a good reason why the moniker "laptop" has all but disappeared: Some notebook computers are really not suitable for resting on your lap because they get too hot on the underside to hold comfortably. But some notebook computers are still designed for those who wish to work from their lap. That's why it's important to find out just how hot a laptop gets on the underside. Either contact the manufacturer and ask specifically about this or visit a store in which the notebook is running, and feel the underside.

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Noise is less of a problem with notebooks than it once was, but it can still be a factor -- especially if you're easily bothered by noise while working.Noise in notebooks generally comes from two sources: the hard drive and the cooling fan. If you want to eliminate the source of hard drive altogether, consider a new notebook with a solid-state drive.

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Batteries act like your laptops in-built UPS. They are the lifeline of your machine. So, it is important that you check up how many hours your battery will run. Some batteries last long, but some don’t. There are three main types of batteries: Li+: Most people get Lithium-ion (Li+) batteries. These are generally good, safe and secure. NiMH: If you want something cheap, a nickel metal-hydride (NiMH) battery will do. NiCad: This probably won't be an option, but if a dealer does try to sell you a nickel cadmium (NiCad) battery, run away. They require constant recharging.

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In these days of technology obsolence it is very important to find out the upgrade options available. Also, one should keep in mind that laptops can be upgraded up to some extent only. While it is possible to upgrade main memory, and removable drives, the upgrades can cost twice as much as a desktop. It is even cheaper and environment-friendly to upgrade your laptop rather than to discard it. So, before buying try and explore upgrade options available.

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Though this may not be that important, still there is no harm in checking the best deal available. Do a recee of the various combo plans being offered by various vendors. Like presently Compaq is offering WiFi music player free with its notebooks. Also, check which dealer is he is offering accessories like free bag, headsets, wireless mouse or some discount coupons. Courtesy: Indiatimes News Network & Agencies

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Hope these tips would help you next time :)

Happy buying lappies !!

How to Develop Your Ideas Exponentially

Believe it or not, ideas develop exponentially. The more ideas you have, the more ideas you will generate, both in term of quantity and quality. In human history, we have a phenomenon called technological acceleration. Do you know that the technological advancements in the last century is more than those in the thousand years of previous history combined? That happens because innovations and ideas develop exponentially. Now I will show you why.

If I have two ideas - A and B - I can only derive one new idea from those which is AB. If I have three ideas - A, B, and C - I can derive four new ideas which are AB, AC, BC, and ABC. If I have four ideas - A, B, C, and D - I can then derive eleven new ideas which are AB, AC, AD, BC, BD, CD, ABC, ABD, ACD, BCD, and ABCD.

To give you clearer picture of the exponential effect, here are the numbers above and some more:

• 2 ideas generate 1 new ideas.
• 3 ideas generate 4 new ideas.
• 4 ideas generate 11 new ideas.
• 5 ideas generate 26 new ideas.
• 6 ideas generate 57 new ideas.
• 7 ideas generate 120 new ideas.

This numbers help explain technological acceleration. Innovations in the last century is more than all those in the previous history combined because the recent civilization has more “raw ideas” and “raw innovations” to begin with.

The same thing applies to your personal life. The more ideas you have, the more new ideas you will get. The virtuous cycle begins, and your ideas will develop exponentially.

How can you start this virtuous cycle and develop your ideas exponentially? Here is a key characteristic of ideas:

Ideas are cross-pollinating

The example above gives us good illustration. A and B are two different ideas, but if we cross pollinate them by interconnecting them, we will get a new idea which is AB. So:

The key to develop new ideas is getting different ideas and then interconnecting them.

Here are some simple steps you can do:

1. Develop multiple passions
   This step gives you the different ideas you need. I’ve written that the way to live a rich life is by developing portfolio of passions. Don’t narrow yourself to only one passion. Expand yourself and develop your multiple passions. If you are too focused to only one area, it is unlikely that you will develop fresh ideas for that area. Remember that ideas are cross-pollinating. You need ideas from different fields which can enrich one another. Plant and grow different flowers in your garden of life, and they will cross-pollinate.
2. Be observant
   Now that you are developing multiple passions to get different ideas, you need to be observant to catch those ideas. Instead of passively waiting for ideas to come and catch your attention, you should actively search them in your daily life. Be hungry to catch the hidden ideas in your daily experiences. Never let the ideas in your surroundings go unnoticed, even if they try to hide from you.
3. Always write down you the ideas you get
   Once you catch an idea, never let it go. Capture them permanently by writing them down. You should do it as soon as possible because some ideas can easily disappear within one minute or less. For this reason I always bring a piece of paper and a pen wherever I go (see 4 Simple Ways to Never Lose Your Ideas). When I get an idea, I will quickly write them down in the paper. I don’t want to risk losing that idea.
4. Review your ideas regularly
   This is just as important as writing the ideas. What’s the use of writing the ideas if you never review them? This simple step greatly helps you interconnect your ideas. Reviewing your ideas makes them stick in your memory and makes them ready to be cross-pollinated with other ideas.
   Later when you read something or encounter something in your daily life, you may suddenly remember, “Wait. I can apply this to that, right?” And there a new idea is born.

Direction for thinking:

Categories

• Community: How can we help connect people, build communities and protect unique cultures?
• Opportunity: How can we help people better provide for themselves and their families?
• Energy: How can we help move the world toward safe, clean, inexpensive energy?
• Environment: How can we help promote a cleaner and more sustainable global ecosystem?
• Health: How can we help individuals lead longer, healthier lives?
• Education: How can we help more people get more access to better education?
• Shelter: How can we help ensure that everyone has a safe place to live?
• Everything else: Sometimes the best ideas don't fit into any category at all.

Criteria

• Reach: How many people would this idea affect?
• Depth: How deeply are people impacted? How urgent is the need?
• Attainability: Can this idea be implemented within a year or two?
• Efficiency: How simple and cost-effective is your idea?
• Longevity: How long will the idea's impact last?

37 lessons to live Life that Matters

1. Discover what matters to you
   Success in the long run has less to do with finding the best idea, organizational structure, or business model, than with discovering what matters to you as individuals.
2. Have the courage to do what matters
   You create enduring success not because you are perfect or lucky but because you have the courage to do what matters to you.
3. Don’t rely on others’ approval
   Successful people don’t rely on the approval of others to pursue their cause or calling. They are more emotionally committed to doing what they love than being loved by others.
4. Redefine success
   The real definition of success is a life and work that bring personal fulfillment and lasting relationships and makes a difference in the world in which they live.
5. Don’t chase money and recognition
   Money and recognition are just outcomes of passionately working often on an entirely different objective that is often a personal cause or calling.
6. Recognize signs of passion
   Builders (the term used by the authors to refer to “enduringly successful people”) become lovers of an idea they are passionate about for years and years. They lose track of the passage of time while doing it. In a real sense, it’s something that they’d be willing to do for free, for its own sake.
7. Worry more about being what you love
   Most of us worry more about being loved than being what we love.
8. Be sure you do what you love
   It’s dangerous not to do what you love. If you don’t love what you’re doing, you’ll lose to someone who does. Passionate people try harder, try more things, and move faster than people who only do things for a living.
9. Check whether you’re on the right track
   You know that you are on the right track when you naturally obsess over what you love. What you love attracts you even when you’re too tired to do anything else.
10. Find your mission in life
    To find your mission in life is to discover the intersection between your heart’s deep gladness and the world’s deep hunger (Frederick Beekner).
11. Find place for your multiple passions
    You do need to find a place for everything that is meaningful to you (your portfolio of passions). When you exclude all other things except a single focus for your life, there is a danger that you might find it impossible to locate the real treasure.
12. Experiment with your other passions
    Carve out a little time each week to experiment in some way with one of your other passions.
13. Never retire from what you love
    Builders’ passions create meaning in their lives that is nothing short of lifelong obsession from which they seek no escape.
14. Have integrity to do what matters to you
    You should have integrity to do what matters to you. Do not waste your time if it doesn’t matter.
15. Be yourself
    You shouldn’t hijack someone else’s value system. To do so would be a violation of integrity to what matters in your life.
16. Listen to that little voice
    Happy endings come from listening to that little voice inside your head - some call it the whisper - about what matters to you.
17. Plug into the cause and get the power
    Whatever Builders are doing has so much meaning to them that the cause itself provides charisma and they plug into it as if it was electrical current. They are lifted up by its power.
18. Do what matters despite political correctness
    Doing things despite the political correctness of the path is the price of admission to almost every enduring life of lasting impact.
19. Do what matters despite popularity
    Builders cling to a personal commitment that’s so compelling to them - something so important to them that they would actually do it for free - that they must do it despite popularity.
20. Have passion, determination, and skill
    Life takes passion, determination, and skill. You can’t skip any of those three and expect to enjoy success built to last.
21. Be greedy to acquire knowledge for your dream
    If you should be greedy about anything, it should be about acquiring “intellectual capital” for your dream. Being your best at what you do is essential to success built to last.
22. Make a difference with your knowledge
    When you have “earned” knowledge, you have an ethical responsibility to “invest” that capital on making a difference.
23. Earn opportunities through expertise
    Opportunity comes from expertise, not just luck, talent, and passion.
24. Recognize when to move
    When Builders found that striving for excellence is unreachable or joyless, they saw it as a message to move onto something else.
25. Have the right attitude toward difficulties
    Having many difficulties perfects the being; having no difficulties ruins the being (Lao Tzu).
26. Make failure your friend
    Many highly accomplished people described themselves as so proficient at making mistakes that, if you didn’t know better, you might think they were losers.
27. Harvest failure
    Enduringly successful people harvest failure. They become more resolute after losing a battle they believe in because they learn from the loss. Losers call it failure; winners call it learning.
28. Always make new mistakes
    When you make mistakes, just be sure to make new ones.
29. Manage your weaknesses
    Builders don’t deny their flaws, nor do they allow them to paralyze action. They manage it, include it, cope with it, and don’t let it stop them.
30. Earn your luck through focus and knowledge
    Builders earn their luck, not simply getting lucky. They earn their luck by focusing on doing work that is meaningful to them and going deep to discover relevant clues along the way. It is focus and knowledge that allows them to observe the subtleties of their path and then take advantage of serendipitous events.
31. Have a prepared mind
    Only a prepared mind and open heart prevails.
32. Have clear goals
    Builders use planning and goals - often big goals - to put themselves into a serendipitous position.
33. Have explorer mentality
    Builders have explorer mentality. They have clear direction, but not the roadmap. What they seek in the long term doesn’t always turn out as expected.
34. Think about your relationships as long term
    If you want success that lasts, then you’re better off if you think about your relationships as being built to last.
35. Surround yourself with “A” players
    Builders spent the largest percentage of their time tracking down, surrounding themselves with, and developing the people who are “A” players.
36. Align your intentions, words, and actions
    Always watch whether your words and actions match your intentions, and are aligned with what you are trying to do.
37. Get the inconsistent stuff out
    Alignment requires that you get out of your life all the stuff that is inconsistent with your passions and goal. That includes people. Choose wisely.

Things to look when buying house

But when it comes to your home, be sure to ask plenty of questions.

1. How big a house do I need?
It depends on your individual needs. If you are a family of five seeking more room, choose your second home with space and additional rooms.

If you are a young couple buying your first nest, settle for a cosy place for two. That is, if you are not planning a family soon.

Once you have figured out your needs, translate them in terms of built-up, carpet area and the new concept of super built-up areas. Carpet area is simply 75 per cent to 85 per cent of super built-up area. That means if the super built-up area is 1,000 square feet, the carpet area would be around 750 square feet to 850 square feet.

The ratio for built-up can be as low as 15 per cent for an old construction and as high as 28 per cent for new constructions. Super built up is at a phenomenal 40 per cent!

Make a note of the budget you will need for the same.

2. Which is the right area for me?
Ask yourself, do I want to spend half my life commuting? Or live in townships or residential complexes far from the dust, grime and noise of the city?

Or are the happening suburbs with their attractions -- malls, multiplexes, luxurious homes -- more my style?

Keep the investment point of view in mind. Suburbs offer value for money and investment appreciation.

3. What do I look for in a neighbourhood?
Once you have the area, narrow it a step further to a neighbourhood. Your immediate neighbourhood will decide how hassle-free your existence will be.

Look for proximity to doctors and clinics, shopping, transport connectivity, schools and hospitals.

Today, people also check out entertainment and recreational options, which could include bowling alleys, game centres, sports facilities, shopping malls, food courts and restaurants.

4. How much importance do I give amenities?
As dull as they sound, these things can be major reasons of concern if they are absent or insufficient.

Starting with water and power supply, look into access roads, parking space, safety and security and perks such as children's play areas, gardens, etc.

Verify the construction quality carefully. Compare a new construction with other existing projects by the same builder. This way, you can be sure that what you get will be the same as what you see in the sample flats.

5. Does it live up to my lifestyle requirements?
Your house is your refuge from the world and speaks volumes about you. Flooring, tiling, classy fittings and fixtures, fancy lighting, French windows can all make your nest a beautiful place to relax in.

Features offered by your building -- jacuzzi, swimming pool, gymnasiums, clubhouses, jogging tracks -- will all enhance your lifestyle.

A major element in your lifestyle will be the profile of people living nextdoor. If you have like-minded people in the neighbourhood, it puts your social calendar in place too.

6. What if I want more?
Above and beyond these, if you are looking at the best, most elite complexes, you are likely to be offered wide open spaces with lush, landscaped gardens and tree-lined roads.

This gives the complex an elegant feel, besides keeping the air fresh. Other green ideas that builders incorporate are rainwater harvesting and sewage treatment plants.

But like all good things in life, this comes with a price tag which you should be able to afford.

7. What if all this is there but the flat size is small?
Small flat sizes are a fact in a city like Mumbai. But there are myriad ways to maximise space with clever interior design. Traditional layouts have fast been abandoned in favour of specialty rooms or areas within the home.

Thus, larger rooms can be segregated into various areas of utility with the help of furniture, screens, dividers and so forth. Balconies can provide both leisure and storage space, even a computer room.

8. What about resale value?
The most important aspect in resale is the view. Naturally, all the amenities will be factored in, but houses with a great view normally sell for premium prices.

So if view is what pleases you, it may be worth that extra chunk of cash. Only people who can afford to pay a premium for a view will be your buyers so you may have to wait longer or drop your asking price substantially and match the general rate of the neighbourhood.

Excellent construction quality and good infrastructure in your area could give your property graph an upward slant.

Smart tax-saving strategies without spending a penny

Shuffle strategy

As per tax rules, ELSS schemes are subject to a lock-in period of three years from the day of investing. And since there are no long-term capital gains tax for equity funds sold after a year of purchase, shuffling ELSS schemes practically entails zero costs. How does the shuffle strategy work? Say, for instance, investor A had been investing Rs 50,000 in ELSS every year for the past six years. Since there is a lock-in of three years for ELSS, his/her investment of last two years would not be redeemable. But those investments made more than three years ago could be redeemed and invested back into the fund to gain fresh tax benefits. Section 80 C of the Income Tax Act, allows tax deductions up to Rs 1 lakh of ELSS investment made in any financial year for an individual. “Earlier Section 88 had a condition for claiming rebate that the investment should be made out of the income chargeable to tax. This was subsequently removed to provide relief to the individual tax payers. Current provisions for claiming deduction under Section 80C do not contain this restriction. Therefore, investments could be made out of the current year’s taxable income or even the past accumulated savings/investments to claim the deduction from taxable income by an individual tax payer,” says KPMG executive director Vikas Vasal. While previously, such reinvestments attracted entry loads, the new Sebi rule has done away with such costs for direct investing. In this investment process though, there is a possibility that the investor might make small profit or losses since the NAV might move up or down during the shuffle process. Such shuffles while helping get tax benefits also gives a chance to have a relook at MF portfolio and prune investments if necessary.

Switching Strategy

There is one more quicker method and that is of switching out proceeds to a liquid fund of the same fund house and switching it back into the fund. Switching refers to the process of transfer of money from one scheme of a fund house to another scheme. While for taxation purposes, such switching is considered as redemption and taxed accordingly, the advantage for investors is in terms of getting NAV of the same day. So for instance, if an investor switches from an equity scheme to a liquid scheme, the same day NAV is applicable. How does it work ? Say for instance, an investor with previous ELSS investments doesn’t have money to make further investment in the current financial year 2008. He could consider switching it to a liquid fund and back into the ELSS fund. There are no loads applicable for doing it if done within a short period (say 10 days or lesser). The call centre officials of Franklin Templeton MF and ICICI Pru MF confirmed the same for their respective schemes. The recent Sebi rules also state that waiver of loads would be applicable for “additional purchases done directly by the investor under the same folio and switch-in to a scheme from other schemes if such a transaction is done directly by the investor.”

Short Term Capital Loss

According to Section 74 of the Income Tax Act, 1961, you can offset your losses and even carry forward them for eight assessment years immediately succeeding the year in which the loss was first computed.
As per the act, any loss related to a short-term capital asset (like the sale of equity funds/shares within one year), can be set off against income under capital gains in respect of any other capital asset (be it short-term or long-term). This means, you can even offset this loss against any long-term capital gain. For instance, let's say you invested in a debt fund. After a year, you sell the units and book a profit (long term capital gains). You can offset this gain with your short-term mutual fund investment loss.

Prayer of Serenity