INVESTMENT MANAGEMENT AND THE FIRST TRADE We expect that, you have reached the stage of requiring an understanding

of a trade and its rules. Before we go into the rules of trading, it would be imperative for you (the investor) to understand what a trade is. Most people across the globe believe, that: When they purchase equity shares of a chosen company or enterprise from the stock markets, they have traded. When others are holding equity shares of a chosen company or enterprise which they have purchased earlier from the stock market, they have traded. And, when others sell equity shares of a chosen company or enterprise in the stock market (which of course they have purchased earlier), they too have traded. So, we have buyers, holders and sellers who have all traded! Take a step back, and look at the sequence: buying, holding and selling. You would realize that these are the three parts of the same composite trade. To elaborate, when we purchase a stock or equity shares of a company or enterprise from the stock exchange (or market), we have only initiated a trade. While we are holding the stock or equity shares in our portfolio, we are expected and required to manage this trade to enable the realization of optimum profits. Further, when we sell a stock or equity shares of a company or enterprise in the stock market, we are expected to realize a profit. However, in certain circumstances we may be required to minimize a loss (which may be the result of adverse market action, causing the stock or equity share to perform contrary to our expectation). This brings us to the realization that from the time we initiate a trade (with its purchase) to the time we finally close this trade (with its sale), there is a period of time which separates the two events. This interval of time may be as short as a few hours of a trading day, a few days or as long as a few months to a few years. Depending on the holding period, the management of the trade becomes of primary importance. In fact, it is in the correct management of the trade (during its holding period) that an investor makes a profit. We would like to bring to your attention here, that depending on the length of the holding period we would also be required to bring into the equation the time value of money. We shall elaborate on this at a later stage. At this stage it would be suffice for you (the investor) to understand that the rules of trading would pertain to the 3 distinct parts of a trade (which are buy, hold and sell) and would be segregated accordingly. INVESTMENT MANAGEMENT AND THE FIRST POSITION A position in a stock or financial instrument is built over a period of time, while purchasing the same stock over various price levels. However, to begin with we would initiate a position only when we have a confirmation of oversold levels and that there is a reasonable margin of safety available to us. We expect that, you have understood the various aspects of the first trade. However, before we proceed to the rules of trading, it would be appropriate to have an understanding of how to build a position in a particular stock or financial instrument. Let's say we have INR 3,00,000/= in our equity trading account. Given our initial requirement to diversify our risk exposure over more than one stock, we would apportion this initial capital into 10 equal risk segments. Each of these risk segments would be a position in a stock. Thus, we have allocated INR 30,000/= per position. Please note, that we may change this allocation to a larger amount depending on market action and news flow with regard to that particular stock. However, we must realize that we do this at the expense of increased risk exposure; as the stock (or stocks) may not perform as expected. Let us explain this with an example. We have observed a stock (XYZ Ltd.) with good fundamentals and reasonable growth projections. It has a reasonable EPS and P/E. However, due to adverse market action, this stock has given an oversold price level confirmation. Further, it's price is quoting near its 52 week low. When we check current news flow with regard to this stock, there is nothing alarming. In fact, they are taking action to expand capacity to meet future export demand for their products. Let's say that XYZ Ltd. has given an oversold signal at INR 100/=. So, we mark this with the purchase of 50 equity shares of this stock. By this action we have initiated our position in XYZ Ltd. Depending on the volatility of the stock and its Beta, the price down move from here would be 6% to 9 %, and in some cases may expand to 12%. As it would be difficult to purchase the stock at rock bottom prices, we can reasonably invest our remainder of INR 25,000/= in the next 6% down move. Over the next few days we find the stock quoting at a price of INR 97/=. Here we would purchase 100 equity shares of this company. So, now we have invested INR 9,700/= and have added another 100 equity shares to our position in XYZ Ltd. Over, the next few weeks the stock price meanders down to INR 93/=. At this point we would invest the remainder with the purchase of 150 equity shares. Here we have invested INR 13,950/=. At this point we have invested a total of INR 28,650/=, and are holding a position of 300 equity shares at an average purchase price of INR 95.50. Now, as our over all purchase price is INR 4.50 below the initial oversold price level; we have built a certain margin of safety in this position under normal market conditions (or moves). Further, we have pyramided correctly. Still, to provide for a further adverse market action usually caused by an unobserved larger trend that maybe against our expectations we would apply a stop loss at 8% below our purchase price at INR 87.85. It would be relevant to observe that this stop loss is a good 12.15% below the initial oversold price of INR 100/=. Thus, a fall below this price would mean that we have built a position that has a longer down move to cover, and it would be reasonable to sell this position at this price. Of course, we could invest again in this stock at a lower price at a later date; and by then there would be more clarity with relevant news flow in this regard. For instance, there maybe certain government regulatory changes which effect the profitability of all companies in this industry or sector or certain clarifications maybe need with regard to certain policy decisions. However, under normal market conditions; the stock price would make one bottom and then retest it after a few days or weeks. Better still it may make a head and shoulder bottom formation. These are all signals for an impending up move in the price of the

stock. So, it would be advisable to hold on to the position while it starts its upward journey. We must await the confirmation of an overbought price level confirmation, before initiating the sale of our position in XYZ Ltd. We have made it sound so simple, and it is. However, we must at all times endeavor to keep emotions away from our transactions in the financial markets. Further, we must respect the equity and other allied markets; and know that we are finite individuals, while the markets are in comparison relatively infinite comprise of millions of participants. Moreover, the markets would exist even after we are gone. STOCK MARKET INVESTMENT RULES The stock markets or equity markets are large market places or trading platforms in the modern sense of the word; where investors buy and sell equity shares or part ownership of various corporations representing various industries and services. To engage in this exercise of buying and selling equity shares the investor would be required to follow certain rules, to enable a successful and profitable conclusion to their transactions or trades. We would get to these rules presently. However, investors are well advised to tread with caution and attain a certain level of comfort with the system they propose to implement. After all a system which works for one person may not necessarily work for another person. A dry run on paper would be in order for a period of time before the investor implements his or her system in real time in the stock markets. Further, we would restrict the application of these rules to the equity markets or the cash market. The other two sub-markets being Options and Futures which are different investment instruments with their own risk-reward profiles and require a different set of rules. The stock market investment rules are listed below: 1. Make investments in the larger companies with price-earning ratios (P/E) of 10 or below. 2. Keep investments limited to the top 2 - 3 companies in each industry or service group. 3. Invest in companies operating in high growth (or sun rise) industries. 4. The price-earning ratio and earnings per share are important tools to estimate the fair value of shares. 5. High price-earning ratio implies that: super growth is expected in the company's earnings in the near future; investor confidence is high; and watch out for low earnings per share ( an earnings per share of 15% of par value of a share is reasonable). 6. Low price-earning ratio implies that: investor confidence is low or poor; and a high growth stock or company not yet recognized. 7. High returns can be earned from high priced stocks with reasonable price-earning ratios. The best investment opportunities usually lie in the most unexpected places. 8. Apply the theory of contrary opinion: The crowd is usually wrong, go against the crowd. When everyone expects the market to decline, prices will rise; and when everyone expect the market to rise, prices will fall. Markets tend to do exactly the opposite of what everyone expects. In the early stages of majority opinion, it pays to follow or precede the crowd. Contrary stock market action pays off only when timed to coincide with the last stages in the consolidation of a widespread majority viewpoint. Sell a stock below the anticipated peak price. Always leave a little margin for the person who buys the share from you. Buy and sell stocks at intermediate levels. To put it in perspective, "Sell, regret and grow rich". The bulls make money, the bears make money, the pigs go broke. Never buy/sell in line with the prevailing market opinion. Habitual non-conformity is no more profitable than habitual submission to fashion. Buy when others are selling, and sell when others are buying. That is buy in depressed markets and sell in boom markets. Always ensure that your stand is supported by reason and logic. When majority opinion begins to dominate the market, watch for crowding in contrary opinion. 9. Preferential allotment should be treated as subsidiary opportunities for making money. 10. Rights issues enable fresh investment without dilution of ownership. It enables investments at prices below the prevalent market price of a stock. And also enables step up of dividend yield substantially. 11. Bonus shares expand the total shares outstanding, trading volume and liquidity of the share. It also raises the dividend amount and gives tax benefits. Further, it also acts as a signal confirming good future prospects of the company. 12. Timing your buys: Initially base investment decisions on selection rather than timing, unless you have an intuitive flair for predicting short term price fluctuations. For superior results learn to combine good selection with good timing. Time the buy at share prices close to the lowest price of the year. Last years average price would be close to current year's lowest price. Never buy shares at prices greater than or equal to peak price of previous year. Under normal conditions buy shares at prices between last year's lowest price and average price. In a rising market, buy shares at prices greater than or equal to previous year's average price. However, do not buy shares at prices greater than 10% of previous year's average price.

Do not buy shares when they are in the limelight, as they maybe over priced. Alternative 1, buy the shares at early stage of publicity. Alternative 2, buy the shares when the publicity dies down and the prices fall. Do not buy shares immediately after a steep rise in prices, as this is usually followed by a steep fall. A sharp fall in share prices is an opportunity to buy. However, you should be confident that the fall is temporary; and that the future outlook of the company is good enough for a future rise in prices. If you have a promising growth stock in mind, and are looking for an opportune moment and price to buy it, the best time would be at the middle of its accounting year. Stock prices record sharp rise just before an expansion project of the company goes into commercial production. If you are a buyer, buy the stock a month before this happens. If you are a seller, sell the stock 2 months after the start of commercial production on an expanded scale to take full advantage of the stock or share price rise. Companies often issue press releases about expansion, diversification, new products, rising order book positions, proposed bonus/rights/conversion and so on. This has a bull effect on the stock prices. If you wish to buy the stock of such a company, do so on the same day the news is released. This same rule applies to companies with improved half yearly results. Buying shares immediately on receiving favorable news about a company is a good timing decision. It would be even better to buy the stock in anticipation of favorable news or market development. Keep a watch on the performance of similar companies in the same industry. Use this information to improve the timing of the buy decision. Improve your investment performance by staying and being ahead of the crowd. 13. Timing your sells: The best time to sell usually coincides with the stock market boom. Reasons why investors are unable to sell at the right time are that investors tend to marry their stocks. They are unable to accept mistakes and correct them. They desire to at least break even on the same stock. And on occasion are reluctant to pay capital gains tax. Reasons why investors sell shares are that they may have made a mistake in their initial selection. Periodic review and reconstruction of their investment portfolio. Enables investors to take advantage of market swings and new buy opportunities. Necessary for regular adjustment of capital gain/loss for tax purpose. And also to provide for regular spending money to meet seen and unforeseen expenses. 14. When to sell: When the price-earning ratio of a stock held in the portfolio shoot up to unrealistic levels. When the investor has made 100% to 200% profit on his or her investment. The investor has overshot his original objective. The investor incurs a loss of 8% to 10% due to a fall in the stock price. However, do not sell in case the loss is due to temporary and widespread decline in the stock market. Keep capital losses short term. Do not let tax considerations hamper a good sell decision. It is always better to sell too soon than too late. Sell after a steep rise in stock price. Do not sell stock immediately after a steep fall in price. Sell during a rally. Sell when in doubt. STOCK MARKET INVESTMENT STRATEGIES The stock market investment strategies are relevant to investors who are in it for the long haul. There are basically two strategies that an investor can apply; the first one being to "buy low and sell high" and the second one being to "buy high and sell higher". We would get to these strategies shortly. However, investors are well advised to realize that the other strategies of "selling high first and then buying back low at a later date" cannot reasonably be applied while investing in stocks as we would have to borrow the stock before we can sell it at higher levels, and then we have to consider the interest cost and dividends payable to the original owner of the stock. To apply such strategies would require the investor to route investment positions through the futures and options markets. And the investor must realize that the futures and options markets have their own set of rules and factors to consider. For a better understanding of futures and options, we would suggest that the investor read a suitable book on options, futures and other derivatives Now to get back to stock investments and stock markets, we can safely state that in the long term stock prices would keep going up. Ideally an investor would buy into an up-company, in an up-industry, operating in an up-economy. Further, holding these stocks for long periods of time to take full advantage of the growth phase of the company. 1. The aspects to be considered with respect to the company would be that it is: well managed. technologically advanced. a market leader or a potential market leader in its industry. committed to long term growth and expansion. 2. To ensure a margin of safety and a reduction of risk, the investor would be well advised to diversify. Invest in a number of growth companies operating in equally fast growing sectors of the economy.

Keep a watch on these companies, using every dip in stock price to buy and increase your share holding in these companies. 3. Do not sell these stocks, except in certain specified conditions. 4. The investor is expected to make money by capitalizing on the underlying growth of a fast growth company. 5. The investor is expected to bank on the climate and not on the weather. 6. The advantages of this strategy are: Shifts emphasis from timing and price to selection. Thus, making initial selection very important. Misses opportunity to sell at peaks, but buys at every dip. A carefully selected and diversified portfolio is safer and less risky. Simple to implement. Maximizes advantages and benefits from tax laws. Investments in fast growth companies have low dividend returns, the gains are mainly from capital appreciation. Savings on frequent brokerage fees and charges. Allows both profits and losses to run. Over time even the loss making positions give profits. 7. An investor would on occasion have reason to sell stocks held in his portfolio. When to sell would be governed by the following: Stocks should not be sold solely to en-cash profit or loss. Stocks which are loss making should be sold to prevent long term capital loss. Stocks of companies which have reached the end of their long term growth phase; and future prospects are questionable. When the investor has made a mistake or error in the initial selection of the stock. When the price earning ratio (P/E) crosses 40. After a steep and sustained rise (of 100% to 200%) in stock price over a period of one year or longer. 8. A investor would have an occasion have reason not to sell stocks held in his portfolio. When not to sell would be governed by the following: Simply to en-cash short term gains. To shift from slow moving to fast moving stocks. In response to current news causing short term market trends. 9. The initial selection of the stock is critical. To reiterate the selection criteria for companies to be held in our portfolio are: Well managed. Technologically advanced. Has long term expansion and or diversification plans. Is market leader or a potential market leader in its industry. 10. The investor would ideally diversify his portfolio by investing in stocks of 10 companies spread over the lead industries of the economy. 11. The investor would also diversify over time. That is he would take his time to invest his money and spread his purchases of the selected stocks from the present to a point of time in the future. This would also help in averaging the purchase price and help bring about an additional margin of safety. 12. The investor would be able to give time to his investments to produce results. 13. Do not get upset over and by short term market fluctuations. Bank on the trends and don't worry about the tremors. The investor must keep his mind on the long term cycle and ignore the sporadic ups and downs in daily price movement. INVESTMENT MANAGEMENT AND STOCK MARKET SIMULATION An investor would be well advised to have an investment system in the first place. Then the investor would be required to test his system through stock market simulation. This would require the investor to conduct dry runs using pen and paper. In fact, in today's time and age it would be more appropriate to use a personal computer, to bring in a certain level of efficiency to this exercise. The investment system would have aspects drawn from both fundamental and technical analysis. However, at the testing stage this system is quite like a game. Where the investor has no exposure to risk, as he would incur no real loss in case of an error of judgment in his investment decisions. Stock market simulation is used by investors to practice their investment skills, before they actually invest their financial resources in the stock market in real time. Stock market simulators are also used by banks and large financial organizations to train their personnel. These stock market simulators are also available in the form of a game, which does not require you to have any prior knowledge of the stock market or investment. Given below is how the stock market simulator usually works: 1. The participant is first required to register. In some cases they may also be required to pay a certain fee. 2. Participants are given an initial sum of "virtual" money, to invest in stocks of their choice. 3. Participants then build a portfolio of stocks by buying and selling equity shares of various companies. 4. Most stock market simulators use real time market data, of both price movement and volume of shares traded. The objective of these stock market simulators is to help you learn how to increase the value of your portfolio. That is, the value of your portfolio is greater than when you started the exercise or game; and also the value of your portfolio is better than the other participants. While selecting a stock market simulator (or simulation game), the investor may keep the following in mind to make a better decision:

1. Select a stock market simulator which comes with impeccable recommendations from banks, financial institutions and corporate bodies who use them extensively. 2. Select a stock market simulator which is comprehensive. Firstly, it should be easily implement-able in various financial and investment classes. And secondly, it should have features for trading stocks, options, futures and mutual funds; to enable the participant to get a feel of the real investment world. 3. Select a stock market simulator that gives valuable, reliable and realistic trading simulations. 4. Select a stock market simulator which is of reasonable price or fee to the participants. 5. Select a stock market simulator which has the capability to test various investment strategies. 6. Select a stock market simulator that has free customer care support through both toll free telephone and email. 7. Select a stock market simulator that is easy to learn and use. The investor would appreciate, that stock market simulation is a training tool and would help you with respect to responses required on your part when faced with situations in the stock markets in real time; when you have actually invested your financial resources and hard earned savings. INVESTMENT MANAGEMENT AND INVESTOR PREPARATION At this stage we expect that the investor has done the preliminary preparation to undertake his investment management exercise. However, it would not be unusual if the investor were unprepared and seeking a path to get ahead. While not detracting from circumstances where he would be standing at a crossroad in life and seeking purpose and direction afresh. 1. The investor realizes that he is on his own. We are our own boss, and are both the employer and the employee. In a matter of speaking we are reporting to ourselves. If the sequence of steps and actions we implement is correct we are justly rewarded and if they are wrong we are punished. This is to bring to your attention that, we cannot indulge in a blame game. Of course, there are no free lunch tickets. If an error is observed it must be corrected immediately. 2. Are we up to the challenge? It is advisable to do a SWOT analysis on ourselves and our present circumstances. We are to consider whether we: # are secure in our present circumstances. # have the frame of mind to take on risk and wait long enough to achieve profitable returns. # have gained an understanding of investment management and the processes involved. # have a documented plan of action available. # have done a what if analysis to know in advance what we would do given the various circumstances and situations the equity and other allied markets would put us through. 3. Do we have the commensurate resources available? Given our present secure circumstances, we should have commensurate personal free reserves available to start the investment management exercise to develop a profitable portfolio of stocks and other financial instruments. 4. Have we a good association with a trustworthy market intermediary (broker)? As individual investors we cannot deal directly in the equity and other markets. We would have to take a broker alongside. The selection of the broker is of importance. We must realize that a brokerage is a business entity in itself; and profits from the brokerage that we investors pay them to execute our transactions on the trading floor of the exchange. In fact some banks (like in India) have developed fully functional brokerage arms. We as investors have a choice, and there is nothing personal or emotional about the selection of this broker we would be dealing through. We must always go for the best (optimal) deal available. 5. Have we prepared a project report? The investor must prepare a project report, and may avail the services of a consultant to do so. The individual investor must also do periodic reviews to ensure that the integrity of the objective is maintained in all his transactions. Any deviation from the objective must be corrected. However, in certain circumstances we may consider modifying the objective to include the deviant action as it may have proved profitable over a period of time. Using the brief list above as a guide, the investor may use his or her own initiative to increase this list of things to do for their preparation. However, most visitors to our website are seeking ways to get ahead; and are probably at a stage in life when they wish to take a look at where they have reached and which way to go forward. Usually at this crossroad, there is also a lacking of adventure and newness of things around them; most get attracted to the stock markets seeking adventure or to bring some zest back into their lives. Most just talk amongst their friends meet up with their friends broker and their investments are based on the tips and salesmanship of the broker. Some would find success although not long lasting, while others would be faced with failure at the very start. Both these circumstances would be counterproductive with regard to their development as investors. There would be a safe and more profitable way forward, if only the person would step back and appreciate that investing in the stock market and even the other markets like forex and commodities would be an enterprise even if it be an individual level. Therefore, requiring a study, learning and understanding of not only the investment environment, but also the selected markets trading platform and systems; along with an understanding of where it all fits in with the larger economy of the country, region and the globe. The investor would be called upon to also develop his own investment system and methodology; and would require a further study; which would be theoretical to start with. Reading of relevant books on investment analysis and portfolio management would be quite in order to gain this understanding and knowledge. Investment wisdom would be gained along the way through the experiences the investor would gain in the real time investment world. In fact, there are thousands of books written on this dynamic field of investment analysis and portfolio management and all its parts; I would recommend a reading of the following books: Security Analysis by Graham & Dodd The Intelligent Investor by Benjamin Graham

 One up on Wall Street by Peter Lynch Investment Analysis & Portfolio Management by Prasanna Chandra Options, Futures & Other Derivatives by John C. Hull Although the list of books provided is not exhaustive, it would make for a good starting point. After reading these and other books selected by the investor himself, it would be time to develop the investment system and methodology. While the system would help the investor transact (both on the buy side and sell side) the stocks selected for onward investment, the methodology would enable the setting up of a structure to enable an optimization of profits on the one hand while reducing the occurrence and quantum of losses on the other. The investment system with regard to selection of stocks for onward investment would enable the investor to differentiate and categorize stocks into investment grade or otherwise; and the investor would invest only in and amongst the investment grade stocks he may have listed based on his learning upto this stage. Of course, a further segregation would take place with regard to the investment grade stocks while the investor gains more knowledge on the one hand and with reference to the inflow of information (corporate decisions, quarterly and annual results, etc.) on the other. The investment methodology would enable the investor to buy stock positions or parts thereof and a subsequent build up of the stock position as a part of a larger portfolio; at points of time and price where there would be a limited downside, and the likelihood of the occurrence of an up move in price would outweigh a down move. It would also enable the investor to sell the stocks at a profit to enable on the one hand a reemployment of the investment capital in other investment grade stocks within the time horizon of the short term investment cycle in progress, while on the other enabling the generation of a turnover to the investment system and methodology in progress like any other enterprise. It would also enable the investor to have in place a stop loss for situations and circumstances which may cause the stock position not to perform along expected lines during the short or medium term time horizon. Usually such profit targets may be maintained at 17% to 20% while the stop loss trigger may be placed at an 8% erosion of price value. Of course, these percentages would be net of transaction cost including brokerage and taxes and may even vary marginally during the real time management of investment transactions. Thereafter, the investor would be called upon to test this investment system and methodology. While the price volume data pertaining to the investment grade stocks selected for the investment portfolio for the test would be real time, the transactions themselves would be documented in a diary for this exercise without the application of real money in the transaction. Although the subsequent decisions taken to manage these stock positions as a part of a larger investment portfolio would be documented in the diary, the profits and losses of such decisions and follow through transactions would be on paper; and would not result in any real loss to the investor. But, the diary documentation with regard to the investment decisions taken and paper transactions carried out would be subsequently available for analysis and to understand and improve the investment system and methodology. This would be mainly with a view to maximizing (or optimizing) the profits while minimizing the losses. Depending on the time the investor allocated to this matter of starting to invest, the reading of the books, understanding them, developing the investment system and methodology and testing it would take anywhere between two to three years. At this point in time, the investor would be called upon to set up the trading platform to enable real time transactions on the stock exchange selected for the investment exercise. Usually such platforms may be available through select banks which may have on offer the 3-in-1 account (which would be a set of linked savings bank account, a demat account and an etrade account) to enable seamless transactions on both the buy side and the sell side at and through the stock exchange. The investor would also be required to understand the mechanics of operating such an account. The alternative of course, would be to select a brokerage house with impeccable credentials offering a similar set of accounts. But, in this latter case of a brokerage house there would be a separation between your savings bank account along with the demat account maintained at the bank and the etrade platform maintained by the brokerage house; with the result that the transactions would not be seamless as in the former case of the 3-in-1 account of the selected bank. In any case, caution is advised while selecting the brokerage house for the setting up of the trading platform. Thereafter, investment transactions executed by the investor through the trading platform of either the select bank or brokerage house would be in real time and would have real time ramifications whether profitable or otherwise to the investor. Although, it may be a difficult task initially, the investor would be well advised to firstly follow the tenants of his investment system and methodology; secondly, to keep emotions away from his investment decisions and transactions; and thirdly, to initially implement stop loss triggers in all his transactions. It is only with the passage of time and gaining of knowledge, experience and wisdom in the real time investment environment that would qualify the investor to afford a certain level of confidence and latitude with regard to either further increasing the returns (or profits) on the one hand while reducing losses on the other. As a word of caution and a disclaimer of sorts, the investor must appreciate that the above description is academic; and may successfully work for some while denying others. The investor would be required to document his own investment management learning process and associated curve; and subsequently analyze and appreciate whether he has been able to achieve a level of learning and understanding to enable successful investments in the stock market. It would be fair to say that the investor is well within his right to call upon a mentor who may guide him through the nuances of the learning process and subsequent real time investments. PSYCHOLOGY OF THE SUCCESSFUL INVESTOR The equity and other markets across the globe are full of investors. Some are successful, some meandering along and others facing outright failure. As investors (future investors) ourselves we look for successful role models in our chosen field of endeavor. Likewise, for an equity investor the role model would be Warren Buffet or Peter Lynch amongst other. We wonder about their phenomenal success and wonder what makes them different from us. That they are successful while we at best are meandering along (sometimes up and sometimes down). We wonder about what skills they have, which may have given them this advantage over us. Let me assure you from the onset that they too are regular people. They only chose to specialize in this field of endeavor.

Lets take a look at some of their qualities: They are honest and hardworking. They do not shy away from walking the extra mile, even though there maybe no visible gain to them. They are trustworthy to the point of being boring in todays glitzy world. They take their time making friends. And once friendship is made, it is a life long commitment on their part. They are very particular about time and appointments. They do not like to keep people waiting for them. And on the other hand, do not like to waste time with people who do not keep their appointments or time. For them time is of the essence. They are emotionally stable. They clearly demarcate between their work and personal life. When working they do not like to be disturbed (unless it is an emergency). And when they are with family and friends they do not think or brood on their work. Further, they have a healthy control over their emotions. Greed and fear are not part of their thoughts. In fact, they see opportunity when whole markets are fearful or greedy. Sometimes, this makes them look like contrarians. For instance, while everyone is selling, they would be stock picking and buying. Or on the other hand, when everyone is buying aggressively they would be selling quietly. Either ways they always maintain a healthy margin of safety in their transactions. They have a relatively deeper understanding of the work they do. And have a qualitative and quantitative system in place. Which they have tested and modified over the years. These modifications are carried out to keep their system abreast with the present. After all we are dealing with the future here. Also they are open minded and willing to experiment with new concepts and ideas. When they make a mistake, it is quickly acknowledged and corrective action initiated. As for them to brood over past mistakes, in itself would be a grave mistake. They spend the same time in improving their investment system, to reduce the probability of the mistake occurring again. They are healthy and conscious of their diet. They do regular daily exercises and go out for morning jogs or walks. Their routine is a part of their lives. If they make a change, it is only to improve the quality of their day. There is a lot more that can be written on this subject. However, at present I feel that the reader has enough to work on. QUALITIES OF THE SUCCESSFUL INVESTOR Given the potential rewards, the risks being reasonable and given a method of well-defined risk management the equity markets across the globe (to our thinking) are the best game in town. However, the investor would require qualities of head and heart to achieve this success. These qualities of the successful investor listed and described below, would also be relevant to the other financial markets. Winners and Losers: Vast fortunes can be made and lost during brief periods of trading in the equity markets. Now, what separates the winners from the losers? The key to successful trading in the equity markets are not only attainable, they can also be learnt and taught. The successful investor exudes self-confidence, self-assurance and singleness of purpose. His handshake is solid, purposeful and firm. He looks you straight in the eye. He is well groomed and dressed. Attitude verses Luck: The winners realize and recognize the importance of a positive mental attitude. They know that the power to achieve comes from within; and that positive motivation overcomes all obstacles to success. They are of the view that, one must have the correct attitude to recognize the opportunity for success. We do realize that, a positive attitude cannot be replaced by the concepts of luck, positioning or political influence. Though these methods mentioned earlier also have their place in the scheme of things; and can and should be utilized to reinforce our positive mental attitude, but not replace it. In our struggle for success, a negative attitude can easily spell ruin, just as the lack of a positive attitude easily inhibits success. Think, See and Do: To be successful, you need to emphasize on these elements. First, you must think. You must think about what you want to do and how you will do it. Next, you must see an opportunity as it develops. And lastly, you must act when the opportunity presents itself. You must think, see and do, as these are the important elements to success. A counter view, comforting to most people: The investor hopes for success in vague terms, he organizes for it. But, when it came to visualizing a plan of attack (or action plan) he was sorely lacking. Then, he did not visualize opportunities when they presented themselves. Also, because he was so intent on not missing opportunities and unsure about what opportunities he is looking for. So, he did not see the opportunities when they did present themselves. As the investor had failed to see opportunities, he could not act in order to get a successful result. Success follows: Success will tend to take care of itself, if you provide the proper psychological and behavioral background for it to occur. Goals are wonderful, without them we would be lost. Yet, the road to success must be paved with behaviour, attitude, opinions and visualization. Each person has his own personal psychology and response style. There are four elements that comprise the essence of success theory: The way in which, we as investors deal with loss and failure is just as important, if not more important, than the way in which we deal with success. Effectively controlling and channeling emotions are two very important issues in the equation for success. Those who have been successful and continue to be successful as investors, recognize the importance of market psychology and incorporate it in their work. To be successful as an investor, you need to develop and maintain similar attitudes, behaviors and opinions. Understanding failure: It is said that we learn more from our mistakes than our successes. Although success is important, it is equally important to understand failure and its role in shaping investor behaviour. The idea is not to punish or ridicule something done or gone wrong. But to understand it, correct it and do it right in the future, so that the rewards of being right may reinforce the winning behaviour. The weak link: The markets offer fortunes without limit to those who master the few simple rules of profitable investing. However, the weakest link in the chain is, has been and always will be the investor himself. The investor would be well advised not to fall prey to the belief that a better investment and/or trading system will make you a better investor. The world's best investment or

trading system in the hands of an incompetent, undisciplined and unsophisticated investor, will prove to be a vehicle for consistent losses and disaster. It does not matter how good your investment or trading system is, as it is you and only you who can make that system work as it is intended to. To put it into perspective, "It is not the gun that counts, but the man holding that gun". Consider an investment or trading system that is so profitable that it makes thousands in a short period of time. Now, consider a period of "drawdown", which is a necessary part of the system. This drawdown is what really makes or breaks an investment or trading system. If the investor were to limit the drawdown to what they should be, based on the trading signals generated by the system, then the system would recoup and move on to bigger and better things. On the other hand, if the investor is undisciplined and unwilling to accept losses when they should be taken according to the system; then the drawdown period will either be longer than intended. Further, the investment or trading system would deteriorate because of the investors lack of action. Thus, the ability of an investor to cope with such periods of drawdown and paper losses will either make or break a system. No matter how good the system is, the investor himself is the weakest link in the chain. This lack of action on the part of the investor will break the back of the system and of the investor himself quicker that any unexpected adverse market event. At this point the psychology of the investor becomes most important; and attitudes, behaviour, perceptions and experience become important factors for success. Finally, by correctly applying experience and coping with losses, the investor will either make or break the investment or trading system. There is no predetermined formula to deal with such adverse situations, but there are methods and procedures to minimize the degree of investor error; or in other words to maximize dependence on the investor's response style. Short-cut to learning: You can learn the various aspects and elements of successful investing in many ways. You may undergo a long drawn psychiatric treatment that may or may not have the desired result. You could enroll in a success motivation course that may be of some help. You can read extensively about investment theory and practice; and develop your own system, which would include both method and procedure. You may read autobiographies of the great investors and speculators to reinforce your investment or trading system. You could also undertake a course to discover the perfect investment or trading system for yourself, only to discover later that it does not suit your style. Whichever way you look at it, your focus should be on technique and investor psychology, as against market methodology or investment system which are secondary. A good investment or trading system is only 20% of the input for success. The rest of the 80% would include the following: Effective risk management tools. A positive mental attitude. A personal investor style or psychology. Discipline and structure. Consistency and persistence. Visualize, recognize and act: To win the war as opposed to winning one brief battle, you need to think, see and do; as has already been brought to your attention above. "You need to visualize opportunities, recognize them when they appear and most of all, consistently act on them once they present themselves". Winning attitudes and behaviour: Every signal generated by your investment or trading system must be considered to be the signal that will produce a vast fortune. If however, you do not look upon each investing opportunity as a significant opportunity for profit, then you would allow yourself the liberty to be dissuaded from acting on the opportunity. No individual or course or tape or lecture or article can do for you what you can do for yourself. To develop this winning attitude and behaviour you have to work with yourself and develop your skills by yourself with your own effort. However, time is at a premium due to its limited availability, so you would have to be selective in what you study and learn. You should focus on your personal growth as an investor, with respect to various aspects to ensure that you become a successful investor. RISK AND RETURN. When the investor want to invest his money at a higher rate of return there is a higher factor of risk. As we would be exposing our money to the markets (equity, debt, etc.) and their associated risks. Further, the higher the risk taken, the higher is the expected return. In the bank the money is exposed to no risk, so the return is just at about the inflation rate. In contrast the risk in equity markets is the highest, and the expected returns would also be the highest. Before exposing ourselves to the markets, we can apply common sense and our learning to reduce this risk to acceptable levels. There are 5 economic factors that affect equity returns: 1. Unanticipated changes in default risk; 2. Unanticipated changes in the term structure of interest rates; 3. Unanticipated changes in the inflation rate; 4. Unanticipated changes in the long-run growth rate of profits for the economy; and 5. Residual market risk. Which can be classified under the 4 types of investment risk, namely; Business risk, Inflation risk, Interest rate risk and Market risk. Statistical techniques can be developed to measure each of the above risk factors. When the investor want to invest his money at a higher rate of return there is a higher factor of risk. As we would be exposing our money to the markets (equity, debt, etc.) and their associated risks. Further, the higher the risk taken, the higher is the expected return. In the bank the money is exposed to no risk, so the return is just at about the inflation rate. In contrast the risk in equity markets is the highest, and the expected returns would also be the highest. Before exposing ourselves to the markets, we can apply common sense and our learning to reduce this risk to acceptable levels.

There are 5 economic factors that affect equity returns: 1. Unanticipated changes in default risk; 2. Unanticipated changes in the term structure of interest rates; 3. Unanticipated changes in the inflation rate; 4. Unanticipated changes in the long-run growth rate of profits for the economy; and 5. Residual market risk. Which can be classified under the 4 types of investment risk, namely; Business risk, Inflation risk, Interest rate risk and Market risk. Statistical techniques can be developed to measure each of the above risk factors. The key insight offered by Dr. Markowitzs work is that risk of any security, as measured by its standard deviation of return, is not what is important. Instead, it is the correlation or covariance of the securitys return within a diversified portfolio that will determine its risk. Thus, while the expected return of a portfolio is the market weighted average expected return of the securities comprising the portfolio, the risk of the portfolio is not a linear function of the standard deviation of the risk of the individual security. By combining securities in a portfolio with characteristics similar to the market, the efficiency of the market would be captured. The risk of a security as measured by the standard deviation of return can be partitioned into 2 components, namely nondiversifiable and diversifiable. Nondiversifiable risk are factors common to and affecting all securities. The impact of these factors on a portfolio cannot be avoided. This type of risk is also called market or systemic risk. Once an investor is in the market he cannot avoid it. Diversifiable risk is the unsystemic risk, which is unique to an individual security. Like a long strike in a factory, which would affect its earnings and profitability. This risk can be avoided by diversifying the portfolio of securities. By holding a portfolio of 1012 different stocks, an investor can diversify away all unsystemic risk. In this situation of a well-diversified portfolio the only risk is the non-diversifiable or market risk (which in any case cannot be avoided when an investor enters the market). The Sharpe-Lintner-Mossin analysis states that market risk can be measured by the product of the standard deviation of the return on the market and the beta of the security. This beta is estimated using historical data, measures the sensitivity of the return on the security to changes in the market as measured by some market index such as the Nifty or Sensex. Now, the standard deviation of the market is common to all securities, thus the beta of the security is a proxy for relative systemic risk. Given that the investor should be compensated for the market risk, the beta is a relative measure of market risk. Expected return = Risk free rate + beta x (expected market return risk free rate). This is also called the capital asset pricing model or CAPM and states that the expected return from a security should equal the risk free rate of return plus a risk premium. Prof. Stephen Ross went on to develop the arbitrage pricing theory or APT. This model allows for more than one factor to systemically affect the prices of all securities. Investors in this case would also want to be compensated for accepting each of these different systemic risks or factors effecting the market. Here: Expected return = risk free return + beta1x (risk premium for factor1) + beta2 x (risk premium for factor2) + ...+ beta k x (risk premium for factor k) In this case the investors expected return is a composite of the compensation for each of the risks. In both the models above the expected return is not determined by unsystemic risk but the systemic risk. Now, to make it simple for you it would be a good idea to study the following: Expected rate of return = [Annual Income + (Ending price - Beginning price)] / Beginning price Where: Annual income = Dividend; Ending price = selling price and Beginning price = cost or purchase price. When we talk about diversification, it also implies not to put all our eggs in one basket. Which means that we would be fool hardy to deploy all our savings into the equity market. We must give due consideration to our life, and look at it from a larger perspective. Then we would sensibly hold assets from various asset classes in our portfolio, to reduce or minimize the various risks listed above. THE CAPITAL ASSET PRICING MODEL The Capital Asset Pricing Model would find its beginnings in work done in this regard by William Sharpe; and later attended upon by Markowitz, while attempting to explain how assets should be priced in the capital markets. This was undertaken while deriving the relationship between the expected return and systemic risk pertaining to individual securities (including stocks) and portfolios. However, capital market theory would be relevant to how asset pricing should occur if the investors were to behave in a fashion suggested by Markowitz. The assumptions underlying the capital market theory would be as listed below: 1. Investors base their investment decisions based on risk-return assessments. These expectations are based on expected value and standard deviation. 2. The purchase and sale of stocks can be done in infinitely divisible units. That is an investor could purchase INR 1.00 of say ACC stocks. 3. Investors can short sell any amount of stocks without any limit. 4. The purchase and sale of stocks by a single investor cannot effect the price of that stock. This would imply perfect competition, where the actions or otherwise of all investors would determine prices of stocks; failing which a monopoly condition would come to pass to influence stock prices accordingly. 5. There are no transaction costs. Where there are such costs, returns to the investor would be sensitive to whether the investor owned the stock or security before the decision period under study. 6.The purchase and sale of securities and stocks is done by the investor in the absence of income tax considerations. Implying an indifference to the form of return received; whether capital gains or dividend income. 7. The investor can both lend and borrow funds of any amount desired at the same riskless rate. 8. Investors are expected to have identical expectations with respect to their decision period under study. Implying that the

investors would have the same investment horizon, with identical return expectations, its variance and thus the covariance of all pairs of securities. Although, the assumptions listed above seem unreasonable, they do help describe prices in the capital markets well without distorting reality on the ground. It would be fair to state that all investors would be faced with an efficiency frontier; which would differ for each of them based on their individual expectations of return. Further, lending would be an investment in a security like a savings bank account, a fixed deposit at a bank or a high grade debt instrument; while borrowing maybe thought of as using margins. Both of which would transform the efficiency frontier into a straight line. Let's say that an investor can lend at a rate Rf = 0.06 (the fixed deposit rate) which would represent a risk free investment. Now, an investor can place all or a part of his funds (or investment capital) at this riskless rate. If he places only a part of his funds at this rate and the rest in a portfolio of riskier securities along the efficiency frontier, then he could generate portfolios along this straight line segment. The equation that would represent this expected return on his portfolio would be: Rp = XRm + (1-X)Rf (Where, Rp = expected return on the portfolio; X = percentage of funds invested in a risky portfolio; (1-X) = percentage of funds invested in riskless assets; Rm = expected return on risky portfolio; and Rf = expected return on riskless assets); and p = X m (Where, p = expected standard deviation of the portfolio; X = percentage of funds invested in the risky portfolio; and m = expected standard deviation on the risky portfolio). The equations and the results thereof would imply that the investor has effectively reduced both the return as well as the risk with regard to the portfolio held by him. there is also the possibility that the investor would borrow funds to augment his investment capital. Which would require a consideration of the possibilities associated with the total funds being enlarged through trading equity. If X is the percentage of the investment capital placed in the risky portfolio, then there would be three scenarios for study; namely: X = 1; investment capital is fully invested in the risky portfolio. X 1; a part of the investment capital is invested in the risky portfolio. X 1; would imply that the investor has borrowed funds to augment the investment capital under his charge. It would be easier to understand in the rewriting of the above equation: Rp = XRm - (X-1)Rf (Where, Rf would be the borrowing rate and not the risk free rate. Thereby, the leveraged portfolio would provide an increased return at an increased risk). The investor would thus be faced with an investment decision with regard to the optimal combination of risky securities on the new efficiency frontier; while the financial decision would pertain to whether to lend (buy risky securities) or borrow (leverage the portfolio). This would suggest that the risk level desired by the investor would be achieved through this optimal portfolio on the efficiency frontier on the one hand combined with lending and borrowing on the other. If all the investors were to have the same expectations and similar (if not identical) lending and borrowing rates and the portfolio of risky assets held by any one investor would be identical to portfolios held by other investors, then at equilibrium it would be the market portfolio; which by extension would comprise of all risky assets. It may be observed here that, each asset held in the portfolio by an investor would be in the same proportion that the market value of the asset represents to the total market value of all risky assets; which would be represented by the capital market line and all investors would end up with efficient portfolios along this line. Of course, the portfolios which are not efficient would lie somewhat below it. The equation for the Capital Market line would be as given below: Re = [(Rf + Rm - Rf) m] e Where, e would represent the efficient portfolio. And the term [(Rm - Rf) m] would be the extra return gained by increasing the level of risk (standard deviation) on an efficient portfolio by one unit. The Rf would be the price of time; that is, it is the price paid for the delay in consumption for one period of time. Thus the expected return on an efficient portfolio would be: (Price of time) + (Price of risk) (Amount of risk) The investor would need to go beyond the above equation to attend on returns from non-efficient portfolios and individual securities. Further, the investor would appreciate that for a well diversified portfolio, the non-systemic risk would be nil or tend towards it. thus, the only relevant risk would be systemic in nature and measurable by the beta. By extension, the investor would be concerned with the expected return on the one hand and the beta on the other; and all investments and portfolios would lie in the return to beta space. The equation for this also called the Security Market Line would be represented by: Ri = + bi The first point on the line would be the riskless asset with a beta of zero. Rf = + b(0) Rf = The second point on the line would be the market portfolio with a beta of one. Rm = + b(1) Rm = b (Rm - Rf) = b Combining the two results given above would give us the security market line represented by: Ri = Rf + (Rm - Rf) This would be descriptive of the expected return for all assets and portfolios, efficient or otherwise. Thus, there would be a linear relationship between the expected return and the beta. It would be quite in order if the investor were to relax some of the assumptions underlying the capital asset pricing model; as some of them seem unreasonable and untenable and appropriate modifications would be suitable. For instance, the borrowing rate

would be higher than the lending rate; and income tax would be required to be brought into the picture with respect to ascertaining a realistic rate of return. Although, the capital asset pricing model was developed with unrealistic underlying assumptions to start with, the Security Market Line equation may not be representative of investor behavior and the expected rates of return. There may also exist circumstances in which investors may not have fully diversified their portfolio, thus exposing it to non-systemic risk. This would also imply that the beta may not be adequate as a risk measurement tool. The beta should be applied to ascertain the market risk pertaining to stocks held in an investor's portfolio. However, the beta available is based on historical data; therefore the validity of a present and estimated future beta would be based on the stability of the beta over time with respect to the historical data available in this regard. For these reasons amongst others the capital asset pricing model may not be valid in its entirety, and the security market line equation may not give an accurate measure of the return on investment. Thus, this model must be tested and validated before it can be applied with any level of confidence in real time investment programs. The capital asset pricing model would be important as a conceptual model in its present form; but, the investor must appreciate that all the input data available is historical in nature, while this input data should be ex-ante. INVESTMENT MANAGEMENT AND MUTUAL FUNDS. Mutual funds and their various portfolios under management are addressed towards individual investors (both men and women) who are otherwise busy with their mainstream careers; and probably have very little time available to attend to their personal investments. A mutual fund is a portfolio comprising of various financial instruments ranging from investment grade stocks traded in the stock markets to high grade bonds and government securities depending on the underlying objectives of the specified mutual fund under study; and the corpus of the same is managed by fund managers and financial specialists. As investors, we have the choice to buy shares or units in a mutual fund in addition to or instead of stocks of underlying corporate entities we may directly purchase from the stock markets. However, it would be prudent to read the prospectus or offer document to understand the nuances of the mutual fund we may have under study for further investment. The price per share or unit of a mutual fund is called its Net Asset Value (or NAV); and in the case of a new launch would be the New Fund Offer (or NFO). The Net Asset Value of a mutual fund, would be the value of the assets under management less its liabilities on a per share or unit basis. The mutual funds can be categorized into various styles depending on its objective like aggressive growth, growth, balanced and income; in addition they may also be categorized on the basis of international geographies. While the aggressive growth mutual funds would include the stocks of underlying corporate entities with high potential for growth; the growth mutual funds would include stocks of underlying corporate entities with reasonably good growth potential; the balanced mutual funds would include a mix of investment grade non-speculative stocks and high grade bonds; and the income mutual funds would be similar to the balanced mutual funds with a higher weightage being given to high grade bonds and government securities. So, in a manner of speaking the categories of the mutual funds would depend directly on the asset mix comprising it. A further classification of mutual funds would depend on its management style; which are actively managed mutual funds and passively managed mutual funds. In the case of theactively managed mutual funds the fund managers are mandated and required to select probable winning stocks and bonds. A further sub-classification would depend on the market capitalization (small, mid and large) of the stocks approved for onward investment by the mutual fund. The performance benchmark would be the various indices quoted on the stock market on a daily basis. Thus, it would be a consistent outperformance of a mutual fund with reference to its benchmark that would attract investors (both big and small) to it. In the case of the passively managed mutual funds, the fund managers are expected to hold and manage stocks and/or securities very similar to, if not identical to that of a mandated index. Here the objective would be not to outperform but to perform inline with the mandated index. We as investors, would be required to read the fine print of the mutual fund offer document or prospectus; with specific reference to important information usually available on the first page and the charter of fees and expenses charged to the investors (which would include commissions, exchange and transaction charges, redemption charges amongst other projections of costs of the mutual fund; some of which are charged to investors). Further, the investors should appraise themselves of the objectives and future plans of the mutual funds they may have under study for onward investment. The investors should also be aware that mutual funds are mainly of two types; namely, the open ended mutual fund and closed ended mutual fund. In the case of the former there is no upper limit to the shares or units a mutual fund issue, hold and transact in at a later date. In case of a further inflow of money (through investor purchases) the fund itself is expanded through the issue of further shares or units. These of course, are more popular amongst both investors and mutual funds. However, the shares or units of open-ended mutual funds are issued, redeemed or otherwise only at the office of the mutual fund through instructions of a fund manager. Now, in the case of close-ended mutual funds the number of shares or units the mutual fund can hold or issue is constant, thereby limiting it. Once the shares or units are sold through an initial offering, they are traded or transacted only through a pre-determined stock exchange. Further, the investor may benefit from the realization that the price of these closed ended mutual funds is dependent on the demand and supply of it, and not necessarily on its NAV (even if the latter be calculated on a daily basis). So, in a sense the share or unit of a closed ended mutual fund is quite similar to stocks traded on the stock exchange. The investors should also appraise themselves, as to whether the mutual funds they may have under study for onward investment are load or no-load mutual funds. This would have a direct bearing on the charges at the time of applying for the mutual fund or while redeeming from it. The other charges which maybe in addition to the redemption charges should be clearly understood and documented before investing. The investor must understand and realize that, investing in mutual funds would also expose them to the various market risks to the extent specified in the objectives of the mutual fund under study for onward investment. However, to reduce these risks the investor may consider ways and means to avoid making the common errors in investment management.

INVESTMENT MANAGEMENT AND FOREX TRADING You may have heard about Forex trading and seen many sites on the internet propagating this seemingly great investment opportunity. In fact, a lot of interest has been generated in this investment instrument. There are some organizations running TV commercials, offering this "Forex trading" as a sure fire system that is expected to bring windfall profits in an easy fashion to the individual investor; along-with the fine print of a disclaimer. The investor is well advised to ask a few questions. So, what is Forex? And what's new about it? The exchange of currencies is said to be amongst the world's oldest professions. As long as there are two sovereign states with their respective currencies, there would be a foreign exchange as a facilitator for trade in those currencies. Foreign exchange has been abbreviated to Forex and has been around as a trading platform for centuries; with a present day daily turnover of US$ 1.90 trillion. Essentially it is a global marketplace with no physical exchange building where all claims on foreign currencies are settled, between governments, corporations, investors and speculators amongst the other participants in the Forex markets. Banks have traditionally been the middlemen who provide the liquidity to this mammoth market, which is trading round the clock across various locations of the globe. In more recent times, the internet came along; and all of a sudden it became possible for everyone and anyone to transact and trade in the market. What we might say, "get a piece of the speculative action". Next, brokers sprouted up out of nowhere with their electronic trading platforms and offering high leverage to their clients. Basically, the brokers lent funds to their clients to speculate with. A leverage of 100:1 and in some cases 400:1 is offered to the clients. This would mean that with a trading account balance of US$ 10,000.00 the investor (speculator in this case) can control up to US$ 40,00,000.00 in the currency markets. This is much higher than is possible in the stock market. Many people have been attracted to this possibility of earning fast profits from Forex. Often there are sharp movements that can turn your US$ 10,000.00 into US$ 20,000.00 in a matter of minutes; and on the other hand you could be wiped out, due to adverse market action. However, the lure of making a fast buck has turned would be speculators into out-and-out gamblers. The internet has also made it possible for an individual investor to obtain "charts", that enable technical analysis on their own PCs. The theory being that price patterns repeat themselves. So, if you have a system of analysis in place; you are expected to be able to predict future price moves in the market. A tall order for any individual investor. Even if the individual investor were able to successfully predict future price moves, we have not addressed the psychology of trading; which would include the waves of fear and greed that cause irrational market behavior. People are often taken in by the seller of a Forex trading system; often paying US$ 5,000.00 for a software which shows a green light to buy and a red light to sell. In spite of this, they don't teach you how to manage your money. New investors to Forex trading do not know the rules of engagement and therefore conduct themselves like speculators. Further, a large percentage of these investors lose all their investment capital within the first year. We must realize that, Forex trading is just like any other business and a certain amount of planning would be required. Also being a profession a certain level of training would be essential. Like other investment instruments, we have to keep the risk and reward in perspective. The investor would realize that there is a high level of risk in Forex trading, and therefore the expected return is also high. So, in the planning process, the investor would have to decide upon his own level of acceptable risk. However, new investors are unable to reconcile this risk-reward equation; and therefore do not have control over either the risk or the reward. New investors have unrealistic expectations of profits from Forex trading. The investor may overcome this by deciding in advance the parameters of trading and then follow them diligently, to achieve a certain amount of success. Before venturing into Forex trading, the investor would be well advised to find a teacher or mentor. This mentor is expected to firstly explain the theory behind Forex trading; then guide the investor through sample trades using pen and paper; and finally guide the investor through Forex trading in real time using real money. Further, the investor would be able to draw upon the mentor's experiences and avoid the common errors he may have otherwise committed. Forex trading in itself is safe if the investors were to be realistic in their expectations and have done their initial preparation. The investors would realize that it is hard work and can provide a profession or a source of income to them. However, the investors must be on their guard against scamsters like in any other business. INVESTMENT MANAGEMENT AND REAL ESTATE One of the most consistently returning asset classes as an investment over the long term; and the one that the majority of us can profit from is real estate. However, good management skills on your part is a prerequisite. Having made the bold and glorious decision to sack the boss and go it alone you are one of the few who have what it takes to succeed. You have an entrepreneurial spirit and a strong will and these are rare and valuable attributes that will guide you throughout your professional and personal life. Now that your business is up and running and youre profiting from your efforts, its time to turn your attentions to investing the profits from your home based business wisely and for maximum gain. Understanding market cycles. Now, youre most likely aware that property markets are cyclical; this is because there is a direct correlation between the underlying price of real estate in relation to individual buying power. Simply explained: When property prices rise above what first time buyers can afford to pay the market slows down, stagnates and sometimes readjusts but as soon as purchasing power increases again, either with a drop in interest rates or an increase in GDP, the property prices begin rising again. And there are even ways to make money from real estate during a market downturn! Investing in real estate for income: Depending on the nature of your home based business your monthly income may be slightly erratic, some months being better than others! If you invest in property assets in a buy-to-let or even jet-to-let capacity you can secure yourself a consistent monthly income which may afford you an added degree of financial security. Buy-to-let is when you purchase property for rental purposes, this maybe an apartment you let to a corporate, it could be a house you let to students studying in a nearby university; or even a family home you rent out long term.

Jet-to-let is similar but it involves purchasing overseas property for short term weekly or fortnightly rental to tourists. This type of letting is usually very lucrative indeed during peak holiday periods but may mean you have a property that is empty for a few months out of season. Both types of property investment return you a regular income and at the same time the physical real estate asset will grow in value over the long term; and if ever you wish to release the profits from your investment you can sell on the property and take the gains you have accrued. Investing in real estate for profit: The alternative to building up a real estate (or property) portfolio for income generation purposes is purchasing property and selling it on relatively quickly to realize the gains the asset has accrued. You can do this in a number of ways; firstly you can purchase run down property in need of renovation, tidy up the property and turn it into a home before selling it on at a higher price and reaping the profits gained. Alternatively you could seek to beat the curve by buying into up and coming areas, waiting for prices to boom and then selling on for profit. This is quite a risky strategy for a first time investor as timing the market is hard! An alternative to this is looking overseas for the latest emerging property markets worldwide and buying properties to renovate or properties off plan and then flipping them on for maximum gains in the short term. Financing your investment: As a self-employed individual it can be tricky to get a mortgage unless you have audited accounts, bank references and other documents required for the purpose. If you dont have all of these requisite documents there are other options available to you. REAL ESTATE AND HOME LOAN SECRETS Building a home is amongst the primary objectives of any reasonable and right thinking man and family. However, the demographics, the age group, cultural background, peer group influences have a role to play in regard to the decision and timing of building and living in your own home. We would realize that not everyone would have the financial resources available to undertake this task; and would therefore require the man and his family to take on the liability of a home or construction loan. We have listed and discussed below 15 home loan secrets to enable you to get a better deal. 1. Which construction loans are available and which one should you apply for?: Home loan banking and the internet has changed the mortgage and construction loan industry forever. Today's construction loan choices include the 30 year fixed, 15 year fixed, 1 year ARM, 3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM and dont forget the popular interest only loans. The construction loan of the past was a short term 1 year loan that the customer would have to refinance into a new loan once the construction was completed. This two time process cost the customer two sets of closing costs and you would have to re-qualify for the new loan once the home was completed. The most popular construction loan today is the "One Time Close" but not all are created equal. Just like any product there are the best loans, good loans and downright bad loans. With today's technology you now have the ability to obtain a construction loan from the best banks in the country and sign your loan documents at your local title company or escrow office. This benefit allows you to have the most competitive construction loan available. The loan that you should apply for is simple; ask for the lowest rate, one time close for a specific period of time that you think you'll be living there. 2. Which lenders/banks have the best construction loans and what do you need to apply?: There are plenty of banks willing to lend money for mortgages, refinancing, home equity loans and every other type of loan. But if you're planning on building a new home, where do you get the best construction loan with the most competitive pricing? More importantly what is a good construction loan? A typical construction loan nowadays is a construction to permanent loan that may or may not allow you to lock-in today's low interest rates until the home is completed. If you choose a loan that does not allow you to lock in upfront, the interest rate may end up higher along with your monthly payment. The most important thing when searching for a good construction loan is to find an experienced construction loan specialist who knows which banks are the best. The best banks can offer you a low rate now, upfront, before you start building your new home. 3. Should you go directly to your local bank or to a loan broker for your loan?: Most banks offer loans, and going to them is like shopping at a Ford dealer. The only thing you can get at the Ford dealer is a Ford. But what if you want choices? One way to get different choices is to go shopping to every bank in town. Or you can call an experienced construction loan broker who has done all of the homework for you and has direct access to hundreds of banks nationwide. A broker is a representative for hundreds of banks. Although the broker serves as middle-man, his or her services will not cost you anything extra. That's because brokers get loans at wholesale rates, and pass them along to their clients at retail prices, just like any other business. The difference between wholesale and retail is how brokers make money. Therefore, you get the same rate from a broker as if you went directly to the lender yourself. In Fact, because or their volume, many brokers are able to offer their clients better deals than you can get by talking to the banks on you own. With an experienced construction loan broker you can shop dozens of the most competitive banks nationwide, work with wholesale pricing and can negotiate on rates and pricing. 4. Should you lock in your construction loan before you start building or let the interest rate float?: If the rates are heading upward, lock. If the rates are stable, relax. If the rates are headed downward, float. Right now interest rates are at an all time low and can only go up in the near future so make sure your construction loan is locked into today's best interest rates with the ability to float downward. Inexperienced loan officers will offer their customers an enticing low adjustable rate during construction without an upfront lock-in and the customer may end up having to lock into higher interest rates when the home is completed. Or the customer is sold on a higher rate during construction with a float down option after the home is built. Again, the rate could be much higher when the home is completed. Meanwhile the loan officer has been paid and has moved on to the next loan. The only time you want this type of loan is if its the only loan you qualify for. Most loan officers do not explain this to their customers until it's too late (Closing). Always ask. Is the construction loan rate locked upfront or floating during the construction loan period? Then ask, is the rate during the construction loan the same rate when the loan converts into the mortgage period. 5. What experience does your construction loan officer have and does it matter?: When it comes to money its amazing how fast any loan officer becomes an instant expert at construction loans. You must keep in mind that all loan officers are salespeople.

Yes, I know they have fancy titles like loan officer or vice president but the title is nothing but a fancy name for loan salesperson. Loan salespeople usually have one main goal in mind when helping you with your loan request and that is the commission. By the way, the fancy name for commission in the loan business is called a loan fee, points or yield spread premium (YSP). Now don't get me wrong, there are a lot of good honest sales people (loan officers) that work very hard at providing you the best service and rates. Whats important is distinguishing the good from the bad. The following questions allow you to quickly find out if your loan officer is experienced at construction loans. 1. How long have you been doing construction loans? 5 years or more is best. 2. What is the loan to cost (LTC) required for construction loans? This is cash equity such as down payment on land. This can range from 5 to 20%. 3. What is better? The voucher or draw disbursement system and why? Draw is now the most popular because the customer has control of the money. If the loan officer (sales person) can answer these questions with no problem then they have passed a pretty good litmus test. If you really want to throw a curve at them, ask the loan officer if they have ever built a home themselves and what type of construction loan did they get. If you find a loan officer that has gone through the experience of building a home themselves then the odds are you have found an experienced loan officer. . Qualifying for your construction loan, exactly how is it done?: The first thing your loan officer wants to see is your completed loan application. The loan application will tell a story of your financial picture. The completed loan application will tell the loan officer many things including; What type of loan you want; How much money you need; Your social security number; Your current employers; A list of all you assets (money) and liabilities (bills); How much money you make; How much real estate you own. Once the loan officer has your loan application in hand they can determine whether you can qualify for a loan. One of the first items pulled is your credit report. The credit report is going to tell 3 main important things. Firstly, show your current credit score. The credit score can range from 500 to 800. Secondly, show a complete list of all your monthly liabilities (bills). And thirdly, show all past credit problems including bankruptcies, foreclosures and late payments. With this information the loan officer will do an analysis to determine if you can qualify for the loan amount that youre looking for. This analysis determines a ratio called the (income to debt ratio) and depending on the banks underwriting guidelines this ratio will usually range from 36% to 45%. The income to debt ratio is the percentage of monthly debt payments (including your new mortgage payment, taxes and insurance). This ratio should not exceed 36% to 45% of your monthly income. Some banks will allow you to exceed this ratio if you have an excellent credit history and excellent credit score. The current and the most popular method of qualifying for a loan today is the stated income loan. Stated income allows you to qualify without verifying your income on your tax returns. The only thing the bank verifies when applying for a stated income loan is your credit score, liquid assets and that you're employed. 7. How not to be taken by the oldest trick in the book "Bait and Switch"?: The mortgage lending business is notorious for baiting and switching. Baiting and Switching is when a loan officer or advertisement offers you one thing and then tries to sells you something else. Typical signs of baiting and switching are obvious, some basic examples are: 1. Over the phone, you are offered a much lower rate than any other quote and once you've sent in your application the rate you were quoted has all of a sudden vanished. 2. You are offered a construction loan with no points and no loan fee's. What you are not told is that you are paying for it with a higher interest rate and the costs are built into the loan. 3. You are told that you will not have any payments while you're building. What you're not told is that all construction loans have this option and it's called "interest reserves" and the payments are added to the loan amount. Remember three important facts and you will always be in good shape. 1. If it sounds too good to be true there's usually a reason. 2. Always get your quote in writing, (ask for a good faith estimate). 3. If you are satisfied with the rate and construction loan program that you are quoted, ask to lock it in upfront. On the flipside, it is very important to realize that most loan products typically go hand in hand with banking guidelines. These guidelines are provided to loan officers to coincide with the customer's qualifications. For example, if you have a very high (FICO) credit score with land free and clear, you have more loan options than the person with a very low (FICO) score and no land equity. 8. Now for the biggest secret of all, ready?: All banks have access to the same rates and the only reason everyone ends up with a different rate is directly related to how much your loan officer and bank is going to profit from you. You should probably read that one again. Your loan officer gets paid like all sales people either by Salary plus commission or Commission only. It doesn't matter if you walk directly into a bank or work with a broker, basically everyone gets paid the same. If you walk directly into a bank the loan officer most likely gets a basic salary and a percentage of the loan origination fee (points and yield spread premiums). If you work with a broker the broker usually works on a straight commission (points and yield spread premiums). Becoming a broker allows the loan officer the ability to offer their customers the best loans with the most options. It always amazes me when I see TV commercials or hear radio commercials advertising zero closing costs. I always wonder if people understand how they can do that. Ok, here is how it is done. The inside secret is that in exchange for these low or zero closing costs the lenders will make their profits and cover the costs of the loan by charging you a higher interest rate. This higher interest rate pays what they call a (YSP) yield spread premium. By charging you a higher interest rate over the life of the loan the bank can easily afford the commercials, commissions, payroll, and cover the costs of the loan while still making a profit. Also the service is usually very poor and impersonal. So the next time you see advertising with no closing costs you will know exactly how they are doing it. So please remember that there is no such thing as a free lunch in any business. Business wouldn't be business if there were no profits. The most important thing is that you want the best loan available at a fair price with an experienced loan officer.

9. What are interest reserves and contingency funds doing in your closing costs?: The two things most customers do not factor into the cost of the building their new home are interest reserves and contingency funds. Interest reserves are added to your loan amount to make the monthly payment on your loan. Yes, you read that correctly, you will not have to make a monthly construction loan payment while your home is being built. The payments are made from this interest reserve account and no, its not free. This reserve is added to your construction loan amount. Interest reserves were designed for the benefit of the customer. Most people building a new home are either paying rent or have an existing mortgage payment while their home is being built. The last thing a customer needs is another monthly payment while building. So, banks created the interest reserve account by adding up the estimated interest payments over a 12 month period and add this to the loan amount. If you do not want interest reserves added to your construction loan amount you can ask to make your own monthly construction loan payment. Contingency funds are added to the loan amount just in case you need more money to build your new home. With all good intentions construction loans tend to have cost over runs. The bank adds 5% to 10% of the cost breakdown and adds this amount to the loan amount just in case you have cost over runs or need better appliances. If you dont need or use this extra contingency fund then it will not be added to your mortgage upon completion of your new home. So when you apply for a construction loan ask your loan officer to provide you a copy of the estimated construction loan budget. The budget is created from your costs and includes every cost within the loan including land balances, closing costs, interest reserves, contingency and bank fees. 10. What is loan to value (LTV) and loan to cost (LTC)?: Why its probably the most important factor in getting approved for a construction loan besides your income and credit. Initially most banks are concerned with loan to appraised value (LTV) but banks are really more concerned with how much cash you have in the project (LTC). If you were buying a home instead of building you would normally have to put 20% of the purchase price as a down payment. Since youre building a home your cash equity usually comes in the form of how much cash you put down on your land. Cash equity is king when applying for a construction loan. Other qualifying cash equity that can be counted are any pre-paid such as plans, grading, permits etc. These pre-paid can be used for cash equity or you can be reimbursed from the construction loan at closing. 11. Should you hire a builder or be an owner builder?: Do you really want to be an owner-builder? The goal of being an owner builder is mainly to save money. Some people can save quite a bit of money if done correctly. Some people are not meant to be owner builder. Possible problems when acting as owner builder are: 1. Construction cost over runs. 2. The best banks with the best rates require a builder or supervisor. 3. Managing contractors to finish on time or to show up for work. 4. Depleting your personal savings. 5. The need to borrow more money. 6. Loan extension penalties. 7. Being taken by unscrupulous contractors. 8. The need to refinance your construction loan. 9. Foreclosure. I could go on and on about the horror stories I hear from builders who did not get a construction loan and acted as their owner builder. If you have never built a home before and absolutely need to act as owner builder please take my advice and hire a reputable builder to supervise you and the building of your new home, for a much smaller fee than their normal fee. The builder/supervisor will help you with the cost breakdown and manage the subcontracting on an as needed basis. If one of your contractors gets out of hand or you need help of any kind, you can call the supervisor for assistance. Your job is to make sure you are hiring the right people to complete your home. It can make the difference between happiness and misery. If you decide on hiring a builder to do everything make sure you hire a reputable builder or supervisor with a good reputation and plenty of references. Ask your friends if they know a good builder and when you start to hear the same name over and over you know you've found a good one. Ask the building inspector for a list of reputable builders. The most important point is shop around until you find a builder with the most reputable and honest background. If you pay a little more for an honest and reputable builder or supervisor you will be very thankful before, during and after your home is completed. 12. How does your builder determine how much your home will cost to build?: The Estimated Cost Breakdown of your home is probably one of the most important forms in the construction loan package. This is the breakdown of each particular cost of construction of the home. The foundation, lumber, framing, plumbing, heating, electrical, painting, and builder's profit, etc. The builder usually completes this form to show you exactly what it will cost to build your new home. The most important thing to remember here is that you do not want to underbid any line item and you do not want to overbid any line item. You want accurate numbers from real bids (not guesses) and a 5% contingency for cost overruns. Good builders will send out the house plans to their contractors for specific bidding on each main item or can estimate the home themselves. The builder will send one set of plans to the foundation contractor, one set of plans to the framer, one set of plans to the plumber, etc, etc. When all the numbers come in, the builder will fill out the cost breakdown and come up with a total cost to build your new home. Bad builders will use the WAG method of estimating the cost of building your new home. The WAG method stands for "Wild Ass Guesses". This method is the most dangerous since it can lead to under and over bidding. The last method of bidding is simply to over inflate every single line item on the cost breakdown. This is the most profitable method for the builder and the most expensive to the customer. This is why you want to find an honest, reputable builder with a good reputation in your community. Once the cost breakdown is completed and you plan on hiring this builder to build you new home you will need to type up a contract. The contract needs to equal the added total of the cost breakdown. Most builders will provide the contract but make sure you read it carefully and that you add your requirements as well. There are two types of contracts: 1. Fixed Contract: This contract is simple and straightforward. Take the total of the cost breakdown and put that fixed number into the contract. The builder will provide a list of responsibilities. 2. Cost plus Contract. This type of contract is usually for large construction loan projects. A. The customer wants to make a lot of changes to their home as its being built. B. The construction loan period to build the home is 18 months so construction costs can change drastically. The builder prefers this contract to protect the costs and profits. 13. How does your builder get paid while your home is being built?: There are two methods that banks use to make sure your builder gets paid while building your home. The Voucher Reimbursement system has been around for quite a while. As usual

you'll have some builders that are very familiar with this method of payment and do not like change. Most builders are really only concerned with how fast they can be paid and how often they can be paid. Most banks find that the voucher system is simply too much paperwork to deal with anymore. The builder is given a big book of vouchers that looks like a check book and when they want to get paid or need to pay a contractor they need to fill out a voucher form. This voucher form is a request for payment and as long as the contractor has signed the lien release the bank will pay the amount requested. The bank will also request an inspection throughout the construction loan to make sure that the work is completed. The Draw Reimbursement system is becoming the standard for construction loan funding for most banks. The main difference is that the bank puts the accounting responsibility on you or your contractor. The bank uses your cost breakdown as the guide for the draws. Some banks use specific schedules of 4 to 7 draws based on completed construction milestones, such as foundation or framing. The draw systems also allow the choice of taking draws on a monthly basis, collecting partial payment for work and material items that have been completed. Preference would be given to the draw reimbursement system because: 1. It requires less work. 2. Provides more control for both the customer and the builder. 3. The funds are wired directly into your bank account. 4. It's easier to use than the voucher system. 5. Some banks now have online draw requests. 14. What type of construction loan insurance is required and who is required to get it?: The reality of construction loan insurance. There are three types of insurance needed to build. All banks require the first two insurances, course of construction and general liability. Workman's compensation is only required if your builder has employees. 1. Course of Construction Insurance. This policy is an all risk policy to include, fire, extended coverage, builder's risk, replacement cost, vandalism and malicious mischief insurance coverage. 2. General Liability Insurance. You or your builder can provide this policy. This policy is a comprehensive general policy or a broad form liability endorsement. There is a minimum amount for each occurrence. If the builder provides the insurance a general policy or a broad form liability endorsement is required. 3. Workman's Compensation Insurance. If your builder owns his own company and has employees that are helping to build your home, workman's compensation is required. If the builder simply subcontracts out the work and does not have employees per se, they will need to write a letter acknowledging that they do not have employees and are not required to have WCI. 5. Has your loan officer structured your construction loan properly and why it's so important?: Home loan applicants go to another lender or broker and are either turned down or are offered a below average construction loan. The reason was because the loan was not structured properly before it was sent into the bank. Structuring a loan properly is simply making sure that you match the customers loan request to the banks underwriting guidelines. Structuring construction loans for approval is vitally important and is the last thing on most customers minds. Each and every time a customer with a bad loan experience it is always because the loan officer did not specialize in construction loans and did not structure the loan accordingly. Other common mis-structured loan scenarios include: 1. Low cash equity. 2. Improperly completed appraisal. 3. Unexplained credit derogatory. 4. Income incorrectly calculated. 5. Mismatch of customer loan request to the correct lender. 6. Plain and simple incompetence. The old saying you get what you pay for is especially true when obtaining financing in building your new home.