How does the dividend discount method (DDM) work?

The DDM is very similar to the discounted cash flow (DCF) valuation method; the difference is that DDM focuses on dividends. 

Just like the DCF method, future dividends are worth less because of the time value of money. Investors can use the DDM to price stocks based on the sum of future income flows by the risk-adjusted required rate of return.

Read more at:
https://www.investopedia.com/ask/answers/042415/when-can-i-use-dividend-discount-method-ddm-value-stock.asp

Why a stop-loss is the difference between gambling and investing

Many small investors - particularly old timers - prefer to invest in 'safe' options. Like bank fixed deposits, tax free bonds, national savings certificates. They get a fixed rate of return - regardless of the state of the economy or volatility in the stock market. Plus, they rest assured that their principal amount will be returned intact on maturity.

For 'safe' investors, investing in stocks is nothing short of gambling. A company one invests in can go out of business. Even if they remain in business, they may make losses and not pay any dividends. In other words, there are no guarantees of any returns, plus there is a risk that the invested principal may get  depleted. (The same logic applies for equity mutual funds.)

In some ways, investing is gambling if you have no idea of what you are doing. If you buy a company's stock without doing adequate research about its background, competition, business outlook, management capabilities then the possibility of making any money through capital gains or dividends will be like betting on a cricket or football match. You will either win, or lose.

Since you have no control over the outcome of a sporting contest, you will lose your entire wagered capital if your team loses. You won't have much control over the performance of a company either - specially if you hold only 200 or 500 shares.

However, you may use a stop-loss - set 3% (or 8%) below your invested amount in a company's share. If a share's price falls more than 3% (or 8%), you can sell the share at a small loss and recover more than 90% of your invested capital.

This loss mitigation technique is the major difference between gambling and investing. One would think that most investors would be disciplined about setting stop-losses for each of their purchases, and sell when the stop-losses get hit.

Experience says otherwise. Setting a stop-loss (or a trailing stop-loss) is an art that few investors learn and even fewer investors practice. 

There is another important difference between gambling and investing: regular dividends. Only long-term investors benefit from it. If you do proper research before buying a stock and then hold on to it for 5 years or more, reinvesting the dividends that a company pays can add up to substantial returns.

In gambling, there are no dividend payments for betting over long periods. Since each bet usually has a short time limit, you either win or lose quickly. Then you place your next bet, with similar results.

You can read more here.

Why you should Invest in Stocks of Companies that pay regular Dividends

Most people who prefer investing in debt instruments or real estate do so because such investments are 'safer' compared to stocks. Stock prices tend to fluctuate wildly and are considered to be more 'risky'.

That logic reminds me of a departed uncle who refused to stir out of his home. He thought his home was 'safer' because it had less pollution and germs. Plus city roads were too 'risky' because of unruly traffic.

Debt instruments like bonds and bank fixed deposits may appear 'safer' but they carry risks too - from fluctuating inflation and interest rates. Real estate prices fluctuate also, putting your investment at risk.

One of the best reasons given by financial experts for investing in stocks is that they provide capital appreciation that can beat inflation. Younger people often flock towards growth stocks in the hope of quick 'multibagger' returns.

More experienced investors - who are in the game for the long haul - include stocks of dividend paying companies in their portfolios. But aren't such companies stodgy, slow-growth ones?

They often are. But not only do they pay regular dividends, such dividends tend to grow over time. Why? Because with lower growth opportunities, there is less need for capital expenditure.

So, the cash these companies keep generating through well-known branded products or services are distributed to shareholders. 

Those investors who are working regularly or earning from their business or profession may not really need the dividend income. But they can very well reinvest the dividend amounts in buying more stocks.

Over the years, 'dividend compounding' can lead to a substantial addition to your stock portfolio - leading to even more dividends that will become useful when you retire and are no longer earning a regular income.

Stock Chart Pattern - Great Eastern Shipping (an update)

These were introductory comments in the previous post on Great Eastern Shipping 7 years ago: "Fundamentally strong, with very good profit margins, strong cash flows from operations, low P/E ratio, regular dividends - all the hallmarks of a stock that should adorn any long-term portfolio."

The shipping sector has been facing a pressure on freight rates for quite some time due to an excess supply of vessels - compounded by a slowdown in the Chinese economy and low oil prices that have affected offshore drilling business.

In spite of such headwinds, India's largest private sector shipping company has produced stellar results. Consolidated net profit of Rs 1039 Crores with NPM of 25.5%; diluted EPS of 68.8 giving a P/E ratio of 5.3; net cash flow from operations of a massive Rs 2047 Crores; debt/equity ratio at a manageable 0.55; dividend yield of 3.7% on CMP.

Yet, the chart below shows the stock price has been in a 2 years long down trend (marked by blue down trend line). Is this a value investing opportunity, or what? 

The stock price had touched a 2 years high of 460 on Sep 15 '14 only to drop into a long correction-cum-consolidation phase. After forming a 'rounding bottom' reversal pattern, the stock rose to touch a high of 399 on Aug 13 '15 but retreated after facing strong resistance from the blue down trend line.

Continuing with the consolidation within a 'rounding bottom' pattern, the stock price breached the down trend line and touched a high of 420 on Nov 10 '15, but formed a 'reversal day' pattern (higher high, lower close) that triggered a sharp correction below its three EMAs into bear territory.

The stock price formed a small 'double bottom' reversal pattern at 275 on Mar 2 '16 and rallied past its 20 day and 50 day EMAs, but failed to overcome strong resistance from its 200 day EMA. Another correction-cum-consolidation ensued.

After forming another 'rounding bottom' reversal pattern (clearly visible on the 20 day and 50 day EMAs), the stock price rallied past its 200 day EMA into bull territory and has breached the blue down trend line once again.

Daily technical indicators are looking overbought. That means the upside may be limited in the near term. Those who understand the nitty-gritty of the shipping business may consider gradual accumulation.

Why you need the resilience and discipline of a door-to-door salesman to succeed in the stock market

If you are thinking: "What on earth is a door-to-door salesman?" then you probably belong to a generation that has never seen 3D picture discs in a View-Master or listened to a 78 rpm vinyl record on a gramophone. In which case, you have obviously never met a door-to-door salesman. 

There was a time in the not-so-distant past, when many retail products - particularly encyclopedias - were sold by salesmen who knocked on the doors of homes to demonstrate and sell their wares.

Just like the buggy whip and the hurricane lantern have almost disappeared with the onslaught of industrial and technological progress, so has the profession of door-to-door selling.

A few years ago, Forbes magazine had listed '10 Top Dead or Dying Career Paths'. Telemarketing and door-to-door selling was 7th on the list - just ahead of photo film processing.

Before the advent of the Internet and social media, the only way smaller manufacturers or dealers could mass-market their products was through door-to-door selling. 

Salesmen were paid a token salary - or none at all - and made money through sales commissions only if they met their monthly or quarterly targets. Each salesman was allocated a specified locality or territory - where they had to compete with other salesmen selling similar or different products.

Home owners were bothered and irritated by their door bells being rung by salesmen at all odd hours trying to sell them anything from incense sticks and toothpaste to books and vacuum cleaners.

Most slammed the door shut on the faces of the salesmen. A few who were kind enough to listen to a salesman's pitch probably didn't buy, giving some excuse like "I just bought a similar product" or "I don't have enough cash with me."

In other words, making a sale itself was a difficult task. Meeting stiff monthly sales quotas was nearly impossible. Still, the salesmen would go on their rounds come rain or shine - knocking on doors and getting them slammed in their faces.

You can just imagine the kind of resilience and discipline that was required to carry on - despite knowing that the chances of success were negligible. But when they did make a sale, good salesmen ensured that they sold their higher-valued products so that they could earn more commission.

Being able to handle repeated disappointments and having the mental wherewithal to bounce back and keep trying is just the kind of discipline one requires for success in the stock market.

A successful salesman eventually developed a winning strategy after repeated failures. So should a stock investor. 

If you have tasted some success by buying a stock without doing much research and then selling it at a profit, you are unlikely to be able to repeat your success.

Even after doing proper study of a company's annual report and its stock price chart, the stock you pick may not give you the returns you expect. 

Eventually, the resilient and disciplined investors will learn from their mistakes (or follow the advice of an experienced investor) and learn to follow a plan and a strategy that enable them to select winning stocks.

And once they have picked a winner, they buy a lot of it and hold on for the long-term to reap the benefits of dividends, rights, bonuses and buybacks.

Stock Buybacks: A Good Thing or Not?

There are many ways in which a company rewards its shareholders. The most common methods are bonus issues, rights issues, dividends, stock splits and share buybacks.

Bonus issues increase the equity capital. The market price of equity shares gets adjusted according to the issue ratio. So, in theory, there is no gain for shareholders. The company can benefit because the higher capital enables them to borrow more. 

In reality, share price often rises following a bonus issue - particularly for established and financially strong companies - as the lower bonus-adjusted price attracts buyers.

Rights issues increase the equity capital, and sometimes also the reserves if the rights issue is offered at a premium to face value. If the issue price is lower than the market price, shareholders benefit through capital appreciation, even though the market price gets adjusted in the same ratio as the rights issue.

Dividends benefit shareholders, because it is tax-free cash in their hands. For companies, the cash outgo indicates that the company does have sufficient resources to pay dividends. 

If the company has to resort to debt in order to pay dividend (or tax), then it is a 'red flag'. This is why studying the Cash Flow statement in Annual Reports is so important. It gives a clear view of a company's cash position.

Stock splits do not increase the share capital of a company. The face value of equity shares get reduced and the number of shares increase proportionately. Again, in theory, there is no benefit for shareholders.

However, the increased number of shares in demat accounts usually leads to near-term selling. Eventually the selling subsides. The lower market price of the split shares attracts buyers, pushing up the market price. 

Here is an example of how bonus and splits can enhance value for long-term shareholders.

Back in 2002, ITC shares of Rs 10 face value were trading at around Rs 600 or so. If someone had bought 100 shares, his investment would be worth Rs 60000 - not a small sum 14 years ago. 

If s/he had the foresight to hold on till today, the holding would have increased to 3000 shares of Rs 1 face value - thanks to two bonus issues (1:2 and 1:1) and a stock split (10:1).

At the current (corrected) market price of Rs 300, the shareholding would be worth Rs 9 Lakhs - a 15-fold increase, not counting the substantial dividends paid each year.

Share buybacks - sometimes at a premium to market price - reduce the equity capital to the extent of number of shares bought back. The bought-back shares are extinguished. Shareholders get an exit opportunity at a profit.

In case they hold on, the market price tends to rise after the buyback (due to higher EPS and lower P/E) - providing capital appreciation.

Read more about pros and cons of share buybacks in this article.

Why periodic profit booking in a bull market is a good idea – a guest post

Most new retail investors join the party late – after a bull market has already been in progress for some time. New highs are hit on a regular basis by market indices and individual stocks. Investors feel excited that the shares they have bought at already high prices are moving even higher.

But stock markets don’t move in only one direction. Corrections in bull markets are common and happen often. Some times these corrections are small – between 3-5% – but once in a while, a 15-20% correction from the top causes panic when some stocks lose more than 30-40% from their tops.

In this month’s guest post, Nishit argues in favour of partial profit booking on a regular basis to turn notional profits into real cash that can be redeployed on corrections or enjoyed as spending money.

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Often the main questions of small investors are when to buy shares and when to book profits. The stock markets are driven by 2 factors - Fear and Greed. Fear grips when markets are falling and that is what prevents investors from buying shares at mouth watering prices. Those who bought shares in August 2013 have seen share prices of very good companies double or treble.

The second emotion which drives investors is Greed. If Aug’13 was driven by Fear we have September’14 driven by greed. When does one book profits? The markets may go up further. We may miss profits if we sell now. Then, one day a crash may come and wash away the entire amount.

So what does the retail investor do in all this?

For every investment, there has to be a price fixed where profit has to be booked. Without booking profits, they remain notional profits. At the same time, there are several investors I know who have been holding a ITC shares since the 1970s and they have become worth crores after splits and bonuses.

Suppose I have bought 200 shares of a company X giving a dividend of Rs 1 at Rs 100. I book partial profits after the shares reach a price of Rs 150 where I get rid of say 30% of my shares.

My original investment was Rs 20000. I have booked profits worth Rs 9000. My cost price for remaining 140 shares becomes Rs 11000 - which is about Rs 78.50 per share. Re 1 dividend on Rs 78.50 gives me a dividend yield of about 1.3%. Over a period of time the company is expected to do well and the dividend amount will increase. At some point, I will get a tax free dividend yield of 5-6% - which means my residual shares have become almost like a bank FD.

Also, if I follow the markets closely I can do a bit of trading in the shares of the same company.

From the freed-up capital, I am able to make fresh purchases, or enjoy the fruits of my investments (if we do not enjoy the fruits then why invest?)

There a few riders to this strategy. The company has to be a very good company like an Axis Bank or Yes Bank or a Voltas.

Business scenarios change and the company’s products or services may become obsolete - so one must be ruthless about dumping the company if it is no longer doing well.

Hence, please book profits regularly, and enjoy the fruits of your hard work.

It is a good time between now and Diwali to take some money off the table if the market continues to rise.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

Announcing re-opening of paid subscriptions to Monthly Investment Newsletter

I am pleased to announce the re-opening of paid subscriptions to my monthly investment newsletter for a 3 weeks period from July 1-21, 2012. A limited number of subscriptions will be offered – strictly on a first-come first-served basis to enable personalised attention and guidance to each subscriber. Special offers await the first 12 subscribers.

If you are interested in subscribing, please send an email to: mobugobu@yahoo.com at the earliest for details. Your email address will be kept confidential.

The newsletter has completed 30 issues. Stock picking in the past 12 months was a challenge because stock indices turned volatile and sentiments were negative. Small-cap and mid-cap stocks bore the brunt of bear selling, with some trading at or near their 2008 lows.

All the stocks recommended in the newsletter in the previous 12 months belonged to the small-cap and mid-cap categories (except one large-cap pick). A couple of stocks have already given substantial returns. Some haven’t performed well, with a few currently trading at or slightly below their recommended prices. However, each and every stock moved higher after my newsletter recommendation.

In a 2-3 years time frame for which the stocks were recommended, I expect most stocks to provide significant returns to subscribers through capital appreciation and dividends. I can claim that with reasonable confidence because stocks are chosen on the basis of strong fundamentals; plus, subscribers receive monthly technical updates to identify entry and exit points.

If you require help in selecting good stocks in uncertain times, all you need to do is subscribe to my Monthly Investment Newsletter. Send me an email (at mobugobu@yahoo.com) soon – subscriptions will close on July 21, 2012.

What to do when the stock market is bearish and volatile?

When stock markets are bearish and volatile, small investors feel anxious and unsure of what to do. Activity, innovation and endeavour are useful in business and employment – but they detract from wealth building. One has to be passive, dispassionate and patient to be able to make correct investment decisions when there is chaos and bad news flying around.

Having a financial plan with clear goals, and an asset allocation plan to meet those goals, helps investors to remain calm and resolute under adverse conditions. A proper asset allocation plan should include an equity component, a fixed income/debt component, a small allocation to gold and some cash. If you don’t have a plan yet, the time to start is now.

The equity component can comprise equity funds, balanced funds, index funds, sectoral funds, company stocks or any combination of these – depending on an investors risk tolerance and investing skills. The debt component can comprise PPF, Post Office MIS and other small savings schemes, bank fixed deposits, debt funds or any combination of these – depending on an investor’s risk tolerance and tax bracket.

The importance of the tax bracket should be remembered in choosing the constituents of the debt component. PPF (Public Provident Fund) scheme is available at post offices and banks. It allows an investment of a minimum of Rs 500 upto a maximum of Rs 1 Lakh per year. The entire investment is tax free under Section 80(C) of the Income Tax act. The dividends (around 8.5% per annum) are also tax free. For small investors, it makes sense to utilise the PPF avenue to the limit. The holding period is 15 years – which allows compound interest to work its miracle. Part withdrawals are permitted after 5 years. Investment can be extended beyond 15 years.

Interest on Post Office small savings schemes (7-8% per annum) and bank fixed deposits (8-9% per annum) are taxable. The tax will depend on an individual’s tax bracket. Rs 9000 earned on a Rs 1 Lakh bank fixed deposit will entail a tax of Rs 900/1800/2700 for tax bracket of 10/20/30%. So, the effective return will be 8.1/7.2/6.3% after tax instead of 9%.

For those in the highest tax bracket, and even for others, investment in debt funds – particularly gilt funds – is advisable. Gilt funds mainly invest in government securities, so there is negligible chance of shrinkage in the principle amount invested. Dividends are not taxable in the hands of investors, but the funds pay a dividend tax. Tax is payable at the time of withdrawal and is treated as short-term (for holdings of 1 year or less) or long-term (for holdings beyond 1 year) capital gains tax. Indexation is allowed for long-term capital gains, which can be a great advantage for long period of holding.

Another benefit of a gilt fund over a Post Office/bank fixed deposit is that you can add to or withdraw from your holdings at any time. A couple of gilt funds – IDFC GSF PF regular and Kotak Gilt Investment regular, which gave 12.5% and 14.2% returns over the past 12 months – beat fixed deposit returns comfortably. They may not do so in future, but the Kotak fund has given 10.35% returns since its launch in Dec 1998.

The importance of an asset allocation plan can’t be emphasised more. The most common query received from investors is: “Is this a good time to start buying?” The answer should be provided by the individual investor’s asset allocation plan – not by me!

Bank the dividends from PSU banks

There is bad news all around. High inflation, negative IIP number, sliding GDP, increasing fiscal deficit, scams and corruption. Anything that can go wrong seems to be going wrong in India.

Add to that the uncertainty caused by debt problems in the Eurozone, which is not helping exports. No wonder the stock market is in a tailspin with no bottom in sight.

Where can one invest without losing sleep? In this month’s guest post, Nishit suggests that tax-free dividend yields of PSU banks is a good place to park your investible surplus.

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The stock market is on a downward spiral. What should investors do? Where does one park one’s cash? The classic dilemma is between safety and preservation of capital and increasing wealth. There is an unexciting part of the stock market which is often unexplored since it is not very glamorous.

These are the PSU banks. They provide steady dividend yields in excess of 5%. Dividends are not taxable in the hands of investors. So, a dividend yield of 5% is equivalent to a return of 7.2% per annum on a bank Fixed Deposit (provided one falls in the highest tax bracket).

To prove this theory I have taken two case studies of Andhra Bank and Corporation Bank. Andhra Bank has declared a dividend of Rs 5.50 per share and it is currently trading at Rs 106. This gives a dividend yield of about 5.2%.

Now, people may argue whether such a dividend will continue in the future? The answer is ‘Yes’ because Andhra Bank has been a steady dividend payer. The dividend for last year also was Rs 5.50. Before that, it was Rs 5 and before that Rs 4.50.

If the stock price goes up and one finds that one has made enough profit, the stock could be sold. The stock had hit highs of Rs 189 and Rs 159 in the previous years.

The second stock is Corporation Bank. It has declared a dividend of Rs 20.50 per share (last year it declared a dividend of Rs 20). The stock trades around Rs 400, giving a dividend yield of 5.1%.

Now, if the stock price declines due to adverse market conditions, one can always add more. Andhra Bank had hit a low of Rs 77 last December giving a dividend yield of 7.14%. Almost similar was the case with Corporation Bank.

The Government is in need of money and keeps pushing the PSUs to pay liberal dividends. The downside to this strategy is if the bank does not declare dividends at all. For this one needs to keep a cursory glance at the Quarterly results and go in for mid-sized PSU banks. The dividend may decline at the most but it is unlikely to get stopped completely.

In times of uncertainty and with questions of where to park the money, this is a low risk strategy. One could always trade in and trade out of these stocks to reduce the cost of acquisition. In 2001, I had bought Andhra Bank shares for Rs 12 in the IPO. If I had held on to them all these years, the dividend yield would have been almost 50% every year for me now.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

Fool’s Four stock investment strategy

Let me first assure readers that the Fool’s Four (or Foolish Four) stock investment strategy is neither foolish, nor is it meant to make fools out of investors. It is a ‘mechanical’ investment strategy that can be useful for those investors who haven’t yet developed their stock-picking skills, and have probably lost money chasing ‘cheap’ small-cap stocks.

The Fool’s Four strategy was designed by The Motley Fool investment group as a refinement to the Dogs of the Dow strategy. I had written about the Dogs of the Dow strategy in a post back in Apr ‘10. The strategy works just as well with Sensex stocks. (If you are a recent visitor to this blog, or have forgotten what I wrote more than a year back, you may want to read the earlier post first.) 

Since it is a variation of the Dogs of the Dow strategy, the Fool’s Four involves selection of four stocks from the Dow index (or Sensex) based on low price and high dividend yield. The dividend yield is calculated by dividing the actual dividend per share in Rupees (not the percentage dividends usually announced) by the current market price (CMP) of the share in Rupees.

The selection process involves calculating the square roots of the CMPs, and the dividend yields of each of the 30 Sensex (or Dow) stocks. Next, divide the dividend yield by the square root of the CMP to find a ratio for each stock. Then rank the 30 stocks based on a descending order of ratios (i.e. the stock with the highest ratio will have a rank of 1, and the stock with the lowest ratio will have a rank of 30).

If calculating the square roots of the CMPs is too much of a challenge, you can calculate the square of the dividend yield (multiply the dividend yield by itself) and divide it by the CMP. The ratios will be different, but the rankings will be the same.

Now comes the interesting part. Drop the stock with the rank of 1, and choose the next 4 (ranked 2 through 5). Buy equal Rupee (or Dollar) amounts of each of the short-listed four stocks, and hold them for a year. Why drop the stock with the number 1 rank? There is a good possibility that it may be in financial difficulties. Sensex (or Dow) stocks are supposed to be financially stable, but the odd JP Associates do get in trouble by being over-ambitious.

Is there any logic behind the Fool’s Four strategy, or is it just some foolish number crunching? Apparently, academic studies have proven that (a) high dividend yield leads to better market performance (which is the logic behind the Dogs of the Dow theory); and (b) stock price variations (or ‘beta’) is correlated with the square root of the price.

So, the Fool’s Four strategy gives slightly better results than the Dogs of the Dow (or Sensex) strategy. That doesn’t mean that all four stocks will beat the Sensex. The underperformer(s) should be replaced by stocks from the short-list of four selected next year. The Sensex-beaters can be retained.

(Note: Interested readers can do the exercise of selecting the four stocks from the Sensex that meets the above selection criteria. I’ll post their brief technical analysis once I receive your feedback. Then we can check back after one year and see how well the strategy works.)

Notes from the USA (Jun 2011) – a guest post

One of the best ways to find out about the true state of financial health of a company is to scrutinise its cash flow statement. The Profit and Loss statement is based on the accrual system of accounting. The cash flow statement records the actual inflows and outflows of cash, which provides a better idea about the sustainability of a company’s business model.

What about an investor’s cash flow statement? Are you keeping track of exactly how much cash inflow is being generated by your cash outflows (i.e. investments)? Specially in a sideways or sliding stock market? In this month’s guest post, KKP shares some of his thoughts on the subject.

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Lets Get Down to Cash Flow Analysis

Q1 and Q2 2011 have shown that there might be a good size recovery, giving a feeling of hope to many people in the US, as well as corporations. The economy has slowly been recovering – no doubt. But the housing and construction market rebound has remained soft despite the big QE (quantitative easing) programs from the Fed and the low-low-mortgage rates (average 30-year fixed U.S. mortgage rate is around 4.82%). The reason is simple: Stubbornly high unemployment and underemployment, and also tight lending policies from the bankers/lenders. Bankers have swung the pendulum to the other end of the spectrum and have very stringent policies. In 2002-2008, lenders would lend money to people without any money down (by doing double mortgages), and today, even if someone is providing 25% down payment (upfront cash), they are scrutinized as if they are one of the worst borrowers.

Predictions show that home prices will fall around the 5% to 10% in 2011 compared to 2010, and they will remain flat in 2012. This median forecast was part of a poll by Reuters of 21 economists who provided price forecasts. In looking at really long term trends of US home prices, it clearly shows that home prices are close to the bottom and will hover around here for a bit, and with a ‘core-recovery’ we will see a bounce up in prices (albeit very slowly).

"It is hard to see the housing market doing better until the massive headwind of foreclosures is removed and that will likely take a couple of years," said Mark Vitner, senior economist at Well Fargo Securities in Charlotte, North Carolina. With home prices still falling, many potential buyers are sidelined and banks are more stringent with loan applications and credit scores, Wells Fargo's Vitner said. "It is not that I am pessimistic about the housing market, it is just that I am not optimistic and a gradual recovery probably will not happen until 2013 or 2014, with a full normalization not until 2015," he said.

I have noticed that there is a rise in the "distressed, foreclosed and short sale" homes due to the fact that the lower home prices have put mortgage balances (what you owe on the home) above the current price of the home. Therefore, the home either goes into a short sale (seller and lender put it on the market), or foreclosure (owner cannot or will not pay mortgage), or distress situation (seller does not pay mortgage, and lender cannot afford to keep the home on the books). The net result is that the price of the home has to be marked down significantly, for investors or home-upgraders or renters are willing to look at the properties.

I am currently sprucing up a home that I purchased as a ‘distressed home’, and will be renting it out before July 1^st, 2011. In addition, have offers out on Short Sales where the Seller and Lender are considering my offers for Downtown Condos (at 1/3^rd to 1/4^th the last sale price). Even with the above flat market situation predicted, I remind myself that I am buying real estate at the “equivalent of March 2009 Sensex prices”. Remember how undervalued we were in the stock market at that time, before we took off? Real estate will NOT take off in the same manner (of course), but my tarot-charts (figuratively speaking) is telling me that I am buying it close to the bottom and have no desire to price these out for sale since I will be renting them out in the near term (2 to 5 years).

In addition, I am buying these at really ‘distress’ prices, instead of chasing them, and have the ‘patience and privilege of dividends’ while I hold. Dividends are in the form of rent here so it is easy to convince myself to hold. So, equate it to holding a stock that may not move up immediately, but will pay you almost risk free 12% to 26% in return with minimum loss of capital (if so).

Bottom line is that a lot of books have been written about ‘cash flow’ production, and with this methodology, I have found how much of a parallel it holds to Selling Calls on individual stocks being held in a portfolio. Call Selling had been a very favourite methodology of mine when I was very active in the markets in the 1990’s, and most recently as a way of reducing my stock holdings. But, in both cases, it taught me how to ‘generate cash flow’ from the holdings, and ‘make a paycheck’ out of it.

Real estate has the power to make the same with almost the same amount of time involvement. Wow. Really? Yes, very true. In India, it is even better since you can literally buy a flat/condo and rent it out, making all responsibilities of maintaining the flat a responsibility of the tenant (minus big issues). I am able to replicate the same with a team of contractors to simplify my life and do virtual-maintenance (call someone to go and fix it at low cost).

For now, think cash flow, and figure out a way to generate a paycheck or cash flow from your investment holdings. If you hold RIL or HUL for a long time, the percentage yield to your purchase price could be significant enough to get a very net high yield, especially if the stock has provided splits/bonuses. With my net-buy-price of HUL under Re 1.00, the percentage yield on the annual dividend seems like a paycheck each time it comes. So, there are many ways to skin the cat, and as one gets more experienced, some of these techniques become part of the portfolio and life, and yet, it is each portion of the portfolio that needs to replicate the ‘cash flow’ generation methodology. Traders might be good at generating cash flow from ‘trading’, but very few can do it consistently, and hence doing it with many techniques/strategies will be good for your long term financial health.

Hope you can ‘draw’ some ideas from this to your thinking and add a twist to your investments that might change the overall short and long term return, such that it gives back some cash flow which can help with your own personal goals (buying gold or silver)…..Oh, that brings me to another favorite topic of mine (gold), but we will leave that for the future….

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.