$M, not too difficult in US for the average

The median income in the US in 2015 was $55,775; there are places where it is more than that. 

It is also true that average Americans cannot save enough to fund their retirement. This is why they also end up working in places otherwise they would not have liked to. This is also why they are sort of forced to take up work for longer years than they would have otherwise liked to. What a life! Even a masochist wouldn't like it. 

Someone said it long ago: Twenty years from now you will be more disappointed by the things that you did not do than those you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore, dream, discover. 

It is an apt statement. Life is too short to stick to the comfort zones. Nevertheless, it is not very difficult to come out of it; neither does it take too long. The key is to become financially independent. Note that it is not being rich, which is actually relative. Someone with $500 k is richer than the one with $100 k; one with $1 b is richer than the one with $100 m. Talking in terms of the rich is not only useless, but also stupid. 

What we need to attain is financial independence. It is always measured in terms of how much cash one has compared to one's expenses. The higher the multiple, the higher the assurance. Someone with $100 k in financial assets and annual expenses of $10 k is wealthier than someone with $500 k assets and annual expenses of $250 k. To become truly financially independent, one needs to increase the multiple. 

There are only two ways to achieve an early financial independence: Increase income compared to expenses, or Decrease expenses compared to income. For most, it is much easier to do the latter; yet, they do not realize it. For them, life is to enjoy the moments on splurge. Little do they know that there is plenty of fun in delayed gratification. 

So how does an average person, employed with an average salary, become financially independent? If the two conditions are fulfilled, it is not very difficult: One, restrain; control; and behave. Two, invest savings in equities, preferably, in the S&P-500 index fund. 

In January 2000, S&P-500 was at 1394.46; in December 2016, it was at 2238.83. A 2.82% annual return over 17 years is no fun. Yet, the average employee could have become a millionaire by that time. 

It is because the markets are inefficient. They fumble on occasions; act irrationally at times. That's how they provide opportunities to the average employee. In February 2001, the index fell over 9% from the January 2001 value. 

Sure one could have bought in March 2001 and sold in April 2001; again bought in October 2001 and sold in November 2001; and so on. But we are talking about the average employee. In fact, here, we should be talking about everyone. It is very difficult to time the market on a consistent basis. Let's keep that story for another day. 

I am going to talk about the average 25-year old couple earning a combined salary of say, $50,000. Not very unlikely for the average. They are ordinary individuals, engaged in ordinary employment. How could they become financially independent? As we noted, it is easier to cut expenses than to increase income. 

If the couple saved and invested $2000 per month, which is $24,000 annually, in a low-cost S&P-500 index fund from January 2000 until December 2016, the total investment would be $408,000. Another way to see it is to keep one salary for living costs, and invest the other; there is not much excuse. Remember the buzz words: restrain; control; behave. It's possible. The investment value would be $707,000 as of December 2016 before the fund expenses, which are not too high in a low-cost fund. So the couple would be worth $707 k at age 42. The annual return changes from the paltry 2.82% to a more reasonable just over 6% due to the dollar-cost averaging, which happens thanks to the market inefficiencies. I have not included dividends, which if reinvested, should increase returns. 

They might say, the salaries weren't that much in 2000. It turns out that the numbers are not far off. If the investment was increased by 5% annually reaching $4600 per month in 2016, the investment value would be just over $1 m; not too bad. $4600 per month translates to $55,200 annually, which is the median salary anyway.

The losers might talk about taxes, etc. Remember, though, we are talking about creating enough wealth for the ordinary individuals early so that they too can let go of their shackles, and explore life. This is to show that it is very much possible for the average. The trade-off is clear: work for someone for life, or call your own shots after 15 years.

Their behavior is more important than income they earn. Cut costs relentlessly, and invest every month irrespective of the index value. After 17 years, at age 42, the couple could have $1 m in financial assets, which would also give quarterly dividends.

With $1 m plus financial assets, the average couple could move to a place where home and living costs are much cheaper, and have a fun-filled life. Why do they have to care to work for another unless of course they actually do love it? There is a superior life outside of the Bay Area and Wall Street too; and it can be more purposeful.

And now for the not-so-ordinary. If the couple can save $5000 per month, the investment would be worth $1.7 m. There are plenty of households whose annual income is $120 k. $5000 per month with 2% annual increases, i.e. $7000 per month starting 2016, would turn into investments worth $2 m.

Again, they might talk about the hindsight bias: where're the future returns?; Europe and Japan are already down; China is on the way; the US is not going to be an exception. Heck, these are the people who don't want to give up on the status car, large TV, expensive cell phone, fancy gadget, and those regular $5 coffee twice a day. If only they learn to defer their gratification, they would have to work, without choice, for only a maximum of 15 years.

But, heck no; human behavior has reasons that reason cannot understand.

buyback paradox at Infosys

Former CFOs of Infosys, who are also major shareholders, are seeking buyback from Infosys board in order to ensure proper use of its cash. They are right in questioning its capital allocation policies. 

That said, whether Infosys should initiate a buyback is a tricky matter. For a buyback to make sense, two conditions should be met. 

First, the firm should have excess cash. The business should be in a position to generate cash in excess of its reinvestment requirements. That happens when growth slows down, and it becomes a mature business. It looks like Infosys does have excess cash; it had Rs.345 b as of March 2016. This cash becomes free cash flow to equity investors if it cannot be used for working capital, capital expenditures, or acquisitions. The Infosys board should first assess whether it is the case; recall the CEO's grand plans for 2020. 

Second, the stock price should be lower than its intrinsic value. The value changes based upon the perception of the analyst though.

Price > Value: The former CFO considers that the stock price is expected to be lower, and consequently, generating lower returns to the shareholders; this is when the stock price is higher than its value. If the board agrees with this analysis, but carries out a buyback, which is usually at a premium to the market price, it would mean that cash is being used for a stock that had no growth prospects. This would bring down the value of Infosys as a business because of the purchase of an expensive stock. Any buyback of the stock would hurt the remaining shareholders, and therefore is not good for the firm. 

A better option for the CFO would be to sell the (expensive) stock at market price, and exit as a shareholder. Invest the proceeds in opportunities yielding higher returns. This will be good for the exiting shareholders, remaining shareholders, and the business itself.

Value > Price: If the board does not agree with the CFO's analysis, and considers that value of the stock is higher than its market price, the buyback makes sense. There is excess cash, and the stock price is cheap compared to its value. If the board carries out the buyback, the exiting shareholders (the CFO and company) would be worse off. This is because the stock having prospects of higher returns is exchanged for cash by the exiting shareholder. This would no doubt help the remaining shareholders; and that is the whole purpose behind a firm undertaking stock buybacks. 

A better option for the CFO then would be not to sell the cheaper stock back to the firm. Stay invested when the value is higher than price.

Whoever is right in assessing the value of the business will be the winner in this game. Heck, isn't this the case in any investment game?

Stock buybacks after all are dividend decisions. When there is excess cash, and assessing value of stock is difficult (if so the managers are not fit to run the business is another story), there is a much better option for the board. Payout higher cash dividends; even normal payouts accompanied by a onetime special dividend will be good.

Dividends are good!

infosys: shareholder value

Infosys is currently in news. This time it is up against its founding shareholders. They are questioning corporate governance at the company. 

After October 2014, when the founding shareholders left the company voluntarily, its affairs were handed over to the outsiders. The shareholders showed faith in the new professionals in running the company in a diligent, transparent and professional manner. The expectation was also that the new board and management will increase the shareholder value over time. 

As noted by them, after their departure, the founding shareholders did not interfere in either strategy or direction. 

There was no question of interference from any of the founding shareholders. Then there was this sloppy headline at the economic times:

However, when you click open the headline, this is what you get to read:

However, the headline coolly puts words in Pai's mouth to blame Murthy for the fiasco. It is evident from the article itself that Pai never said anything of that sort. We wonder why not do some clean reporting. In fact, Pai has backed founders in raising corporate governance issues at Infosys. 

Making significant severance payments to departing employees was not called for in the best interests of the company and its shareholders. This was the first crack. Furthermore, remuneration of the CEO not commensurate with the value being created was also questioned; the second. The remuneration committee is primarily responsible for it. 

With responsibility, there comes defense, which is human nature. Yet, not disclosing such a serious matter (excessive severance pay) in the annual financial statements was a serious breach of corporate governance. How could the audit committee overlook such an important matter?

Of course, the board is collectively responsible for this mess. 

And of course, it is a joke to bring in a legal firm to deal with the founders. 

The founding shareholders own over 12% of the business. It is only fair that their queries are addressed in a manner that is transparent and professional. The fact that their opinions are out in the open reflects how they are being treated by the board. 

I am surprised that Oppenheimer Funds, which owns 2.40% of Infosys, is not in line with the other large shareholders. What the founding shareholders have said, and what response Oppenheimer has given is another joke. The fund needs to know the difference between corporate governance and business strategy and plan. They are two different things, although one would expect the managers to have strategy that is not in fight with corporate governance. 

Of course, Infosys is the business of its shareholders. So what it is publicly listed? A 12% shareholder is a significant shareholder, not an apathetic animal in captivity.

Let's come to the management performance. Vishal Sikka took over in June 2014.

Infosys has done reasonably well in the past five years. Both operating profits and earnings have increased on a per share basis. Yet, the market value has not moved much from 2011 high.

Pai is not off-mark when he said:

It looks like the past performance was not satisfactory for the market. Clearly, market expectations are low with respect to its future performance; growth rates have reduced, and both automation and global, especially the US, trends are expected to drive down growth rates further.

Nevertheless, Sikka has grand plans for the business.

For 2016, the revenues were $9.46 b (Rs.624 b), and operating margin was 25.39%. If these targets are achieved, operating profits would be $6 b in 2020; in rupee terms, the value will depend upon the expected exchange rate. At Rs.70, the operating profits would be Rs.420 b as against Rs.158 b in 2016. Infosys was priced at a high of 17.80x EBIT and a low of 13.44x in 2016. If we take the lower value of 13x, Infosys could be priced at Rs.5460 b in 2020, which is only 3 years away. For the investor at the current price of Rs.2224 b, the annual rate of return would be close to 35%; phenomenal, assuming no dilution in equity. Any one interested?

As for the intrinsic value, I am not brave enough to do it as there are too many variables related to the future, which I am not capable of dealing with.