What is the best time to prepare for the retirement?

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Contributed By: Sumit Duseja, CFA (Co-founder Truemind Capital Services)

 What is the best time to prepare for the retirement?

A study of 1,000 senior citizens conducted by LendEDU in the US reveals the biggest regret among elders in not saving enough for retirement. The concerns are not much different from what can be witnessed in urban India. The situation may be worse in India since the financial literacy is very poor compared to developed economies.

The worst feeling post retirement is to ask for help from others to meet your basic requirements or to compromise with your lifestyle. Moreover, nobody wants to lose self-respect at any stage of life. However, a simple planning can help you avert such a situation post retirement.

The biggest reason for failing to appropriately prepare for the retirement is the wrong notion that the retirement planning should start a few years before the retirement. Another reason is procrastination. In reality, the best time to start preparing for the retirement is TODAY.

Why Today? For the simple reasons – inflation and the power of compounding. Let us see how inflation affects our expenses and how the power of compounding can be used to trounce it.

Inflation: A silent monster

Inflation is the most under-rated threat that is always feeding on your money, reducing your purchasing power. It is under-rated as it grows gradually without making one realize the severity of its impact in the long term.

If you are currently spending INR 50 thousand per month on your lifestyle, you will have to spend a much higher amount at the time of your retirement to sustain the similar lifestyle. Assuming our lifestyle inflation of INR 7%, you will need INR 98 thousand (almost double the amount from today) after 10 years just to maintain the current lifestyle standard. That means, what you can buy today for INR 50 thousand, you will have to shell out INR 98 thousand for the same after 10 years. It keeps on increasing with every passing year due to inflation. This also means that if you are not saving or your savings are not earning more than inflation, your purchasing power will gradually reduce.

Check below the inflation adjusted expenses of INR 50 thousand/month over the following years.

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Source: Truemind Capital Services Research

#Average inflation assumption of 7%

If you are retiring after 20 years, be ready to spend INR 1.93 Lakhs per month to sustain the present lifestyle at the time of retirement. Unfortunately, inflation will continue to hurt post retirement also. 10 years after the retirement, the monthly expenses will become INR 3.80 Lakhs.

To fund your monthly expenses post retirement, you will need around INR 8-10 Crores (assuming the current age of 30, 30 years to retirement from today, a life expectancy of 80 years and returns on your post retirement funds at 8%). This calculation doesn’t even take into account the rising medical expenses in the old age. Do you think you are prepared for such a situation?

You can calculate your own retirement corpus that you would need at the time of retirement by using the tool on our website. Click here to find out.

Now, since you know that a substantial corpus is needed at the time of retirement, don’t let that frighten you into feeling that it is not achievable. Simple planning, discipline, and power of compounding are all that you need.

Power of Compounding: Eighth wonder of the world

Power of compounding is a powerful method to reach any of your financial goals. Sooner you start better it works. Let us see how procrastinating your investment plan affects your wealth in the long term.

Imagine today you have started investing INR 10,000 per month over the next twenty years. You will be investing INR 24 Lakhs over the twenty-year period. One of your friends started late – 10 years from today. To make up for the loss of time and savings, he decided to double up the investment amount to INR 20,000. In that way, his total investment after the end of 20 years from today will be INR 24 Lakhs, same as yours.

However, if both yours and your friend’s investment grow at 12% per annum, by the end of 20 years the value of your investment would be INR 99.91 Lakhs whereas the value of your friend’s investment would be INR 46.46 Lakhs. Therefore, despite putting the same amount, a delay of 10 years resulted in a loss of INR 53.44 Lakhs to your friend.

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Source: Truemind Capital Services Research

From the above discussion, we learn that the power of compounding is a powerful tool that multiplies your wealth in the long term.

In the same manner, to prepare for retirement, you can start with even small amount to create a substantial corpus for your retirement. To find out the amount to be invested per month for creating retirement corpus that you need, click here.

Referring to Mr. Warren Buffet quote, it is essential to make your savings work for you while you are sleeping to achieve financial independence.

Warren Buffet pic

With two sources of income – from job and higher compounding returns on savings, you will be able to achieve your retirement goal with ease. Only other traits you need are patience and discipline.

Retirement is inevitable. You cannot wish it away. Therefore, don’t procrastinate. Start your retirement planning today.

 

 

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Fragility and optionality in business models

Contributed by : Rajni Dhameja, CFA

CFA Society India organised a session on August 04, 2018 on “Fragility and optionality in business models” by Prof. Sanjay Bakshi.

Key takeaways are as follows.

Fragility as defined in Cambridge dictionary means the quality of getting easily damaged. In business context fragility would mean the business being vulnerable to the fragility. There are various factors which can make business vulnerable to fragility. This fragility can come from various sources, few of those are discussed below:

  1. Lack of entry barriers : Lack of entry barriers causes fragility in the business in a way that the business loses its competitive advantage eg: Go PRO
  2. Business where the both input and output is commodity are susceptible to fragility. On the other hand the business where the input is commodity and output is brand, has competitive advantage as the brand can give it the pricing power.
  3. Disruption through innovation can bring fragility to the existing business
  4. Dependence on one or few customers, dependence on govt. subsidies, dependence on kindness of others can be a major source of fragility in the business
  5. Dependence on the price of something that is volatile and beyond control can bring out the fragility in the business
  6. Rigid cost structures can also cause the fragility in the business
  7. Gambling tendencies in the business can bring about the fragility

As can be seen from above that fragility can stem from various sources hence in few cases it becomes inherent part of the business. Now the question arises how to deals with it. Ways to deal with it:

  1. If it is unacceptable, avoid it completely
  2. Ignore it completely and then later on face the consequences
  3. Being pragmatic: Be aware about the presence of fragility and then act consciously. Eg: Portfolio sizing, taking calculated bets

Optionality lies at the other end of spectrum from fragility. Optionality has unlimited gains, limited losses whereas fragility can bring unlimited losses. As opposed to fragility, optionality is desirable. Fragility depends on luck on the other hand bad luck in optionality is not fatal, whereas good luck can bring big bang gains.

Look for the business which has optionality in it. Value investing is an example of implementing optionality, wherein you do not pay for growth. Being aware about both fragility and optionality enables you to size your portfolio in optimum manner.

 

– RD

 

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Future of Hedge Funds in Asia

Contributed By: Team Voyage Capital, IIM Indore

Event Date: 22 August 2018

Voyage Capital, the Investment and Equity Research Club of IIM Indore hosted the session on “Future of Hedge Funds in Asia” conducted by Mr. Jainendra Shandilya, CFA, CAIA, in collaboration with Indore Chapter for CFA Society. Mr. Shandilya is an esteemed Faculty Member at the National Institute of Securities Markets(NISM). He has represented SEBI before the Central Information Commission for ensuring compliance under the Right to Information Act, 2005. He holds Master Degree in Economics and is also CFA and CAIA charterholder and is the Chapter Head of CAIA India. The event also witnessed esteemed guests like Mr. Pramod Saraf, CFA and Director of Swan Finance Limited and Mr. Gaurav Somani, CFA and Director of Finoptions Institute of Financial Studies.

IMG-20180822-WA0005

In this session Mr. Shandilya busted the prevalent myths of Hedge Funds being highly risky, illiquid and an irregular vehicle for investment. He compared the Hedge Funds in India, Asia and Western World and the results were astonishing. Indian and Asian markets, despite having an abundance of Mutual Fund schemes, are still at a very nascent stage in terms of Hedge Funds. The total corpus of Hedge Funds in the Asia Pacific region is around $157 billion, whereas that of Western Countries is close to $3 trillion.

He explained why hedge funds were able to deliver superior returns over traditional investment instruments such as mutual funds. The most important reason for the same was the use of leverage, capacity to go short and the high amount of due diligence gone into each potential investment. Another important aspect of the discussion was related to the advancement in technologies which have led to algorithmic trading and other software based portfolio management schemes. All these have posed a serious threat to the jobs of traditional fund managers, which brings Hedge Funds in positive light as they are more personalised.

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He discussed about the scope of Hedge funds in India and the future job opportunities and roles. He shared his positive outlook towards the Industry by citing the fact that at present around 5000 mutual funds in India function with a corpus of more than $300 billion, whereas only 200 hedge funds currently operate in the country having an approximate corpus of $1 billion. Thus, a high rate of growth can be expected in the next 5-10 years.

 

 

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Investment Channels – UK and India

Contributed By: Meera Siva, CFA

Friday, July 6, 2018, Chennai

The relation between UK and India, for trade and money, has a long history. UK and India continue to work closely in cross-border investments. In this talk, Sam Prasanth Kumar, Prosperity Adviser at British Deputy High Commission, shared the various programs for investment and collaboration between the two countries in various domains, including fintech.

Sam fosters relationship and facilitates partnerships between UK and India public and private sector institutions in Ease of Doing Business, Smart Cities and Financial Services, including FinTech. He is well experienced in working with non-profit organizations. He holds a Masters’ degree in Social Work and a Bachelors’ degree in Commerce from Loyola College, Chennai.

July6 Chennai - Speaker

 

Big partner

UK investments into India accounts for 1 in 20 jobs in the formal sector. Likewise, India invests more into the UK than it does into the rest of the EU combined. Last year, Indian firms created the second largest number of new jobs in the UK (Tata Global Beverages, HCL, Reliance, Axis Bank, ICICI, TVS logistics, HCL Insurance BPO, Dr Reddy’s Laboratory, to name a few).

 

Indian Ministry of Commerce & Industry data shows that UK goods exports to India grew by 31.2% in FY 2017-18, at $4.8 billion while imports from India to UK was up 13.6% at $9.7 billion. Research collaboration between UK-India has been on an exponential growth track – from almost 1 million in 2008 to around £400 million by 2021.

 

There have been many successful partnerships at the company level. For example, Hero Global Design (Hero Cycle) and 42 Gears Mobility Systems from India setup operations in the UK. Westminster Healthcare and Dental Nursing academy of New College Lanarkshire established operations in India. There is also interest from Indian companies to raise funds in the UK through Masala bonds.

July6 Chennai-Audience

Many programs

There are many awards, grants and programs that help foster relationship between the two countries. One big initiative is Chevening Fellowships/Scholarships. Others of interest include Tech Rocketship awards and the recently launched FinTech Rocketship Awards for entrepreneurs. Another interesting award is the India Emerging Twenty (IE20), created by London & Partners and launched by the Mayor of London. Its mission is to discover 20 of India’s most innovative and high-growth companies to help them grow to London.

 

Some of the channels for partnerships through investment include the Pontaq’s UK-India Innovation Fund and Innovation Lab. Business partnerships are also forged through various groups and organizations such as various City Councils such as London, Manchester as well as business groups. Many cities have City Councils that offer various incentives and information sharing programs to attract businesses.

 

Knowledge partner

Besides investment and programs, there are also many ways in which knowledge sharing happens between the two countries. There are UK firms that are looking to share technology such as in payments for public buses and flood detection/monitoring. UK is also actively partnering with the FinTech Center of Excellence that is coming up in Chennai.

 

There are focus groups in the British Deputy High Commission for each verticals – Smart Cities, Financial Services, Energy, Ease of Doing Business, Healthcare, Skills – to find ways to collaborate

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Field notes of a FinTech Entrepreneur

Contributed By: Meera Siva,CFA

Friday, August 3, 2018, Chennai

FinTech is all the rage now; but imagine starting a fintech venture in Chennai a decade ago. In this candid, interactive session filled with laughter and sense of awe, Srikanth Meenakshi, co-founder and COO of Funds India shared his experiences as a fin-tech entrepreneur and mutual fund investing/advisory. FundsIndia.com is an online financial services platform for investors, since 2008. It manages an AUM of Rs 5,400 crores of about 2 lakh customers, pan India and for NRIs – making it the largest FinTech platform for investment services, by a large margin.

August3 -img1.jpg

Srikanth started his career with IBM global services and moved to a startup doing an online brokerage platform called Folio Investing. He then worked at Fannie Mae, handling securitization and capital markets. Srikanth received his MS in Computer Science from Oregon Graduate Institute, USA.

Early years

Srikanth found the problem space in 2008 based on his pain in making mutual fund and other investments, as with many entrepreneurs. “I also needed a job, having moved to India from the US”, he adds humorously. The original problem they wanted to solve was to create a financial plan for investors. But it changed to online mutual fund investing.

Srikanth noted that their venture was based on technology and this needed substantial investment in the early years. He and his co-founder had each invested INR 50 lakhs each from their savings in the venture. They had to add to this and there was always need for more money. Raising money was not easy and at one point they had come up with an exit plan – how to shut operations gracefully and continue servicing exiting investors. It did not come to that, but it was very close, he says.

He said that customer confidence, from clients who had never met the team, kept them going during difficult times. “The faith they had in sending the cheque in our name, gave a lot of validation to the idea”, he says.

August3 - img2.jpg

Role of research

Funds India has a strong research team to understand and analyze mutual fund investments. While the initial focus was on technology and enhancements continue, the emphasis is on research and analysis to provide the best advise to investors. Srikanth says that investment is knowledge business and domain expertise is critical. “Without that, it becomes a platform, not different from IRCTC”, he notes. In the long run, this differentiation – by creating a knowledge factory – is what will help clients to stick with Funds India.

Srikanth also highlighted the issues of an online platform in engaging with clients. “Unlike an advisor who sits across the table, we are remote and do not have opportunities to interact. So, we must find ways to be connected”, he says. “Marketing gets you customers, research keeps them”, he notes. Their customer stickiness data shows that they have been successful in this.

Funds India also does not believe in churning portfolio. “Using technology to pro-actively monitoring returns and suggesting changes may appear as service. But it is often misleading guidance”, Srikanth says.

Service options

The features in the platform are on par with or in some cases even better than global robo advisory platforms. The platform has tools to provide reports on your portfolio. This includes analysis of stock holdings in different mutual funds in your portfolio to understand overlaps. Investors can also opt for periodic review – say once in six months – of their portfolio. They can always call anytime to clarify. One recent example was when the mutual fund categories was changed by SEBI, investors had many questions and there were calls to understand.

Srikanth feels that tools such as artificial intelligence are buzzwords. There is a lot of structured data and rule-based decisions can be taken. For example, based on the profile of the customer and AUM, audience can be segmented to share messages. You need lots of data to do real big data analytics and only when you deal with unstructured data, require neural networks. “We look at technology to figure out which business pain points can be solved inside and how customer experience can be improved”, he notes.

Mistakes

The success – as measured by revenue and customer growth, funding, team – also had its share of setbacks and was despite mis-steps. Srikanth noted that they must have focused on marketing earlier. “We were a digital business; but we did not do digital marketing for nearly two years”, he says. The company also launched its app only in 2015.

“When people stop their SIP as market goes down, I feel bad that we have not educated investors”, he says.

Short quips

How did you convince your first investor to fund you?

With lots of difficulty.

Does the platform allow investments in equity, FD and other products?

Yes, but why do you need anything beyond mutual funds for retail investors?

How is it dealing with the regulator?

The forewarnings and rumors give sleepless nights. The news finally is usually not so bad.

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Investment Channels – UK and India

Contributed By – Meera Siva, CFA

Date: Friday, July 6, 2018, Chennai

The relation between UK and India, for trade and money, has a long history. UK and India continue to work closely in cross-border investments. In this talk, Sam Prasanth Kumar, Prosperity Adviser at British Deputy High Commission, shared the various programs for investment and collaboration between the two countries in various domains, including fintech.

This slideshow requires JavaScript.

Sam fosters relationship and facilitates partnerships between UK and India public and private sector institutions in Ease of Doing Business, Smart Cities and Financial Services, including FinTech. He is well experienced in working with non-profit organizations. He holds a Masters’ degree in Social Work and a Bachelors’ degree in Commerce from Loyola College, Chennai.

Big partner

UK investments into India accounts for 1 in 20 jobs in the formal sector. Likewise, India invests more into the UK than it does into the rest of the EU combined. Last year, Indian firms created the second largest number of new jobs in the UK (Tata Global Beverages, HCL, Reliance, Axis Bank, ICICI, TVS logistics, HCL Insurance BPO, Dr Reddy’s Laboratory, to name a few).

Indian Ministry of Commerce & Industry data shows that UK goods exports to India grew by 31.2% in FY 2017-18, at $4.8 billion while imports from India to UK was up 13.6% at $9.7 billion. Research collaboration between UK-India has been on an exponential growth track – from almost 1 million in 2008 to around £400 million by 2021.

There have been many successful partnerships at the company level. For example, Hero Global Design (Hero Cycle) and 42 Gears Mobility Systems from India setup operations in the UK. Westminster Healthcare and Dental Nursing academy of New College Lanarkshire established operations in India. There is also interest from Indian companies to raise funds in the UK through Masala bonds.

Many programs

There are many awards, grants and programs that help foster relations between the two countries. One significant initiative is Chevening Fellowships/Scholarships. Others of interest include Tech Rocketship awards and the recently launched FinTech Rocketship Awards for entrepreneurs. Another interesting award is the India Emerging Twenty (IE20), created by London & Partners and launched by the Mayor of London. Its mission is to discover 20 of India’s most innovative and high-growth companies to help them grow to London.

Some of the channels for partnerships through investment include the Pontaq’s UK-India Innovation Fund and Innovation Lab. Business partnerships are also forged through various groups and organizations such as various City Councils such as London, Manchester as well as business groups. Many cities have City Councils that offer various incentives and information sharing programs to attract businesses.

Knowledge partner

Besides investment and programs, there are also many ways in which knowledge sharing happens between the two countries. There are UK firms that are looking to share technology such as in payments for public buses and flood detection/monitoring. The UK is also actively partnering with the FinTech Center of Excellence that is coming up in Chennai.

There are focus groups in the British Deputy High Commission for each vertical – Smart Cities, Financial Services, Energy, Ease of Doing Business, Healthcare, Skills – to find ways to collaborate.

-MS

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In Conversation with Kenneth Andrade

Contributed By – Karan Sharma, CFA

The Kolkata Chapter of the CFA Society India hosted Mr. Kenneth Andrade, Founder & CIO, Old Bridge Capital in Kolkata on 15th of June 2018 in a conversation about his investment style, investing journey and his experience over the last 25 years in this field.

Q.How has your career shaped up over the last 25 years and what are your learning’s from the last two decades of investing?

A.It takes two complete cycles for a fund manager to fully understand markets. It is then when one realizes that money is made in bear market but to do that one needs to survive over a cycle. A major part of my career over the years has involved assimilation and analysis of data points. The biggest lesson for any budding investor would be to observe bear markets as they give the best learning

Q.How were you able to identify many of the successful consumer franchisee companies at an early stage?

A.In 2007-08 when we bought many of these companies we were actually buying stable cash flow companies at historical low valuations. The main reason was the low valuations these companies were available at because they had not participated in the infrastructure and real estate boom of 2005-08. The best way to look at companies trading at low valuations is looking at which companies are able to earn money in down cycles. This helps in separating from the value traps which are usually the companies trading at relatively low valuations in an industry

Q.How do you view the deleveraging of corporate India and how should an investor views this transformation affecting the corporate climate in the country?

A.In the good time when consistently superior returns on capital are being achieved industries attract capital, which in turn brings competition and depresses the return. The gap between cost of capital and return narrows at this point of time and an investment, which looked attractive some time ago, now turns unviable. When companies go through this cycle we see very less investment coming into the sector at the bottom of the cycle. The returns are not too lucrative to encourage additional capex. The demand for most things in our country is linear and as new supply halts and the demand supply balance now turns in favor of demand is when you find that inflection point in an industry. We see a similar thing happening in the country right now in many sectors where new supply has halted because of unfavorable returns, which can be seen happening in the telecom industry
KA_Detail

Q.Explain the working of the capital cycles with an example of any particular industry?

A.If we have a look at the power sector which was adding capacity relentlessly during 2010-2015 we can see how that depressed returns for the sector as a whole. A slew of capacity is now on stream earning returns below cost of capital, which has now led to a halt in incremental capacity additions in the sector. This has now led to supply demand equation being in the favor of supply at the moment. The demand grows at a linear rate and it will not be long when this equation shifts in the favor of demand. The companies generating free cash flows in today’s times in these sectors would be at advantage because they will be able to gain market share very fast

Q.How do you view capital efficiency and efficient capital allocation

A.The math of efficient capital allocation is well understood. It has to be above cost of capital to make any sense. However, often in industries trading at depressed valuations the returns on capital will be below the cost of capital. This is due to the nature of the capital cycle that the sector is undergoing. The advantage for an investor in these industries is that usually there is no fresh capital coming in the sector and thus finding companies which today are earning below average returns on cost of capital and would go on to achieve higher returns in the future due to the demand supply balance shifting in their favor becomes easier. This is what leads to an expansion in valuations.

Q.Why have you stayed away from investing in the financials sector?

A.The business model of the banks where they leverage the balance sheets 10-15 times makes them more vulnerable to shocks in the ecosystem. This coupled with the facts that valuations for most of the players are trading at historic highs makes me uncomfortable while selecting financials as a place to be putting money in. Also my inabilities to adjust to the hyper growth the sector has witnessed have led to the exclusion of financials in the portfolio.

Q.What are your views on democratization of capital and the reach of leverage to even the weakest section of the society?

A.I believe that there are many new opportunities opening up in the financials space as new sectors like asset management companies, exchanges and small finance banks come in the listed space. This should give a host of opportunities but I would be more comfortable buying them post the next down cycle. Also there is a belief that India will shift from a developing economy to a developed economy over the next decade and as that happens we will see people analyzing consumer trends more rather than annual government budgets
Q.Your thoughts on the whole agriculture & rural India theme and how do you view regulatory risks in this sector?

A.The sector is going through a phase where incremental capital additions have stopped due to regulatory interferences and sub par returns. Over this some companies have been deleveraging their balance sheets while growing well along the way. The profits look depressed but that should change over the cycle. Also one cannot take out the regulatory angle from this equation but the situation could look much different over the next two years.

Q.How do you view the SME space which has brought many smaller companies into the listed space?

A.I believe that post GST & demonetization contrary to popular belief that the smaller companies will become inefficient and wither away the exact opposite should happen. The smaller companies will come into the formal ecosystem and should flourish. This will be due to the ancillarisation of corporate India where the smaller companies will be able to take away market share from the larger players. Also if one is looking at valuations they should look at the peak and trough valuations of small cap companies versus large cap companies. If this data is analyzed we will see that smaller companies have yet not shown significant out performance over the larger companies

Q.How do you manage the poor liquidity in the SME space?

A.The problem of liquidity is prevalent in all spheres. Even larger companies face liquidity pressures when the companies are going through turbulent phases. Also before investing one should not focus too much attention on how would one get out.

Q.How do you construct a portfolio and what determines your largest allocation?

A.My largest position is usually in companies where I will not lose money. That is usually the strongest point of portfolio construction. Also, one cannot be correct on all of the positions and hence the focus should be on not losing capital in the companies where one can go wrong

Q.Do you focus on the macro economic environment before investing in companies?

A.In macroeconomics usually one can spend a lot of time trying to understand the forces and still not get any conclusion. Thus I believe that time is better spent in analyzing companies which will not be overly affected by a worsening macro climate
Q.While looking at value versus growth how do you avoid “value traps”?

A.One cannot always avoid value traps or any thus it is important to have a diversified portfolio so that even if one goes wrong in assessment of a situation it will not have a big impact on the overall portfolio

Q.What are the most important points one should look at before selling a stock?

A.Everyone should try and look at valuations from different angles and not just associate it from one or two ratios like Price to earnings. Many a times analyzing from the point of replacement cost, opportunity cost and other aspects when combined with individual valuation parameters would help in giving  much better picture than a standalone examination via the Price to Earnings ratio

Q.What are your views on corporate governance and do you believe its cyclical?

A.Yes, it is true. The management will mostly be on shareholders side when everything is going wrong but its mostly when things are going great when managements turn towards poor capital allocation

Q.Going by the analogy of Mahabharata if we believe that markets are a “Chakravyuh” and the investors are “Abhimanyu” knowing very easily how to get in but not how to get out, how would you advise us in such a situation?

A.It usually works both ways and it is not always possible to get in and out at the correct time. Sometimes the investor will exit at the wrong time as well but that should be taken as a part of the game and move on.

 

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