Credo Capital

Wish you a happy and forgetful new year 2015 !!

Let me explain 🙂

Fidelity Investments did a study of their investors to find out who made the best returns, one would like to think that those who made the best returns were either most educated, or people who carefully analysed their investments and went to investments conferences to get new ideas etc or even people who were emotionally strong investors who did not sell during a panic or buy at the top. The answer to who makes the best investor is surprisingly simple that people who had forgotten that they had investments made the best investors.

Why is this so? Investments compound wealth over long periods, so when some one says 15% annual growth our minds immediately calculate 100 Rs becomes 115 at end of year 1 and stops there (not exciting,right), but does not move on to think it will be 132 Rs at end of 3rd year, things get very interesting from there on. At the end of 9th year the total return is 50 Rs approx which is half of the initial investment of 100 Rs, at the end of 15 years the annual return exceeds the initial value of 100 Rs and by 20th year it is almost twice the initial investment every year. So if you spend Rs 50k today instead of investing it, you are potentially losing around 8 Lacs in twenty years, and around 1 lac per year after 20 years. 1.5 lacs per year in returns after 22 years etc.

So the really large returns ( not % returns but amount wise returns) happen after longer period of times, While someone who invested Rs 50000 and took out Rs 1 lac + change at end of year 5 did make 15%, he never made 50k per annum that the investor who stayed till 15 years made or 1.2 Lacs per annum that investor who stayed till 22 years made.

I can hear some of you say where do i get 15% fixed return, I agree we can’t get 15% but the volatile markets where one could lose money in some years and make more in some others have delivered an astronomical 18%+ over 20 years, so anyone who stayed the course for 2 decades has made 20 lacs out of 50000 Rs. In fact mutual funds like franklin bluechip have delivered 20% over last 20 years.

The reason why the fidelity investor made large returns was because they had forgotten that they had invested and the money was compounding for them quietly all the time, if they had known that there was such an investment, chances are they would have taken the money out and donated the money to poor companies like Apple or Google for buying gadgets that will be outdated in about 2 weeks 🙂

So, in 2015 please ensure that you invest in a good diversified mutual fund via monthly installments or SIP and forget that you invest till you retire, the results are likely to be an happy surprise for you !!

Disclaimer : Mutual Fund investments like just about everything else in life carry risks, please understand them before investing.

Inspired by the Make in India campaign of the Prime Minister.

India has one of the largest stock markets in the world, extremely well regulated and has given spectacular returns over long term which is tax free to boot. yet most Indians prefer real estate or gold. While in the past this may have had some validity ( As gold was like cash and can be borrowed / sold fast during emergency, Real Estate provides security etc) it is not the be all in today’s world. Your bank ATM ensures that you can get hard cash 24*7 and what is more pays you some interest (even  6% in some cases!!)  unlike gold which you pay to safeguard ( even if some one steals from ATM your money is safe whereas if your gold is stolen it as good as gone). Agreed that a home of ones own is every ones dream, and all should work towards it but it is sad to see many people buy real estate for investments and struggle to pay EMI’s for the next 20 years.

Sadly, while majority of us focused on past short term returns to buy Real Estate and Gold, we missed the long term story unfolding in Indian equity markets which has given around 16% returns over last 10 years and around 18% per annum returns over 20 years. To put that in perspective at 18% your investment doubles every four years. Mutual funds that have been around for 20 years have given around 22% or 53 times in 20 years !!

Indians shun equities because they think it is ________( fill your pick here : gambling / risky / volatile etc) this is again an old tale, Indian markets have delivered amazing returns to those who invested and were patient, I’m not for a minute suggest that one should invest only in equities but that one should at the the least ‘also’ invest in equities.

What is more, investing in equities can be done in small chunks monthly by almost anyone ( from 1000 Rs / month)  so that it is easy on your budget and can help you create wealth ( Rs 1000 invested every month in Franklin India Bluechip for last 20 years has grown to Rs 28 Lacs, no doubt it was not a smooth ride of 22% every year but lumpy as some years saw great returns and some negative)  but overall the performance was excellent. In fact if one had started at 1000 Rs and increased the investment as their incomes grew, the resulting wealth would be in crores !!

So, Invest in India. If you believe that this country can do well, its stock markets would do much better !!!

Note : Past returns may or may not be sustained in the future / Mutual Funds are subject to market risks. Come to think of it that is true for Gold and Real Estate,too !!

Managing your career, or home requires action. The same can not be said of investing, there the action required is only in evaluating a investment and then deciding to invest on it. Checking out after that say once a year to see if any course correction is required. Like the Zen concept of glorious inaction, our investments act for us.

Prof Sanjay Bakshi an investor and teacher of behavioural finance. on a recent visit to Chennai, gave a talk on the concept,

https://dl.dropboxusercontent.com/u/28494399/Blog%20Links/October_Quest_2013.pdf

The basic idea is that if you buy quality companies even though they be relatively expensive compared to others, you tend to benefit over longer periods of time. Key word here being quality of course.  Once that is done, the investment plan is more or less on auto-pilot.

Buying the first private sector mutual fund Kothari Pioneer Bluechip ( now Franklin India Bluechip) has generated around 20% return per annum for last 20 years.  Apart from signing the initial form and cheque an investor had to do absolutely nothing else.

This is the epitome of glorious inaction, as the market acts on our behalf in creating wealth.

What uncles and aunts can teach you that the business newspapers will not.

If you are going to invest in stocks over the next five years, would you hope for a higher or lower stock prices during that period? Many investors get this one wrong, they are elated by higher prices and depressed when they fall. This reaction makes no sense – Warren Buffett.

There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they’d all be millionaires by now…as far as I know, most of them are still gainfully employed, which ought to tell us something. – Peter Lynch
We can say the same thing about our business news people too. Thing is investing is all about ten,twenty years from now while writing headlines is all about today, not exactly co-related.

“Blood bath on Dalal street”, claims the newspapers headlines following the 700 point drop in Sensex on August 16^th. Do google blood bath on dalal street and you shall see that every year ‘blood-bath’ occurs. Leading one to think that probably it is a scary place for people to set foot in!

Today, the investors interest in equity stocks and funds is so low that not many investors are around but if you see people who have made serious wealth over the long term, they are likely to have started small, kept investing, learn a thing or two about what fund or stocks to buy etc but more importantly never let the headline be their guide for investments.

And if you thought that is a tough thing to do meet Mrs Ashalatha Maheshwari from Mumbai, this 77 year old grandmother has seen a thing or two since she started investing in 70’s. Her investments are about 4 Crs, apart from this the house she lives in was bought from the profits she made by investing too. She reads annual reports diligently and is a fixture in most Annual General Meetings so much so that even Ratan Tata remembers her!

Not convinced ?

In my sleepy little home town we had an investor association that met every month, I came across a middle aged person who was the quintessential middle class guy, living in a small house, driving a moped, you would expect him to be working for some bank and you would be seriously wrong. he would  talk to us about how it is best to invest for long term in companies with great brands, captive business etc. Nothing esoteric just basic steps of long term investing. Many years later I learned that this ‘uncle’ who moved around in a TVS50 was worth a cool couple of crores and that was a decade back ! All made by diligently investing in great brands and good businesses with excellent managements like Colgate, HLL, ITC, CRISIL etc. He was in a way our own Warren Buffett.  HE was financially independent, yet unassuming and ready to teach anyone who cared to listen.

Both the ‘uncle’ and grandmother featured above would have gone through recessions, inflation, balance of payment crisis, etc. and kept investing.

OF course not all investors can be expected to study balance sheets and find which stocks to pick, it is much easier to invest in a Mutual Fund via monthly investments, but no, we don’t do that. We start investing keep at it for couple of years only to see the low rate of return and stop investing. Of course we will start investing again after market goes up !! Rinse & Repeat till glory comes. That will never work, what works is keep investing when there is blood bath all around, in fact invest more when you hear words like Blood-bath, Mayhem, crisis, etc.

If you go to you tube and search for the short film One Idiot, made by IDFC Foundation on habits that make an investor successful though, the message is clear. There is a path to financial independence and leading life in your own terms.

Notes : http://blogs.wsj.com/indiarealtime/2013/08/01/the-grandmother-with-faith-in-indian-stocks/

http://www.youtube.com/watch?v=vU1l1TB7GzI

In the world of investments, one is constantly barraged by data, analyses, news, etc., As we saw some issues back most of it is noise, and only few signal. Indeed, the investment world is the most famous one after entertainment with dedicated news channels, newspapers etc.

The management thinker Stephen Covey said that the only way to take on big tasks is to first start within your circle of competence and slowly expand your competence, Most of the time we end up doing the opposite in investing. A civil engineer buys stocks of IT companies without much knowledge of IT companies working, whereas the guy in IT co may be buying the stock of the engineering co because some talking head on TV said it was a good ‘buy’. So the first thing is to look for investment opportunities within your circle of competence, So first gain knowledge of the companies you work for, suppliers , competitors, customers etc.

In the last 4-5 years compared to any other industry FMCG Co’s have given stellar returns, this would have been obvious to any FMCG employee, supplier, stockist etc.; I’m not sure how many used this information. Obviously I’m not asking the FMCG employee to bet his house but buy the co’s share because he is the first one to see the growth that I would be the last one to see.

Normally as they say grass is green on the other side, hence many do not invest in their own co’s but that of others!

The above is the first level of competence, second level is where we as consumers come across great products that we use daily. Let us see some of the products:

Toothpaste and Brush : Colgate, Hindustan Uniliver, P&G

Water Purifiers: Tata, HLL

Kitchenware: Hawkins, Prestige

Appliances: Bajaj Electricals, Whirlpool,

Breakfast: HLL from cookies to bread,

Watches and Jewelry: Titan

Footwear: Bata

School Books, Note Books, Stationery: NAvneet, ITC,

This is just before 9 AM!!

We can go through this the entire day Transportation, Food, Medicines, even Holidays!!

The above does not obviously mean that all these are great companies to invest in but they are the starting point for further study, into the company & the environment it operates on.

So there is wealth out there, for many of us though this may be too much work to research and buy, o buy only in your circle of competence and leave the rest to professionals like Mutual Fund managers who scour the market for good investments every day. Some of them have compounded wealth so well that as I wrote previously, if you don’t want to go through this work, it is as easy as fill it shut it forget it to invest and reap rewards from long term investing via equity mutual funds.

Of course you need to comply with your co’s rules on insider trading. We need to distinguish between genuine research and insider trading, Calling your friend and telling him that your co’s board has approved a rescue plan before anyone in markets know it is insider trading, which is what Rajat Gupta is alleged to have done, but doing your homework in analyzing a co whether it is where you work or its product is liked by you or your friends is not insider trading.

“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” Sir John Marks Templeton

The biggest complain that one hears from investors seems to be the past returns have been poor (in the last 5 years) hence prefer the safe FD (never mind that adding inflation and taxes the real return could be negative). Second complaint is that the equity markets are too volatile and risky. Buy low sell high is all ok but how low is low and how high is high?  Not all of us are experts and we have seen that even experts can go wrong ( or usually go wrong 🙂  ) To address these need to buy equity as the valuations go lower and sell as valuation gets higher and keep the rest in bonds is a good way to do this. Let us see one such unique Mutual Fund.

FT India PE Ratio Fund of Fund

What is the idea sirji? Simple enough, markets keep swinging like a pendulum from one end of pessimism and the other end of euphoria, the fund values the market based on Price to earnings ratio (a simple formula to measure how cheap or expensive overall market indices are) and keeps selling equity and buying bonds as markets become costlier and sells bonds and buys equity as they become cheaper. So this first means comparatively lesser risk since at higher prices, stocks are sold and lower prices they are bought. Meanwhile the money in bonds also gets interest income.

The key thing is buying low and selling high, idea professed by all great investors be it Warren Buffett or Sir John Templeton ( this fund is from Franklin Templeton India incidentally) but hard to practice.

How does it work? This is a fund of fund structure i.e. the fund invests in its own Franklin Bluechip Fund (profiled last month in our column) and Templeton India Income Fund (a bond fund). As market keeps becoming costly, equity fund is sold and money moved to bonds, when equity is going down bond fund is sold and equity fund is bought. The allocation between equity and bond fund is given below.

Recognizing that market works in cycles and there is no way to say how high is high or how low is low, the fund lowers or increases exposure but is never fully into equity or into debt.

Why Invest

This fund was started way back in 2003 and would complete 10 years in Oct 2013. Its latest price is 46.29 implying an 18% return over last 9 years, in the same time period BSE SENSEX has delivered 16.35% returns. So an investor has got better returns with comparatively lower risk.  Even in the volatile past of last 5 years the fund has given 7.67% vs. NSE Nifty returns of (–) 0.62%

Costs & Taxation

This is a fund of fund and hence taxed as a non equity fund. So short term gains will be taxed at the marginal rates of the investor and long term gains will be either 10% without indexation or 20% with indexation whichever is lower. Ideally this fund is meant for 5 years + holding time but I would recommend for even longer periods. It makes a good entry point for investors who have not invested in equity or are afraid of the volatility of the markets.  Cost (expense ratio) is a bit high since it is a fund of fund approximately 2.71% per annum however my take is that the advantage of buying low and selling high automatically makes it attractive for me even with the cost.

Risks: Though there is a disclaimer at the bottom, there is no harm in repeating that Mutual funds do not and can not guarantee returns and there is no assurance for either principal or returns, not only that past performance may or may not be repeated in future. However, investing wisely in equity markets remains the corner stone of capitalism, and the only known way to beat inflation. I think it will remain that way.

Min Investment Amount : Rs 5000. Min Investment Period : 1% Exit load applicable if investment is sold before 1 year, nil after 1 year.

Source:  Scheme Factsheet, Morningstar.in, Valueresearchonline.com

Disclaimer : Mutual Fund investments are subject to market risks, please read scheme related documents carefully.

Author is a Certified Financial Planner based in Chennai.

An article on The Mint newspaper for which i contributed. Old one but the message is relevant ( actual reason is i forgot to post it earlier 🙂

http://www.livemint.com/2011/04/04212641/Four-products-for-beating-infl.html

A very good interview by IDFC MF Dy CEO says that most investors come in when the PE ratio for the markets are in the highest band ie between 19-25 times earnings and get little or no returns for next few years which makes them disillussioned with both markets and investing itself.

What the IDFC folks have done it is created a market signal much like a traffic signal with Red , Amber and Green signals ( these are valuations so the index number does not matter for example at 16000 points if the EPS for index is 1600 its dirt cheap and at 12000 points if the EPS for index is 600 the markets are very costly..so just reading the index level doesnt tell the full story)

Red signals PE of more then 19 meaning markets are richly valued and risks are high

Amber signals fair  valuations at PE of >16>19

Green with less than 16 PE means markets are undervalued, they may be just undervalue at say 15 pe or highly overvalued at 12 pe.

Now a word of caution here markets simply dont fly from green to red offering a quick way to make money but sort of meander a long time at green and amber before suddenly shooting up which means that as usual patience pays. Also just because its in red zone doesnt mean you need to sell all your holdings because markets may be in red zone all the way from 19-25 thats almost a 30% range so they can go high and keep going higher too.

The main issue is that in green zone the valuations are low because mostly the news flow is negative, economy is slowing down, Inflation is high etc. These are not the times when investors generally prefer to buy but this is the only way to get good returns not when there is a slew of IPOs ,fund launches and everyone is painting a rosy picture.

Secondly green and amber zones are best for SIPs too as markets seems to stay in these zones a longer time frame than red zone which makes them ideal for accumulation.

The only hitch here is if the EPS of sensex keeps going down bringing the signal from green to amber to red without prices moving up, this remote possibility happens when earnings drop are significant but the good news is that while these can be bad for a single stock usually earnings of sensex are blended so well that chances of everything going wrong at same time is nil..even if it does like in 2008 markets fall rapidly and enter green zone again making the valuations attractive.

So an lay investor can use the PE ratio as a good valuation tool and entry point for both lumpsum purchase as well as SIPs to get superior returns. There are funds specifically designed that move from debt to equity or vice versa based on the PE ratios such as FT India PE ratio Fund of Fund, Principal Smart Equity Fund. FT India PE Fund for examples moves between Franklin Bluechip and Templeton India Income Fund based on the PE multiple being higher or lower and has given almost same returns as Franklin India Bluechip Fund over last 5 years with much less volatility.

The full interview by IDFC Dy CEO can be read here http://wealthforumezine.net/AMCSpeakIDFC091011.html

This is a headline from moneycontrol.com “edelweiss expects mkts to be volatile 1st half2011”, what they actually mean is we do not know what will happen but since you asked a question we shall give an answer!

Saying that it will be volatile is like saying it may “rain sporadically with heavy rain in one or two places” lots of words with no meaning.