Credo Capital

“The important thing is to find wet snow and a really long hill. –  Warren Buffett explaining compounded returns via snowball effect.

Snowball effect describes something that starts out in  a small way, gathers momentum with time and has the highest effect in the end. Investing is no different, no investor ever started out in a big way, recently i saw an excellent video by Mohnish Pabrai an US based investor who has made  26% pa since 1995. Mohnish is an avid Warren Buffett fan and has not only created wealth for his family but is also a great philanthropist. 

Let us forget 26% returns of Mohnish and stick to 15% return for equities ( stocks ) as a probable return since that is the market return in Indian context for the last 20 odd years.

Starting out with a capital of 1 lac and investing for say 30 years it takes approximately 6 years to reach 2 lacs, but only three years to reach next level ie 3 lacs, 2 more  years to reach 4lacs and hardly 1.5 years to reach 5 lacs.

The snow ball effect moves big time after this,  it reaches critical point when the returns are higher than the initial investment of 1 lac,  ie annual returns itself is higher than the initial investment of 1 lac. and after this the annual returns become greater than the initial investment. In the last year ie 29-30 the returns are a whopping 7 times compared to the initial investment.

Though this is just school level maths, the implications are life changing, if you have 10,000 Rs today the choices are two either spend it or invest it, if you spend it the implications for your future wealth is tremendous around 5.7 lacs in 30 year if you get 15% return. There are three simple things to observe ie the more you save matters ie every rupee counts, the earlier you start to invest matters, a 60 year old can not expect to compound his wealth for 30 years( though he can do so for his children or grand children ), whereas a 30 year old can. Finally more you earn ie rate of return obtained matters.

to recap the three ingredients to snowball your way to wealth.

1. Earlier you start investing

2. More you invest

3. Better returns you get

Ideally one should have some investments before marriage and start adding to it as soon as one is settled a bit after marriage, review and if possible increase your investment post every salary increase or income.

The toughest question one can ask is where can i get 15%?

Stockmarket index like BSE Sensex have given around that returns in the past 20+ years Few equity mutual funds have a done a better job to give 20% returns. So even if we expect either similar returns or even lower. Irrespective of whether the return is 12% in future or 15% not the big question but to get the other 2 parts of the equation ie saving more and starting early.

Equity investing remains best way to go to compound wealth and equity mutual funds remain best way to invest in equity. So next time you are tempted to buy the new Iphone remember you may be throwing 10 lacs away in future wealth for something that hardly lasts year or two. This is just lump sum investing, the story gets much better if some money can be added every month to the kitty via equity fund SIPs.  Happy investing and remember the snowball effect always.

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.