Credo Capital

Infosys came out with IPO in 1993 and it was a failure as no one knew much about IT companies then so hence did not invest.  By 2001 with three bonus and split 100 shares bought at 95 Rs in IPO became 1600 Shares ie around 23 Lacs in value. Today the same shares are worth around 5 Crs. In a span of 21 years the stock gave around 43% per annum returns.

I know several people who had bought infosys and sold it in 2-3 years, i happen to know even employees who sold off the stock, very few thought if the company is doing well and continues to grow, why should i bother about the stock price. To compare the house that i grew up in was owned and we never bothered about its price / growth in price, it was a home to live in. If Infy shareholders had the same long term holding capacity as they had for their house, gold and other tangible assets, they would today be dollar millionaires and the dividend would be enough to lead a good life !! Trick is to think of financial assets like we do our other intangible assets such as house, gold even silver articles and even brass utensils that we pass on from generation to generation without bothering to check the price.

Image and data source : Economic Times.

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.

“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.

“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

Oh, if the topic sounds like gobbledygook, dont worry. It simply means bonds that are issued privately among select investors as opposed to bonds that are issued publicly like the recent tax free.  Debentures are fancy word for bonds and non convertible means that they can not be converted to shares at a later date. Why call them non convertible? beats me but that’s how we call it and as we love jargon’s we keep inventing new ones.

A small note on the topic for which i contributed in Economic Time recently published.

http://articles.economictimes.indiatimes.com/2011-12-06/news/30481893_1_private-placement-ncds-public-issue

You can be a crorepati by hardwork or sheer luck and usually a combination of both in varying degrees, the real question is can you stay on as a crorepati and even improve on your wealth. A small article on what to do with sudden gains that seem for many lucky people to disappear even faster.  My discussion on the same in Economic Times.

http://articles.economictimes.indiatimes.com/2011-12-01/news/30463210_1_reality-show-fortune-goa