@Alphin@DonaldLess than 10% of the person’s net worth is in equities, so he sleeps well :). He is also an Entrepreneur - so he is what can be called a “Calculated” Risk Taker
@Donald: If this is the case then I think there needs to be a thread to discuss just the allocation…plain returns without right allocation hides more than it reveals:
I joined theequitydesk paid forum for sometime, 1 point which was repeatedly pushed by Basant was higher allocation to equities. He used to even emphasize that with a carefully selected set of stocks in consumer/housing finance, one can even go with upto 20% leverage.
If your networth is say 1-2cr and you invest 10 lac into 10 different companies, how much difference would it make?
What is the point of 10% allocation, was it even lower when he started? I think he got peaceful sleep but at the same time missed/delayed a golden opportunity to create lifetime wealth,…The example should be studied both as a success and a failure.
I also have the same question in my mind as pointed out by Raman, why has this gentleman not put more money in equities since no other asset class has given that kind of returns (54% CAGR) in that time frame? Would be good to know his views as 10% looks like very less allocation.
My 0.002 cents - an IRR of 54% is eye-popping and how I wish I could do that over a long period of time.
This however poured water on it all. When you say only 10% is invested in equities, I am not sure if it is starting or ending 10%. This means 90% is in assets besides equities. If he is an entrepreneur as you mention, then maybe a good part of the capital is deployed there. If so, then it makes sense to consider deploying capital, instead of in the business, into equities.
But my larger point is that returns should always be looked at total capital and not just the portion allocated to the specific asset class. No doubt we will learn stock-picking from the portion allocated to equities, but we also learn from the %age allocated to equities. A compounding of total capital at 20% is superior to a compounding of 55% on 10% of capital, say over 5 years, while the rest chugs along at risk free rate, even though, given the market we are in, we are likely to snub that guy who compounded 20% of the entire capital.
P.S: This is in no way to undermine the expertise of the person; if anything I can only learn from him.
What I think is it much easier to learn to be disciplined with 10% capital allocation [ due to low magnitude of capital loss ] and then grow the capital, and subsequently allocate more capital as one is confident to be disciplined with ones experience.
This seems to be similar to a person who joins a gym first learns to maintain his proper form while doing exercises to avoid injury and once his form is perfected he can confidently lift heavier weights to get significant gains.
The problem I face and many of us here face is that we have grown our capital allocated in equities to a significant percentage and then we are trying to learn to get the discipline required to manage the capital.
That being said we as salaried employees lack other medium for getting good returns and may have to forego on opportunity cost due to low equity allocation trying to learn the discipline. I myself have become risk averse and have atleast 40% allocated to gold, mf and safe stocks right now.
I duly appreciate the persons capability and maybe we should take it as a example to follow , based on the outstanding returns of the person which I think has more to do with the discipline followed by the person.
For salaried employees with few options on the table, Equity is a good option assuming due diligence and risk taking ability is there. If I have 1cr I need to put atleast 50-60% to equities to earn a decent return. It also depends upon the amount of Capital one has got. May be entrepreneur share of 10% may be 10 or 20 crs.In that case 10% is decent sum to invest unless they are professional investors
There can’t be any single answer for this. The most correct answer would be: It depends ! It depends on really how much return you are able to generate consistently and how much risk you are willing to take.
If one is able to generate high return consistently, then equity allocation (high or low) won’t matter. Since the compounding effect will anyway take care of it in very short time. So in this case, I will certainly start with low equity allocation just not to lose my sleep and peace of mind.
If one is just able to generate a few percentage point higher return than other asset class, then I will assume, it will come with the required volatility and having high allocation will take away my sleep and peace. So totally personal call, how much risk I am willing to take. High allocation to equity will certainly matter in this case.
From my experience, being as salaried earlier and over last 2 years as an entrepreneur, the capital allocation is very crucial part and it is subject to how much risk-reward ratio you have against various options and also how much time you are ready to allocate to each asset class.
When I was salaried, my allocation in equity never exceeded more than 25%. The reason was not that I other investments, but the amount of time I could allocate to equity research was quite less, and hence I couldn’t convince myself invest more. I felt equities risky because my knowledge was limited.
Over last 2 years, I am able to spend more time for equity research and my allocation is increased to 50% of my total capital. The reason I feel is mainly because I am spending more time on equity and I am more knowledgeable than when I was salaried. I feel equity less risky now.
When it comes to the different asset class, one more factor is related expected future returns. In the case of equities, even in the most optimistic scenario, it is not easy to estimate forward returns at more than 25~30%.I doubt any investor can claim he can plan for 50%+ CAGR return over 5 years. If during any 5 year period if the CAGR is > 30%, then it is more due to good times and very likely it will get averaged over next 5 years.
Now considering 25% as sure shot forward return on equity over long terms, if one is running a business, where the returns are ~ 25% then where would you put more money? I would say, it would be good to invest in own business even if returns are >20% and there are chances in future returns exceeding 20%. Because you are spending most of your time on your business and better you capital is allocated where you spend your time.
Allocating 80%~90% of capital in equity is most suitable for full-time investors as this much allocation requires, your 100% time is allocated to that.
Incidentally, I was reading a book called “The Millionaire Next Door” - one of the most recommended book on characteristics of American Millionires. It’s the result of research on about 15000+ Millionaires with a focus on those who have accumulated wealth. It’s one of the most recommended books on wealth creation/maintenance.
Here is a direct quote from the very beginning of the revised version:
A bull market gives an impression that >70%, even 90% equity allocation is essential in order to become rich - but there are other components of “staying rich” which is equally important (if not more), usually ignored by most, Modest Living, risk exposure etc to name a few. Even if we keep on screaming “compounding” - usually we fail to understand its full potential due to the failure of realization on how long 20 years actually feels like.
The only purpose of investing is to use capital to create capital, and is best measured by annual returns. If some money is saved (by frugal living) it is added back to the capital for investing. If money is spent (i.e. expenses), it is taken away from the capital.
To look at only a portion of capital will not fulfil the purpose, and in fact can be deceptive.
Am not talking of busineessmen, for a normal retail guy the other options are Gold, FD or real estate and allocating to equity(provided you know what to choose) would be best option.
26% compounded for 10 years becomes 10x, now this is 10x only if you have entire net-worth allocated, if you had allocated only 10% of your wealth then it only becomes 2x… Many investors would have done fabulous job in compounding wealth in last 7-8 years but whether the wealth accumulated would make a material difference to their networth or not is a subject of % allocation
Background: I have 75% of my capital in the U.S., 25% in India. Mostly cash, some equities and some real estate.
I plan to transition 80% of my total capital to equities and 100% of my India capital to equities (70% stocks and 30% bonds/FDs). Some of the rest will be tied up in my primary residence and 3-5 years of expenses in cash/short term bonds.
It is the best and only way to beat inflation.
Equities are more liquid with fewer transaction costs than real estate.
I cannot imagine how with real inflation at 10% in the U.S. and even higher in India, sitting in cash or other investments beats inflation. Real estate keeps up with inflation, stocks beat inflation.
Agree to above, though instead of just beating inflation but you may also think of accumulating wealth over long term using equities…10x in 10years by finding quality companies growing at 25%+… or may be copying picks of valuepickr founders
Hi Raman Sir,
Well, I think most of the members in this forum, have the same goal, to accumulate wealth over long term, next 10-15 years, and to find the next eicher, hdfc, symphony!
Even I want to do the same, however, I may only have 1% knowledge what other seniors here are having.
I feel confused sometimes upon seeing the valuation of many companies, and one big issue which I am sure many are facing is:
How long will this bull run continue?
When will I get my watchlist stock at correction price?
or it might happen that it will not give me a chance to buy due to continuous upward trajectory…
Example: RBL bank.
I can’t answer these questions but can suggest a framework to think upon.
If you have less than 25lacs to invest, better focus on you job that is the place to be…accumulate money first.
If you have more than 25 and are confused with many questions like the ones listed here - give your money to equity pms or mutual fund with track record of 25%+ CAGR for last 10 years… this could be an amazing option where they focus on what they know best and you focus on what you know best(your job)
If you have 25+ and think you have it in you - then you would slowly start figuring out right questions and move from “how long will this bull run continue” to “can my company sustain growth even in bear market”; “When will I get my watchlist stock at correction price” to “which is a consistent performer in my watch-list and do I really need to wait for correction” etc etc
my 2 cents and a broad framework…individual scenarios may be different…