These were people who invested sum equivalent to about five years of their annual earnings and and were able to generate 10x returns over last five years. That is why they could reach their targets.But these guys took concentrated bets with high convictions.
When they actually started they would have started with sum equivalent to one year of their annual earnings about ten years back.Secular index growth and entering at right time provided them innitial five bagger with much diversified portfolios.
So effectively they have made 50X returns over last decade.If we stay focussed and do not let any of western invetsment gurus or indian analyst influence our thought process we can also achieve similar returns
I learn that, Index went up 7 times between 2002 to 2007, so ppl who were present at the right place at right time surely had it little easier if i could say so !
A set of ppl with brilliant investment strategy multipliedtheir money multi-fold even in the next 5 years 2008-13 while index didnât do much. Kudos to them !! and some ppl will continue to do it amazing regularity for years to come!
Personally, I am NOT confident about my abilities to multiply money in factors anywhere close to such numbers. But to me, a 18% CAGR over a period of 10+ years sounds like a reasonable & achievable target if the Indian economy inflation hovers around 6-8% and GDP around 6-8% over long term. That will be close to 5 bagger in 10 years period.
But i continue to look for and invest in companies that can grow at higher rates with good financial management.
On the basis of personal experience, let me share my thoughts:
**_Equity investments: _**To earn inflation beating investment, investment in equities and equities mutual fund is must. But irrespective of the level of experience, itâs not a wise decision to invest your entire networth (less your property for residential purpose) or even a major portion of your networth in equities. In times of uncertainty like 2007-08, when your entire net worth is invested in markets and you see markets falling new lows every day, emotionally its becomes very taxing. While being a sell side analyst (though in a KPO), I got overconfident and invested a major portion of my networth in equities. At the same time I was facing job uncertainty. It was one of the worst periods I have gone through. From that time, I have decided to keep fund which is required to meet my personal expenses atleast for next three years [for you time period may be shorter, as I am into full time investment and do not have luxury of a full time paying job] safe instruments like short term debt mutual funds or long term government gilt funds. But I ensure that I restrict my investment to those mutual funds which invest only in government bonds.
**Fixed deposit: **I prefer debt mutual funds which invest in government bonds [short term or long term depending on the interest rate cycle]. We should remember that FDs provide fixed returns, but we cannot rule out possibility of 100% loss. Unlike equities, here diversification will not work. As Benjamin Graham said, a couple of extra percentage points in interest cannot compensate for risk of loss in case of debts. Avoid Non-convertible debentures bonds being issued by various companies unless you are absolutely sure that its earnings are going to be stable and it provides sufficient interest coverage [see attached doc which contains extract from Security analysis for further details]. Also size plays a major role in case of debts. So strictly avoid FDs of small and mid-cap companies, irrespective of the interest rate offered by them.
Own management of equity investment: Until and unless you have acquired minimum financial understanding and can understand the basics of Balance Sheet, profit and loss account etc and have passion to invest 5-10 hours every week doing your own diligence, itâs better to invest through Diversified equity mutual funds [no sector specific funds] through SIP route. [ofcourse even in selecting rights MFs you need to go through funds past performance of last five years or simply choose based on star rating by valueresearchonline.com or morningstar.com
@Subhash: Donât worry too much about macro black swans. Like Ustad WB says - earlier boom-bust cycle used to happen over a cpl of decades, then over a decade, then 5 yrs and now few years. The more frequent this cycle happens, the more money we may be able to make
Nice thoughts going around. Have been totally tied up in attending to some pressing personal issues. So much so, this is the first actual full day at work in 2013!
Happy Sankranti and Happy New Year again to all.I like to throw numbers at discussions like this. Always adds depth to the perspective.
A company like ITC historically has given 30% compounding over the last 15 years and more - where a few black swans have come and gone. I have held ITC from late Dec 2006/early 2007. My average cost was Rs 60, today it quotes at Rs 286, or a 36%+compounding over last 6 years.
30% compounding over 10 years is a whopping 17-18x. The magic is in starting early. someone who is starting at age 25 (vs someone at 35) already has a 17x advantage!!
The point I am trying to make is:
1 lakh in 10 years is worth 17 lakhs, 2.4 Cr in 20 years, and in 30 worth 34 Crs
This is plain simple compounding -working its magic. How many of us have the faith to stick with a quality company and allow basic compounding to take care of wealth-building?
in 2009, HDFC boasted of a 42% compounding over 17 years - not sure what that record is now; HDFC Bank should have a great record too. This direction is worth investigating - there should be atleast 7-10 bluechips which have historically provided 25%+compounding over the long term - and for good reasons too. We know why an ITC is favoured, right?
@ Atul - yes, there are multiple answers. One does not need a Huge Corpus at the start - is what I tried to exemplify above. Nor does one need to be full-time into equities.I would say the best option is in a situation where we have a steady cash flow (thatâs very very important -so we can let compounding work its magic) and have quality 10-15 hours per week to devote to thinking/refining/executing what we learn.
A steady high-paying job where you are in your comfort zone:) works well for many friends I know. They always have the gunpowder to strike and the space not to be harried about finding quality time. A consulting-retainership arrangement works well for some (after 5-10 years in a domain). Steady cash flow from real estate (invested 10 years back) works well for some. As you said there are many answers - to the right question posed:)!
Think we must introduce a new separate thread : Quest for blue-chip 25% Compounders over next 10 years.
We already have a framework of sorts in the Business Value Drivers discussion, which we can take forward to understand better why these business have delivered thus, and probably stand a very decent chance at similar compounding over next 5-10 years - given what we know of Management, Business Quality, Opportunity size, and fundamentals.
The answers would provide valuable insights for fortifying the ValuePickr Portfolio - which to my mind - needs lot of balancing - for an all-season, all-weather performance ability.
Interesting thread. I loved reading it simply because I am completely biased in this regard. I have never had any fixed deposits till recently (and even now I have less than 1% of my capital in FDs).
Personally, I think it is always better to buy stocks. Midcap and small cap for those who are adventurous and can handle volatility and large caps for those who does not want to.
If you lower your return expectation to that of an FD (say 8%), you can find a lot of good companies that will give you that kind of return without much of a problem. A very good way is to look for very large caps - say Nifty stocks - and buy when they are going through sectoral/company specific troubles. Like if you invest in BHEL, Siemens, ABB kind of companies (not recommending these stocks but citing them as examples) now and have the patience to sit it out for 3-5 years, you will surely make better than 8% and that too tax-free.
The problem is the moment we start thinking of money, we dream of 30% CAGR
For the money you want to keep safe, a solid contrarian approach on large caps works fairly well.
If you are not deep into stocks, a better approach is to diversify and have some FDs. I prefer recurring deposits for the salaried. That way you can sleep well at night (which is very very critical and prevents you from doing foolish things at market extremes).
I think I am little confused over what you guys mean? Do you mean a person can have 100% of his/her entire networth in equities without diversifying in any debt instrument to meet short term needs? By short term needs I mean any unfortunate event like losing a job, medical emergency etc I know many people who lost their job during last two years and could not get new job atleast for a year.
Letâs think about allocation to debt vs equities [ I personally do not invest in FDs, rather prefer debt mutual funds] from the overall portfolio perspective and not simply whether or not to invest in FDs. Last ten years for Indian market have been secular bull market, prior to that we have many periods where over an extended period of time markets have gone nowhere [ofcourse in hindsight one can say that if someone invested in HLL or such other stocks, one would still make money]. During a extended range bound market or secular bear market over a period of 5-8 years] where markets are not going anywhere and all of a sudden if one lose job or need funds to pay for some emergency funds, then one may be forced to sell stocks at a loss.
My whole argument is that from an overall portfolio perspective [which excludes oneâs residential property] EVERYONE should have sufficient funds to meet atleast one year expenses in safe instrument, which can be encashed at a short notice, without incurring any penalty or loss and IMHO such funds cannot be invested in in any instrument where market prices fluctuates widely. For me its debt mutual funds which invest in sovereign bonds [short term or long term depending on interest rate cycle]
I agree with you. Everyone should have a contingency fund, medical insurance, life insurance, own house before even looking at the stock market.
Also, typically for salaried people, their PF contributions are a significant debt investment. I also think tax saving through PPF is of utmost importance. After that you come into the market.
The FD vs stock question is (to my mind) for surplus âinvestibleâ cash that you have and are thinking where to invest and you donât need for the immediate future. If you need that money in the next 1-3 years, you should not even take the money close to any stock market
However, the amount of money you set aside in contingency funds because you are afraid of losing your job, medical emergency etc needs to be judged based on your personal context. For example, my dad had a severe heart condition and I had much more cash in my savings account than now (he passed away in 2010) because that risk is much lesser now.
I donât think there is any dichotomy. I was mainly reacting to folks inputs/queries of the type - bread and butter from investing vs Wealth building, sizeable corpus size, black swans, etc.
We are talking of letting something lie and compound at a (much) higher than the Risk Free rate (8% in PPF today). I talked of letting just 1 lakh lie uninterrupted for 30 years - and compound in a quality, safe company - which are those, is a separate discussion. Abhishek says asking 30% over 10 years is being greedy (I disagree:)), but I think he will also agree 20-25% is very doable. Else why are we in the game, at all?
Ofcourse like you say, to be in a position to let something compound undisturbed, you need to first create an Emergency Fund - atleast 6 months of Income/Expense may do just fine, stowed away in risk-free, reasonably liquid instruments. Thereâs no denying that. This is covered in ValuePickr Investing Basics section (Why to Invest, How to Invest, where to Invest sections).
Assume all newbies have read/pondered on these basics here or elsewhere.
Also as Vijay Pawha has mentioned, Perceived Risk is very different from Actual Risk. With some material experience in the markets (knowing what to avoid) we come to appreciate this very clearly. Like Abhishek mentions, Ayush can point to many stocks for Capital preservation purpose, with better than FD returns over short and long term, and currently tax free too (dont know wht the coming budget will have in store;)).
Donald, you are putting words in my mouth I am not saying 30% is being greedy. I aim for it myself. As you mentioned, otherwise I wouldnât have all my money in the game.
But the problem is when the high expectation is ingrained in our brains. If someone chases 30%, the possibilities of taking a lot of risk and getting into hot momentum stocks is higher and thereby higher chances of permanent loss of capital. So, better to have moderate expectations (say compound at 18% over a 20-30 year period). Then one will be less prone to chase fads.
My experience has been that I have done much much better when I have been more aware of the downside than looking for significant upside. Also, putting money is a no brainer for me, even when I was not directly in stocks. Much much better to be in good diversified mutual funds than FDs.
Thanks Donald and Abhishek - fully agree. Regarding returns expectation, my past experience is that better to concentrate more at downside risk. In the past when I was chasing higher returns, failed to see the downside and incurred huge losses [its different that I incurred losses on stocks on which my company rated analyst were highly bullish.
Regarding stocks providing better returns than FD and I think one should go over what Benjamin Graham had mentioned about the circumstances in which a stock becomes a debt. I think NHPC, SJVN and NTPC are such stocks. I know there is lot of policy uncertainty, why else they would be available cheap. These are the stocks 1) With highly predictable earnings 2) Earnings are recurring and demand will not decline steeply except for severe depression in which case even many of the FDs of companies may go bankrupt. 3) currently available at close to historically low valuation. NHPC had run up over the last few months, so dividend yield has come down. Read here for what Graham has to sayhttp://www.valuepickr.com/forum/stocks-for-the-long-run/171243013
Thecompoundeffect, is no doubt very powerful.It is helpful not only in financial aspect of ones life but so many other aspects as well. Thanks for pointing that out. I have read a nice book on compound effect some time back.
you can read this article on how to analyse before investment in any debt instrument. This blog also contains article on how to analyse various NCDs [though I am strictly opposed to investing in NCDs, but if someone want to chase higher returns better to do due diligence]. See the linkhttp://www.caporbit.com/how-can-you-make-safe-debt-investments/#comment-905
Yeaterday, while thinking, found a loophole in the way we are thinking. We are thinking in the line of static allocation between equity and fixed-income instrument. What we are lacking is the dynamic view of the same, i.e why canât we have a dynamic asset allocation framework.
As we know equity being volatile, to tend to swing between super-undervaluation and super-overvaluation in 5-10 year time period. Being 100% invested in equity in such scenario doesnât seems an optimal strategy. The best strategy is to be 100% invested when we are at a super-undervaluation stage (we know we can find it out when this is happening), and say 20-25% invested in fixed income instrument (be it FD, debt MF or whatever you choose) when we are at a super-overvaluation stage. So we can interpolate to find out how much of money we should put in fixed-income at any market condition.
This suggestion is based on the assumption that none of us are following the pure value-investing principle, and hence we are not looking for margin of safety at time. Rather we are following a mixture of growth, GRP, moat-based investing, turnaround, relative undervaluation, and techno-fundamental calls.
Absolutely, dynamic allocation between equity and debt should help one to reduce risk, and maximize returns in the Indian stock market, where stocks go through periods of ultra bullishness and deep bearishness every few years.
Having said that, the equity-debt allocation should be between your investment portfolio. Meaning, that suppose I have 1 crore of networth (cash, FD, Stocks, PF), excluding the home I live in. Out of this 1 crore, I may decide to keep 20 lakhs for a black swan event, 5 lakhs for personal emergency, and invest 75 lakhs. Then the dynamic allocation between debt-equity would be in my 75 lakh fund. I would not touch the remaining 25 lakhs, as they do not form part of my investments, even though some of it may be in debt fund.
The equity debt allocation of my investment portfolio can be based on the index PE or based on the sentiment index. Usually, analysts find a top or bottom by the PE or technical analysis. However, the sentiment can more correctly identify the top of any asset bubble including the stock market, real estate etc.- http://goo.gl/ryMO3
The sentiment is more qualitative and hence, difficult to identify by objective methods.
Recent bloodbath in midcap space has reconfirmed my belief that a dynamic asset allocation strategy between equity/debt instrument is key to success in share market. If someone has put all his egg in equity in this situation, he will be siting idle even at a mouth watering valuation level as he has no money to put in equity. On the other side, the smart one with decent amount of money in debt instrument is bound to get excited with each fall in stock price.
I feel to think an instrument as a risky is a wrong way of thinking. The best way of thinking is to have original thinking to find out where you can use the instrument to optimize your risk and return level. I feel it is the strategies which is risky, not the underlying instruments. (FDs are not risky per se, but having 100% invested in FD is a very risky strategy indeed)
**A balanced strategy is always better. One can have a seperate allocation to equity and debt investments. While equity takes care of higher returns, the debt generates cash at regular interval for the expenses and additional cash can be deployed back to equity if the opportunity arises. Also one can have cash component in the amount allocated to the equity investment which is useful during the fall. Always have an asset allocation plan and then strictly adhere to it. Always try to balance the asset allocation when one asset had a run-up. **
in a bull market equities will outperform debt by huge margin. in that scenario its better to be entirely on equity. but then we neve know when the market will turn around. so âdynamicâ allocation is very very tough to implement
in my view we should start with ALL equity and then slowly build debt from the profits. early start is very important from compounding perspective
if i could say so !