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Editorial,
Dhruv Girdhar ............................................... 4
Survive To Thrive,
AnkitKanodia ............................................... 11
Market Lessons,
Manish Dhawan .......................................... 15
In the recent times, our economy has been going through patchy rides.
Increase in surcharge, slump in the auto sector, fall out of DHFL and
IL&FS and many other unfortunate actions have made a decent dent
in the investors returns.
© DELHI INVESTORS But we must never let these events affect our investing practice. In fact,
ASSOCIATION, 2019 such times are often good times to select good quality companies for
our portfolios and reject the ones that have become laggards.
On the contrary, I have observed that many of the retail investors have
lost confidence in the Indian economy. A lot many have stopped their
DIA JOURNAL IS OWNED BY SIPs. While a few others are planning to shift towards fixed income
DELHI INVESTORS ASSOCIATION assets.
History shows that such negative times don’t stay forever like diamonds.
In the long run, these negativities will become irrelevant. With a lot of
PUBLISHED BY: DELHI INVESTORS new businesses and entrepreneurial spirits, the size of opportunities in
ASSOCIATION the next 10-years is going to be much higher that what we have seen in
the last 30-years.
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Being from the financial industry (which also makes me biased against
Arun is a financial blogger at real estate), I have the opinion that equities are better over the long
run vis-a-vis real estate to create wealth. But when I look around,
Eighty-Twenty Investor. He
almost everyone around me has a real-estate-made-me-rich-story. I
writes about the financial hardly hear stories of normal-neighbor-next-door kind of people who
assets class and psychology have made wealth from equities.
that affects the investment
returns Am I missing something??
In order to solve the confusion, let me seek the help of one of the
greatest minds Mr. Charlie Munger.
While this is anecdotal, you would agree that majority of people who
have created wealth in real estate have held it over decades. 10,20,30-
year investment periods are numbers that you commonly hear when it
comes to real estate.
“OUR OWN PROPERTIES BOUGHT
BY MY PARENTS HAVE BEEN In fact, our own properties bought by my parents have been held for
over 20 years and I don’t think for the next 10 years anyone is even
HELD FOR OVER 20 YEARS AND I thinking about selling.
DON’T THINK FOR THE NEXT 10
YEARS ANYONE IS EVEN The major reasons that contribute to this long-term holding is primarily
THINKING ABOUT SELLING” the emotional connect a home creates, the fact that Indian society still
sees an own home as a status symbol and the inherent belief that over
the long term, home prices will definitely keep going up. The lack of
liquidity, taxation, black money etc. are few other reasons I can think of
for the long holding period.
Unfortunately, this is not the case with equities. Thanks to the volatile
nature of equity markets, most of us are not able to hold equities over a
long time period. You hardly see people who are able to hold on to
equities for long periods.
But what’s this fuss about longer time horizons. Why is it such a big
deal?
The logic is pretty simple – you can see that the money approximately
doubles every 5 years. As you move past the first 20 years, in the next 5
years your doubling effect is phenomenally magnified given that you
already have a 16 times initial amount as your base. Similarly between
25 to 30 years the multiplying effect is doubling on a 33x base which
gives you a 66x returns. See that!!
“MOST OFTEN THAN NOT, THE
FIRST REAL ESTATE INVESTMENT So as seen, an additional wait of 5 to 10 years brings about a significant
FOR MOST OF US HAPPENS change in your final investment value or put in other words, the
AROUND THE AGE OF 30 GIVEN multiplier impact is dramatic as the time frame increases.
THE IMMEDIATE PRESSURES
FROM OUR FOLKS AFTER Hence the key thing to remember is: Compounding or the multiplier
GETTING MARRIED” effect is back ended
While most of us don’t realize this intuitively, real estate investing and
the “my property multiplied by so much” stories are simply a reflection
of this humble boring concept commonly referred to as compounding.
You can refer the table below to see the “multiplier effect” at various
returns for various periods.
Most often than not, the first real estate investment for most of us
happens around the age of 30 given the immediate pressures from our
“PERSONALLY, I AM NOT A BIG folks after getting married. The story generally goes like this – 20% down
FAN OF THIS WORKING-YOUR- payment via our savings and some money from our families and the
remaining 80% through a bank loan. Then for the next 20 years or so,
ASS-OFF-TO-PAY-EMI’S- you are forced to save in order to pay for the EMIs (Equated Monthly
CONCEPT” Installment).
On one side, there is a sugar patient and on the other, someone like
me who wants to reduce weight by avoiding sugar – the intent is the
same – but who do you think is likely to avoid sugar!! (I hope you are
not checking my pics to confirm the answer)
Equities have an edge over real estate when it comes to long term
returns. The zero long term gains tax post 1 year is the icing on the
cake. Historically, equity returns in India as seen in the Sensex index has
been around 15%. (Mutual Funds have given 2-4% above the Sensex)
Real Estate Returns have historically been around 10-12% over long
periods (Source: How to Buy a House by E. Jayashree Kurup). And as
seen below you can see that for most periods equities have
comfortably outperformed Real estate returns.
After all isn’t it only fair that someone with the ability to generate ideas,
convert them into viable products/services, market and sell them
profitably, employ people, deploy land etc. should generate a higher
return at least more than the input costs (real estate is an input cost).
Parting Thoughts:
“THE REAL PROBLEM LIES IN THE
FACT THAT NOT MANY OF US Thus, putting all these together,
CAN HANG ON FOR A LONG Real Estate in terms of wealth creation has the inherent advantage of
PERIOD” long investment time horizon and large investment amount. So, the key
is to ensure that you don’t get it wrong on the third component –
reasonable returns. Most important is to not blindly believe that real
estate returns are always great and just like all asset classes, real estate
also goes through cycles and the key is to buy when valuations are
reasonable. (Read more on how to evaluate real estate investments
here)
In Equities, while long term returns are good, the real problem lies in the
fact that not many of us can hang on for a long period (as in real
estate) and most often the capital in play is also not adequate. So as
investors we need to start thinking more on “how do we survive the
volatility” and “how do we inculcate the discipline to save and invest
regularly”.
“EQUITIES ARE BETTER THAN All other issues such as which stock to buy, fund selection, expense
REAL ESTATE TO GENERATE ratio, index vs active, direct vs regular, how to time equity markets blah
blah.. which take up most of the media and blogging space is a clear
LONG TERM WEALTH ONLY IF example of missing the tree for the woods. While it’s good to read
YOU CAN HANG ON FOR A about these issues, let’s make sure that as 80:20 investors we get our
LONG TIME PERIOD AND HAVE long-term investment horizon and savings discipline in place first before
A REASONABLY LARGE we start worrying on these issues.
INVESTMENT AMOUNT IN PLAY”
So thus, by applying Munger’s framework and thinking through my
mother’s advice, I have finally concluded:
My earlier opinion:
Equities are better than Real estate to generate long term wealth.
My revised opinion:
Equities are better than Real estate to generate long term wealth only
if you can hang on for a long time period and have a reasonably large
investment amount in play.
If I had to simplify it in one sentence, I would say: “If you can survive for a
long time, compound interest will take care of you.”
Wikipedia writes this about the importance of survival for human beings:
“An organism’s fitness is measured by its ability to pass on its genes. The
most straightforward way to accomplish this is to survive to reproductive
age, mate, and then have offspring. These offspring will hold at least a
portion of their parent’s genes, up to all the parent’s genes in asexual
organisms. But for this to happen, an organism must first survive long
enough to reproduce, and this would mainly consist of adopting selfish
behaviors that would allow organisms to maximize their own chances for
“IF YOU CAN SURVIVE FOR A survival.”
LONG TIME, COMPOUND
INTEREST WILL TAKE CARE OF What could be those selfish behaviors for investors to survive for a long
YOU” time? Let’s try to think of some:
“If you buy things you do not need, soon you will have to sell things you
need.”
So, as an investor, if you wish to survive for long, you must avoid debt not
only at your portfolio level (by buying nearly debt-free companies) but
also at your personal level (by keeping yourself debt-free and avoiding
“I’M ALWAYS ASTOUNDED WHEN credit cards)
I THINK ABOUT COMPOUND
Second thing is to focus on your strengths. You cannot do many things
INTEREST AND THE POWER THAT IT together. You cannot learn about all the companies and industries
HAS FOR INVESTING”
right from your initial days of investing. So, you must pick and choose
which ones you are comfortable with to start with.
So, the lesson is to focus only on our conviction ideas even during the
euphoric times. If we buy any company just for the sake of higher returns,
we will not be willing to hold them when the market turns for the worse.
So, it proves that if you are an investor, your first aim always should be to
survive.
An effective hack to come out of this is to look at what the news was six
months ago, a year ago, a couple of years ago and five years ago. Be
mindful of the fact that you may always go wrong in your assessment of
a business or a promoter.
“FOCUS ONLY ON YOUR
CONVICTION IDEAS EVEN However, taking a falling price as the only evidence of performance is
suicidal. To survive in a challenging environment like the stock market,
DURING THE EUPHORIC TIMES” you must have the stomach to digest large, temporary, but notional
losses in your portfolio.
It’s easier said than done. However, the following conversation with
legendary investor Charlie Munger, the Vice-Chairman of Berkshire
Hathaway might help:
I know, you must be thinking that we are not like Buffett or Munger.
However, I want to bring this point here.
Buffett, Munger and all other successful investors were pretty much like all
of us when they started.
So, if you are a 25-year graduate with at least a thirty to forty years of
compounding ahead of you, all you need to focus today is on surviving
those forty years. Hence, the job for you is to work hard, earn well, save
regularly enough and regularly invest those savings in equity.
And if your portfolio survives for the next forty years, you are bound to do
well.
CALL US 91-11-43011000
One of the biggest lessons for example is HUMAN URGE TO FIND WHY?
Spend 15 minutes on Business channels and you will know a well-
articulated 15 sentence reason of Why India had its fall. Crude oil, ILFS,
currency etc. BUT remember these are post facto blabbers. They mean
nothing to a speculator or to an Investor for that matter.
“ONE OF THE BIGGEST LESSONS Lesson is Watch them for what they are worth, ENTERTAINMENT. In fact,
FOR EXAMPLE IS HUMAN URGE NOT EVEN that, because Information overload can actually paralyze
TO FIND WHY?” you from pulling the Trigger.
There are primarily 02 ways to milk the Market Cow. Momentum and
Value. The question is NOT which one is BETTER? Instead it is WHICH ONE
SUITS YOU!!
It’s about knowing yourself, who you are and what are your core
values. Are you a contrarian who thinks he is right, and market is
wrong? Are you confident about what you know about the company?
Are you the kind of person who can easily sleep well at night seeing
your portfolio down 50–70%.
or Are you not cocky about your abilities and convictions and believe
in the wisdom of the market? Believe in Strong risk management to
ensure you never reach a draw down which can trigger your Uncle
“IT’S ABOUT KNOWING point.
YOURSELF, WHO YOU ARE AND
Now Trust me, neither path is EASY or BETTER than other. A momentum
WHAT ARE YOUR CORE VALUES”
guy needs to have guts to square off his positions now and be willing to
look stupid if this was a BOTTOM.
A value guy needs to have guts to buy more of his position or other
positions as the market keeps falling. You can only pull off such acts
when you exactly know who you are, the strategy has to align with your
belief system.
And once you have figured that out, it all boils down to DISCIPLINE to
adhere to the defined process.
The way to address this problem is Position sizing as a strategy over and
“A VALUE GUY NEEDS TO HAVE above your current stock selection strategy. I discussed that in detail in
GUTS TO BUY MORE OF HIS our webinar below. Timing the timing model. (02 ways to do that,
POSITION OR OTHER POSITIONS deploy more capital when going is good and less when trend of equity
AS THE MARKET KEEPS FALLING” curve is down. Second, deploy more money on preset drawdown
levels)
Whatsapp and social media are full of WB and Howard marks quotes
and what one should do ideally in these situations. How you should add
to your positions and how “this too shall pass”.
The first thing a Practioner did, was liquidate all his liquid funds. That is
the way how FAT TONY would think. The LAST thing you want is to lose
your money on an account which was not even meant to generate
ALPHA. Only an academician tries to beat benchmarks in Liquid funds.
Of course, these are extreme views but get the drift. The point is this: Let
us say you have a position in a STOCK and bad news HIT it. What would
you do?
“ANOTHER WAY TO ENSURE WE
KEEP WHAT WE HAVE EARNED IS A) Evaluate the situation (if market is irrational, buy more)
TO DEPLOY OPTION HEDGES
WHEN TREND CHANGES” B) Do nothing.
In both option A and B, you are presuming that you know more than
the market and B) you have complete information. and remember in
these situations you never have complete information, you don’t know
the Fraud angle, or counter party risks etc. etc.
“A MOMENTUM GUY NEEDS TO
HAVE GUTS TO SQUARE OFF HIS
Nestle Maggie example: I would hold and buy more because reason of
POSITIONS NOW AND BE fall is known and there is no fraud angle
WILLING TO LOOK STUPID IF THIS
WAS ACTUALLY A BOTTOM” PC Jeweller: I would sell as I don’t know what the jhol is!!
The Book Trillion Dollar Coach is written by Eric Schmidt, the former
Chairman of Google and his co-authors Jonathan Rosenberg and Alan
Eagle
Nitin is a Mumbai based The Coach in the Book is Bill Campbell who is supposed to have
investor and the founder of coached half of Silicon Valley including legends like Steve Jobs, Larry
Alpha Ideas - an Investment Page, Sergei Brin, Sheryl Sandberg etc. Trillion Dollars in the title refers to
the wealth created by these companies thanks to the advice and
Blog for Indian Stock Markets
guidance provided by Bill
Bill Campbell is no more (he died in 2016) and his coachees felt a Book
would be the best way to honour his memory and bring his learnings to
ordinary folks,
One amazing aspect of Bill was that he did not charge a dime for his
“THE BOOK HAS QUITE A FEW services.
INTERESTING ANECDOTES FROM
BUSINESS AND THE BOARD Some of the hottest companies in Silicon Valley (including Google)
ROOM WHICH BRING TO offered him compensation to which his reply was:
COLOUR THE BUSINESS ASPECTS
OF SILICON VALLEY” “I don’t take cash, I don’t take stock, and I don’t take shit”
Then why did he spend so much time and energy coaching and
guiding others?
That to me was the greatest lesson from the greatest coach of all time
And the worst thing is that you cannot erase the risk, but you can
transfer the risk or hedge against the risk by placing some counter-bets.
Sorry to bust your bubble, but the only person you are fooling is yourself.
I will tell you exactly why:
For example, at the start of 2012, you have 1,00,000 in your account
and you want to save it till end of 2016. Now you would think that the
below will be your expected interest or earnings:
126,247.70 – 2000 – 500 (atm and cheque book charges) – 20% inflation
total over 4 years so it would be 25,250
The biggest mistake people make is ignore the fact that there exists a
huge financial market for financial instruments which bear better
returns than the savings bank account. A savings bank account should
only be used to keep some idle cash for unforeseen requirements.
Now that I have told you there is the Indian stock market for you to
take advantage of, let us see the two financial instruments:
• Equity Shares
• Bonds/Debentures
“SOME COMPANIES LIKE WIPRO Equity Shares are a part of a company, and the profit/loss is divided
HAVE RETURNED 535 CRORES into equal parts as per the number of equity shares. Equity shares are
traded and influenced by the market news and sentiments and Equity
JUST FROM A 20,000 RUPEE
share investments can give you the best and at the same time the
INVESTMENT IN 27 YEARS! BUT worst returns depending on the company you have invested.
AT THE SAME TIME COMPANIES
HAVE DESTROYED 99% OF THE Some companies like Wipro have returned 535 crores just from a 20,000
WEALTH” Rupee investment in 27 Years! But at the same Time companies have
destroyed 99% of the wealth, so it is imperative to select good
companies.
Bonds are nothing, but a loan taken by a company from an investor
with the promise to pay him regular interest and the principal on the
date of maturity. Bonds are financial instruments which have a face
value and interest value, for instance if one bond is 100 rupees and it
carries 8% interest for 5 Years. It means for 5 years you will get 8 rupees
“BONDS ARE NOTHING, BUT A each year and 100 rupees at the time of redemption i.e. after 5 years.
LOAN TAKEN BY A COMPANY
Why you should invest early?
FROM AN INVESTOR WITH THE
PROMISE TO PAY HIM REGULAR
Here is a great example why you should invest early, even though the
INTEREST AND THE PRINCIPAL amount may be small.
ON THE DATE OF MATURITY”
As you can see from Case 1 and Case 4, if you started out late, the
amount generated would almost be less than 90% of what was
generated in Case 1.
The MF Guy is a CA who helps We all are conditioned to believe that we need to be optimistic to
make money in equities, what goes down, bounces back, is the
investors on Personal Finance
mantra we all hear in every conversation. But there is a thin line
and Mutual Funds. He can be between being optimistic and ignorant.
reached at: @TheMFGuy1
Driving a car on a busy road and believing in your excellent driving skills
to avoid any accident is being optimistic. But trying to drive a car on a
busy road without knowing how to drive is being ignorant. You may
crash.
In this case you know whether you can drive or not. It isn’t tough, is it?
But when it comes to investing in Mutual Funds, it is surely not as easy to
identify whether you are being optimistic or ignorant.
One should never ignore a bad performer. As they say, “one bad
apple can spoil the entire bunch.” Similarly, one underperforming fund
“ONE SHOULD NOT COMPARE can decay your entire financial plan. What could be those selfish
FUND’S PERFORMANCE WITH behaviors for investors to survive for a long time? Let’s try to think of
PEERS BUT BENCHMARK” some:
Risk: Watch out if the fund is taking undue risk due to which the
performance has been impacted. For example, a big fund had taken
huge bet on PSU Banks since last 4 years and it underperformed badly
during that tenure. While the fund ultimately recovered, but those who
wanted money during these 4 years had to exit with poor returns. Such
undue risk is a red flag in a diversified fund.
“UNDERPERFORMANCE
AGAINST THE BENCHMARK IS A
Look out for any such sector skewed calls in the fund which is dragging
CONCERN WHEN IT IS FOR the performance. Such contra calls may take time to recover or may
LONGER PERIOD” not even recover. Another area could be concentration in top 10
stocks. Ideally it should not exceed 40% to 50% in a well-diversified
portfolio. Specially in small and midcap funds, diversification is
important. If underperformance is prolonged and is due to such high
concentrated bets it is a red flag.
So next time you are confused stay away from motivated ignorance,
use this simple STAR approach and you may be able to decide whether
you should stay invested of exit the underperforming fund.
Happy Investing!