It WAS Easy!!!! It IS NOT Easy!!!!

A few weeks ago, Howard Marks came out with his brilliant Memo Titled "It's Not Easy".
In that Memo, he argued that it's not Easy to make super-normal returns from your investments.
You need second level thinking, probabilistic mind-set, understand risk, contrarian thinking & many such things to be a super-investor.
For full Memo- See here.

If I look back at my near 5 year investing experience, I don't agree with him. It was so easy to get super-normal returns from equities for the last 5 years. There were so many Near No-Brainer ideas available which had-

1) A Great Past - in terms of growth- both high growth as well as consistent growth, Low debt levels, high ROCE, Dividends, Promoter walking the talk etc

2)  Great Outlook- Businesses were looking scalable, had decent opportunity size, were small compared to opportunity size, strong tail-winds to future growth.

3) Great Price- Yet these emerging moats were available at such a low valuation that market was assuming zero future growth for them.

You could buy Buffett kinda businesses at Graham's Prices!!

And there were not just a few of them but were plenty of them to choose from. Some names that come to my mind- Mayur, Cera, RS Soft, PI, Repco, Canfin, Ajanta, Amara Raja, Fluidomat, Kaveri, VMart, Symphony, Relaxo.

IT WAS EASY!!! REALLY EASY!!

Fast Forward to Nov 2015, The Bull Market-
Now with Bull market in full swing, you (this applies to Me, atleast) will very very rarely find a PERFECT THREE COMBO- Great Past, Great Outlook, Great Price.
We need to leave at least one of the three aspects- Either Past won't be great & we have to assume last 1/2 quarter to be the new norm going forward, Or (Near Term) Outlook won't be great, Or you will have to pay a high price for the business.

Some examples from my track-list-
Past Issues- Jubiliant Life, Indo Count, Cupid, Capital First, Intellect.
Outlook Not Great- Eclerx, Tata Motors, Accelya, Mayur, Dhanuka Agri.
Valuations Not Great- Ajanta, Canfin, PI, Repco, Cera.

NOW IT'S NOT EASY !!!!
At-least, I am not finding it Easy.

PS- If you have a Perfect Three Combo in any one stock in your portfolio & are finding it easy, please message me.

Finding Friends in Trends!!

I have always been a Bottom-Up investor all through my investing life (of 4.5 years). So much that, however hard a friend may try to convince me to buy a stock on story/macro, I will not even bother to study the stock, if numbers don't look convincing enough.

However, since last few months I have started to look at big level macro themes & trends. Whether that is because of getting more experienced & hence more intelligent OR desperation as Bull market makes more in-roads OR me getting more closer to noise thanks to twitter & whatsapp OR due to macro trends more visible thanks to Mr Modi's marketing skills, I am not too sure.

Some of the trends that are attracting market participants these days are -

• Affordable housing and Housing for All

• 100 smart cities

• More toilets

• Revival of CV industry

• Growth of Solar & Wind

• Humongous opportunity for Indian Pharma

• Textiles - The Next Pharma  

• E-com Boom

• Growth of Commodity trading in India

• Make- in- India

• Growth of QSR Industry in India

• Digitization

Though stocks are still not finding place in my portfolio just on these trends, however, when trends meet numbers, I am getting more & more inclined to look deeper.

And a result of that, have found a few friends in the above trends.

Now whether these trends become destiny (& give me multi-baggers) or fade away (& give me multi-beggers), we will only get to know in due course!!!

Some of the ANTI-TRENDS that are quite prevalent these days are-

• Rural growth struggling

• Offline retailing struggling 

Both look over-hyped to me. 

Rural struggled last year due to poor monsoon. This year I expect this trend to reverse due to better monsoon, increase of MSP in few crops, more focus on MGNREGA and last year's low base.

People don't buy non-branded apparels online, especially in Tier-2 and 3 cities.

Hence, I still continue to have a few friends in these Anti-trends and I remain bullish on their long term performance.  

How much is Enough??

A big part of our financial life keeps revolving around a simple looking equation-

A= P * (1+r)^n

The compound interest equation. No wonder, it's called the Eighth wonder of the world.

Investors' keep trying to improve r.... the CAGR.. by looking to benefit from volatility that equity markets' possesses.
Financial advisers, on the other hand, keep asking us to ignore r & focus on n.. the time period.

So, let me ignore both & focus on A.. the final amount, The Target.

Was listening to Mr Subra's lecture on personal finance (See here), and in the first part of the video he says, A = 20 crore for a 30 year old with monthly expense of 50,000.
Looked really high to me, having believed Basant's figure of 50 times annual expense to be the final target (he used 2% dividend yield to calculate the amount).

So, the question came again- How much is Enough??

So, here is my calculation-

Assumptions-

• Remaining Life = 60 years (better to be conservative here; so a 30 year old to live till 90)
• Inflation= 10% (better to be conservative here also)
• Cagr= 12% (better to be conservative here also)
• Money withdrawn at year start (& not equally throughout) & return comes at year end (& not equally throughout) .. (better to be conservative here also)

Lets say I withdraw 1 lakh (from portfolio) in Year 1 to pay for annual expense & that annual expense keeps on rising at 10% every year, so in Year 2, I will need 1.1 lakh & so on & so in Year 60, I will need 277 lakh.

Now, this withdrawn amount will reduce the portfolio by same amount & then have applied r (12% growth) on year ending fund. Calculation below- 

Year starting fund withdrawn ending fund 1 37.0 1.0 36.0 2 40.3 1.1 39.2 3 43.9 1.2 42.7 4 47.8 1.3 46.5 5 52.1 1.5 50.6 6 56.7 1.6 55.1 7 61.7 1.8 59.9 8 67.1 1.9 65.2 9 73.0 2.1 70.9 10 79.4 2.4 77.0 11 86.3 2.6 83.7 12 93.7 2.9 90.8 13 101.7 3.1 98.6 14 110.4 3.5 107.0 15 119.8 3.8 116.0 16 129.9 4.2 125.8 17 140.9 4.6 136.3 18 152.6 5.1 147.6 19 165.3 5.6 159.7 20 178.9 6.1 172.8 21 193.5 6.7 186.8 22 209.2 7.4 201.8 23 226.0 8.1 217.9 24 244.0 9.0 235.0 25 263.2 9.8 253.4 26 283.8 10.8 273.0 27 305.7 11.9 293.8 28 329.1 13.1 316.0 29 353.9 14.4 339.5 30 380.2 15.9 364.3 31 408.0 17.4 390.6 32 437.5 19.2 418.3 33 468.5 21.1 447.3 34 501.0 23.2 477.8 35 535.1 25.5 509.6 36 570.7 28.1 542.6 37 607.8 30.9 576.8 38 646.1 34.0 612.1 39 685.5 37.4 648.1 40 725.9 41.1 684.7 41 766.9 45.3 721.6 42 808.2 49.8 758.5 43 849.5 54.8 794.7 44 890.1 60.2 829.8 45 929.4 66.3 863.1 46 966.7 72.9 893.8 47 1001.1 80.2 920.9 48 1031.4 88.2 943.2 49 1056.4 97.0 959.4 50 1074.5 106.7 967.8 51 1083.9 117.4 966.5 52 1082.5 129.1 953.4 53 1067.8 142.0 925.8 54 1036.9 156.2 880.6 55 986.3 171.9 814.4 56 912.1 189.1 723.1 57 809.8 208.0 601.9 58 674.1 228.8 445.3 59 498.8 251.6 247.1 60 276.8 276.8 0.0

Then using the Goal seek function (to make Year 60 ending fund value = 0), we get Starting fund value at Year 1 = 37.0 lakhs 

i.e 37 times annual expense.

So, the magical number for a 30 year old with annual expense of 6 lakh is 2.22 cr (assuming he continues to cover medical, leisure expense etc in this annual expense only).

For a remaining life of 70 years, we need 40 times expense & for 80 years remaining, we need around 43 times.

So, 37-40 times annual expense is enough!

However, since equity returns will be lumpy, a negative return in early years will hurt. Hence, we need to build some Margin of safety into the formula.
Hence, 50 times annual expense should be enough! (except in extreme situations)

And that's not impossible provided we take care of P, r and n of the Compounding equation.

2014- The Year That Was!!!

As we enter 2015, lets us look back at how 2014 was for investors.
Thanks to Modi, commodity movements and good valuations, 2014 proved to be an amazing year for investors.

It proved to be an year where losing money was tough!!  

My 2014 20 stock model portfolio (posted here) performed as follows-

VALUE PICKS		LOW PE		MEDIUM PE		HIGH PE
Nesco	121%	Canfin	187%	Repco	91%	Page	127%
Selan	17%	RS	199%	Astral	138%	Itc	14%
Piramal	51%	Acrysil	191%	Ajanta	146%	Nestle	20%
Noida toll	62%	Avanti	538%	Symphony	359%	Gruh	113%
Ilfs Inves	40%	JB	56%	PI	109%	Sun	46%
AVERAGE	58%		234%		169%		64%

A few points to note-
1) Somebody cloning the full portfolio and then doing nothing for the full year would be sitting on 131% returns.

2) Avanti & Symphony performed the best (on earnings growth & PE expansion) while Selan, ITC and Nestle performed poorly.

3) Highest return came from Low PE portfolio followed by Medium PE portfolio- clearly shows if you want high returns, small caps- untested names is where you got to be. High PE- proven names will give stability in tough times but will under-perform in bullish times.
While Value picks need Catalysts to do well, irrespective of market mood. For ex- Selan did well for most of the year on the hope of production increase, but when reality proved different and crude saw sharp drop, stock price cut was sharp.

Looking forward, I expect 2015 to be decent (but not as good as 2014) due to loose monetary policies in EU and Japan and lack of good investment opportunities (other than India) for FIIs.
Due to SEBI regulations, I won't be posting model portfolio for 2015.