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.

Taking cues from Nifty Fifty History- Tone down Expectations

Yesterday, Nifty reported PE crossed 21 for the first time in 3.5 years (last time it was at 21+ PE on 2nd May 2011). See here. 

I did some calculation on how Nifty has behaved in the past from various PE, PB and Div Yield levels (taken all data from NSE website) & here is the analysis-

PE	1yr Return	3yr CAGR	PB	1yr Return	3yr CAGR	Div Yield	1yr Return	3yr CAGR
<12	70%	39%	<2	11%	26%	>3%	82%	55%
12-15	52%	30%	2-3	35%	27%	2.5-3%	55%	43%
15-18	20%	18%	3-4	14%	13%	2-2.5%	53%	36%
18-20	8%	10%	4-5	8%	5%	1.5-2%	32%	19%
20-22	5%	6%	5-6	-3%	5%	1-1.5%	4%	7%
22-24	-7%	1%	6+	-52%	-1%	<1%	-11%	2%
24-26	-29%	-3%
26+	-34%	-9%

So, data clearly says- "Be Greedy when others are Fearful and Be Fearful when others are Greedy."

Currently, Nifty is at 21.1 PE, 3.5 PB and 1.25% div yield.

So, history says-

1) Tone down your expectations. Nifty won't run up fast from here.

2) But 1 yr and 3 yr returns are not into negative territory as yet. So, we are not into bubble territory as yet.

Though, there are early signs of bubble-

1) Small & mid caps are running up fast on (a) One good quarter results (b) Some expert's reco

2) IPOs are coming and getting huge subscription

3) Quality Consistent growers are selling at 30+ PE.

But these are early signs only. Big zero Profit IPOs are yet to come. Valuations are yet to get over-stretched.

So, according to history, Nifty Index should give close to FD kinda returns over next 3 years. 

But, some will say, it's different this time-

1) We are at the bottom of the economic cycle. Q1 GDP growth is encouraging, interest rates should go lower in some time which will give boost to ROEs and PAT growths.

2) Strong government and PM after a long long time.

So, according to me, its time to get a bit cautious; but only a bit!!!

FY15- Where are We Heading?

FY14 has been an amazing year for Indian stock market thanks to strong election verdict and turnaround hopes.

25,000 on BSE and 7,500 on NSE looks too high to someone waiting on the sidelines and looking to enter. Wish someone can forecast where are we heading !! I certainly can't.

But at least we can see where are we now & use that as a guide for decision making (as suggested by Howard Marks in his book The Most Important Thing).

So where are we right now?

1) PE- Nifty standalone PE is 20.4 (See Here) while Sensex standalone PE is 18.5 (See Here).
Consolidated will be somewhat lesser. This is little higher than long term average PE but lower than 2008 peak levels.

2) Mcap to GDP ratio- Market cap of BSE listed companies is 87.8 trillion INR which gives a Mcap to GDP ratio of 79.5%. At 2008 peak, this ratio went up to 103%. See news links here and here.

So, here is the good news- We are not into insane levels yet! However, we are above long term average on Valuation. Hence, don't expect huge up-moves in FY15 like we saw in FY14.
*********************************************************************************

Now a word of advise-
Ignore all of the above. Everything is just noise.
Just find a portfolio of stocks which can surprise the market by earnings growth or by dividend payout or by special situation (de-merger, de-listing, asset sale, or even stock split) and sit on it.
   

V Mart Retail- A Possible Multibagger...

Wrote on V Mart Retail as a part of Safal Niveshak Value Investing Contest.

Report can be accessed here-

http://www.safalniveshak.com/value-investing-contest-v-mart-retail/


However, please note-

This is not a Buy & Forget Stock. There are things which can go wrong here.
An investor needs to monitor-
1) Sales/ sq foot — A declining trend here means they are struggling to grow in their existing stores / growing too fast for confort.
2) PAT margins — A declining trend here means they are giving too high discounts to attract customers may be due to increased competition or due to lack of customer interest.
3) Inventory Days — A declining trend here means they are not able to sell inventory fast enough & run the risk of obsolescence.
4) Payable Days — A declining trend here means suppliers are taking better terms from the company.

Disclosure- Invested

2014- Model Portfolio

As promised in the last post, here is my Five stock model portfolio for 2014.

But rather than picking one portfolio, I have picked four different portfolio for four different investment styles.

Value Picks	Low PE	Medium PE	High PE
Nesco - 783	Canfin - 174	Repco - 348	Page - 5164
Selan - 304	RS Soft - 194	Astral - 330	ITC - 322
Piramal - 551	Acrysil - 205	Ajanta P - 946	Nestle - 5297
Noida Toll - 21.5	Avanti - 248	Symphony - 424	Gruh - 256
IL&FS Inv Managers -13	JB Chem - 129	PI Ind- 247	Sun Ph - 568

* stock picks along with recommended price

Value-picks Portfolio has stocks wherein there is a huge asset base supporting the market cap like Nesco has 700 acres of land in Bombay. But there is uncertainty about how that value will be realized. However, I feel, these five have potential of value-unlocking in 2014. Ben Graham & PPFAS Value Fund might well have these picks in their portfolio.

Low PE Portfolio (PE < 10) has stocks which are cheap relative to their current earnings & book value. These five have potential to beat the market in 2014. However, future visibility is low & hence market may not pay very high PE/ PB to these. Who will have these? Don't know... Maybe Howard Marks will have them.

Medium PE Portfolio (PE < 25) has stocks which are growing very fast currently & have good potential to keep doing that in next 2-3 years. These are stocks that have moved from small caps to mid caps in past few years & can become semi-large caps in next few years. Maybe Charlie Munger will have them.

High PE Portfolio (PE > 30) has stocks which are proven great stocks. The Tendulkar, The Kallis of investment world. These are the stocks to buy once market drops 30-40-50%. However, current high PEs makes investors worry whether they are paying too much or not! Stocks which will fall into portfolio of Philip Fisher.

PS- I/ Good investors I know are bullish on all the 20 stocks. I hold some in my portfolio and hence bound to be biased.

Lets see which portfolio performs the best in 2014.