2016 - The Year that Was !!!

2016 proved to be a tough year for the Indian markets. Indices went nowhere. Mutual funds also did similar with PPFAS NAV going up just 4% (This is one of the best funds, in my opinion).

It was also an Unexpected Year with the best returns coming from the commodity industries - Paper, Sugar, Metals did well while Pharma, IT, Financials struggled. Not many would have predicted that!!!

Two great articles that I read about 2016 learning are Here & Here.

My Learning- Year proved to be quite a tough one for my portfolio with portfolio growing slowest in last 5 years. Though was lucky & could manage to achieve double digit growth.
What better to expect from a portfolio that was devoid of commodities!!

With the benefit of hindsight bias, the Three mistakes of 2016 were-

1) The 'Not to be' Big Bet- A business is about to be demerged into two parts- (a) This segment is leader in consumer durables & has been sold to a PE player which will give open offer at around Rs 100/- per share. (b) Has power, industrial etc segments & is not losing money. How much of portfolio to allocate to this if stock comes to (i) Rs 100 (ii) Rs 120?
This should have been a big big bet (15-20% portfolio allocation) at Rs 100 & also, should have taken 5% or so allocation at Rs 120. However, when it touched Rs 120, I kept waiting for Rs 100 & hence, fully missed the 100% upside that followed next.
Never Wait for Absolute Bottom, Keep SIPing downwards in stocks with strong fundamental bottom, as long as fundamentals don't change.

2) Not touching The Untouchables- 2016 was the Year of the supposedly Untouchables- Paper, Sugar, Metals, PSUs & even few Chemicals. Having happily ignored most of these in the past years, I chose to do the same in 2016 & as a result, missed the big run in these names.

3) The Longgg Term Thinking- When Black Swan strikes, you run for cover. Market did same in case of NBFCs, MFIs & Real Estate. Despite holding a few names & being clear of near term hit, I chose to hold these with belief of being long term investor, hence missed a great exit & later, great prices for re-entry.

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2017- Based on my limited thinking, 2017 (at least first 2-3 quarters) looks to be tough. DeMo impact on earnings, not so cheap valuations, FII selling, GST hit in near term should prevent Indices to move up a lot. Hopefully a good Budget & DII fund flow should prevent a big downside.
But can't rule out the unexpected as 2016 has taught us.

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.

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.
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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.