My favourite book Rich Dad, Poor Dad says "poor dad pays taxes while rich dad coins legal ways to avoid them". The recent change in RIL's holdings glorifies the statement.
Mukesh Ambani restructures his holding in RIL
Saturday, August 28, 2010
Wednesday, August 11, 2010
RIL: Should I accumulate or wait?
Reliance Industries has come down to 980 level. How long should I wait before I pounce on it to see a wonderful retirement :-). Well RIL is not a good dividend paying company as far as my dividend calculations go, so such expectations are unfounded. And due to some whim of mind, I already have RIL at very high price, it will take ages for it to break even (since I am sure of good returns, I am holding on to it).
But lets deliberate on RIL a bit. It has been dropping since 1080 levels and has done absolutely nothing for an year. The probable reason that market is currently punishing RIL--in spite of good results--is that they have created a lot many liabilities and they still need a lot of capital to fund their future acquisitions. Their current spate of buyouts in the US Shale gas field is a risky business anyway. Well to fund their needs, RIL is selling its treasury stocks to LIC @ 950. This is what the investors are more angry at. No one likes thy neighbor getting richer without sharing the profit. I am sure RIL stock will tumble to 960 levels before coming into senses. Even at those levels (15-16 PE), a big company like RIL will be a good buy opportunity for long term.
Let's look at the brighter side of RIL. What is the internet penetration in India? Close to 7%-8%, so if we believe the India will shine someday story--I do believe, not because I am a patriot but because it is my gut feeling--at least internet will be ubiquitous. Who has 4G licenses? Bharti & RIL (I own both). RIL is sitting on the largest gas reserves and RIL has biggest reach in the policy making. They are just waiting for a trigger to start their dysfunctional petrol pumps.
So I am accumulating, are you?
But lets deliberate on RIL a bit. It has been dropping since 1080 levels and has done absolutely nothing for an year. The probable reason that market is currently punishing RIL--in spite of good results--is that they have created a lot many liabilities and they still need a lot of capital to fund their future acquisitions. Their current spate of buyouts in the US Shale gas field is a risky business anyway. Well to fund their needs, RIL is selling its treasury stocks to LIC @ 950. This is what the investors are more angry at. No one likes thy neighbor getting richer without sharing the profit. I am sure RIL stock will tumble to 960 levels before coming into senses. Even at those levels (15-16 PE), a big company like RIL will be a good buy opportunity for long term.
Let's look at the brighter side of RIL. What is the internet penetration in India? Close to 7%-8%, so if we believe the India will shine someday story--I do believe, not because I am a patriot but because it is my gut feeling--at least internet will be ubiquitous. Who has 4G licenses? Bharti & RIL (I own both). RIL is sitting on the largest gas reserves and RIL has biggest reach in the policy making. They are just waiting for a trigger to start their dysfunctional petrol pumps.
So I am accumulating, are you?
Tata Steel: What should I do now.
Before I go ahead, let me declare that Tata Steel has a comfortable place in my dividend, thus long term, portfolio. I have explained my expectations from a dividend portfolio here. Currently I am sitting on a handsome capital gain with respect to Tata Steel. Now the question is what should I be doing today? Today Tata Steel is going to declare its first quarter results and one doesn't need to be a genius to know that results will be bad. Reason! None of the steel companies have reported profit in the current result season and it is a commodity business, Tata Steel may not do much different. I am sure I will lose 5%-10% in terms of capital reduction today.
Given that this stock is for my long term portfolio, I am not willing to trade my long term vision for 5%-10% change. I will slightly add up my positions. Rationale? If input costs shoot up, these companies will no longer be doing charity, they will increase the price to adjust and Tata Steel being the most respected and the largest will have a cake walk.
Since I thoroughly believe that it will give me double benefit ( good dividend & good capital appreciation) adding up when the prices come down will give me good dividend yield and good capital appreciation.
Update:13/08/2010
Results were as expected. Not very good. I stuck to what I said, I was jumping with joy when people sold it to me at 500.
Given that this stock is for my long term portfolio, I am not willing to trade my long term vision for 5%-10% change. I will slightly add up my positions. Rationale? If input costs shoot up, these companies will no longer be doing charity, they will increase the price to adjust and Tata Steel being the most respected and the largest will have a cake walk.
Since I thoroughly believe that it will give me double benefit ( good dividend & good capital appreciation) adding up when the prices come down will give me good dividend yield and good capital appreciation.
Update:13/08/2010
Results were as expected. Not very good. I stuck to what I said, I was jumping with joy when people sold it to me at 500.
Tuesday, August 10, 2010
The most powerful thing in finance
They say is it compound interest. Yes they are right but the other most important powerful thing is time. Sometimes all you have to do is 'do nothing' to make your money grow.
Lets take an example for a 20 years scenario. Lets assume that we invest Rs 10,000 a month in a modest recurring bank account giving interest rate of 8% compounded monthly. What should be the sum after 10 years? 18,50,000 by saving 12,00,000. Not so impressive! But after 20 years it would be 59,00,000 by saving just 24,00,000.
Lets take interest rates of 12%. After 10 years resultant sum would be 23,33,000 by saving 12,00,000. Good! But just imaging the 20 years time frame; the sum would be whooping 1,00,00,000.
Could you guess your savings if you could manage 15% for 20 years? It will be 1,51,00,000.
Now just for fun, lets imagine it is 30% for 20 years. 10,000 monthly savings will lead to unimaginable 15,32,50,000.
This is power of time and compound interest.
Are these numbers unrealistic? Not much! We have couple of mutual funds which have give more than 30% CAGR for more than 10 years.
Had I started my investments in any such mutual funds, I could have retired in the age of 30 by now!
But it needs patience and trust. Do we have anymore of it in Indian market?
Lets take an example for a 20 years scenario. Lets assume that we invest Rs 10,000 a month in a modest recurring bank account giving interest rate of 8% compounded monthly. What should be the sum after 10 years? 18,50,000 by saving 12,00,000. Not so impressive! But after 20 years it would be 59,00,000 by saving just 24,00,000.
Lets take interest rates of 12%. After 10 years resultant sum would be 23,33,000 by saving 12,00,000. Good! But just imaging the 20 years time frame; the sum would be whooping 1,00,00,000.
Could you guess your savings if you could manage 15% for 20 years? It will be 1,51,00,000.
Now just for fun, lets imagine it is 30% for 20 years. 10,000 monthly savings will lead to unimaginable 15,32,50,000.
This is power of time and compound interest.
Are these numbers unrealistic? Not much! We have couple of mutual funds which have give more than 30% CAGR for more than 10 years.
Had I started my investments in any such mutual funds, I could have retired in the age of 30 by now!
But it needs patience and trust. Do we have anymore of it in Indian market?
Bajaj Corp : IPO
I missed this IPO. I am not much an IPO fan at the same time I like to keep an eye on bargains.
I feel that this IPO was worth my opportunity fund risk. Lets see why!
Good:
On the lower side at 630, it is valued at 21.3 PE and on the higher side at 660, it is valued at 22.3 PE. While its direct competitor are trading at 27 (Marico) & 31 (Dabur). Since Bajaj is a good brand name, it is quite likely that this will easily trade at 27 to 31 PE. In any case there is a small upside expected when the IPO opens.
I feel that this IPO was worth my opportunity fund risk. Lets see why!
Good:
- Brand test: What image comes to mind when someone whispers 'hair oil'. Dabur Or Parachute Or Bajaj Almond drop? Well I see there is a big tie here but how many will know that Marico manufactures Parachute. Anyway both the names are justified; Bajaj has little more than 50% market share of hair oil market.
- Product test: Bajaj is mostly into hair oils. It has other notorious but almost extinct product "Kala Dant manjan'. Hair care products majorly need a prestige in the market and that's what Bajaj Corp already has.
- Management test: I haven't dug much about the management but I trust Bajaj is a good management.
- Financial status test: During FY10 topline grew by 35% and similar was the trend in bottom line. Companies profit margin is at 25%, which is quite good as compare to Dabur or Marico. Bajaj Corp has wisely chosen its manufacture units in tax free zones. It will enjoy no excise duty for 10 years and no income tax for 5 years from 2009. After this period too it will enjoy good concession. (A good way to achieve margin for an FMCG company). Company's balance sheet is quite strong and it has enough cash to fund future growth.
- Only one category: Bajaj corp has leadership in only on category of the product. In fact it has only one product to offer. If suddenly any other company does something better and cheap, the whole company will have to bear the brunt.
On the lower side at 630, it is valued at 21.3 PE and on the higher side at 660, it is valued at 22.3 PE. While its direct competitor are trading at 27 (Marico) & 31 (Dabur). Since Bajaj is a good brand name, it is quite likely that this will easily trade at 27 to 31 PE. In any case there is a small upside expected when the IPO opens.
Infrastrure Bonds and Tax saving:
If some creditable institution gives me a guarantee for returns--which even if matches with the inflation rate--on my investment, I simply adore it. The simple reason for my rejoice is guarantee! For there is no guarantee on equity market. A simple spur of bad events may take me back to 80% loss portfolio and I may have to wait till eternity to recover my loss.
Currently I am looking forward to invest a good chunk of my cash fund into bond market. I am considering NSCs, FD & Infrastructure bonds as my options.
In the revised DTC, infrastructure bonds have been added as a new tax saving instrument. These bonds can be issued by LIC, IFCI, IDFC and any other non banking infrastructure financial institution. Rate of return offered is not yet known.
Let's objectively analyze these bonds and their effective yield assuming that they will offer not more than 8%.
Suppose I have invest 10,000 for 5 years (lock-in period) on March 31st (for simplicity). With the revised tax slabs, I shall be saving 1000 in the first year itself. So my effective lock in money will be 9000. After 5 years with the compound interest, 9000 will be 10000*(1.08)^5 ~ 15000. If we take 9000 into account the actual interest benefit we get will be {(15000/9000)^1/5 } - 1 } *100 ~ 10.3 %.
Lets see what would be the interest for NSCs. 10,000 invested for 6 years. After 6 years it will mature to 16010 (8% annual but compounded half yearly). Effective rate of interest would be 10.08%. With NSC we will not get 'additional tax saving benefit'
In the same line tax saver FD with and interest rate of 8 % will effectively fetch 10.3%.
Clearly infrastructure bonds have additional benefit. So what are you going to do?
ABCIL
I have discussed ABCIL here. I initiated a small position in it that day and kept on accumulating whenever it went down.
My fair value calculation for this stock then was somewhere at 130-150. I knowingly kept it on little low side as ABCIL is into commodity business where margins are always skimpy.
First quarter results have been stable. There has been a marginal increment in profit (but the input cost has gone up) and dividend of 15% (Rs 1.5 per share). As I mentioned previously, this stock is not part of my dividend portfolio. I still have it in a small quantity and expect a hefty capital appreciation before I sell it.
In the current scenario, where I don't see much to change, I would like to remain invested in ABCIL. I will start planning my exit if people are ready to buy it at 150 from me.
My fair value calculation for this stock then was somewhere at 130-150. I knowingly kept it on little low side as ABCIL is into commodity business where margins are always skimpy.
First quarter results have been stable. There has been a marginal increment in profit (but the input cost has gone up) and dividend of 15% (Rs 1.5 per share). As I mentioned previously, this stock is not part of my dividend portfolio. I still have it in a small quantity and expect a hefty capital appreciation before I sell it.
In the current scenario, where I don't see much to change, I would like to remain invested in ABCIL. I will start planning my exit if people are ready to buy it at 150 from me.
Saturday, August 7, 2010
My Investment chunks
I have been discussing my investment objectives in my various posts. Here in this post I am going to jot down a high level plan to meet my investment goals.
I have divided my total savings into four chunks majorly.
1> Bond Fund Chunk: This contains 30% of my total investment. I keep this fund in safe heaven such as AAA rating FDs, NSCs and PPF (yes I consider PPF a very good investment vehicle). In this bit of my investment planning, I am allocating money for my short term needs such as my education etc. I am happy with 8%-9% growth in this investment chunk.
2> Opportunity Fund: This is the most liquid part of my income portfolio and never exceeds 10% cap. I keep it in my savings account and use it to take advantage of news based sentiments. ICICI buying BOR, petrol prices etc. Since I am not a regular follower of complex news items, this part of the portfolio remains cash most of the time.
3> Medium to Long term Equity fund: This contains 30% of my investment capacity. I allocate this capital for various equity linked avenues. A part in Mutual Funds and a part in stocks. Here I choose companies which have good management and have wonderful business concept/moat and are to grow for sure. I consider Moser Baer, ABCIL in such category.
4> Dividend chunk fund: This consists my rest 30% investment chunk. Here in this part of the portfolio I would rather invest in a company that gives good dividends. My aim from this pocket of investment is to have capital appreciation and maintain a regular flow of income in terms of dividends.
Having said all this, I shall deliberate more on what to vehicle to choose for each investment chunk in further posts.
I have divided my total savings into four chunks majorly.
1> Bond Fund Chunk: This contains 30% of my total investment. I keep this fund in safe heaven such as AAA rating FDs, NSCs and PPF (yes I consider PPF a very good investment vehicle). In this bit of my investment planning, I am allocating money for my short term needs such as my education etc. I am happy with 8%-9% growth in this investment chunk.
2> Opportunity Fund: This is the most liquid part of my income portfolio and never exceeds 10% cap. I keep it in my savings account and use it to take advantage of news based sentiments. ICICI buying BOR, petrol prices etc. Since I am not a regular follower of complex news items, this part of the portfolio remains cash most of the time.
3> Medium to Long term Equity fund: This contains 30% of my investment capacity. I allocate this capital for various equity linked avenues. A part in Mutual Funds and a part in stocks. Here I choose companies which have good management and have wonderful business concept/moat and are to grow for sure. I consider Moser Baer, ABCIL in such category.
4> Dividend chunk fund: This consists my rest 30% investment chunk. Here in this part of the portfolio I would rather invest in a company that gives good dividends. My aim from this pocket of investment is to have capital appreciation and maintain a regular flow of income in terms of dividends.
Having said all this, I shall deliberate more on what to vehicle to choose for each investment chunk in further posts.
Should I invest in commodities?
Since I started investing, I have kept myself away from commodity investment. I even remained aloof from precious metals. Not that these things shouldn't be part of one's portfolio,in fact gold has given consistently good returns for a few years. It is time to tell if such a run will continue.
But should such things be part of a long term portfolio of an investor like me? Taking stock of macro economic policies, understanding currency movements and making sense of other political decisions could be a matter of luck, which may not work most of the time.
Takes take a few examples:
1> Investing in wheat:
Monsoon was wonderful, wheat production was good thus prices are supposed to fall in near future. We sell our stock either at marginal profit or little loss. Suddenly news breaks out about a drought in Russia and wheat prices starts mounting. In the hope of wonderful returns we enter into wheat again. Next day government out of their whim reduces the import duty on the dream commodity. Price tumble!
2> Investing in Gold:
Stock market is crashing! Gold is the only rehab now. Gold price jump with joy and investor in the hope to mint more money keep the precious metal pump. Dollar is another paper gold that people like and acts as a substitute to gold and gold is sold in international market in Dollars. Indian government has artificially kept rupee so low to support export & IT industry (lobby). But with the FDI & FII pouring in, we cannot keep our currency so low for every. INR will appreciate against dollar some day and effective gold prices will appear coming down.
This is not a future prediction. It is just my analysis of gold prices from an Indian investor perspective.
Clearly, with such a huge uncertainty ahead, I cannot consider gold a safe bet for my long term portfolio. It may be my one of the few investment mistakes; let it be, but I will stick to my investment objectives at least.
But should such things be part of a long term portfolio of an investor like me? Taking stock of macro economic policies, understanding currency movements and making sense of other political decisions could be a matter of luck, which may not work most of the time.
Takes take a few examples:
1> Investing in wheat:
Monsoon was wonderful, wheat production was good thus prices are supposed to fall in near future. We sell our stock either at marginal profit or little loss. Suddenly news breaks out about a drought in Russia and wheat prices starts mounting. In the hope of wonderful returns we enter into wheat again. Next day government out of their whim reduces the import duty on the dream commodity. Price tumble!
2> Investing in Gold:
Stock market is crashing! Gold is the only rehab now. Gold price jump with joy and investor in the hope to mint more money keep the precious metal pump. Dollar is another paper gold that people like and acts as a substitute to gold and gold is sold in international market in Dollars. Indian government has artificially kept rupee so low to support export & IT industry (lobby). But with the FDI & FII pouring in, we cannot keep our currency so low for every. INR will appreciate against dollar some day and effective gold prices will appear coming down.
This is not a future prediction. It is just my analysis of gold prices from an Indian investor perspective.
Clearly, with such a huge uncertainty ahead, I cannot consider gold a safe bet for my long term portfolio. It may be my one of the few investment mistakes; let it be, but I will stick to my investment objectives at least.
Thursday, August 5, 2010
Long term investing: A thought
Long term investors like me have always been confused about
- How many stocks should be there in the portfolio?
- What should be the real investment objective? Clarity of goals and objectives!
- How to diversify? Is there an ideal diversification?
- When to sell!
I will try to take each point one by one and elaborate on them. My observation and comments are according to my risk acceptance and my investment objectives. Please always be sure of your investment objectives before investing.
- How many stocks should be there in the portfolio? How many marbles can we hold well such that none slips or falls if the wind blows awry? It is as simple as that. One should have only those many stocks in hand, which one can easily keep watch on and monitor the progress. When we buy a stock we buy a part of business and become partial owner. And we must think like an owner then! But of a little different type. Since we generally don't get the majority share we cannot influence the business decisions but if the business is not going well we can make a safe exit and deploy the same capital somewhere else.
- What should be the real investment objective? Clarity of goals and objectives! If you are full time investor and your monthly expenses are from stock market, you may not like my investment methodology. However, many of us would be having a secure stream of regular income and we would be interested in deploying some capital for our future planning. What is an investment objective? Saving and raising fund for a car? Saving funds for our own house? Long term or short term? What I believe is that clarity of investment objectives is must before one should start investing. For my short term investment objectives I keep the money in savings accounts & Fixed Deposits and for my long term objectives I keep them in equity. Not that this is the ideal scenario and has some guarantee but this is what I evaluated as per my risk appetite and long term investment objectives.
- How to diversify? Is there an ideal diversification? Why should we even be thinking about diversification? The answer is simple. If I could find a business that always keeps increasing, I would deploy all my cash in it and will never sell it. But as we all know it is almost impossible to find such a business. Many factors such as input cost, policies and competition. And some business (and management) go up and some come down. But does this mean we should figure out a perfect business and deploy our cash in those companies, which are into such business. This may work out but why stick to only one business when there are aplenty to choose from? Some may shine today and some may shine tomorrow (as I feel alternative energy business will glitter more than gold someday and I am long on Moser Baer & Suzlon). (Suzlon is in fact my contra investment). Equity diversification is good; that's what all sane fund managers do. But remember what happened in 2008. Market tanked and so did all mutual funds and any equity portfolio. Even gold was not glittering then. But the worse part was in such times when your saving took a huge beating, your job was in danger too. Many people lost jobs and savings and everything! What didn't evaporate then was old friend Fixed deposit and other bonds. I laughed when I saw my equity port folio down by 80% and my bond portfolio up and growing at 8 CAGR. Little late in 2008 even gold started glittering but the equity kept silent. So what the lesson has been? There is no ideal diversification, but diversification is must and bonds provide ideal cushion when in need.
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