Wednesday, January 18, 2012

Millionaires portfolio – part 2

In October 2011 blog, I had recommended 5 stocks at the prices prevailing then -  all the five stocks (SBI, BHEL, Bajaj Auto, Esab Industries and Maharashtra seamless) are still hovering in the same range today and are still worth buying.

The methodology used for stock valuation is given in detail in my Sept 2010 blog - you can go back and look at it, if you wish. It is based on based on the historical earning per share growth rate (EPS CAGR) and the price earnings multiples (PE) for the company (over the past ten years) – using this past data, we can forecast the future stock prices beyond five years with a very high degree of certainty - especially for select companies that have an identifiable durable competitive advantage that cannot go away easily in the future decade.

Warren Buffet and Peter Lynch are known to follow these principles in stock picking - these are simple and straightforward methods and taught in MBA schools all over the world – the mistake that everyone makes is that they want quick results. For example mutual fund managers are measured by the investors based on their daily NAV - the fund manager has to make sure that he is giving at least as good returns as his competitors “on a daily basis” –he cannot think five years. Individual retail investors look at one year timelines for all investments as most of us have a tendency to slice our lives in yearly intervals. However, if we start looking at 5 years for equity, then there is a good chance of making good returns provided you follow some proven equity valuation and forecasting method.

So here are five more stocks that I recommend at the prices mentioned - all these stocks I have personally invested in the past 2 months and my analysis tells me that they will grow at 20% plus CAGR over 5 years:

  1. COLGATE – all of us know this company - this stock is currently quoting at around 960 – I recommend this stock at even a price up to 1000 – the company has shown an EPS growth of 21.5% over the past 10 years. Looking at the performance of the company and the stock movements for the past few years - it is a good buy at this price and should give a 18-20% growth per annum over the next 5 years.
  2. DABUR – this is another company known to all of us - this stock is currently quoting at around 97 – this company has shown an EPS growth rate of 24.7% in the past 10 years –at the current price of 97, it is expected to give a return of 18-20% per annum over the next 5 years – this surely is a buy at prices below 100.
  3. Havells India – I am not sure if you know what they make –they are a large player in the industrial and residential electrical equipments space – they own well known brands like Sylvania, Crabtree and Standard – they make domestic appliances like irons, geysers, fans and motors , modular switches,  circuit protection components and cables and wires – the company has shown an EPS growth rate of 45% in the past 10 years – this stock is quoting at 434 now – if you get this at any price below 385 – buy it. Every stock goes up and down based on market sentiments and I do expect the stock to touch 385 at least once in the next 2 months.
  4. TCS – TCS is a juggernaut that has enough momentum to take care of most external shocks – outsourcing and offshoring as a concept are here to stay and the more the pressures on the US and EU companies to cut costs, the more the opportunities for TCS – the company has shown better growth in EU this qtr than the US and the INR depreciation will make the company more profitable as it earns in USD and spends in INR – for the past 6 years, it has had an EPS growth rate of 26.65%  -I recommend this stock at any price till 1125 – currently it is quoting at 1067
  5. Voltas – This company is quoting at 94 currently – I recommend this at any price till 100 – with a 10  year EPS growth rate of 38%, it surely is going to give a 5 year return of 20% plus.

 As always I want to put the rider that these are my recommendations -I have invested in these stocks in the prices mentioned above– it will do well for you to look at these stocks and read about these companies. After all it is your hard earned money – your risk and your reward.

As Peter Lynch puts it -“Spend at least as much time researching a stock as you would choosing a refrigerator."
Not that you chose a refrigerator every now and then :-)

Happy Investing.

Friday, January 13, 2012

Passive Income

Passive income as a concept is easy to understand – “it means getting a cash inflow every month without working for it” - passive income unlike active income does not depend on your effort –we all work for 8 hours or more a day - for 25 days a month and then we get a salary cheque – passive income comes every month without your working for it - a good example is rental income  - the rental cheque comes every month whether you are going to office or not.

Now imagine if your monthly living expense is Rs 50,000 and your monthly passive income is also Rs 50,000.

Wouldn’t that be an ideal situation? I am sure you’ll agree that this is a good situation to have.

So what does it take to reach this stage?

It takes a bit of planning, smart investing and about ten years of time in Indian conditions - that’s all.

Let me repeat this – In India, if you plan your finances well and invest smartly and keep at it for 10 years consistently – you will reach the stage where your passive income is equal to your monthly expenses.

There was this couple in their 40’s –they had invested smartly and bought a plot of land in a well known part of Delhi a decade earlier and over time, they had built a three floor residence. As the house was on a main road, they also built a few shops. By giving two of the floors and the shops on rent, they earned more than enough passive income to lead a comfortable life.  The story does not end there. The husband was an engineer and had a regular job - ever since this rental income started flowing in – his performance in the job shot up – he realised that he was stress free – he was more cheerful  - this was because, like most people, he was also fearful of a job loss and that created stress and performance issues which vanished once the rental income came and he was financially free.

Another friend had a great idea – he had worked for a few years in the US and had saved in USD – as he came back to India, he had savings of about 120 lacs in INR. He invested Rs 10 lacs in yearly FD @ 10%  which gave him an interest earning of 1 lac – and he figured out that after 12 months and 12 such FD’s he will get Rs 1 lac every month as interest which will easily meet his monthly expenses. All he needed was to reinvest the principle amount of Rs 10 lac every month in a FD @ 10% and use the interest earned.

How does that look?

Looks good?

Well not very good actually.

You see India has an inflation of about 8- 10% and this scheme of rotating FD’s means that his interest income will stay at Rs 1 lac per month for ever – over a few years, the purchasing power of this 1 lac would go down due to inflation and then he will need a higher passive income –or he will feel poorer.

We all know the salaries of our parents - in 1970s or 1980’s or 90’s  - the salaries in the 70’s were something like Rs 1000 per month –in the 80’s a good government job paid about Rs 2500 per month – in the 90’s a similar job came with a Rs 10,000 pay cheque – today the salaries are about Rs 40000 per month for a manager’s job – this increase is not because of living standards – it  is because of inflation.

Even government pensions are adjusted for inflation every now and then.

So in the long run, one needs to have a passive income that goes up at least as much as inflation – otherwise, we will become poorer over time.

Having enough passive income does not mean that you will retire early – it just means that you can chose to do what you want – you do not have to take up a job because of the salary – you can chose a job because you like the role. I teach as a visiting faculty and I left my high paying job – because I love to teach and because I can afford not to look at the salary difference between a corporate job and a teacher’s job –thanks to my passive income.

Now that we have understood the concept of passive income and would love to have it, you may be wondering whether it is possible.

The answer is that there are ways to achieve it – many people have achieved it – those who have achieved it may not talk about it openly– such people are all around you – just observe – you will generally find them less stressed, more cheerful, friendlier, and more helpful and generally they would contribute more than their fair share towards society.

In my forthcoming book, you will find ideas for passive income that will set you thinking. it will hopefully help you make a long term plan which will take you towards getting enough inflation proof passive income to meet your expenses through out your life.