Friday, June 29, 2012

How the rich got rich

A recent research on how the top 400 rich people in US made their money makes interesting reading. The data spanning a period of 1992-2007 showed that the richest 400 in the US made their money though:

  • Wages and salaries: 8.6%
  • Interest: 6.6%
  • Dividends: 13%
  • Partnerships and corporations: 19.9%
  • Capital gains: 45.8%

So what does it mean – I believe it means that:

  1. Working for a salary won’t make you rich –this is true as much in India as it is in the US –Most of us look at salary to become rich and that is the first wrong assumption. We all need to create multiple passive incomes.
  2. Making “Safe” investments in debt based instruments won’t make you rich either –inflation and taxes eat up whatever you may make out of debt instruments like fixed deposits. So interest income will not make you rich -but one should have a part of their portfolio in these instruments just so that there is some safe capital.
  3. Investing only in large companies also won’t make you rich – we in India mostly invest in large companies through the equity route. In the US, the investors search for the next multi-bagger – a small company today that will grow into a large company in the future.
  4. In the US owning a business or businesses (fully on in part) seems to help people get rich as 2/3rd of their money came from this route. Remember that US is full of small businesses.

In India, I believe, for getting into the top 400 richest - one has to follow a similar path with one small additional option

  • invest in yourself,
  • grow your knowledge and experience,
  • take risks in equity ( large and mid cap) and in real estate (this is the additional option in India); and
  • build a financial windfall through investing in companies that would be future stars (the venture capital route).

If you do not want to be in the top 400 richest in India – but still want to be reasonably rich, then you can

1.       invest in yourself,

2.       grow your knowledge and experience and

3.       take risks in equity and in real estate.

Thursday, June 14, 2012

How will the Greek exit from Euro impact us?

There have been many recent news items saying that if Greece left the Euro zone, it will have devastating effect on the global economy and we are not insulated enough - that set me thinking as to what would happen to India and my view is that nothing much will happen to us – we are reasonably safe.

First let us see what will happen to Greece, and then we will see what will happen to us in India.

As we all know, elections are scheduled in Greece this week and there is a 50% plus chance that the Greek will vote for the party opposed to the austerity measures imposed through agreements with IMF and ECB. If the new government goes back on its austerity agreements, the Greek government will not be supported by further infusions of credit from IMF and ECB – this will result in the Greek government running out of funds in a month or two –but before that there will be a run on the banks –Greek citizens would like to take their cash out of banks and that will trigger a banking crisis.  In order to avoid that, the Greek government will need to launch its own currency immediately and leave the Euro zone. In order to be globally competitive, the new currency will need to be pegged at an estimated 30% lower than the current Euro. This will create inflationary conditions in Greece –the interest rates will go up, cost of doing business will go up and Greek economy will be in a recessionary state for a few years – they will need to pull themselves out of this mess over time by improving their competitiveness and productivity.

Now what will happen to the rest of the world and especially to India - If Greece exits the Euro zone, there will be flight of capital away from other “high risk” countries like Spain and Italy. The cost of borrowing in these countries will go up. Investors would move to safe haven currencies and currently US is the preferred safe haven. The Dollar would strengthen against the Euro.  That would mean that the Indian Rupee would be under pressure on account of the strengthening US Dollar –Indian Rupee would depreciate a bit further – this would put further pressure on Inflation in India as imports will become costlier. It will surely put pressure on the Indian economy – but as we know, the Indian Rupee has already lost about 20% of its value in the past 12 months –so we will live to see this further slide due to Greek exit and we will survive.

India’s trade with Greece is negligible and devaluation of Greek currency will not leave us poorer. India’s trade with Europe will survive as the movement of Rupee vs the Euro will not be impacted much.

So the exit of Greece from the Euro will at best devalue our Rupee a bit more –beyond that, I do not expect much to happen in the short term.

In the long term, if this exit opens up the doors for the exit of other countries like Spain and Italy (which is highly unlikely), then it could have some impact – otherwise we are insulated reasonably well from this event.

Friday, June 8, 2012

Current directions on where to invest

After a one month break, I am back. Not that I was not watching the markets or the economic news –our smart phones ensure that we are always connected.  But I was not actively investing as I was busy elsewhere.

Warren Buffet had famously said – “Be fearful when others are greedy. Be greedy when others are fearful.”

This is the time when everyone is fearful –there is more than normal amount of bad news –my prediction in December for 2012 was a tad optimistic – I did not predict that the Indian GDP growth would fall so much so soon – I also did not predict that the EU problems will go beyond Greece and Italy – now it is at Spain’s doorstep. There is more bad news than what I predicted.

And that is good news

I believe this is the time to look at investment opportunities.

Let me quote Warren Buffet again:

“Buy a business, don’t rent stocks.”

“Buy companies with strong histories of profitability and with a dominant business franchise”

“If a business does well, the stock eventually follows”

Some may say that these sayings of Warren Buffet are more suitable for the US markets where the market is very broad and deep (there are very large number of stocks and many investors). Our stock markets are very shallow - the FII mood dictates whether our markets will go up or down.

Well Yes –there is some truth in this argument – But, when you look at long term of 3-5 years, I believe that  the basic principles given by Warren Buffet will apply for Indian stock markets as well.

So I am happy I bought the stocks in second half of 2011 (when the markets were down).  The companies that I have invested (and most of them are listed in my blogs) have high profitability and good profit growth and have been bought at a fair value. I will invest again in these companies in the next few months as opportunities arise.

Some of the companies that are in the buying range right now are:

Agrotech Foods (invest at around 450), Bharti Airtel (invest at current levels of 300), BHEL (invest at current levels  till Rs. 270), Gruh Finance (invest at around 660), LMW (invest at around 1650), Shriram Transport Finance (invest at current levels till Rs 540). 
In case you are looking fore investing in these companies, I would recommend that you wait for another 3-4 weeks - the markets may go down further and that will give you still better entry price.

Some of the companies that I am watching and am close to investing are - 3M India (will invest at Rs. 3250), Bosch ( will invest at around 7000), Exide (will invest at around 100), Hawkins (will invest at around 1130), Nestle (will invest at around 4200). I hope to get these prices sometime in the next two months and I will invest in these companies if that happens.

I am confident that over a long term of 3-5 years, these stocks will return a 20% ROI for me. The current atmosphere of fear and pessimism will open up opportunities. And I am waiting patiently.