The 4th and 5th session of wealth management –Investing through equities.

Let me start by wishing all my readers a Very Happy Diwali.

This blog was due for more than two weeks – but as the college had exams and then a 10 day break, this session on Investing through Equity was dealyed.

As we all know, different people have different views on investing through equities. And my guess is that everyone is sometimes right and sometimes wrong – there is no one right way to make money by investing in equities.   

Here, I share the methodology used by Warren Buffet –who I think has the most successful track record in this area.

With a view to share Warren Buffet’s approach to life and investing,  I showed the class a one hour documentary on the great man himself -  you too can see on YouTube. This documentary was  produced by BBC and is called “The biggest money maker, Warren Buffet”   (it is split into 6 parts in YouTube – each about 10 minutes long and here is the url of the first part https://www.youtube.com/watch?v=bk0Rgyv6BzU).   

The documentary tries to explain the reasons behind Buffet’s success –his early style of investing (called buying cigar butts) - his journey through the years and his views on life and on investing. As is evident in the video, he invests just the way he lives  –he is an independent thinker – has self awareness of “what works for him”  - and sticks to what works for him – he is long term in his approach – is willing to accept mistakes – sometimes break his own rules - is willing to take large risks once he is convinced about his approach  - is very honest in whatever he does - and, even though he is one of the richest men on earth, money is not important to him personally –he just “enjoys making money”.

After the documentary, we discussed his style of stock picking – the following are the key points that I would like to share:

• Warren identifies "well managed consumer monopolies" and waits for market price of its shares to come down to a level where investing in it makes sense. He avoids companies that are in commodity businesses.
• Once invested, he holds the investment for long term until the business loses its attractiveness or until a more attractive alternative investment becomes available.
• Warren believes that any equity investor should view the company in the same way as any business person buying up the whole company –focussing on its cash generating potential in the future – overtime the company that has a superior cash generating potential would give a good value appreciation of the stock.
• In this session, I describe 14 questions that one must ask before investing in any company. I also take the example of CRISIL to explain these questions – at the end of these 14 questions, we discuss two ways of forecasting the stock price  - and this would then give us the 10 year returns on this investment, if you invested in CRISIL at today's market price.
• These 14 questions are given in the ppt – most of them are self explanatory. The last two questions are mathematical and anyone who can read a financial statement can (hopefully) understand the flow of logic – our forecast of the share price of CRISIL ten years into the future is given in the end and we take the more conservative of the two forecasts and we take the decision to invest or not to invest.     

As more detailed treatise on this subject is coming out in my forthcoming book – where there is more than 40 pages on just this area (hopefully it is easy to read and understand :-) ).

You can down load my ppt used here -http://www.authorstream.com/Presentation/sgraja-1590883-session-equities-final/

What is next 12 month outlook – do we stay invested?

I have had quite some queries on the recent market conditions and what is my outlook.  So here are my views.

We all know that our government always knew what is required to be done – but they did not have the political courage to do it. The Congress is now in a do or die situation – if they do not act now, they will find it difficult to showcase their governance record in the 2014 Lok Sabha elections. And hence this recent burst of reformist measures – after all they too need a job after 2014.

The next 12 months, I expect the government to be keeping up this pro reform agenda –they will talk the markets up with one reform a week (something like –“an apple a day____).  India needs capital from abroad for growth and the world markets are flush with cheap liquidity. So the government in India will try its darn best to attract global capital to India.  And the opposition will try to stymie these efforts and that’s something we will need to live with – the Indian political theatre.

But overall the Indian markets should do well over the next 12-14 months.

But that is only half the story.

The remaining half is the global market outlook itself – here, the situation is not that rosy. The economies of US, EU and Japan are struggling to stay afloat –the central banks in these countries are giving large doses of liquidity (it is akin to keeping a patient alive on drips) – without these doses of liquidity, these economies would get into recessionary mode.  The stock markets, the real estate markets and the consumer sentiment in these countries is being propped up by the low interest rates ( cheap money) – this has been going on since 2008 and the economies are not doing any better  - but they are managing to stave off recession.  

Will the situation change in the next 1-2 years?

I do not think so.

These countries will continue to drip feed their economies by keeping interest rates low and infusing liquidity into the economies as and when required. Some of this money will trickle into Indian economy due to our “reformist government” and will keep our stock markets in good cheer.

 So till here everything looks fine – both the global markets and Indian markets will do well in the next 12-14 months even though the global markets are being propped up by low interest rates.

But there is one event next year that could be a game changer - the Iran problem.

With the conclusion of US Presidential elections, focus will be back on Iran. There will be pressure on Iran to give up its nuclear programme and I expect Iran not to surrender meekly. I expect increase in tensions and somewhere in Q2 2012, there could be some kind of flash point. Many scenarios are being talked about – about how it could unfold. It could happen through Iran mining of the Strait of Hormuz, or may happen through the current strife in Syria where Iran, Turkey and Israel get involved as the country dissolves into chaos, or it could be through Lebanon, where Iran could activate the Shiite militia to attack Northern Israel or it could happen pure and simple by Israel delivering a surprise attack on Iran’s nuclear installations.

 Whatever the scenario, there is a likely hood of a prolonged regional disturbance – it could result in oil prices going up, stock markets going volatile and one cannot predict to what extent the global economy will be impacted. This can present opportunities as well as threats and one needs to be careful.

So this is the situation - the India story looks good (12-14 months) – the global story, without Iran problem, looks OK - but the Iran issue is like the looming dark cloud in the horizon.

I would recommend that you stay invested in the Indian stock markets – surely till Q1 2013.

This is a period when gold and stocks will rise at the same time. Gold will rise in USD terms more as there is increase in liquidity globally – and depending on the short term fluctuation in the USD/INR rate, gold is expected to give inflation plus 3-5% at least in India ( i.e. about 13-15% ROI per annum).

Stocks surely could do better than that.

So my advice is to stay invested in stocks and gold and keep a close eye on the developments in Iran.

The 3rd wealth management session – A discussion on Mutual funds

A discussion on Mutual funds – the types of MF’s and how to select the MF for investing

Mutual  funds are a very good way to start your investment journey and I recommend it to everyone who is looking at becoming rich. This session was aimed at sharing with my MBA students the logic used behind selecting the right MF -  many of my students will become Wealth managers next year  and this would be useful learning for them in their jobs (last year appx. 200 students from my institute joined the WM industry and this year I believe it will be similar numbers).

As a primer to this session, I had requested my students to read the document on MF available at http://www.nseindia.com/education/content/module_ncfm.htm

In the class, they went through a 90 min quiz on MF’s  - here we discussed the basic concepts through the quiz format.  My ppt for this session is mostly these quiz questions – may be you must look at it to figure out your basics on Mutual funds as well.  You can download it at http://www.authorstream.com/Presentation/sgraja-1551985-session-3-mutual-funds/

Post the quiz, we logged on to www.moneycontrol.com and studied the various types of MF’s available in the Indian market – we saw the details of a few mutual funds – we looked at where they have invested currently, what is their relative performance, who is the fund manager etc and discussed how to evaluate the mutual fund and which fund to invest in.

So the class was one half quiz and one half browsing the internet portal on MF’s .

I would recommend that you too browse www.moneycontrol.com and look through the various types of mutual funds available and drill down into a few funds to look at detailed data on their performance and the portfolio that they hold.

The key question in your mind would be “how do I select that particular mutual fund where I can invest  and get good returns”. My session ppt does not have much content on that as it was a freewheeling discussion.  However, my forthcoming book has a lot of content on the various types of MF’s available in the Indian market and how does one select that particular MF where you can invest in.

It obviously depends on your investment objective and broadly the objectives could be described in the following scenarios:

•         Growth objective – “I want to invest Rs 10,000 today and after five years take back Rs 25,000 and I want this to be tax free”. The funds that try to meet these objectives invest in equities – hence they are called Equity funds

•         Income objective – “I am retiring next year and would get a gratuity of Rs 30 lacs - I want to invest it such that my gratuity is preserved and I get a monthly income better than a post office deposit interest”. The funds that try to meet these objectives typically invest in debt instruments issued by government, banks, corporate and financial institutions - hence they are called Fixed income funds or debt funds.

•         A combination of growth and fixed income – “I have received my annual bonus of Rs 10 lacs just now – I want to invest it such that in 5 years it becomes 15-18 lacs plus I get a payoff of Rs. 60,000 per annum for my vacation out of this fund”. The funds that try to meet these objectives typically invest in both equities and debt instruments – these funds are called Balanced funds.

•         Short term investments – “I have Rs 100,000 with me for the next three months – it is meant for my child’s school admission in May and I need to park it somewhere till then – I would like to have a better return than a savings bank account”.The funds that try to meet these objectives typically invest in short term debt instruments like interbank money markets – hence these are called Money market funds.

•         Tax saving – “I want to reduce my tax out go and is there some place I can invest beyond PPF and Post office schemes?”. The funds that offer tax rebates are called Equity linked saving schemes (ELSS), - these funds invest in equities and typically have a three year lock-in period.

So you have to start with your investment objectives  and then select that particular mutual fund where you can invest and reach your objectives? 

There is a whole industry out there that makes selecting and recommending Mutual funds look very difficult and complex – but that is not really true. One can easily select which MF to invest.

My forthcoming book has more than enough content on “how to select the right MF” – it is really not that difficult and anyone can do it.

The 2nd wealth management session

A discussion on risks that we face and how does the wealth management industry quantify the risk taking ability of a customer?

Prior to this session, the students had prepared and sent me a 20 year cash flow plan for an MBA couple - this was done in groups. I had picked a few of these cash flow plans – and specific groups got a chance to present their plans and as a class we critiqued the work. I am sharing one of the better plans in this blog –with permission from the students who made this.  Here is the link https://docs.google.com/spreadsheet/ccc?key=0AtBnUnyierp7dExnVkVRZV9LVE1MMGhrcmNpUXAxZFE

The key message that I wanted to convey was that anyone of my MBA students can become rich in the next 10-15 years - with smart investing; they can reach a stage where they “do not have to work for money”.  This is a mindset change – it does not come easily as most of us are from middle class back grounds and this 20 year financial plan proves to the students that they can also become rich – all they need to know is how to invest smartly.

This template can be used by my other readers as well – anyone can and should make a 20 year financial plan for himself/ herself –as I had said in my first session, “Failing to plan is planning to fail.”

Here is a small paragraph from my upcoming book (which is with my publishers right now) that explains this better -“As you plan for the next 20 years, you will get more clarity in your mind on your way forward – this financial planning exercise compels you to find a strategy to achieve your dreams – you will figure out the factors that are under your control that will help you achieve your dreams. You will meet and befriend people who will help you get closer to what you want. You will eventually reach your dreams earlier than your plans – the world will call it luck – but you will know that it is not just luck – subconsciously, you have been working on achieving your dreams and you have succeeded. Planning for long term and achieving will become a habit - a lifelong quest - and you will surely succeed in whatever you do.”

The second half of the session (90 mins) was used to talk about Risk as a concept.  We addressed two issues here –

• What are the types of risks and how does one mitigate these risks - Here we discussed the kind of risks that we face as individuals –  theft of our valuables, an accident, a heart attack, sudden death, unplanned hospitalisation, a customer suing a doctor for a mistaken surgery etc etc. We classified these risks, and discussed approaches to mitigating them. The message was that each one of us needs to be aware of the risks we face and that we must figure out ways of mitigating them.
• What is your risk taking ability and how do I link it to your asset allocation?  -Each one of us has a psychological risk tolerance level – some of us are Ok with higher risks and some of us are not. Plus the risk taking capacity is also defined by how much financial assets you have amassed – someone with 100 lacs assets can afford to risk Rs 10,000 in King fisher airlines stock right now – but someone with Rs 10,000 assets, should not think of taking that kind of risk with that stock. Needless to say, the kind of investments we should make should be in sync with both these factors –the psychological tolerance to risk and the financial capability to take risks – I shared with the class, how the wealth management industry does this –

The ppt for the session can be downloaded from here:

http://www.authorstream.com/Presentation/sgraja-1543947-session-2-risk-profiling-investment-planning-final/.

The 1st wealth management session – The importance of defining the term “Rich”:

In any journey, if we do not define our destination, we will find it difficult to reach it.  

Similiarly, in the wealth journey, we all need to define the term “rich” – otherwise we will not reach it. The reason why many people do not reach the “rich” stage is that their definition of rich is not a very clear cut definition.  

The class discussed a few common definitions of the term “rich” (two of which are in the ppt) – obviously everyone has a different take of this term - we then agreed that any goal needs to be Specific, Measurable, Achievable, Realistic and Time bound (SMART goal) – and so the definition of “rich” also needed to be SMART.

 I then introduced them to the definition by Robert Kiyosaki in his book “Rich Dad Poor Dad”. We went one level deeper and discussed the quantification of this term “rich” based on this definition. In order to quantify this definition, we discussed the case of an MBA couple (that my students can relate to) and tried to make a 20 year financial plan for them – this 20 year financial plan is not finalised yet as the students are supposed to work on it over the week and so I will share one or two of the finalised plans in my next week’s notes.

This was the key issue we discussed for 2 hours of the three hour session.

The last hour was devoted to an over view of the wealth management industry in India. Here we discussed the market estimates, the key players, the kind of business models and the current challenges that the wealth managers face today.

The ppt used can be viewed and downloaded at http://www.authorstream.com/Presentation/sgraja-1538228-session-1-financial-planning/

Knowledge has value only if it is shared

As a faculty, I have learnt to take life trimester by trimester. This is my eighth trimester as a faculty and just like the prior seven trimesters, I am looking forward to the starting of the new session. This trimester is also special as I am teaching Wealth Management. This subject is close to my heart.  I learnt it by actually doing it. It comes to me naturally.  I know that I am good at it and I know that my students too like these sessions.

Even though the course is designed to prepare students for a career in Wealth management, I am also teaching them “how to become rich”. After all as MBA students, they are all a privileged lot - the top 1% of the population in their age group in India. They will have many opportunities post their MBA and I surely think each one should become a High Net worth Individual (HNI) over the next 10 years. That is what I am aiming to teach – “How to become rich”.  

This trimester I intend to put my content on my blog with every session – most probably every Thursday. The blog will carry the key points discussed and there will be a link to the ppt that I used in the session. This is for those who are not in the campus and still want to follow the sessions.

For those who are in the campus but are not part of my class, you are welcome to join us. I have sessions in Kengeri campus on Tuesdays and Thursdays from 10 till 1 pm and in the city campus on Wednesdays from (I think) 8.30 am till 11.30 am.

I hope that this works for you and that you will be a co traveller with me in the wealth journey.

I am interested to find out your feedback on the content – whether you agree with what I am saying or not -  So please do pen your comments on my blog or you can send me a message through FB or gmail. Also request that you register your mail id on my blog –it is on the right hand side  -a box called "follow by email" -  that way my updates will reach you automatically every week.

 

 

Midyear review 2012 and where to invest now?

July first week is a good time to look back at the annual predictions made in Dec end / Jan and course correct if required. So here I am, looking back and seeing what course corrections are required.

My 2012 predictions included the following:

• Indian economy will slow down a bit – well it has slowed down “quite a bit” and I am not too optimistic of the current government’s ability to kick start the spluttering economy. It is not that those in power do not know what is required to be done. The problem is that those in power do not have the political will to push the reforms and the unfortunate part is that the next elections is in mid 2014 – a full 2 years away.
• Europe will dampen the markets – but there will be no crash like the Lehman brothers crash in 2008 – this has held on till now – they have been limping from one problem to another – and they have avoided a crash – but the problem is still there and there are no easy solutions to Greece and Italy’s problems – they will have to improve their productivity and become world class in some industry – easy to write in a blog – but very difficult to do.
• US will limp through at 1-2% growth – well the US has done better than predicted and the economy is holding out  – they are growing at around 2% and the US Dollar is in demand as a safe haven.
• Chinese economy will slow down too – well all the emerging economies have slowed down – China, Brazil and Russia are dependent on their exports and the slowing down in EU and US is resulting in slowing down in these emerging economies.

I had predicted that in 2012, the interest rates in India will go down  and that would present an opportunity for investments in Long term debt funds – well the interest rates have not gone down to the extent that I had thought – RBI is more cautious and they are right – having said that, those who had invested in long term debt funds in Jan  have got appx 5% returns in six months – but that is below my predictions of 12% annualised.

Equity markets have also been volatile and range bound in the past six months – this was expected. I am currently more pessimistic than in Dec / Jan 2012 (actually post the Budget fiasco). But as a long term investor, I see opportunities and I am still investing with a 3-5 year timeframe. My equity portfolio in the last six months has given me a 14.25% returns where as the sensex has done 7.88% (at current sensex of 17296).

Gold has done better than my predictions and has given a return of 24% since Jan 15th – this has been primarily due to the depreciation of Indian Rupee and I believe that this will not continue for the remaining year and in 2012 the overall returns may not go beyond 30%.

Real estate is a very localised call and one cannot take a generic prediction. In Bangalore, there is a general sense of optimism and there are property launches and property expo’s as usual – the sale is happening at every segment – premium to mid level segments – the prices are going up slowly but surely. I cannot say the same about other places though, as my knowledge is limited.

So my views on the markets have not changed much in the past six months –

For investors with 1-2  year  horizon – I do not have much to recommend beyond debt – you can look at FMP’s as FMP’s are more tax efficient than normal debt investments.

For investors with 3 years plus horizon – I recommend Equities and Real estate even though over the last six months, I am tending to go more towards real estate than equities. If you cannot analyse stocks, then go for equity based MF’s  – I recommend HDFC’s family of MF’s as they have the best long term track record amongst the various MF’s – depending on your age and ability to take risk, you can look at mid cap ( HDFC Midcap opportunities fund)  or at large cap ( HDFC top 200 fund).