A millionaire’s portfolio - part 1

For the past 6-8 months I have been working on short-listing about 100 – 150 good companies – that have a great past and should have a great future. I now have 5 companies that I recommend that you can invest at the current levels. These stocks are expected to give 300% returns in 5 years – over time, I intend to amass about 20 such stocks and I intend to share my recommendations  to you through this blog.

These are companies that have:

1. an identifiable durable advantage
2. products or services that will not get obsolete in the next 2 decades
3. investment focus solely on it’s core business and does not look beyond into unrelated diversifications
4. a good EPS growth rate, a high return on Equity and a good return on capital employed in the past 10 years
5. produced more cash than it used in the past 10 years  -is cash rich and low on debt (preferably zero debt)
6. the ability to increase the prices of it’s products/service without losing market share

More details of the logic used can be seen in detail in my blog dated 29^th Sept 2010 called “Investing in equities  - part -2”.

Needless to say that this is what I teach in my Wealth management course in MBA and this is what I personally use for investing.

As we all know, the stock prices in India are dependent on the mood of FII’s – when the FII’s invest in our markets – the stock prices go up (beyond the normal PE multiples) – when they exit, the stock prices go down (below the normal PE multiples).

As of now, due to the global fears of a crash emanating from Europe, the markets are down (and I expect the markets to dip further). Due this, some of these stocks are at values that I believe are worth buying.

I have bought all these stocks recently and I intend to buy more of these stocks in the coming 4-6 weeks. So here are my recommendations and the current prices where I recommend that you enter:

1.       SBI – there has been bad news emanating from SBI ever since the new chairman took over a few months back – the stock has gone down as well – however, this bank is solid and has a great market reach in India and will surely perform well - At current market price of Rs. 1720 – this is surely a BUY recommendation – even if the price goes up to Rs. 1825 – this is a good buy.

2.       BHEL – again this is a great stock – the stock has not been performing well lately – but India’s power sector will grow tremendously and BHEL will be there supplying in the years to come – at the current price of Rs. 313 – this is a good buy.

3.       Bajaj Auto – when you look at the India’s motor bike market – Hero Motors is doing very well and is over priced. TVS is a laggard and is under priced. Bajaj has a good story, is doing well in India and has a good story in exports and is expected to grow faster than others – At the current prices of Rs. 1500, I believe it is starting to go above my buying price – I have been buying this lately and I still recommended it at this price.

4.       ESAB industries is a market leader in it’s field and has a very good past and a better future – this is a company that many will not notice – but I surely recommend that you invest in this stock – at the current price of Rs 515.

5.       Maharashtra seamless is another company not many people will notice – again a market leader in it’s market and has a very good story. I recommend that you invest in this stock at the current price of around Rs 345.

A few words of caution here –

·         Spread your investments across these stocks -do not invest in just one stock.

·         I do not know what will happen in the next 6 months to these stocks – but I am very confident that in 5 years these will give good returns – I expect 300%. These recommendations are for those who want to invest for 5 years or more -these are not for those who want to invest for periods less than 5 years.

·         You are investing - the reward is yours – the risk is also yours. But remember that I am also putting my money before I recommend it  - I am putting a minimum of 50K in each stock.

As and when other opportunities arise – I will share them – I do believe there will be opportunities in the next few months.

2011 predictions revisited – expect a rough ride in September 2011

If you thought August was tumultuous and volatile -get ready for September – it’s going to be a rough ride globally.

Nouriel Roubini, the economist who predicted the 2008 crash correctly, has said this week that "we are in a worse situation than we were in 2008” – He thinks that there is a 60% chance of a second recession (http://www.moneycontrol.com/news/fii-view/we-areworse-situation-than2008-roubini_582263.html)

World Bank President Robert Zoellick said on 3^rd Sept that “the world economy is stepping into a new danger zone" (http://www.moneycontrol.com/news/world-news/global-economydanger-zone-says-world-bank-chief_582370.html)’

Europe’s sovereign debt crisis will test the waters again in Sept. Greece is due for another round of International aid around 15^th of Sept. But before that aid is cleared, they will have to work with IMF/EU /ECB to show that they are implementing fiscal austerity measures agreed upon and they have only 10 days to do that.

Italy is also on the edge – they had promised to get their public finances in order and balance their budget by 2013 and now they are struggling politically to implement their promises. As the Italian politicians debate the austerity measures - there is a growing alarm in Europe over the credibility of the Italian govt’s ability to keep its promises.

US is also staring at a long period of low growth – US economy has slowed down last quarter - last week’s employment report which showed that US economy has not added any jobs in August –all this has increased investor fears that US may be headed for another recession.

President Obama is going to unveil proposals on Sept 8^th to create new jobs – but with political bickering between Democrats and Republicans -there is little hope for anything substantial in the short run.

There is a G7 Finance ministers and central banker’s meeting in France on Sept 15^th – they are supposed to discuss ways to reinvigorate global effort to support growth, jobs and financial stability – I do not believe it will have much impact in the short term.

There is a US Fed meeting scheduled for Sept 20-21^st  - it is expected to further discuss measures to support the US economy – but they too are not expected to announce another round of quantitative easing (QE3).

As these events unfold, I see investors being nervous –  FII's will pull out money from Indian markets –  sensex will be very volatile and may go below the 15750 levels it touched in August. This can open up opportunities for investing in equities if one looks at a 2 year plus horizon. Gold is expected to go further up due to this global nervousness – I am not recommending that one invests in Gold at these levels –But if you have already invested – you can look at further growth in your returns from Gold.

Overall just tighten your seatbelts and watch the events unfold.

Brand Anna - a case study on branding

Today I am going to give my views on why the Brand Anna has seen such a meteoric rise. I have tried to relate this meteoric rise to branding theories that we study in marketing classes in MBA.

To me Brand Anna is a brand extension of Brand Mahatma Gandhi – The physical similarities between the two (the topi, the white dress, the physical features etc), the similarities in their core promises (a better future based on value systems), the similarities in their approach (fasting indefinitely, non violence, superior and unconquerable value systems etc)  - all these have made us relate at a personal level to the core meaning of Brand Anna, trust the value proposition of Brand Anna and associate with it in ways that reminds us of the stories of freedom struggle that Mahatma Gandhi lead.

 “A brand should strive to own a word in the mind of the consumer”. If you want to build a brand you must focus your branding efforts on owning a word in the prospect’s mind -there are many examples - RIN, NIRMA, FEVICOL, INFOSYS all own a word that connotes something to us as consumers. In this case “Anna” is the word that has got etched into our mind.  Even though Anna means elder brother in India– today, the word Anna does not get the image of elder brother in our minds –it is the image of Anna Hazare that comes to us when we hear the word Anna. And we relate to brand Anna based on our interpretation of what he stands for.

“The crucial ingredient in the success of any brand is its claim to authenticity” – If Anna Hazare had not been there and we had the same core team except him (i.e. Kiran Bedi, Prashant Bhushan, Arvind Kejriwal,  Santosh Hegde etc)  and the same Lokpal bill– this movement would have gone nowhere. There is something in Anna Hazare that has made this movement what it is today.  Anna Hazare’s credentials as a Gandhian and his past record are his claim to authenticity that the consumers of this brand trust.

“The birth of a brand is achieved with publicity, not advertising” – this is a golden rule for creating a brand. What the Anna team has achieved without spending any amount in terms of publicity is something that can clearly be a benchmark for any marketing campaign anywhere in the world. Now beyond media, the brand is being disseminated by the brand followers through events like marches all across India, and using “branded” items like the Gandhian topis with “I am Anna”slogan.

“The essence of branding is finding a compelling value proposition, something that differentiates it from the rest” –Team Anna has caught the imagination of people as they have been able to create a compelling product (the Lokpal Bill) that meets a latent need (freedom from corruption) of the common man. This latent need of “freedom from corruption” has been there for long – but has been ignored by the political class – and this is the gap that Team Anna has filled with the Lokpal bill. This emotional connect with the brand followers has been so strong that any smear campaign against it (like Anna’s arrest) would only bounce back.

“A brand becomes stronger when you narrow its focus” –India may have many issues that needs to be resolved – but this campaign is completely focussed on one issue - anti-corruption  - if they had fought on a broader platform  – then we as consumers may not be able to relate as clearly to it.

Needless to say that Brand Anna is every politician’s dream. All politicians try to create a brand around themselves (think Rahul Gandhi) –but they lack credibility as their promise is not supported by performance (as I write this blog – I understand that Rahul Gandhi is hiding in rural Maharashtra). They differentiate themselves through physical aspects like white cotton dress, security guards, long chain of powerful cars, lots of people welcoming them with garlands etc – but over time these differentiators need to be backed by a core product (in this case delivery of something good for the people) - as they do not deliver, over time, the market understands the hollowness of these political brands. Due to this non performance, there is currently a commoditization of political brands in India and only few people (like Manmohan Singh, Narendra Modi) are able to rise above the clutter.

Brand Anna has connected so well at an emotional level (instead of physical level) that it’s followers are willing to bear extreme physical inconvenience just to connect and contribute.

2011 predictions revisited - trying to make sense of the market

My last blog on the economy written on June 3^rd started with lines - “Just like the sea which seems calm at the surface but has massive amount of energy boiling inside it, I am seeing business as usual on the outside but large amount of chaos beneath this calmness.” As I wrote those lines, I was sensing trouble ahead – but I did not expect that it will erupt so soon.  Last fortnight - the chaos finally surfaced – just like a volcano erupting, all over the globe, the markets turned extremely volatile.

Even as this was happening – I see experts in CNBC calling the situation “temporary” and urging people to invest in mutual funds and equity as the Indian markets are attractively priced at around 17000.  

I do not believe this is a temporary situation. Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, and former chief economist at the IMF,  has presented a very apt analogy – he says, “for instance, if you have pneumonia but you only think it's a very severe cold - you go on a completely wrong medication which instead of curing your disease further alleviates your woes.  In a nutshell, this is exactly what happened with the developed world. They misjudged the real problem. Governments and central banks used the wrong medicines. They tried to treat a debt-problem with more debt. No wonder the health of the economy became bad to worse.”

 The current Fed decision to keep the interest rates in US to near zero levels till 2013 is a similar decision. This is aimed at encouraging people to leverage up, with the knowledge that their borrowing costs will likely be very low for a long period of time. Fed expects the people to take risks by investing in equity, business etc and this will hopefully keep the US economy growing.

In the past two decades, the developed economies have gone through a massive credit expansionary phase. People were living off credit (future income), assuming that the future will be brighter than the present – appreciation in real estate fuelled this feeling of wellness – however, the rise of China and India and the resulting slowing of western economies changed the situation –the future today does not look brighter than the present for the western economies (in India and China the future looks brighter than the present) – those who borrowed and leveraged highly could not repay – and from individuals the virus has spread to countries – today we have countries like Greece, Portugal, Ireland etc which cannot pay their debts – and that is bringing down the Euro zone. 

I believe that the recent downgrade of the US debt is just a starting point - and there is more to come – may not be in the form of downgrades by rating firms – it may be in the form of wild swings in the bond market, series of defaults, financial repression measures and not to mention, inflation. I expect much more severe turmoil in the months ahead.  The world economy is likely to experience an extended period of contraction and deleveraging.

India is not safe too and we are one of the countries identified by economists where there is a risk of rating downgrade.

In these times of uncertainty, I believe there will be opportunities to invest – I suppose Warren Buffet is investing heavily right now - however, for ordinary people, these are times when one must be careful – it is better to be safe than sorry.

In these times, I advocate investing in Gold ETF’s –I have been advocating this for the past one year now and I stick to my recommendations. Gold has given a 30% return in the last 12 months and there is more to come – so even if the prices of gold looks high  - enter in dips (there are dips every fortnight) and wait patiently – I expect 15-20% returns in the next 12 months.

India’s half finished revolution

Germany had that one single dramatic day – on 9^th of Nov, 1989 – the day that marked the fall of Berlin wall and events that led to the reunification of Germany.

USSR had a similar dramatic moment on 19^th Aug, 1991 - when Yeltsin stood on top of a tank and addressed people in Moscow – that lead to Yeltsin taking over USSR and eventually the breaking up of USSR into 14 new countries.

India’s economic revolution in 1991 did not have any such dramatic event– But if one has to look back and find one such single day when it all happened – it was 24^th of July 1991 – exactly 20 years back. That was the day India dismantled the license raj – the mesh of government controls, through licenses and tariffs, used to control all industrial activities in the country in the name of centralized planning.

That was the day, when Manmohan Singh told the Parliament that “the room for manoeuvre, to live on borrowed money or time, does not exist any more.” He ended by paraphrasing Victor Hugo: “No power on earth can stop an idea whose time has come.”

The opening up of Indian economy in 1991 has had far reaching changes in our society – in 20 years, we have become richer ( or less poorer as some put it) - our GDP per person (in 2010 prices) has gone up from $503 to $1265. The official poverty rate in India has gone down from 45.3% to 32.3%. Our GDP has grown almost four times from $433 B to $ 1538 B and our forex reserves has shot up from $1 billion in 1991 to about $300 B now. Foreign investment also rose from $150 million in 1991 to $23.5 B in 2010.  The markets have expanded, consumption levels have gone up and companies in virtually all industries have expanded. Adult literacy has improved from 48% to 68% and today we have 49 Billionaires in the Forbes list as compared to 1 in 1990.

What they achieved in that “Summer of 1991” was admirable – to dismantle 45 years of established system in 6 months would not have been easy – one has to note that all these reformers were part of the system all their lives - to fight such a well entrenched system, with people who have been part of the system for years must have been difficult.

Unfortunately for India, this was the reason why the reforms only went half way - what was absolutely required, was done. What was not urgent, was left for the future and was never followed up. I believe that these reformers were opportunistic - they were not 100% reformers at heart – they left it half way.

Today the license raj is gone – but the inspector raj is thriving –especially in the excise and customs duty area. 

The size of Government has gone up since 1991.

93% of working-age Indians, estimated now at 500 million, continue to work informally—outside of the organized sector and without proper labour contracts - India’s labour laws makes it very difficult to hire and fire labour in India –it protects existing workers – but have kept new workers out of job.

Private companies even if they are bankrupt cannot be closed easily in India.

India has still not opened up Agriculture sector and is subsidising this sector very heavily.

India has still not reformed Education and Healthcare.

Infrastructure and retail is being opened up very slowly.

Despite all this, I believe, India’s time has come – we have reached the tipping point beyond which there is no return  – increasing aspirations of Indians to improve their lives and the presence of democratic institutions in India will ensure that the politicians will, over time, improve their governance – our increasing consumption will grow the domestic economy - and our population demographics will ensure that we have lots of youth which will keep the labour costs low and companies technologically savvy and make us globally competitive in industries where manpower is a key cost component.

So I would Iike to remember that day 20 years back as a great step forward and I am grateful that I am living in these exciting times in India.

2011 predictions revisited again

Just like the sea which seems calm at the surface but has massive amount of energy boiling inside it, I am seeing business as usual on the outside but large amount of chaos beneath this calmness. All across the world there is news that is screaming for attention – but one has to connect the dots —we see rioting in ME, increasing fuel prices and spontaneous uprising against corruption and bad governance in India, sovereign debt downgrades in EU and volatility in all the stock markets of the world. The most unusual news that caught my attention is that one state in the US, Utah, has legalised Gold and Silver as currency –are we going back to the Middle Ages? There is fair amount of unusual news around us - but if you look at the business news papers – there is calmness and near normality. No one seems to be connecting the dots, not at-least in public.

In the first big economic pillar - the US,  the public mood is sombre – by June end, there would be no more Quantitative easing ( QE2) – the Fed has pumped $600 B in the last six months and has helped grow the stock markets and commodity markets globally – but QE2 has added just about 700,000 full time jobs in the US – the unemployment stays stubbornly high at around 9% - after all why would any company invest in the US when Chinese and Koreans and Indians can do it far more efficiently. Japan has gone through two decades of slow growth and stagflation. Now it is US’s turns to go through a long period of slow growth.

The other big economic pillar is the EU, where there is a good chance of a crisis that will over time integrate the economies more with more stringent rules – a Greece or Italy or Ireland or even Spain will not create the downfall of EU – it is like saying that a bankrupt West Bengal govt can create a down fall of Indian economy – it will not happen. However, there will be a period of uncertainty for a few more quarters before they are able to reign in the countries having large deficits and get better financial controls in place.

That gets me to Indian markets and the situation here – as I had predicted six months back, there has been volatility in the stock markets – BSE sensex is still hovering around 17,500 to 20,000 – the markets will be range bound for this year – however, I expect the markets to be at the bottom of this range from June mid till about July end – the end of QE2 in the US will suck out the money from Indian markets and there will be opportunities for the smart to buy good stocks at a lower price.

Inflation will be high in India – and to rein it, RBI will still increase the interest rates – this will impact the GDP growth, which will be around 8%. Loans will get costlier. Increasing interest rates will also pull down the stock markets. In all this turmoil – Gold will be the place where investors will run to – we have seen gold giving a returns of 1.5% per month between Jan 1^st and May 31^st –I believe that Gold ETF’s will be the safest liquid bet even though the prices are high at any time if you enter.

I also believe that real estate is still an attractive option for those who have the money and can spot a good deal –However, real estate investments are very local in nature  and one cannot generalise – the price and the location are important and if done right, can give upwards of 20% per annum returns. If anyone wants to invest in Bangalore – I would be more than happy to help out.

Where does one start

While I am aware that half of my readers are professionals in India and abroad who have been working for at least 5 years - this note is mainly for my MBA students who have just joined their jobs in the past one month.

In this note, I am addressing those who are starting their careers in India and what is it that you need to do to start your investment journey.

As you go through your career – you must remember that while it is important to focus on your earnings and your career growth – it is more important to focus on how you invest your savings. In about twenty years, those who did well in their investments would be far ahead financially than those who just did well in career /earnings.

One of my friends has two decades of successful career behind him but has hardly any financial assets – he has about 30 lacs in savings – but that 30 lacs is kept in savings bank accounts –earning 3.5% interest where as the inflation is currently hovering around 9%. He focussed on earnings and career growth – but did not focus on investing his savings. If he had focussed on investing his savings well, over twenty years, he would have had assets worth more than Rs 5 crores (USD 1 million).

So my advice is to spend some time learning about the various investment options. Two hours a week is all that you need to spend.

If you are an MBA, you will have a monthly take home salary of about 35K and a monthly savings of about 15-20K. If you are an engineer, you will have a monthly take home salary of about 25K and a monthly savings of about 10-15K. If you are a graduate, you will have a monthly take home salary of about 10-15K and a monthly savings of about 5-10K.

The point is that in each case, you will be saving some money every month. So the key focus is to invest your savings at as high a rate of return as possible.

So where do you start?

You start with a Demat account. Just as you all have a passport, a driving licence and a PAN card (Income tax card in India) – please open a Demat account in the bank where you have your salary account.

Once you have a Demat account, start with investing through Mutual funds through Systematic Investment plans (SIP), where you commit to invest a specific amount every month in specific mutual funds (something like a recurring deposit). Due to Indian economy’s 8% growth that is expected to continue for the next few years, investing in mutual funds that are focussed on large cap equities are expected to give about 12-15% returns per annum over a 3-5 year time horizon – by investing every month, you are averaging the market movements that happen over shorter periods of time.

The key question is how to choose the specific mutual funds where you will put your monthly investments – The broad approach to that is as follows:

¢  Compare the performance between the same types of funds –in this case large cap equity focused Mutual funds

¢  Risk assessment  - Look at the ratings from  Value research ratings and Money control.com’s  -their ratings are fairly comprehensive

¢  Go with funds that have a large corpus of funds – these are mostly safer than the ones with low corpus

¢  Management  - look at the fund manager’s record and go with fund managers who have a good past performance record

All this data is available in http://www.moneycontrol.com/mutualfundindia/ or on http://www.valueresearchonline.com/

The basic ground rules of investing are:

¢  Have a long term investment plan – early in life, you can have a higher exposure to equities or equity based MF’s

¢  Keep a small amount liquid /debt funds for contingencies or planned expenses over 2/3 years

¢   Spend time in educating yourself in investment areas

¢  Ignore hot tips, hot stocks etc

¢  Start early

¢  Invest regularly –look at Systematic investment plans offered by Mutual funds

¢  Buy and hold your investments and do not get into short term day trading.

Over a period of 3-4 years, you will see your net asset value fairly large as your returns would be around 12-15% per annum and tax free ( if it is equities) and you will have a reasonable sum ( along with a loan) to move into real estate where the returns can be higher than 15%.