Investing
For a growing country like India, depending on the year inflation can get somewhere around 6% to even 12%. That means value of your cash decreases a good amount every year. Bank Fixed Deposit rates are generally lower than inflation rates. Keep in mind that, you also have to pay 1% tax on income from Fixed Deposits.
To solve the problem of decreasing value of an individual’s money it is important to invest, in particular invest in stock market. Though stock market is highly volatile, historically remaining invested in stock market (think index) for long term (say 10 years) has been a very good source of wealth generation and has provided a somewhat assured returns.
I have recently started investing in stocks. Since last few months, I have immersed myself in contents related to long-term stock market investing. So, far I have found contents of MoneyLife and Marcellus Investments quite convincing and that is what I am using for my personal investments. I don’t agree with everything that both of these institutions have to say, I also add some of my own believes while investing.
Following are the insights, I have gathered so far.
Pick Companies with Clean Accounting#
This does not tell which stocks are good, but It does tell you which one you should stay away from. Public companies have to reveal most of their activities, despite that most of the companies do accounting frauds, shuffle money here and there, create complex financial structures, for personal gains of the promoter (founder or largest individual investor). This is not something that happens only in small companies, it happens in large companies with reputed brands. Cafe Coffee Day, Jet Airways are just some of those examples.
Regulators turn a blind eye on these frauds, so you are on your own.
Timing is important#
Marcellus says you shouldn’t time the market and so does every other fund house. MoneyLife says you need a sense of timing in order to do well in the market. Fund houses need regular investments coming in (think SIPs), so it is in their benefit to tell you to not time the market and invest today.
Though, you don’t know when some stock or market will go down, you need to have cash reserves so that if perfectly good stocks get undervalued for irrelevant reasons or market emotions (think elections, bomb blast, financial crisis), you can buy them cheaply.
Mutual fund sahi nahi hai (Mutual Funds are not good)#
NAV of an Equity Mutual Fund is just as volatile as price of a stock. Picking a mutual fund is just as difficult as picking a stock (probably more). Pick the wrong mutual fund and you could see bad returns.
Over time, mutual fund fees add up. Mutual fund houses put most of their money into benchmark stocks (think 60-70%) and use their own investment brain only on the remaining amount. Some of the mutual funds notoriously invest all the money in the benchmark, thus putting zero effort and still collecting management fees from you.
Most of them remain 100% invested and thus cannot take the benefit of low prices when the market goes down.
I personally see no reason to invest in an equity mutual fund. If you feel like investing in stocks take too much of your time and you would rather give your money to someone else and not bother about investing, equity mutual funds might seem like a good option. Fund houses release their portfolio each month, you could just buy those stocks yourself and save yourself the management fees.
I, however, see a value in debt mutual funds. Though return is not guaranteed, they have historically provided better returns than fixed deposits with similar volatility.
There has been incidents of mutual fund houses not abiding by the rules. Like Equity Mutual Fund lending money to other companies, or investing in private companies instead of public ones. Stick to good institutions like HDFC and Kotak Mahindra.
Invest in India’s consumption story#
I believe eventually most countries would have a similar life style and income gap between people from various countries would decrease. So, more and more people will become richer and come out of poverty line. This would result in more consumtion.
With this belief, investing in Private Banks, Financial Institutions and Consumer Products (especially essential consumer products) could be beneficial.
I think following are strong companies in these areas. You could buy their stocks given their value is reasonable.
- Banks: HDFC Bank, Kotak Mahindra Bank
- NBFC: Bajaj Finance
- Consumer Goods: Asian Paints, Nestle, Pidilite, Britannia, Marico, probably ITC as well
India has a great Pharma and Chemical industry, but given that their stock prices have risen a lot lately, I am not sure if their value is justified and which ones are better than others.
Invest with money that you don’t need#
Though, stocks will give you good returns, but not when you want.
A lot of people happen to buy stocks with their essential money and end up selling them when market is down.
Even though, Fixed Deposit don’t give you good returns, they are safe and safety of your money comes before its growth. Put fixed deposits only in large scheduled banks. Co-operative banks have high default rate (1 every month). Avoid them and other small banks, otherwise you would be at the risk of loosing your Fixed deposit money.
Start small#
Start small. Initially you are just learning and betting. You will learn over time.
Never remain fully invested. Don’t worry about lost opportunities. You always need to have money left to invest further. If you remain fully invested, you will miss out when prices are low.
Singles and Not sixes#
I am not sure how true this is, but it seems quite convincing to me. Instead of finding great rare companies that market has missed out and undervalued or are likely to disrupt things and give great returns, just pick companies that have strong business model, proven track records and is a well-oiled machine, which give you not great, but a decent return rather safely.
I believe over time this method would make more money. It’s not about strokes of geniuses, but more about making fewer mistakes.
You should spend time for investing#
A lot of people shy away from learning about investment and are hesitant of putting time into it. Over time, investment could easily generate more wealth than salary, thus I find it quite justifiable to put more effort and time to make better investment decisions, learning and staying updated about what is happening in your portfolio companies.