Have you ever thought about investing ?? 

Investing if done right, it has the power to generate returns more than an entire lifetime of working. The first process of investing is having a good financial plan and understanding the goal you want to achieve with the returns from the money.

Once you have your financial plan ready, it will help you understand the average return that is required from the investment to achieve your goals. It is important to link the investing style to your financial goals.

There are multiple avenues that one can invest in, they are as follows:

• Stocks and Mutual Funds
• Real Estate 
• Government bonds 
• Gold and Sovereign Bonds
• Fixed Deposits 

There are various concepts and strategies in investing, Today we are going to speak about one of them known as Coffee Can investing from the book Coffee Can Investing by Saurabh Mukherjea. This Strategy basically says Buy and Forget. In this method, it is about finding the right companies according to criteria mentioned in the Coffee Can Investing philosophy and sit tight to watch these companies grow.

This means staying invested in the companies even in the times of ups or down in the market. 

Most successful investors hinge to two questions – Which stocks should I buy & for how long should hold these companies? When it comes to investing in India it is surrounded by sub-level advisors and common thinking “ To make higher returns in stock markets One must take higher risk.

Warren Buffett suggests that when investing in the companies we should understand the following things

1. Understand the business plans
2. Management and its trustworthiness 
3. A sensible price tag to the business 
4. Enduring Moat, a competitive edge that competition cannot replicate 
5. Once we find a company like these stay invested forever

Then the next question arises why most of the investors aren’t adopting this. It’s because emotions sway the decision making of investors. 

Coffee Can investing strategy was founded by Robert Kirby in 1984, where he had suggested his client buy shares of Xerox for $ 500 each and held it for 10 yrs. And the portfolio grew to $ 8,00,000 which came from the zillion shares of Xerox.

How to Create Coffee Can Portfolio 

The process starts with identifying the companies having a minimum market capitalization of Rs 100 Cr. Once this filter is applied the next filter is looking for companies that have grown in sales by at least 10 % year on year along with 15% ROCE ( Return on Capital Employed) in the last decade.

The median portfolio returns (compounded and annualized) has remained robust at around 24 to 25% historically, regardless of whether the investor’s holding period has been as short as three years and as long as 10 years. If held for at least five years, there is more than a 95 % probability of generating a return greater than 9 %.

The Coffee Can philosophy of investing is built using the twin filters to identify great companies that have the DNA to sustain their competitive advantages over ten to twenty years. Hence able to generate such returns. 

CCP in action – Page Industries 

Page industries the master franchise of Jockey in India. The firm has consistently achieved revenue growth in excess of 10 % per annum and ROCE above 15 % each year. Page’s Revenues have grown at 31% CAGR and ROCE has averaged a staggering 55 %.

Page has, on an average, reinvested around 50% of its operating cash flows back into the core business via fixed asset investments to expand its manufacturing capacity. More importantly, although the stock’s trailing P/E multiple re-rated from 27 times in 2007 to 70 times in 2017. The firm has delivered 32% earnings CAGR over this decade.

Once the portfolio is created, then during the 10 years there are no changes to be made. While churn in a portfolio goes against the basic philosophy of long-term investing, it ensures a higher probability of profits over a longer period. Investing and holding for the long term is the most effective way of killing the ‘noise’ that interferes with investment decisions.

The Coffee Can portfolio attracts businesses with smaller ticket sizes and repeats the purchase of products and services. Businesses in B2C can leverage loyalty with consumers and can be one of the competitive advantages. Also, a great B2C firm is better able to respond to or drive an evolutionary trend of its end-consumer. CCP Prefers the company with Strategic Asset.

Strategic assets are those that give a firm a platform over which it can build a stack of initiatives like raw material procurement, product development, marketing strengths, great distribution, pricing power, supply chain, etc. For most good (but not ‘great’) companies, strategic assets are only tangible in nature. 

But CCP prefers companies whose strategic assets are a combination of such tangible strengths alongside intangibles and hence difficult to replicate no matter how much money a competitor is willing to spend.

Expenses matter 

Gross return is not a true reflection of a portfolio’s performance because it is inclusive of fund managers’ and brokers’ fees. Investors should instead look at net returns

Transaction fees:

Also called brokerage, it is the fee you end up paying every time you enter a transaction. If a broker charges you a 0.5 % fee for a stock purchase, it may not seem like much. If, however, in the course of a year you bought and sold five times, your total fee as a percentage of your portfolio becomes 5 %.

Annual fees:

This is more typical of funds (like mutual funds and PMS) wherein the fund manager charges an annual fee which can actually be paid on a monthly or quarterly basis as well.

Hidden fees:

In insurance products and structured products, it is not easy for investors to understand exactly what fees are being charged. Expenses too can compound over time!

Mutual Funds 

The Indian mutual fund industry now has more than forty fund houses offering approximately 2500 schemes across various asset classes like equity, debt, hybrid, and commodities (gold). The industry now manages more than Rs 20 lakh crore.

Mutual Funds have exit loads which are charged from 0.25% to 2.25% if investors redeem in less than a year. The distributor of mutual funds used to earn as much as per 5% to 10% annually from the upfront commissions alone. 

Read more about Mutual Funds here

Active Funds & Passive Funds 

Active funds are those funds that are actively managed by fund managers and focus to outperform the benchmark index. While Passive funds are those funds that replicate the index and are not actively managed and hence have lower managing charges.

Direct Schemes investments give investors an option to deal directly with the fund house without any intervention by intermediaries like distributors, agents, financial planners, banks, etc. Direct plans are much cheaper, by 0.5 to 1% per annum in equity and 0.05 to 0.5% per annum in debt.

The Real Estate Trap 

As we all are aware, Real Estate is a large size transaction and due to this remains one of the largest components in most Indian investors. Most Indians associate property with safety, status, and prestige, given the feudal traditions of our country. 

In the previous era, people typically built houses when they retired. A house was something which was built for staying, never as an investment. Fast forward ten to fifteen years. In the opening decade of the new millennium, we saw a paradigm shift in the way retail investors started viewing residential real estate

Why do Investors get trapped in residential Real Estate? 

Compared to the familiarity of buying land or gold, investment in any form—either in mutual funds or in stocks or bonds—is alien to most Indian investors.

Unlike other asset classes like equity and debt, which can have a cycle of three to five years (i.e. price movements change their trend every three to five years), real estate runs into a supercycle of over ten years. So, most people who made significant profits in the bull cycle of 2003–13 don’t have any experience or memory of a downward cycle. 

 More importantly, outsized gains on this scale leave a lasting imprint on not just those who made the gains but also on their friends and relatives—envy is a powerful emotion. returns: All investment decisions have to be considered relative to their opportunity costs. Most real estate investors are usually satisfied simply because they look at absolute returns in isolation.

But the compounded annualized return that property has generated over the last twenty years is just 8.3 %. In that same period, the Indian stock market’s benchmark index is likely to have risen at 15 % per annum which, compounded over twenty years translates to a sixteen-times return.

When it comes to real estate, investors are happy to buy and hold for long periods. As a result, they end up holding their properties through thick and thin, which is why they are able to see an appreciation in the value. In contrast, inequity, investors typically end up buying at the peak, trade frequently, and then exiting at the bottom. The harshness of most investors experience of the stock market versus their happier experience in real estate

How to own real estate at low cost 

Non-convertible Debentures / Real Estate debt funds 

NCDs are similar to bonds issued by borrowers which promise to pay a certain coupon along with the principal back within a predetermined tenure. They were issued by real estate developers, typically at a project SPV level. The high-interest rates offered—anywhere between 18 and 25%—was because these projects could not get funding from banks and other avenues.

REITs 

REITs, or Real Estate Investment Trusts, are structurally similar to mutual funds in that they pool investors’ monies and invest in real estate projects.They are allowed to invest in income-bearing assets only and mandated to return more than 90% of the rents they get as annual income to investors. The pooling gives an excellent opportunity to investors with small ticket sizes who cannot afford to invest in a single property.

Real Estate has given far lower returns compared to equity over long periods of time. Along with that, its high correlation with equity means that real estate offers little by way of diversification. 

Patience & Quality 

What explains this investor pessimism with respect to equities, given that the asset class has given healthy returns?

The answer to this can be best understood through Shlomo Benartzi and Richard Thaler’s paper published in 1995, They defined ‘loss aversion’ as: ‘We regret losses two to two-and-a-half times more than similar-sized gains.’ Let us assume we buy two stocks—A and B—for Rs 100 each and sell them for Rs 95 and Rs 110 respectively. We thus book a gain of Rs 5 in total (gain of Rs 10 on stock B minus the loss of Rs 5 on stock A).

 In simple words, we will regret the Rs 5 loss on stock A at least as significantly (if not more)

As we would rejoice in the gain of Rs 10. to stop regretting investments in equity markets, his probability of generating profits needs to be at least twice as much as the probability of generating losses.

At what point investors lose their regret about investing in equities, is the probability of generating profits twice as much as the probability of generating losses.

The Patience Premium 

‘Patience Premium’ is the difference between annualized returns generated by a stock or an index over any holding period compared to the return generated by the same stock or index over a one-year holding period. A positive value of ‘patience premium’ implies that the longer the holding period of the stock, the higher is the return generated from it for an investor.

For example, if holding stocks for five years gives you 10 % per annualized returns whereas holding stocks for one year gives you 7 % returns, then the patience premium is 3 % (10 % minus 7 %)

‘Quality premium’, which we define as the difference between the annualized returns generated by a stock or a portfolio and the benchmark index ( the Sensex) over a particular holding period.

As the holding period increases from one year towards three and five years, volatility (and hence risk) of returns for a Sensex investor reduces.

The degree of risk involved in a one-year holding period has been three to four times higher than the risk involved in a five-year holding period and six times higher than the risk involved in a ten-year holding period.

There were certain observation made on the CCP 

• The shorter the holding period, the higher the quality premium
• A high-quality portfolio with a very long holding period delivers the highest return with the lowest risk

Conclusion

We conclude that investing in stock markets is a long term game that ensures a higher probability of returns. The Coffee Can investing  Philosophy is completely based on the game of patience.

If you are looking to invest to in the stock market for the short term, then definitely this CCP is a philosophy would not work for you. Even Warren Buffett mentions to be successful in the game of investing one needs to have systems in place.

Coffee Can investing is one system. As they say, one size does not fit all same goes for the investing.

Chech out the book on Amazon:

About the Author

Saurabh Mukherjea is the CEO of institutional equities at Ambit Capital, an Indian investment bank. In 2014 and 2015, he was rated as the leading equity strategist in India by the Asiamoney polls. Mukherjea has spent most of the past decade trying to construct and implement systematic methods for analysing Indian companies in the midst of the chaos that surrounds the Indian stock market. A London School of Economics alumnus, Mukherjea is also a CFA charter holder. 

About Roopesh

Roopesh is an author at Hackedwits and writes on summary for books from Business and Finance.A Project Manager at day and content writer at night. Love to learn new things, to connect dots in life. Follow him on LinkedIn for collaboration for freelancing projects.

Read his other top articles here:

1.  3 Things to think for to build Emotional Resilience
2.  10 Things to consider while buying a life insurance
3. Before you Start-Up 

Roopesh

Roopesh is an author at Hackedwits and writes on summary for books from Business and Finance. A Project Manager at day and content writer at night. Love to learn new things, to connect dots in life.

hackedwits.com/

The post Book Summary: Coffee Can Investing appeared first on E S Krishna Ram.

The aim of investing in equities/debt is to generate wealth over time, and mutual funds do just that. But they do it with much less risk than individual stock picking. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income on your behalf.

The Mutual Funds Sahi Hai campaign had a huge positive impact on demystifying mutual funds in India. This led to a lot of investors seeking Mutual Funds as an investment tool, especially through a Systematic Investment Plan. With the flexibility and options it offers, there is a fund for everyone!! Let’s explore some of the options:

Types of Mutual Funds

Equity Mutual Fund

An equity mutual fund is one which predominantly invests in equity shares or other equity related instruments. So how much should be in equities? So as per current SEBI Mutual fund regulation, for a mutual fund to be classified as an equity mutual fund, it should invest no less than 65% in equities. The fund manager has the liberty to invest the other 35%. Considering that in mind, there are various types of equity mutual funds, some are described below.

Large cap MF

The top 100 stocks by market capitalization listed in the Indian stock markets are called large caps. A mutual fund which invests in these top 100 stocks makes up the Large Cap Mutual Funds.

Mid cap MF

The next 150 stocks by market capitalization listed in the Indian stock markets (100-250) forms mid caps. A mutual fund which invests in these 150 stocks makes up the Mid Cap Mutual Funds.

Small cap MF

The stocks with rank 250+ by market capitalization listed in the Indian stock markets forms the small caps. A mutual fund which invests in these stocks usually 250-500 makes up the Small Cap Mutual Funds.

Multi cap MF

As the name suggests a Multi cap mutual fund has the freedom to invest across market capitalizations. A recent development in multi cap space is a circular by SEBI dated 11/09/2020. The circular states that a multi-cap mutual fund has to invest at least 20% each in Small, Mid and Large caps to stay true to its name.

Index Funds

Index funds, as the name suggests, is a mutual fund that tracks an Index. They are passively managed funds. That is there is no active stock picking. The role of the fund manager is mirror the respective index as closely and accurately as possible.

Because of the passive nature of such funds, fund houses need not spend huge amounts of cash for fund managers to identify and pick stocks. Hence the expense ratios for such Index funds are much lower than actively managed funds.

Index funds are often the best instruments for beginners to enter into equity markets

Besides these, there are also sectoral funds, thematic funds, international funds, focused and value oriented funds.

Debt Mutual Fund

A debt mutual fund is a scheme which invests in debt instruments such as corporate bonds, debentures, government bonds and other money market instruments. Such investments are often risk averse and provide stable and predictable income to investors, unlike equity investments.

The following are some of the types of debt mutual funds:

Liquid Funds

These mutual funds invest in debt instruments with a maturity period less than 91 days. Are often the safest funds to invest due to the low duration. Liquid funds are an excellent alternative to a savings bank account (or even FD in the current low interest situation) and often producing better post tax returns.

Average Yield: 6-7%

Corporate Bond Fund

Corporate bond funds are those mutual funds which invest not less than 80% of their portfolio in bonds of companies having a rating of at least AA+. As such a credit rating is only given to financially strong companies and history of paying back lenders on time, investment in such companies is seen with lower risk.

Average yield: 8-10%

Duration Fund

These are mutual funds which hold various debt instruments over certain durations of time. In fact Liquid funds discussed above are a type of duration fund. They are classified based on the duration to maturity of the underlying instruments that the fund is holding. Some of them are:

• Overnight
• Liquid Fund
• Ultra-short duration
• Low duration
• Short duration
• Medium duration
• Medium to Long duration
• Long duration

Gilts

Gilts are debt mutual funds that invests in government securities. These instruments have no credit risk associated with it as the borrower is the government and repayment is assured. (Indeed, if the government defaults on its interest payment, it would mean the GoI has defaulted, in such a case you would be having much bigger issues to worry about!!)

Hybrid Mutual Fund

A hybrid mutual fund is one which invests in both equity and debt to extract the best of both world. It often produces better returns than debt funds due to the allocation in equities but are more riskier than debt funds. Compared to pure equity funds, though it doesnt give returns as much as equity funds, but they are less risky and less volatile. This makes it an excellent choice for investors with medium risk capacities.

Even within hybrid mutual funds, there are subcategories such as

Aggressive Hybrid

Aggressive funds can hold up to 75% of the portfolio in stocks and the remaining 25% in fixed income options such as debts and FD like instruments.

Dynamic

A dynamic fund offers the fund manager complete freedom as to the accocation towards debt and equity. There is no fixed maximum and minimum percentage for the asset class and the manager is free to choose an allocation he deems fit according to the market condition.

That is if the manager feels that the stocks are overvalued and a crash is eminent, he can completely exit and invest in debt and vice versa.

Multi Asset

All the mutual funds discussed til now either invested in equities or debt. A mutli asset mutual fund can have a third asset class such as gold or real estate.

Multi asset funds are required to have a minimum of 10% in each of the respective asset classes at all times.

ELSS

Equity Linked Savings Scheme or ELSS is an equity mutual fund that helps you save tax under Section 80C by investing up to a maximum of Rs 1,50,000 per financial year.

ELSS mutual funds have a lock-in period of 3 years. Since the on-set of the new tax regime, exemptions under 80C have been removed. This makes ELSS scheme unattractive for such investors, opting for the new tax regime as it does not offer much benefit and their investments are locked away for 3 years.

FOFs

Fund of Funds (FOF) is a mutual fund that invest in other mutual funds for managing risk, volatility, ease, etc. But FOFs usually have higher expense ratios and tend to dilute the portfolio.

Things to consider

Open vs Close ended funds

99.99% investors should only invest in open-ended mutual funds because of the peculiarities of how closed-ended mutual funds work and how it might not be the right option for most investors. Read more…

Direct Plan ONLY

Mutual funds offer 2 ways through which you can purchase them. One is directly from the fund house (Direct Plan) or through an intermediary, usually the brokers (Regular Plan). The key difference between the 2 is that through the regular plan, usually the brokers take a commission for themselves out of our total fund value. This reduces our returns by over 1% each year and is not worth it, as you will see in the example for expense ratio.

Zero commission direct mutual fund investing has caught up even through brokers such as Zerodha and other offerings such as Groww, ET Money, Paytm Money.

Expense Ratio

There is literally zero direct cost of owning mutual funds at the hand of the investor. However, the fund house charges you a percentage of your total holding for running and maintaining the fund.

Expense ratio though doesn’t seem like much, but over years and compounded becomes an enormous amount in itself. A simple additional percentage over long periods can have huge repercussions.

Example:

10 lakh lump sum at 15% for 25 years grows to Rs 4,15,44,120

Add 1% expense ratio to that equation, the net return becomes 14% and the total investment becomes only Rs 3,24,51,308

That’s a humongous difference of nearly 90 lakh rupees over 25 years!!

Exit Load

Again, certain mutual fund houses charge a small percentage of holding if you exit the fund within a specified time period. This is in fact to discourage people from shuffling around with the funds too often and will not be a point of concern if your investment horizon is long term for most funds.

AUM

AUM stands for asset under management. It refers to the total value of investment a mutual fund house is holding under that specific fund. A general rule of thumb is to ensure the mutual fund has at least a couple of thousand crores as AUM so that the fund faces no liquidity pressure while redeeming.

FAQs

I hope the article covered enough to provide a bird’s eye view of the mutual fund space. If you have any doubts or comments feel free to let me know in the comments or through any other mediums, will be happy to discuss.

My other articles on Investing: Investing: Why should you start now?, What I learned after 5 years of Investing

E S Krishna Ram

Krishna Ram is the man behind the website you are currently on. For more updates follow me:

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Like any other young dude doing his engineering, I started tinkering with the idea of investing stock markets, back in my engineering days. What started as an endeavour to make some quick bucks turned out to be a much more entertaining, fulfilling and learning experience.

Five years of investing is by no means a colossal amount of time in the investing universe. However, I’m still sharing my experiences, learnings and mistakes over this time frame.

Introduction

My investing journey started somewhere in the last weeks of May 2015 by filling out forms and signing out countless times in the application form at Geojit – a broker based out of Kerala. It was my lack of knowledge (at the time) that led me to believe that you needed to be at least 18 years old to get a PAN Card which was necessary for opening a Demat account.

The actual investing process started a few days later when my papers were processed and they have activated my account. On the Wednesday of June 10, 2015, I finally made my very first investment in a relatively unheard company, which I held on for nearly 4 years along with 5 other companies.

Like many others, I made some money, lost some money, made mistakes and did stupid things. But most importantly, learnt a lot during the process. I’ve summarised some of them below, not in any order.

Learnings

Quality first, always

Initial years saw me chasing the so-called “hot stocks” which “seemed like” having huge potential to generate tremendous returns. But I really ended up eroding capital in the process. The argument I had against excellent quality stocks at the time was: This company (share price) is already doing good, so I don’t see much opportunity in it anymore. I wasn’t more wrong. In fact, an elite company has better chances of, say, doubling from the CMP than a cheap but questionable company. Example: Reliance doubling in the past couple of months.

Don’t judge a company by its share price.

A lot of beginners (including me back at the time) make the mistake of judging companies by its share price. You and I make the mistake of thinking say, an HDFC Bank trading at 1200 is expensive. Whereas a Yes Bank trading at 25 is cheap. But one should never gauge a company by its stock price alone. Companies trading at tens of thousands of rupees might be cheap from a valuation perspective when compared to a cheap penny stock trading at expensive valuations.

You cannot time the market

You can often see discussions on “if it is the right time to enter/invest the market or not.” In my experience, there is no right or wrong time, the best time is when you have the means to do it, without trying to time the market. The primary reason one tries to time the market is because of a short investment horizon. If you plan to hold on to a company for years, it doesn’t matter if you buy it today or 2 weeks later at a 2% discount. The issue with trying to time the market is that you never know for sure and you’ll always end up questioning yourself.

Returns come from patience

One of the most overlooked aspect of investing is the investor’s patience. The difference between an average investor and a brilliant investor is the ability of the latter to sit on his investments for interminable periods of time, allowing it to compound. One should also note that sitting blindly on a terrible investment hoping that tides would turn in your favour is also a grave mistake.

The 80/20 Rule in Investing

One of the mistakes early investors makes is to sell their winners and hold on to the losers. Some make it even worse by selling the winners to buy the losers. Even I have been victim to this mentality. The primary reason for such a thought is that one often thinks of an investment as a one time instrument and once a certain return is achieved, we must replace it with another instrument. But the reality is far from it. A fundamentally sound company, with a proven track record, can generate returns year after year.

Stock markets are volatile, and there isn’t much you can do about that.

Stock markets are volatile, it doesn’t work like fixed income assets such as debt or FD. It is also wrong on our part to expect it to behave like one. And more often than not, it takes a toll on you. You’ll definitely be stressed to see wild swings in your portfolio over time. But that doesn’t mean that you must take action or monitor it daily.

To visualize the nature and volatility of markets and expectations, consider the following. A hypothetical price movement of a share from 100 to 200.

Expectations: 100->110->120->130->140->150->160->170->180->190->200

Reality: 100->130->110->96->78->130->155->181->177->186->200

Say, you’ve correctly identified and picked a stock at 100 and know it has the firepower to reach 200. You need genuine conviction to hold on to it when it has corrected 20% just when you bought. And boy does that happen.

Cash is king

Consider the following situation: The markets have corrected heavily, say 20%. You suddenly needed some amount of money for an emergency. If all your savings were invested, with no emergency fund in cash, it would force you to exit at a terrible time. Leaving you with no other option than an untimely exit. Hence, one must only invest in equities after having an emergency fund which can take care of your immediate needs if the case arises.

Also, if you allocate a percentage of your portfolio to be liquid cash, it gives you the opportunity to deploy it at a stage when the market has corrected because of a temporary event. Example: Markets corrected heavily in 2020. But as I was fully invested and had no spare cash lying around. Hence, I could not take advantage of the opportunity financially by averaging down.

Trading is not for you, if you don’t know what you are getting into

Almost everyone starts off as a trader. Almost no one starts investing with the mindset to hold an investment for years. The problem starts when you get lucky with a few trades and think trading is easy.

When investing, remember that Rome was not built in a day. When trading, remember Hiroshima and Nagasaki were destroyed in one.

Vijay Kedia, Veteran Investor

But that’s not to say that making money by trading is not possible. Trading like long-term investing has lots of nuances and there are a lot to be studied and understood. One must know this before becoming a trader.

Mutual Funds Sahi Hai

The aim of investing in equities is to generate wealth over time, and mutual funds do just that. But they do it with much less risk than individual stock picking. MFs are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income on your behalf.

The Mutual Funds Sahi Hai campaign had a huge positive impact on demystifying mutual funds in India. This led to a lot of investors seeking Mutual Funds as an investment tool, especially through a Systematic Investment Plan. With the flexibility and options it offers, there is a fund for everyone!!

Mistakes

Not diversifying enough

The saying “Don’t put all your eggs in one basket” seems like such a cliche. But the truth is cliches work. Diversifying with respect to investing is a risk management strategy that limits the exposure to any single asset or risk. An example of not diversifying would be stuffing your portfolio with a lot of sector specific stocks.

There are various types of diversification even within investing, some of them are among:

• Different sectors
• Different countries
• Different asset classes/instruments

Not exploring other instruments

Investing in equities is not the only form of investment, there are various other avenues. These includes:

• Bonds
• ETFs
• REITs
• Commodities such as Gold, Silver

With the unpredicable nature of the markets, it is always in the best interest that you diversify beyond equities. Also, a mixture of multiple asset classes greatly help in reducing the volatility in one’s portfolio.

Portfolio churning

Portfolio churning is in simple terms nothing but “over trading” with the expectation of better returns. If your stock picks are into decent companies with a proven track record, portfolio churning only helps the broker to rake in additional income in terms of commissions and brokerages from your returns.

Example: My very first investment, on day one, was into 6 companies, which I have sold off at various timings. I checked for this article, what would that holding have returned if I had still continued to hold on to them even today. Surprisingly, the combined returns from those six holdings is not much different from the returns from my current holdings. Not to mention all the savings from the various fees, brokerages and tax paid while buying and selling in the second case.

You can only beat the market, if you first match it.

It’s only natural that one aims to generate alpha. I.e. the returns one generates over the returns generated by the benchmark. However, what you forget is the fact that you can only beat the market, if you first match it.

In my initial days, with the aim of “beating the market” I started betting on riskier bets, in hopes of better returns and to some degree found success. But as the Warren Buffet saying goes, “Only when the tide goes out do you discover who’s been swimming naked.” This was exactly what happened when the market cycle took its course and my riskier bets got exposed.

The simple learning from the above chart is that, numbers wise, I would have been far better off just investing in a Sensex ETF or Index fund instead of taking the risk and effort of finding individual stocks and investing.

Investing in Penny Stocks

We should read the mistake of investing in penny stock in conjunction with the learning “Don’t judge a company by its share price” Nearly for the entire first year, I never invested in a company with a share price over Rs 1000 due to the misunderstanding mentioned above. Also, my google searches would be along the following lines: “Best stock under Rs 50/100/200” This is not to say that there are no good stocks under 200, but a flaw in the thought process while picking stocks.

Conclusion

The first five years of one’s investing journey is barely just the beginning. But, all the mistakes, experiences and lessons over this time makes him a better investor from 5 years ago. If you want to learn the craft, make mistakes and make mistakes in the beginning, when the stakes are low.

A man should never be ashamed to own he has been in the wrong, which is but saying… that he is wiser today than he was yesterday.

Alexander Pope – English Poet

I’m sure you too might have had some of these experiences and have came to your own conclusions. Let me know in the comments what are some of your key takeaways from your investing experience. If you found this article interesting, you might also like my article Investing, Why should you start now. Also, don’t forget to subscribe to our newsletter to receive the latest updates on our latest articles.

Announcement: Myself along with 2 of the most passionate guys out there, Padmadip Joshi and Gokul G Kumar have launched a podcast series: Conversations with Reinforced Engineers. Do check it out here (YouTube) or on Spotify by clicking the web-player below if you haven’t already. The podcast is also available on all the leading podcast applications.

E S Krishna Ram

Krishna Ram is the man behind the website you are currently on. For more updates follow me:

The post What I learned after 5 years of Investing appeared first on E S Krishna Ram.

The best time to plant a tree was 20 years ago, the second best time is now. This Chinese proverb is very much relevant to a lot of things in life, investing included. Read along to understand why one should start investing ASAP!!

What is Investing?

Investing is the calculated act of allocating money in various instruments with the expectation of generating income or profits or capital gains. This very intent of investing differentiates it from savings, which is often used interchangeably.

Why starting early matters?

When you are young and early in your career, money is scarce and so is the amount you can set aside for investing. But it’s those tiny amounts you save early on that bring in the most returns. Let’s understand why that’s the case.

Compounding takes time

Warren Buffett, one of the greatest investors of our time started at 11. Yet, he often says he should have started earlier. The initial investments one makes, though small in quantity has the potential to grow over time to huge numbers over the years one stays invested. Anyone aware of the concept of time value of money would agree to this.

Compound interest is the eighth wonder of the world. He who understands it earns it… he who doesn’t… pays it.

~ Albert Einstein

I’ll explain this with an example.

Take Krishna and Ram they both are 25 years old young engineers. Krishna on his father’s advice and help started investing ₹2000 per month starting age 18. At age 25, Krishna met Ram and educated him about the importance of investing. Consequently, Ram taking Krishna’s advice did the same.

Krishna, to help Ram understand the power of compounding, challenged Ram that, even if he stopped investing anymore, he’ll still have more money than Ram at age 60.

Accepting the challenge, Ram also started investing ₹2000 per month without a break for the next 35 years (until age 60). During this time, Krishna just waited with the money he invested in his initial 7 years.

Whom do you think might have won our hypothetical challenge?
Of course, Krishna!!
I’ll break down the math for you.

Krishna

Age 18: Krishna invests ₹2000 per month until age 25.
Amount Invested till 25: ₹2000x12x7 = ₹1,68,000.
Assuming a nominal 12% return, the invested money would have grown to: ₹ 2,63,957 by age 25.

Krishna then stops investing, but lets the accumulated amount compound till age 60.
Assuming the same 12% return, the invested money would have grown to an astonishing ₹1,72,38,924 by age 60.

Ram

Ram, on the other hand, starts investing at age 25., Assuming the same 12% let’s see how much he made by age 60.

Amount invested till 60: ₹2000x12x35 = ₹ 8,40,000
Assuming the same 12% return, the invested money would have grown to only ₹1,29,90,538 by age 60.

That’s a difference of about 40 lakhs even though Ram invested 5x more than Krishna.

Here, Krishna is reaping the benefits of starting early.

Inflation

Most Indians are not comfortable investing directly in equities, they prefer the liquidity and stability of fixed deposits. Little do they understand that a hidden tax on savings inform of inflation is eating away their gains (more on that in a future article). But the underlying fact is that inflation is a factor most don’t consider while making investments.

Inflation would affect any investment over time. As a result, care should be taken to ensure that the investment instrument must first keep up with inflation to increase “real purchasing power”

Furthermore, the fact that inflation hurt savers more is a reason why one should “invest”, that too, in inflation beating instruments.

If we take the above case of Krishna and add in inflation factor of 6%, his portfolio would have only grown to a meagre 17 lakhs of “real purchasing power” by age 60.

Financial Goals

Everyone has financial goals, be it retirement, the dream home or car, foreign vacation, child’s education/marriage, etc. Therefore, it makes perfect sense to plan for it well in advance.

Where to invest?

There are multiple avenues to invest which I will try to cover in detail in future articles, such as:

• Fixed Deposits
• Recurring Deposits
• Stocks
• Bonds
• Mutual Funds
• ETFs
• REITs
• Real Estate
• Gold, etc.

Interested in reading more about each of the above instruments? Let me know in the comments below which instrument you’d like me to write about next. Also, don’t forget to subscribe to our newsletter to receive the latest updates on our latest articles.

Footnotes

Calculator: Magic of Compounding Calculator
Previous article: Decoding Union Budget
Further reading: The Intelligent Investor

E S Krishna Ram

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