Starbucks has finally opened its first store in India. Being in Mumbai, we got an opportunity to check out the store on very first day. Lucky us… 🙂
|From Starbucks (India) website|
Now, if this amount was invested on monthly basis (SIP) in a good mutual fund scheme, then assuming 15% pa growth, the amount would have become Rs 1.65 Lacs in 10 years. You can calculate the same yourself by using a SIP Calculator.
|A Snapshot from SIP Calculator (Source: HDFC MF)|
We want our portfolio to be so easy to maintain that even a dead person is able to do it, i.e., without much thought and activity. 🙂
For us, monks are ultimate symbols of calmness, serenity, stability and longevity. These are some of the terms which we want our portfolio to be associated with.
Note – The topic may seem a bit haywire as it documents a loud thinking session.
Here are some of our thoughts –
- Dead Monk’s Portfolio (DMP) can follow a Core –Satellite approach in which core could account for 60-75% of portfolio and Satellite the rest 25-40%
- Core can be made up of high dividend yield large cap stocks OR low PE, average to good dividend yield large & mid cap stocks OR low to average PE, good to average dividend yield large and mid cap stocks, trading below their book values OR any other combination of parameters and concepts like Magic Formula.
- We prefer companies which pay regular & increasing dividends as the proceeds can be used to buy more stocks or as a source of passive income. Also these stocks are stable and less risky. But according to experts, this stability comes at the price of lower returns. And as stable long term investors, we are ready to accept non-astronomical returns.
- Satellite can be made up of companies which offer long term above average growth and which may not be doling out dividends. Such companies generally prefer to invest profits back into the company which may be growing at rates higher than company’s cost of capital OR for novices like us, higher than overall market growth rates.
- But how do we find stocks which offer stability as well as good dividends? There are many ways of finding such stocks. One is to check the indices that track dividends. Another is to check lists of highest dividend yielding stocks. But such lists throw up names which we are not comfortable investing in : so it would be a good idea to take such lists and add a filter or two like market cap, profitable in last 5 years, etc).
- Another approach can be to use stock screeners with conditions like large and mid caps, dividend yield of more than 3%, consistent & increasing dividend payouts in last 5 years, trading close to 52 week lows, low PEs etc.
- We are compiling a list of good stock screeners for this purpose and would share them shortly.
- Another question which has been raised is that does it even make sense to bother about capital appreciation of the Core portion of such a portfolio?
- Over any rolling period of 5 years in last 12 years, Sensex has not given negative returns! So if you are ready to stay invested (in this case, in an Indian Index Fund) for a period of 5 years, you won’t lose money.
- Returns earned during last 12 years, when segregated on basis of P/E ratios are –
|Returns (Over 3 & 5 years) & P/E Ratios|
This clearly indicates that at current P/E of 16.5, we have a chance of earning more than 15% per annum for next 3-5 years!
- Stable Investor is now in a better position to respond to people’s view that it is better to invest in markets of lower multiples (P/E). Our analysis clearly shows that if investor invests in markets of lower multiples, probability of earning high returns is very high.
- P/E Ratios are still relevant for judging overall valuations of markets, if not individual stocks.
- It is advisable to invest when markets are trading in early teens (i.e. 13<P/E<16). It has also been seen that Indian markets tend to stay between P/E Multiples of 12 and 24 (Read Indian Markets PE 12 to 24 for details)
- P/E Ratio is a beautiful indicator of market’s overall valuation. But before making any buy or sell decisions, an investor should also look at a lot of other information/data.
Oracle of Omaha, Warren Buffett has been in news lately for tipping his son Howard Buffett to be the new chairman of Berkshire Hathaway (source). By profession, Howard is a farmer. Company’s investment strategy would still be governed by the CEO and Board of Directors. But Warren Buffett’s son would serve as a Custodian of Company values rather than take part in regular day to day affairs.
So what makes Warren Buffett so special? On very first page of his famous and revered Annual Letters to Shareholders (2011, 2012), it is mentioned that from 1965-2010 (a period of 45 years), Berkshire has had a CAGR of 20.2% i.e. your money doubles every 4 years!
Can average investors like you and me, who don’t know so many things beat that performance?
Can we earn 20% year on year for decades? I doubt that.
|You are not Warren Buffett. Period.|
Such superlative performance can have have the effect that average investors try to become the next Warren Buffett. But in doing so, they would be making a grave mistake. That’s because-
- Most profits made by Berkshire come from owning entire companies, which an average investor is incapable of doing.
- Though Buffett gives independence to individual companies’ management, he always keeps a tab on them to see that they don’t deviate from Berkshire’s simple but sacred principles. As far as an average investor is concerned, he doesn’t even meet any member of the company’s management.
- Buffett owns the perfect business of insurance. This is equivalent of having a constant source of interest-free loans given to buy shares of other companies. Now who among us can boast of ownership of such a business?
- Inspite of being famous for having a holding period of forever, Buffett occasionally sells stocks. Unlike us, he doesn’t require money for his basic needs. He sells when he does not see value in his investments or wants to fund more lucrative investments.
- Unlike average investors, he has access to loads of insider information and has an army of people who can do comprehensive number crunching for him. This augments his investment decision making process.
- For him, return of capital is more important than return on capital. But this statement requires a lot of discipline and will-power to be put in practice. An average investor is attracted by prospects of high returns from risky companies. He is ‘absolutely’ not ready to do his due diligence and find a few large and stable stocks trading at discount to their real values. Day traders use various tools like 200 Day Moving Averages for earning a quick buck. But they forget that they can also use these 200 Day Moving Averages to help them in investing for long term.
- Buffett is a fast and voracious reader. We can’t imagine an average investor to read Forbes, Wall Street Journal, Financial Times, New York Times, USA Today and Omaha World-Herald every single day of the year, decade after decade. (For Indian Investors, replace above names with Indian financial newspapers and publications). Even if a person does read a few good publications, the question arises whether he will he be able to utilize and interpret this information to his advantage?
- An average investor does not get deals which are skewed heavily in his favor. Buffett got one hell of a deal from Goldman Sachs, where he was earning $500 million every year for doing simply nothing!!! And when Goldman Sachs decided to redeem the preferred stocks, Warren was the unhappiest person in the world as any normal person would hate to lose a free cash flow of $500 Million an year. Very recently, he entered solar energy via Topaz. An interesting article shows once again that why and how he lands up such delicious deals.
Though compounding has a peculiar problem, it still works for those who are patient enough.
So an average investor should focus more on buying good stocks and allowing compounding to show its magic. But instead, what he does is that he is constatnly on a lookout for stock tips and is looking to find the next multibagger. As a sensible investor, one should be prepared for opportunities which markets throws up every now and then. And when that opportunity comes, be prepared to take advantage of them.