Tata Motors DVR – Why is it Rising Faster than shares of Tata Motors?

Recently there has been a lot of noise about reduction in percentage difference (discount) between ordinary shares of Tata Motors and its DVRs.

For those who don’t know, Tata Motors has two kinds of shares listed on exchanges.

Ordinary shares (TTM) …and the DVR shares.

What is a DVR share?

DVRs are a completely different class of shares of a company whose ordinary shares are already listed on exchanges. DVR stands for Differential Voting Rights. It means that when compared to ordinary shares, a DVR carries different voting rights.

In India, it all started in 2008 when Tata Motors became the first Indian company to issue DVRs. The company came out with a Rights Issue where existing investors of TTM, were offered 1 DVR share for every 6 ordinary share held by them. As for the voting rights, one DVR share of Tata Motors has only 10% voting rights of an ordinary share, i.e. you get only one vote for every 10 DVR shares.

Apart from Voting Rights, is there any other difference between a DVR and an Ordinary share?

When you buy DVRs, you have lesser voting rights. And this needs to be compensated for. The shareholders of DVR are entitled to an extra 5% dividend compared to ones given to ordinary shareholders.

Tata Motors DVR Dividend
Dividend History (2010 Onwards) – Tata Motors (Ordinary & DVR shares)
Unlike India, DVRs are used extensively in other countries to prevent hostile takeovers. At times these are used to bring money into the company without significant dilution of promoter’s voting rights. On an average, DVRs trade at a 10%-15% discount to ordinary shares.

Tata Motors – DVR Discount Trend Analysis

Like global peers, TTM-DVR also trades at a discount to ordinary TTM shares. But there is something interesting about this discount. I plotted this discount and found that in past 4 years, this discount has oscillated between 30% to 50%. And this is nowhere close to global average of 10-15%.

As of now, its quite close to its 4 year lows. And this has happened because share prices of DVRs have outpaced that of ordinary shares since start of 2014.

Tata Motors DVR Discount
Discount at which DVR has traded in last 4 years

Now in 2008, when DVR was originally offered, the discount was a reasonable 10%. But over time, this discount kept widening until it reached almost 60% in mid-2013!

And this seems to be against common sense. That is because both DVRs and ordinary shares are based on the same business. Only difference is of the voting rights. And that anyways has been compensated for by a higher dividend promise to DVR holders. Ideally, discount should not be so large.

But in past few weeks, this discount has reduced to 33%. And many market participants now believe that this trend will continue and eventually, discount will settle at levels of 10%-15%. But we must remember that this is not the first time discount has come down. Few years back in 2010, discount had narrowed down to levels below 30%. Even at that time, experts felt that time had come for markets to give more respect to DVRs and that discounts will stabilize at 10-15%. But markets have this uncanny knack of surprising…And it did surprise once again by proving the experts wrong.

Price of DVRs fell and once again, it was available at huge discounts to ordinary shares. As mentioned above, discount almost touched 60%.

This time too, I am not sure if experts have any idea what they are talking about when they say that discounts would further reduce. 🙂

Beware – Controversial Idea Ahead

The last traded price for TTM was Rs 468 and that for DVR was Rs 312. Now simple calculation tells that for gaining ‘a’ vote in Tata Motors’ votings, you will have to shell out Rs 156 extra (468-312). I personally don’t think this makes sense for small investors. It might make some if you have substantial stake in Tata Motors and want to affect company’s decision making. But since you are reading this post on this small website, I assume you don’t have a very big stake in Tata Motors. 😉

I agree that its very important to exercise voting rights if the company is not being managed properly or its taking certain decisions which are not in best interest of minority shareholders. But broadly speaking, Tata Motors is managed decently if not brilliantly. And hence a small investor should not worry too much about his voting rights and consider DVRs as long term bets (if convinced about Tata Motors business).

One is getting the same business at 30% discount with assured higher dividends.

And if the DVR discount was to reduce further, a DVR investor stands to gain further as he will also be earning higher dividends in addition to capital appreciation. And if discount does eventually become insignificant, one can always sell DVRs and buy ordinary shares.

But having said that, please understand that we are not valuing DVR here. We are just discussing the discount at which DVR shares are available. It is very much possible that ordinary shares are over-valued and consequently, DVR may themselves be overvalued.

Why Did DVR Rise Much Faster Than Ordinary Shares in 2014?

The DVR shares have outperformed ordinary shares in last 6 months as evident from graph below:

Tata Motors DVR 2014
Price Appreciation in last 6 months – TTM and DVR

Now the text that follows can be speculative and you should take it with a pinch of salt.

In last week of June 2014, a UK based fund house Knight Assets came out with a recommendation for Tata Motors. It advised the company to list its (planned) new DVR shares on New York Stock Exchange. But it asked Tata Motors to add the words ‘Jaguar Land Rover’ to the name of the DVR before listing. This according to fund would help it correct the big discount which DVR trades at and bring it in line with global averages of 10-15%. And since US markets are more familiar with JLR brands and with the dual-class shares, it would help listing the DVR in US markets.

This possibility of international listing might not be the only reason, but possibly one of the main reasons why DVR prices were running way ahead of ordinary shares.

Another possible reason can be that markets and analysts in general had ignored this stock completely in past few years. And because of this absence from analyst’s radars, it kept going down without any logical reason. Another evidence that markets can be irrational at times.:-)

What do you think? What are your thoughts about DVR shares of Tata Motors?

Disclosure: No positions in both the shares discussed above.


One Big Problem With Compounding & Why You Cannot Become A Long Term Investor!!

I have been a hard-core follower of the concept of compounding. And like Albert Einstein, I believe that it is the 8th wonder of the world. Using this concept, you can make your money work for you rather than working for it.

But there is a problem with this concept. A big problem!

The problem lies in the fact that this MAGIC of compounding does not begin during the first few years. For example, you invest Rs 10,000 in a company’s shares, which is capable of earning a realistic 10% every year. This would mean that next year, a neat sum of Rs 1000 would be added to your original investment (assuming linear returns for theoretical purposes). But now if this position grows to almost Rs 1,00,000 after 15-20 years, because of dividend re-investments, compounding etc, then going forward, a 10% return would mean Rs 10,000. This is not much. But compared to what it produced in first year, it is almost 900% more. And that is the problem with compounding. The money-making-magic begins after almost 15 years.

Magic of compounding
Compounding: Magic Begins After 15 Years

Similar is the case with dividends. Annual dividends paid out by good dividend paying companies after 15 years would be almost equal to what they produced in first 10 years combined!! And that is one hell of money when you understand the real meaning of the previous statement.

So if you consider yourself to be a really long term investor who can stay focused for decades, then you need to understand that real benefit of compounding begins only after year 15. And frankly speaking, it is unlikely that Rs 10,000 investment is going transform your life over a 15 year period of compounding. Rather, it is during the next 15 years after that the magical wealth creation starts taking place.

And that is why, we need to understand that one should accumulate as many shares as possible, of few good, stable and reliable companies as core holdings during the first 15 years of one’s investment career. Once done, the magic begins to unfold after year 15. And believe me, with most of your investments, the years 26-30 would produce much more wealth than the first 25 combined.

This shows why most people are unable to keep faith in long term investing. Its simple but its tough. And it requires a lot of patience from you. I personally aim to become a long term investor. Currently I am in accumulation mode and prefer bear markets to bull markets. (Evil Disclosure: I continuously pray for market corrections) 😉

What are your thoughts? Do you think its easy to wait for 15+ years to allow compounding to show its magic? Or do you think that its better to go for short term trading?


Rethinking Dead Monk’s Portfolio – Part 2

We are in process of making an annual assessment of our Dead Monk’s Portfolio. In our last post, we tried to questioning portfolio structure. We eventually arrived at a conclusion that Core-Satellite structure has worked for us and we are going to stick with it. But we have made slight adjustments to it. We now have a simpler SATELLITE structure. For more details about the new modified portfolio structure, please refer to this.

Do we need more dividend stocks?

In previous post, we mentioned that we might need to find new dividend stocks for the CORE of the portfolio. This was to stay prepared for possible exits from existing positions and to maintain the dividend income levels from the portfolio. We are almost through with our stock selection and we feel that inclusion of new dividend stocks may not be necessary at present. Reason? Apart from 5 stocks which will form our dividend core, the stocks forming part of the Large Cap Satellite themselves have decent dividend yields. Add to this the fact that a pick in Growth Oriented Satellite comes from energy sector and has recently announced a promising dividend policy.

We have chosen 13 stocks for DMP. Out of these 8 stocks have a known history of paying generous dividends to the shareholders.

dividend history
Dividend History
Do we need to have stocks from every sector?

The answer is a big NO!! The chosen 13 stocks belong to just 4 sectors. These are sectors and industries which we are comfortable with.

Energy – 4 companies
Chemicals – 1 company
Financials – 4 companies
FMCG – 2 companies
Others – 2 companies

sector allocation in stock portfolio
Sector Allocation
At present, we are not very comfortable with FMCG sector valuations. But we have still chosen 2 stocks from this sector because this is a portfolio, which can be kept for years, if not decades. But we do believe that currently, FMCG stocks are good businessesto buy, but not at current valuations.

Another thought which bothered us was that we regularly come out with list of stocks like 10 Stocks to buy in next market corrections & 13 Great Indian businesses. Wouldn’t it be a wise idea to have a few of those stocks in this portfolio? This concern has been addressed in the new portfolio and a number of stocks from these lists have found their way to Dead Monk’s Portfolio. 🙂

We have intentionally not chosen specific stocks for cyclical section of the portfolio because these stocks would be bought and sold at regular intervals. We do not plan to hold them for decades at a stretch.

We would share the portfolio composition in our next post.

Dead Monk’s Disclaimer – As an investor, we can never eliminate the risk of being wrong.


Rethinking Dead Monk’s Portfolio – Part 1

Almost an year back, we came out with our strangely named portfolio – The Dead Monk’s Portfolio. For those who don’t know about the origin of this name, we suggest you read this.

Though one year cannot be referred to as long term, we thought it was a good time to re-evaluate the ideas / concepts / principles on which we built this portfolio. We are still learning from Mr. Market and we are ready to accept our mistakes and take into account certain new developments.
Portfolio Structure
Structurally, we think that Core – Satellite approach works fine for us. It allows us to focus on creating an ever increasing CORE of dividend paying stocks. This core periodically generates cash to fund purchases for SATELLITE stocks.
In the new structure, the CORE remains same. It would consist of 4 to 5 dividend stocks. This part of the portfolio would form about 50 to 60 percent of the entire portfolio.
There is a small change in the SATELLITE part. We continue having sub – sections of Large Caps (15-20%) & Growth Oriented Stocks (20-25%). But we have decided to merge the Miscellaneous, the Cyclicals & the Speculatives Section. This part of the portfolio would now form less than 10% of the entire portfolio. We are doing this to simplify the structure. Another reason is that the cyclical stocks & other short term bets can increase the volatility of the portfolio. It is best to combine them into one section and put an upper cap on their weightage. This would also help in reducing the emotional purchases if (& when) we are tempted to do so. So the new structure stands like this –
stock portfolio structure
New Structure – Dead Monk’s Portfolio
Portfolio Composition
We would have loved to hold hundreds of great stocks like Peter Lynch. But we don’t have a team of analysts to help us out. And neither are we Warren Buffet nor Peter Lynch. 🙂 Therefore, we stick to our earlier approach of keeping the number of stocks to less than 15.
As far as individual stocks in the DMP are concerned, we prefer not being judgmental of the price performances after just one year. Some stocks have done good. Others have been pathetic. But there are a few, whose poor performance is because of the change in fundamentals of the business. We need to take a call about them.
We also need to find new dividend stocks for the CORE of the portfolio. This is to stay prepared for possible exits from existing positions.
Another issue which we felt needed some addressing was that though we have tried to stay within the sectors which we understand (circle of competence), we feel that this makes the portfolio skewed towards one or two sector (energy, commodities, banking, etc). Hence, we also need to decide whether to choose stocks from other sectors like FMCG, auto or not.
Another thought which is bothering us is that we regularly come out with various list of stocks like 10 Stocks to buy in next market corrections & 13 Great Indian businesses. Wouldn’t it be a wise idea to have a few of those stocks in this portfolio?
We will try to answer most of the questions in next part.
Dead Monk’s Disclaimer – As an investor, we can never eliminate the risk of being wrong.

Dividend History of Indian companies – 10 Years

We continue with our focus on dividends and dividend investing. Though dividend yields can attract an investor in short term, when investing for long term dividend income, it is important to look at the consistency with which the companies have paid dividends. We tried to find lists of Indian companies similar to ones offered in US Markets like Dividend Aristocrats, Dividend Champions (companies that have consistently raised dividends for last 10, 20 and 25 years). But sadly, such a list is not available in India free of cost. (Please let us know if you find one). This forced us to compile our own list of such companies (using a professional data source – MVXenius : Educational version). But, we could only manage to find data for last 10 years.
We first tabulate dividend history of stocks in our portfolio (DMP) and then move onto other known good dividend paying companies.
We have only tabulated data of stocks which have a current dividend yield of more than 2.4% and which we believe would continue paying out decent dividends in future.
Click to enlarge
Apart from collecting 10 year dividend data, we have also calculated average annual increase in dividends doled out in last 5 years (2nd last column).  Though ONGC is India’s largest dividend payer in absolute terms, it should be noted that it has not increased its dividend substantially in last 5 years (only 3.17%). On other hand, smaller companies like Balmer Lawrie, Clariant Chemicals (I) Ltd., Graphite India have shown amazing consistency and above average dividend growth rates (24%, 48% and 33%). But unlike ONGC, NTPC & Tata Investments Corporation, a few large caps like Bank of Baroda and BHEL have increased their dividend by an average of 28.5% & 35% respectively. You can read more about dividend policies of these companies in our previous post.
Apart from stocks in DMP, we also collected 10 year dividend data of a few other large companies. The data is tabulated in table below.
Click to enlarge
Though we have tried our best and adjusted dividends for bonuses and splits, we do not claim that this is an accurate list. The purpose of these lists is to share the information we collected for our personal use. At your own risk, you are free to use this in any form you may want.
Dead Monk’s Disclaimer – No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.
PS – Morgan Stanley recently came out with an interesting list of Dependable Indian companies. We loved reading it as it voiced our opinion that large cap stable companies are good for long term investing.

15 stocks to buy for long term in india – Dead Monk’s Portfolio

We recently wrote a post detailing rules for Dead Monk’s Portfolio (DMP). Therein, we mentioned that we plan to divide DMP into different parts i.e., core and satellite(s). This approach will help in addressing requirements of dividend income, capital appreciation & long term stability.

But before delving deeper into DMP, you must understand that it is built around our risk appetites, our understanding of markets & our strengths and more importantly, weaknesses. Since it is born out of our personal vision for ourequity portfolio, DMP will always be like a magic mirror for us. It is there to show how our equity portfolio should look and be like.

And since your risk appetite and investing style may differ from us, we suggest that you use DMP as a snapshot of what stocks we own / plan to own in our long term portfolio. This should not be taken as an investment recommendation from us.

So have a look at DMP below…

To put on record, we are very risk averse (atleast the author is) J. The author still holds a large part of his assets in fixed deposits, mutual funds & cash. At present, equities form only 10% of the overall portfolio. You won’t be wrong in thinking that these guys are running a blog on stock investing and themselves have only 10% of their money in stocks! But low levels of equity exposure are due to our past financial commitments. But slowly moving out of that phase, we now plan to increase our equity exposure. And we won’t be boasting if we were to say that this time, we are far more structured than we have ever been (Boasting 😉 (Read details of portfolio structure in previous post)

After DMP has been applied, this is how author’s investment portfolio would look like:
  • 4-5 Dividend Stocks (~ 50% 0f equity portfolio)
  • 8-10 Large Caps + High Growth Potential Stocks (~ 30% of equity portfolio)
  • 4-5 Cyclical / Risky Bets (~ 20% of equity portfolio)
  • 2 mutual funds (ongoing SIPs – Large Cap & Multi Cap)
  • 2 planned SIPs to be started in 2012 (Mid & Small Cap) & 2013
  • Fixed Deposits
  • PPF

Note – Author has a few financial liabilities and has secured them by a couple of term insurance policies.

Author plans to invest whatever he saves every month (& receives as dividends) in a few of these 15-20 stocks.

But how to decide when to invest in these stocks? Should they be bought at current levels?

We will try answering this question in our next post which would be based on Warren Buffett’s quotation – “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

We will also weigh these stocks on parameters like P/E, P/BV, Dividend Yield, dividend growth, PEG ratio, etc and try to arrive at intrinsic values, graham’s number etc.

We also plan sharing our stock watch-list. This contains stocks which may form part of our portfolio in future.

Please remember that we will never suggest you to blindly go ahead and buy the stocks from the above list (or even include these in your personal watch list). Reasons is simple and explained by dead monk’s disclaimer – No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.

PS – ’15 stocks’ in title refers to all stocks mentioned except cyclical and miscellaneous ones. 

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Launching the Dead Monk’s Portfolio – Ground Rules

After a lot of deliberation, both recorded (Part 1, 2, 3, and 4) and unrecorded, we have finally managed to put down the ground rules for Dead Monk’s Portfolio.

If you haven’t read our earlier posts on this issue (which changed our hearts), we recommend you do so. It will give you an idea about how and why we zeroed upon this approach.

So without further delays, we present to you the details of our new portfolio in form of FAQs.

Where has the old portfolio vanished?

We have abandoned our old portfolio – Monk’s Portfolio. We have removed all posts related to it.

Then what is this new portfolio?

The new portfolio is named DMP – the Dead Monk’s Portfolio.

Why such a funny name?


Do you have to pray to God for making this portfolio work?
Yes. We have a Portfolio Prayer (We need it) J

~ ~ ~
Remember God in good times and equities in bad times.

We shall welcome bear markets as they allow us to buy from pessimists.

We shall love fear and blood on the streets.

We will always buy with an intention to hold for long periods and preferably, forever.

We shall hate selling stocks, unless fundamental reason of buying them changes for worse.

~ ~ ~
What is DMP’s basic structure?

The portfolio would follow Core-Satellite approach with one core and four satellites.

Can you give the details of the new portfolio’s exact structure?

Dividend Core
This would form 50-60% of the portfolio.

This would comprise stocks which
          Are regular dividend payers
          Have paid dividends consistently for last 5 to 10 years
          Have been profitable in last 5 years
          Have sustainable & ordinary dividend yield of more than 3%
          Have a sustainable dividend payout ratio
          Trade at low P/E multiples (<12; preferably <10)
This part of DMP would result in a regular, sustainable & increasing income stream, which would be used to increase the size of DMP by reinvesting these dividends selectively in stocks already present in DMP.
Growth Oriented
This would form 20-25% of the portfolio.
This would comprise of stocks which
          Are from mid-&-small cap
          Have been in existence for around 10 years
          Even with most pessimistic outlook, would survive for next 10 years Or should be good takeover targets
          Have been profitable in last 3 years
          Trade at low to medium P/E multiples (preferably <20)
          We don’t expect such stocks to pay dividends
          Good ROE in past 5 years
          Good and dedicated management
These stocks would be our bets on long term growth and can be potential future blue chips. These would be businesses which have potential as well as management genuine intent to reach the blue chip category. But we must be cautious that obvious prospects for physical growth in a business do not translate into obvious profits for investors (Graham).

Large Caps
This would form 15-20% of the portfolio.
This would comprise of stocks which
          Are from large cap category (preferably of Market Cap>Rs 15,000 Cr)
          Have been in existence for more than 20 years
          Even with most pessimistic outlook, would survive for next 10 years
          Have been profitable in last 5 years
          Trade at low P/E multiples (<12; preferably <10)
          Trade at low P/BV multiples (preferably <2)
          If they do pay regular dividends, then nothing like it J (why we love dividends so much?)

Large caps give strength and stability to our portfolio as they are better suited to weather downturns, economic recessions, etc.

Cyclicals (Large + Mid Cap)
This would form 10-15% of the portfolio.
This would comprise of stocks which
          Are preferably from large cap category
          Have been in existence for more than 10 years
          Even with most pessimistic outlook, would survive the next downturn and for next 10 years
          Have been profitable in last 5 years
          If they do pay regular dividends, then nothing like it.
We would have loved to time our entry into cyclical stocks because there cannot be better wealth creators if one can time one’s entry and exit well. But timing, that too cyclical business’ is tough. That is why we prefer large caps of cyclical companies as they can weather the downturns better than small caps.
Note – We are still trying to understand how cyclical stocks work and how empirical ratios like P/E, P/BV can be used to enter such stocks at levels which may not be lowest, but somewhere below historical averages.

Miscellaneous / Speculative / Special Situations related bets
This would form 0-5% of the portfolio.
This would comprise of stocks which
          Are preferably from large cap category. But may be from any of large, mid, small or micro cap categories.
This would comprise of stocks in high risk – high reward category. We would never take blind bets based on tips given by others (read traders – We hate them so much!!). We would analyze the business behind the stock to see whether risk reward ratio is skewed towards reward or not and then take sensible calls.

When would you buy stocks for DMP?

Though it’s a tough task to time the markets, the fact remains that one should invest when there is over pessimism in market. In one of our earlier posts, we tried to decipher whyaverage investors like us should be concerned about entry price of stocks. Here also, we share a few guidelines to help us make buying decisions, a little quantitatively.

·         Dividend Core
          When stocks are trading closer to their 2-3 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.
          When P/E x P/BV < 22.5 (Graham’s)
          When stock features in top-20 lists made on basis from High ROE and High Earnings Yield (Magic Formula)
          When Dividend Yield of stock crosses 5% without any substantial negative change in fundamentals

·         Growth Oriented
          When stocks are trading closer to their 1-2 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.

·         Large Cap
          When stocks are trading closer to their 2-3 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.
          When P/E x P/BV < 22.5 (Graham’s)
          When stock features in top-20 lists made on basis from High ROE and High Earnings Yield (Magic Formula)
          When overall markets are trading at low multiples of P/E, P/BV & Dividend Yield, as detailed in an earlier post.

·         Cyclicals
          Note: We are still trying to understand how cyclical stocks work and how empirical ratios like P/E, P/BV & Dividend Yield can be used to enter such stocks at levels which may not be lowest, but somewhere in a range, which skews the risk reward ratio in favor of rewards.

·         Miscellaneous / Speculative / Special Situations related Bets
          Need to be analyzed on case by case basis.

When would you sell stocks in DMP?

Though we hate selling stocks, there may and will be times when the very reason which resulted in a buying decision, ceases to exist. This would require selling some shares in DMP. We will work on selling triggers for our portfolio soon. As of now, we don’t plan selling what we own, and don’t plan buying what we would like to sell in the next 10 years.

In the event of temporary downward movement in a stock’s price, would we be happy to buy more shares?

If we have free funds which we do not require for next few years, we would definitely be interested in averaging down our costs. But this would be done after confirming that fundamentals of stock remain good enough and there are no fresh triggers for us to sell the stock. Some investors may be unwilling to pick up more shares of a particular stock, even when the opportunity to buy discounted shares is presented.  We would rather treat this opportunity as a discount sale of stocks which we would love to buy.

Is there just one Dead Monk’s Portfolio or multiple versions?

Dead Monk’s Portfolio is a reflection of our thoughts. It is built around our risk profiles, understandings of markets & our own strengths and weaknesses. It will not be exactly same as ones maintained by the two of us, as we maintain a total of 4 portfolios (2 personal and 2 for our families). But since Stable Investor is a journal of our learnings in portfolio maintenance, sooner or later, our personal portfolios would come in line with what we learn here. Therefore, to keep things simple, we will have just one DMP.

Do you maintain a buy list of stocks at all times?

Absolutely! We would prefer that any stock which we buy should first enter our buy list and then our actual portfolio. A buy list also helps in tracking multiple companies which we may be interested in future. Keeping a rough record of such companies from the start is necessary as the price may not be right at the time when we first analyse a company.

How do I track Dead Monk’s Portfolio?

We are putting up a dedicated page for easy tracking of DMP. All posts related to DMP and latest portfolio snapshot can be found there.

Do you have anything else to share?

We have a personal experience about large and mid caps. There are times when due to lack of any trigger worthy news and discussion in media, a stock tends to go down without any significant change in fundamentals. These are the times when one can accumulate these blue chips.

According to WB, as an investor, our goal should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, we will find only a few companies that meet these standards. We must also resist the temptation to stray from these guidelines: If we aren’t willing to own a stock for ten years, we shouldn’t even think about owning it for ten minutes. We should aim to put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.

One should “never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

What is this Dead Monk’s Disclaimer?

Dead Monk’s Disclaimer: No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.

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Thoughts on starting a new portfolio – Part 4 – Why we prefer dividend investing for the Core of our portfolio?

In our last post, we discussed why entry price is important for a dividend investor. But does it mean that we are advocating timing the markets?
The answer is Yes, and No.
Yes because if one can time the markets, there is nothing like it. If one buys stocks of a good company trading at low valuations, the stock (generally) cannot go down much lower as it may already be at levels which are close to what it would cost an acquirer to pay for it. The problem with high multiple stocks is that future growth is already accounted for in stock prices. This implies that long term investor could likely see little gains even if the earnings grow over time.
No, because markets are supreme and trying to beat the market is an illusion. Though people like Warren Buffett have done it, the fact remains that we are not Warren Buffett(s).
After our last post, it became obvious that we shall be using Dividend Investing to construct the core of our portfolio. The proportion of core to that of overall portfolio is still under discussion. In this post we would like to give reasons about why we want to use the Dividend Investing approach.
One of our heroes, John D. Rockefeller once remarked – “The only thing that gives me pleasure is to see my dividend coming in.” And dividends are what give us pleasure too. We just love dividends! So without any further delay, here are our reasons –
Our Real Reasons J
  • It is easier to sit, relax and wait for good companies to share their profits, year after year, with additional potential of capital appreciation. Though capital appreciation may not be at rates comparable to high growth companies. This can be attributed to our laziness  J and inability to do comprehensive equity analysis.
  • We prefer picking stocks of companies which are ‘so-obviously-good’ on parameters of safety, stability & growth, that we don’t need to analyze them much.
  • Evidence of profitability in form of dividends helps us sleep easily. Profits on paper say one thing about a company’s prospects and profits that produce cash dividends say entirely another thing.
  • We hate selling stocks! And to a large extent we agree with concepts of value investing. One of the concepts of value investing tells us to buy stocks to hold it forever. Our question is that, if we do not sell our stocks, how are we going to make money on a regular basis?

Text Book Reasons we agree with

  • A company’s willingness and ability to pay steady dividends over time – and its power to increase them – provides good clue about its fundamentals. We are still on a lookout for a database of Indian stocks or a tool, which lists out stocks that have consistently increased the dividends year after year (Just like S&P’s Dividend Aristocrats of US markets). If you know of any such tool, please let us know.
  • Dividends signal sound fundamentals and typically, it’s mature and profitable companies that pay dividends.
  • Dividends bring more discipline to management’s investment decision-making. Holding onto profits might lead to excessive executive compensation, sloppy management, and unproductive use of assets. Studies show that the more cash a company keeps, the more likely it is that it will overpay for acquisitions and, in turn, damage shareholder value. In fact, companies that pay dividends tend to be more efficient in their use of capital than similar companies that do not pay dividends.
  • Value investors always like to buy shares forever. When a value investor buys a blue chip stock they are most certain that the financial stability of the company will ensure regular dividend payouts. A blue chip stocks will ensure that you are earning regular streams of income in the form of dividends. This dividend payout will only increase with time as the company grows and its profits also grow. So if one is making healthy income (which is also increasing) from current holdings then why will one sell his shares? Hence value investors prefers to hold share forever. Dividend focused investment (in blue chip stocks) is also like a risk-free investments like bonds, bank deposits etc. So not only dividend based investment is profitable in long run but also offers returns with minimum of risks. As the volatility of the market price of stocks will not affect your earnings, as an investor, one will feel very secure. The only thing that one needs to keep a track of is the companies’ business fundamentals (which will ensure dividend payouts). Volatility is not one’s concern. Let bloody(!) traders worry about stock index fluctuations, you can rest in peace even in the most turbulent of times in the market.
To conclude we would say that investing with focus on dividend yield & payout ratios is one of the safest and one of the more profitable forms of equity investment.
Note – Some parts of this post (Text Book Reasons) are adapted from Investopedia& GetMoneyRich.
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