Stable Investor Mid-Monthly

Mid Monthly June 2016
Its extremely hot here in North India and I don’t know when the rain gods will send their blessings. I envy those who have permanently settled in mountains – and I gave it a serious thought myself when I visited Bhutan few months back. By the way, it’s a lovely country and if you are a traveller at heart and one who seeks peace, then it can be a great place to visit sometime.
Nevertheless, like my monthly State of Market posts, I have decided that once every month, I will do a roundup kind of a post where I share links to:
  1. Good financial and non-financial posts I have read in last 30 days. I read a lot, but will share only few that I think would be worth your time.
  2. Useful posts written here on Stable Investor in last month – for those who somehow missed reading them.
  3. Some stuff that is lost in archives here.
  4. Random thoughts which I might not want to write a full post on or tweet about.
I know you would be cursing me as I did start something similar last year too – when I did a series of posts titled Boring Tuesdays. 🙂
Unfortunately, I stopped it after few months – Not because of lack of stuff to share but because I really did not have the time to do a weekly roundup-kind of a post alongwith my regular writings.
So I am trying again. This time though, it will be a monthly commitment to start with.
Lets see how it works out (…and keeping my fingers crossed).
So here it is…
Great Stuff Elsewhere
When is a 7% return Not a 7% Return? Yes. That’s not a typo. (Must) Read it to believe it.
How the quartet of cash flow, liquidity, profitability and net worth can help you sleep well (focus on the second half of the article). (Update – Sadly, author has removed the article.)
Useful rules to organize and declutter everything (something I feel is very important) by Leo Babauta of Zen Habits. Of all things mentioned in the article, I don’t follow most of them myself. But I am trying a few and it actually works! The article is a good starting point if you are thinking on the lines of decluttering your life.
My guess is that 37.8% of readers of Stable Investor have had Maggi in last one month. 🙂 Now that was just a guess. But Maggi and more importantly, Nestle is trying to comeback from the fiasco. May be it was just the right wakeup call which the company needed. This article details how Nestle (after the Maggi screw-up) is getting back on its feet.
This is pretty old but I still like to revisit it at times – Ten things Google guys believe to be true. It’s a sort of owner’s manual in line with what Warren Buffett’s Berkshire Hathaway has. Now don’t tell me you haven’t read the Berkshire’s Manual. If you haven’t, leave everything and head straight to this page.
In Last 30 days on Stable Investor
This has become one of my personal favorites. These crystal clear financial principles (very easy to read and understand) by Jason Zweig (a noted writer) can open your eyes and mind to how best to manage your money, without being fooled by others.
First we didn’t bother about buying health insurance policies sighting various reasons. Now most smart people do buy it but still end up not paying attention to one very big risk, i.e. Health Care Inflation.
I interviewed John Huber of Saber Capital about investing, money and other stuff. Once you read the interview (Part 1 and Part 2) and do spend some time on his awesome blog, you will become his fan, just like me.
Some people are so fond of bad luck that they run halfway to meet it. They take unnecessary risks and to make the money they don’t have and they don’t need, they risk what they do have and do need. That is plain foolish and the real reason why some people always lose money.
From the Archives
I start with something personal. Here are the 17 Odd Things that you might not know about me.
What would happen if teachers, doctors, gardeners, weathermen, etc. i.e. the normal people started behaving like those in Stock Markets.
A Random Thought
I did try this on a friend recently – to scare and sadden her financially. 🙂 I asked her to add up all the monthly salaries (or annual incomes), which she had received in her working life.
Then I asked her to compare it with what she had saved up or invested anywhere.
And she was shocked.
This small exercise easily proved that she did not manage her money well. So lets say that she earned a total of Rs 50 lacs in last 7 years. Out of which, she was only able to save Rs 4 lacs. So there definitely is a problem somewhere. Isn’t it?
Try this exercise yourself.
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SIP on Steroids – How to give boost to your regular investments?

(Latest Update) – You can read an updated and more detailed analysis of the PE and other ratios here.

We decided to use this insight to boost our SIPs.

For our analysis, we started with SIP of Rs 5000 every month, from January 2000 and kept on investing till December 2011. A total of Rs 7.25 Lac was invested in 145 instalments. Now we add the Boost. Whenever markets PE fell below 15, an additional Rs 5000 was invested in that month i.e. a total of Rs 10,000 was invested in that particular month. This happened in 23 of the 145 months and an extra Rs 1.15 Lac boosted the normal investment of Rs 7.25 Lac. This took total investment to Rs 8.40 Lac.

So what is the current value of the investment? Did the boost help in earning higher returns? Read further. The investment of Rs 8.40 Lac stands at a Rs 23.8 Lac. And if SIP was not boosted by Rs 1.15 Lac, it would have stood at Rs 19 Lac.

In an earlier post about timing the markets, we saw that it doesn’t make sense in trying to time the markets. If earning a better-than-average return is the aim, it is enough to invest regularly in a disciplined manner rather than trying to time the markets.

Let’s suppose that you as have decided to invest at regular intervals. This type of investment can easily be executed by means of SIP or Systematic Investment Plans.

Systematic Investment Plan (SIP) allows investment in markets at regular intervals. A normal SIP invests once every month.
There are many online SIP Calculators available that can be used to calculate SIP amounts based on your financial goals.
 
SIP is fine…But how to put them on steroids?
Before we answer this question, we would quote an analysis from our previous post on Analysis of P/E Ratios of Indian Equity Markets. Our study suggested that whenever an investment is made with markets trading at a multiple of less than 15 (PE<15), returns over 3 and 5 years have been phenomenal.

Above data shows that on increasing our investment by 15.9% (Investing more when market is trading at lower valuations), our overall investment value increases by 25%.

So to summarize,

  • But even after discussing the benefits of regular investments in markets & redundancy trying to time the markets, if you want to time the markets by investing in direct stocks, you should stick to shares of large & stable companies (Read about how to find Large Caps selling at massive Discounts!)

Market Timing Or Disciplined Investing – Which is More Sensible?

If you have read some of the older posts, you would have a fair idea about what Stable Investor is all about. And you will also understand that timing of stock markets is not what this website is interested in. And that is because for all practical purposes, it does not work!
A famous columnist once said,

“The market timer’s Hall of Fame is an empty room.” 

And the great stock picker Peter Lynch once remarked,

“I can’t recall ever once having seen the name a market timer on Forbes’ Annual List of Richest People.”
This clearly shows how successful (or unsuccessful) market timers have been. In an ideal world, an investor would have all relevant information and would know when to invest and when to get out of markets.
To explain these concepts, lets take a scenario, in which there are 3 investors – A, B and C. All three are ready to invest Rs 5000 every month from January 2000 onwards. But timings of their investments are different. 

Investor A invests at lowest index level during the month (i.e. A has all the information);

Investor B invests at highest index level during the month (i.e. B mistimes the market every month!); 

Investor C is indifferent to news flow and invests at month-end closing prices. Each one them has invested a total of Rs 7,20,000 in 144 months.
So where do A (Perfect Timer), B (Perfect Mistimer) & C (Indifferent Investor) stand at the end of 12 years?
Market Timing Make Money
This analysis shows that the difference between a Perfect Timer (A person who has all the insider information) and an Indifferent Investor (Does not care about intra-month fluctuations and has automated his investment process to invest at month ends) is of just 6%. Just 6%.

That is, if you are ready to invest in a disciplined manner for long term, having information and timing does not matter much. Even an indifferent person can make money by investing dispassionately.
So what does this analysis point to?

  • It should be understood that there is no point in trying to time the market. Though it has been tried by millions of people and people have made money and have become millionaires, the fact remains that it is neither easy nor feasible for a average investors like us.

  • Timing is possible. But only for those who are part of the inner circle – people who have insider information.

  • There is a difference between information and wisdom. An investor should be vary of all information being bombarded at him and one needs to be wise enough to filter out the noise.

  • As a regular retail investor, it makes sense to keep on investing in a disciplined manner. The reason being that there is not much to lose (6% – Refer to above example) if an investor decides to ditch time-the-markets approach.


And wish you all a Merry Christmas to all the readers!
Stock Market & Christmas