Sensible Measures without getting Too Ambitious

Sensible Investing
Sensible measures without getting too ambitious – these 6 words from an old RBI press release caught my attention.

RBI governor Raghuram Rajan’s recent announcement to not take up the second term, triggered a desire in me to read up whatever I could find about him. So I landed up on a press release (link), which had some key points in a speech made by him.

Talking of this announcement, the media is full of debates around the so-called Rexit (Raghuram Rajan’s Exit). I read up a lot and still have no answers to questions related to Rexit’s implications for the Indian economy.

But I am quite impressed with the PSU Bank cleanup that he initiated. There are few more initiatives that I think were in the right direction. To cut a long story short, I am of the opinion that having him around as the RBI chief would have been better for the economy than not having him.

But in life, we can have anything but not everything. So I guess, we will just have to do with a good Prime Minister for the time being. 🙂

Now getting back to the 6 words that caught my attention…

Sensible measures without getting too ambitious.

I feel these words can act as Level-1 Guidance for people looking to put their personal finances in order.

These words are neither as comprehensive nor as spectacular like these. But are still worth pondering over for few minutes (atleast in my opinion).

When we invest, its very natural to be influenced by the recent performance of the asset we are investing in. So when for example, stocks have given 15% plus annual returns in last 5 years, it becomes the new normal. People start believing that same (or higher) returns can be achieved ‘easily’ in future too. This is also known as the recency bias. People tend to believe that stocks will behave like bonds with guaranteed returns! Now is that sensible? Hell no!

We cannot take high-returns for granted. No matter how much we want something, we should be sensible about what we believe in.

Similarly, using a low inflation in your personal finance calculations can reduce the required monthly investments today.

But when the day of reckoning comes and if actual inflation is higher than your assumption, you will be short of the required funds for some very important goals of your life.

Ofcourse you can borrow and bridge the shortfall.

But why borrow when you can plan better today? Why not assume a higher inflation in your calculations and invest more from today itself? So that there are no rude shocks later on?

I am not advocating completely sacrificing the present in preparation for the future. But turning a blind eye to realities is something that is not acceptable.

Remember that returns given by any asset won’t necessarily match your expectations or those calculated returns that you need to achieve your goals. Markets and assets have no regard for your wishes. They take their own bloody path.

So lower your expectations. Don’t be too ambitious. If it means investing more today, so be it. Be sensible enough to do that.

As for RBI, it will be interesting to see who gets into Mr. Rajan’s shoes and continues the reforms he had initiated.


Are You Worried About Falling Bank Stocks?

Fall Bank Shares 2016

I would love to say that all is well and you should not worry. But that is easier said than done. When portfolios are down 15%-20% and banking stocks are down upto 50% in a matter of just few months, any gyan that anyone gives, feels like hurting the financial soul. 🙂
Nobody likes losing money. Absolutely no one.
But markets are like that. It doesn’t owe you a thing. It doesn’t know that you are saving for retirements. It doesn’t care whether your financial goals require money tomorrow or decades later.
And as Michael Batnick of The Irrelevant Investor puts it, [the market] doesn’t care about your wants and needs or your hopes and dreams.
But I am not here to predict anything about short-term. No on knows that. But I am pretty hopeful of one thing. That once the current crisis surrounding the banks gets over, it will lead to emergence of better and more robust banks. I don’t know if government will merge weaker and smaller PSU banks with stronger ones. But the ones that remain in existence (and I am sure most will), will be far cleaner and better equipped to do their businesses than their previous avatars.
You can accuse me of being an optimist here. But as an investor, that is what one must be. I am not saying that don’t be a realist. But when everything is falling around, there will come a point when some of the bank stocks will look attractive from long-term perspective. I know that with new banks coming, its only a matter of time that government-backed banks will have their market share eaten up. But the value destruction that is happening now in PSU bank stocks will stop somewhere. Most of them are not going to go to zero.
I was reading a speech by RBI governor about the Issues in Banking.
I thought I will share some important parts of the speech with you all. No. Don’t worry. Its not that boring as its sounds… 

You can read the full speech here. Its worth the time you spend on it.
The recent decline in bank share prices has investors on the edge. Of course, part of the reason is that markets are in turmoil. Some of the greater decline of bank share prices can therefore be explained by the fact that they are seen as a leveraged play on the economy.
On bad days, they move down more, on good days they move up more. With markets generally in decline, the decline in bank share prices has been more accentuated.
However, part of the reason is that some bank results, mainly public sector banks, have not been, to put it mildly, pretty.
Over time, a number of large projects in the economy have run into difficulty. Reasons include poor project evaluation, extensive project delays, poor monitoring and cost overruns, and the effects of global overcapacity on prices and imports. Loans to these projects have become stressed.
There are two polar approaches to [dealing with] loan stress:
One is to apply band-aids to keep the loan current, and hope that time and growth will set the project back on track. Sometimes this works. But most of the time… the stress persists. Facing large and potentially unpayable debt, the promoter loses interest, does little to fix existing problems, and the project goes into further losses.
An alternative approach is to try to put the stressed project back on track rather than simply applying band-aids. This may require deep surgery. Existing loans may have to be written down somewhat because of the changed circumstances since they were sanctioned.
But to do deep surgery such as restructuring or writing down loans, the bank has to recognize it has a problem – classify the asset as a Non Performing Asset (NPA). Think therefore of the NPA classification as an anesthetic that allows the bank to perform extensive necessary surgery to set the project back on its feet.
If the bank wants to pretend that everything is all right with the loan, it can only apply band-aids – for any more drastic action would require NPA classification.
Loan classification is merely good accounting – it reflects what the true value of the loan might be. It is accompanied by provisioning, which ensures the bank sets aside a buffer to absorb likely losses. If the losses do not materialize, the bank can write back provisioning to profits. If the losses do materialize, the bank does not have to suddenly declare a big loss, it can set the losses against the provisions it has made.
Thus the bank balance sheet then represents a true and fair picture of the bank’s health, as a bank balance sheet is meant to.
So in April 2015, banks [were asked to take] proactive steps to clean up their balance sheets. For the loans that are of concern, the banks are attempting to regularize the loans that can be put back on track, and are classifying those that cannot for deeper surgery – and taking provisions in accordance with the degree of extant stress in the loan. They will also make provisions for loans that have weaknesses.
…intent is to have clean and fully provisioned bank balance sheets by March 2017.
…December 2015 quarter results can be compared across banks to get a rough sense of the task each bank has to accomplish.
Some banks have expressed an intent to move faster, so as to put the problem behind them.
The [Government] has indicated that it will support the public sector banks with capital infusions as needed. Various scenarios also show private sector banks will not want for regulatory capital as a result of this exercise.
There are some wild claims being made by some financial analysts about the size of the stressed asset problem.
Our projections are that any breach of minimum core capital requirements by a small minority of public sector banks, in the absence of any recapitalization, will be small. They will need government equity or preference share infusion since they are typically banks that will find it difficult to raise equity in the markets.
In sum, while the profitability of some banks may be impaired in the short run, the system, once cleaned, will be able to support economic growth in a sustainable and profitable way.
The market turmoil will pass. The clean-up will get done, and Indian banks will be restored to health. While we should not underplay the dimensions of the task, we should be confident that it is manageable and that the Government and the RBI will do what it takes to make sure that banks are able to support the tremendous growth that lies ahead.
As you must have felt, the speech by RBI governor does a decent job of giving a background of why banking shares are falling so much.
But inspite of the realistic picture painted in the speech (and I respect the person giving the speech a lot), at the end of the day, its RBI governor’s duty to ensure that people and investors have confidence in country’s banking system.
So if after reading this speech, you feel that you should go and buy more PSU bank shares now (to average down your prices), I will say that you should not be in a hurry to do so.
There is still pain left in the system as many of bank MDs and Chairpersons have been honest enough to claim during quarterly result declarations. Many people say that all PSU Banks will go the Air India and BSNL way. I think it’s a little too early to paint all of them with the same brush – aviation and telecom sectors were never as as critical as banking. Its seems intelligent to be bearish when shares are falling. But sometimes, being bearish for the sake of sounding intelligent and to be a part of growing crowd is not sensible.
Now, I am not predicting anything here.
Will the shares of PSU banks rise after next quarter results?
The answer is I don’t know.
Or whether stocks will fall more from here?
Answer again is that I don’t know.
But going by what sentiments are surrounding these banks and what bank officials are saying during result declarations, a further fall won’t come as a surprise.
If you think that you know something about the sector and can see light at the end of tunnel, then you should play this scenario accordingly. If you don’t understand it, then remember that its best to say that you don’t know and do nothing. Known-Unknowns are less dangerous than Unknown-Unknowns. Isn’t it?
A friend of mine was really excited about the fall in shares of banks. He literally seemed to have arm-twisted himself to take exposure to banking shares. I told him that he could do it but that would mean that he was willing to take the risk of further downside. He asked me that he was not sure which banks were worth investing, but felt that at a broader level, it might be a good idea to invest in the sector.
I asked him whether he knew of banking ETFs. There are some that are designed specifically for PSU banks and others that have a good mix of both PSU and Private banks.
So I mailed him an excel to play around with how he could take exposure to banking sector through ETFs.
Here is the screenshot of the excel:

Invest Banking Stocks India

The two portfolios are taken from two funds:
  • Goldman Sachs PSU Bank ETF (only made up of PSU banks)
  • Goldman Sachs Banking Index ETF(has both PSU & Private banks)

By choosing the % of investible amount to be invested in PSU Bank ETF, you can see how your money is exposed to various banks.
If you, like my friend, are interested in banking sector now, I suggest you to first understand the risk that it entails.
Second is that if you still feel comfortable taking that risk considering your long-term horizon, you can consider going for these ETFs instead of direct stocks, as they help diversify the risk of overconcentration in specific shares.
I suggest you make a similar excel and play(!) with it.
I can send it to you too to save you the effort. Just tell me how to reach you in comments or drop me a mail at
I will send it to you.
Now don’t think that I am recommending you to go an invest in shares of PSU banks. As you can see, Mr. Rajan is quite hopeful of banks turning around (sooner or later). But as Buffett once said: “Turnarounds seldom turn”. So we cannot be sure of that.
The post is more about me doing some loud thinking and to help you do the same about the current banking crisis.

Disclosure – Invested in some private and public sector banks.

10 Stock PSU Banks Portfolio – 1st Year Performance Update

Caution: Lots of Graphs ahead. 🙂

Its been one full year since I started tracking PSU Bank stocks using a 10 stock portfolio. The catalyst for putting this portfolio in place was a feeling that PSU Banking space seemed relatively cheap (in November 2013) when compared to historical averages. I further hypothesized (or rather speculated) that over a period of next 5 years, this space would give better returns than broader markets.

And this speculative thought led to this portfolio and its quarterly tracking.

Portfolio Composition & Weightages

The portfolio which started off as an equally weighted one with all stocks sharing 10% of initial capital has moved a bit in last one year. It has now tilted more towards large caps due to better performance of larger banks than smaller ones over the last one year.
Banking Stock Portfolio Weightages
Current Banking Portfolio - Large Caps
Overall Portfolio Returns

So how has the portfolio fared in first year of its 5 year journey? To be honest, the results have been better than what I expected a year back. But that is not only because of low starting valuations or my stock picking skills. It is actually because of sudden rebirth of the Indian Bull Market. The portfolio has returned more than 42% (excluding dividends) and 45% (including dividends) in last one year. This is much higher than market returns of 35.8% in the same period.
Bank Portfolio Yearly Returns
Initial & Current Portfolio
Individual Stock Performances

But not all stocks have performed equally well. If we were to look closely at next graph, we will find that larger banks have performed much better than smaller ones. Four of the five large banks have given returns higher than market returns of 35.8%, whereas only one among the smaller ones has beaten market in last one year.

Portfolio Stocks Vs Index Returns
Quarterly Portfolio Performance

On a quarterly basis, the portfolio has been quite volatile. Though it wins the annual race comfortably, it should be noted that in 3 of the last 4 quarters, broader indices have beaten this portfolio!! It was only because of a jaw dropping 2nd quarter performance, that annual returns of the portfolio could beat the overall markets.

Quarterly Banking Portfolio Returns
This also shows that if someone was brave enough to go out and buy these banking stocks in February 2014, when they had come crashing down, the current returns would have been much higher the 45%.

It’s been rightly said that you need to show some Courage in Crisis (and take Cash-backed decisions) to make money in stock markets. But its tough to time the markets for average investors like. Period.

You can read more about the quarterly portfolio performance using links below:

Dividend Income from Portfolio

Apart from market beating capital appreciation, these stocks have also given dividends which are in line with expectations from PSU stocks. The ten stocks have cumulatively earned dividends of Rs 3173 on original investment of Rs 1 Lac. This gives a dividend yield of 3.17% to this portfolio – Decent by historical standards.

Banking Stocks Dividends
I know a lot of investors do not like stocks paying dividends as it means that company does not know what to do with its cash. But I personally prefer dividend paying companies. But this does not mean that I own all these shares in my personal or family portfolio. 🙂

So what should be the expectation for next 4 years? If one expects this portfolio to give similar returns (45%) for next four years too, then that would be wrong and over-optimistic. Under normal circumstances & assuming that common sense will prevail, maintaining a 45% rate for a portfolio of 10 stocks for five years is not possible – Assuming that we are not Warren Buffett. 🙂

But out there in markets, there are people who are ready to throw targets like 40,000 and 1,00,000 for Sensex over next few years at your face. They believe that we are getting ready for mother of all bull runs and its possible to earn 45% kind of return year after year.

My First Advice is to ignore them.

My Second Advice is to ignore my advice too. 🙂

Its your money and you have earned it the hard way. Don’t just depend on other people’s advice to take decisions about your money.

After 47.2% between Feb & May, PSU Bank Tracker Portfolio takes a breather with 10.9% – Update 3

It’s time for 3rd quarterly update of PSU Bank Portfolio. For benefit of those who do not know the whole story behind this tracking portfolio, I would briefly share the purpose of this portfolio:

In November 2013, like many others, I also felt that PSU Banks (as a group) were grossly undervalued and would give better returns than broader index in next 5 years. This portfolio tracks my gut feeling on a quarterly basis and was started with 10 stocks having equal weights.

Initial Portfolio PSU Banks

To know more details and thought process behind this portfolio, please read the first post in this series here. After this there have been 2 quarterly updates which can be found at below links:

In last 3 months, markets have been kind to PSU Banks (except to Syndicate Bank, which was in news for a bribery case linked to its Chairman). The portfolio has given a return of 10.9%, which is similar to that of broader index (11.3%).

Now if you compare this performance with that of previous quarter, i.e. 48% (against market’s 18% – details), then this one can be shrugged off as a pathetic one. But frankly speaking, I don’t think 10.9% in one quarter is a bad performance at all. Even if I am not beating the market, a performance which is better than after tax returns of safer, risk-free assets is acceptable to me.

In last 9 months, this portfolio has given returns of 40.5% (excluding dividends) and 43.7% (including dividends), which is better than Nifty’s 29% return in same period.

9 Month Banks Portfolio Returns
And surprisingly, it has been the larger banks which have performed better than than their smaller counterparts. And we always thought that smaller stocks moved more and faster.

Current Bank Portfolio Value

10 PSU Banks which pushed up Portfolio Returns by 47% in last 3 months!!

I still remember my last portfolio update post in February 2014. The post was titled PSU Banks are Losing Hell Lot of Money, and rightly so. After just three months of starting this portfolio, it was down -12% compared to Nifty’s -1.5% returns. 

It seemed that markets were hell bent on proving me wrong. 🙂

But thanks to Modi-Wave sweeping the country, last month has pushed up PSU banking stocks like a eagerly awaited IPO’s price in first week of its listing. And because of which, the overall 6 months returns of this portfolio has reached a stupendous 27%!!

And if you include dividends, it touches almost 29%. And this is against Nifty’s return of 15.8%. And here we are talking about big, country-wide banks and not small cap stocks.
PSU Bank Stock Returns 2014
Note – Returns based on prices upto 14th-May-2014

But before you put your money in PSU banks, please remember that on the business front, almost nothing has changed for these banks. Its only because of the so-called-hope, that these stocks have charged ahead. But having said that, prices these shares were trading sometime back were ridiculously low compared to historical valuations. And because expectation from this portfolio is to give better returns than index in next 5 yearsthis current out-performance should be taken as an exception and not as a rule.

But there are two simple yet important observations which I would like to highlight here:

  • Sometime in January 2014, concerns about asset quality were getting a lot of media attention & hence stocks of these banks reached almost absurd levels of undervaluation. But when the markets turned euphoric due to elections, it was the group of larger banks (SBI, BOB, PNB, etc) that bounced higher than smaller ones (Syndicate, Allahabad, Andhra, etc). This came as a surprise as I expected smaller ones to be more volatile and prone to movement due to market noises (even though asset quality of these smaller ones pose a bigger question than that of larger ones.)
  • Another interesting fact is that this Portfolio of government owned PSU banks is quite a volatile one. And as you can see in table below, quarter-on-quarter portfolio returns have fluctuated from -14% to +47% over the last 6 months. And that is a very high level of volatility. So, those who have difficulty sleeping at night due to stock markets, please avoid this group of stocks 🙂
PSU Banks Volatility

In last post, I had specifically mentioned (read speculated) that it was possible that these stocks would become volatile in coming quarter. Never thought volatility would be so high. 🙂

PSU Banks Prediction
A screenshot from previous post dated 15-Feb-2014
If you are interested in knowing further details of these 10 banks’ share-price performance & dividends in last 6 months, please click on image below to enlarge:

Detailed Portfolio Tracker – Last 6 Months – Click to enlarge

PSU Banks are Losing Hell Lot of Money!! 1st Quarter Portfolio Update

Shares of PSU banks have been bleeding for some time now. And unfortunately, some time back I had created a portfolio for tracking PSU banking stocks for next 5 years. Though it has only been 3 months, the fact is that the news is not good. 🙁

The portfolio is down 11.90% compared to Nifty’s 1.5% loss. And if you remove the contribution of dividends, then it further goes down to 13.90%. Pretty bad for 3 months… Isn’t it?

But lets remind ourselves of our original expectation from this portfolio

“[We] expect these stocks to collectively give better returns than index (Nifty50) in next 5 years.”

And with this being the first quarterly update, we still have 19 more quarter to look forward to. As we all know, asset quality issues and competition from more efficient private banks still remain. But the journey has just started. A snapshot of the portfolio is given below:
PSU Banks 1st Quarter Returns

In case you want to get more details, please click on the image below to enlarge:
Detailed PSU Banks Tracker Portfolio - Quarter 1 Update
Detailed PSU Banks Tracker Portfolio – Quarter 1 Update
Please note that I am separately tracking dividends as these government entities are quite liberal in doling out dividends to their shareholders (read: government), and hence we cannot neglect the contribution of dividends in this portfolio.

One of Stable Investor’s loyal readers Subhodeep made an interesting point in the earlier post:

“Some PSU Banks may yield progressively more than their own FDs over next 5-10 years. In other words, for someone looking for supplementing his monthly income, it might be better to buy stocks, which might end up yielding eventually 15% (on initial cost) or so in next 10 years, instead of buying a 5 or 10 year monthly income certificate (8% or 9% taxable return) in the same PSU Bank.”

And this yield on cost makes quite a lot of sense. I personally know people who now earn yields in excess of 600% every year (on-cost) on their investments made almost two decades back!! 

But lets go back to banking sector for now. 🙂 March 2014 is almost here and pretty soon, its possible that there might be some important announcement about new banking licenses. So, it is once again possible that few of the PSU banking names may see a volatile quarter of price movements.

But already down close to 15%, these stocks look quite attractive for long term. What do you say? Do you think these stocks would make more money than index in next five years? Or we are not going to see these stocks make new life time highs in next 5 to 10 years?

Do share your views.