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Stable Investor’s Interview

In May 2013, my interview got featured on Safal Niveshak (SN). A few days back, a reader (of both Stable Investor & Safal Niveshak) left a comment saying that I should consider sharing this interview with readers of Stable Investor too. I liked the thought and Vishal (of SN) permitted me to reproduce the interview here.
Stable Investor’s Interview
So here it is…
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Safal Niveshak (SN): He claims to be no superstar of an investor. But as the legendary investors say, “Focus on the process and not the outcome,” Dev is a superstar when it comes to working on a sound process that I surely believe will lead him to a great outcome in the future.
SN: Before I pick your brains on investing, please share about your life, family, and career.
Dev: I was born in an upper middle class family of advocates and doctors. But instead of becoming a doctor or a lawyer, I chose a different path and went on to complete my engineering.
After engineering, I got a job in an Indian Fortune 100 organization in oil refining sector where I worked for a few years. After that, I went onto complete my MBA. Very soon, I would be joining the banking sector.
Being born and brought up in Lucknow seems to have had an effect on my investing style too.
I prefer ‘Nawabi-styled’ passive and long term investing. :-)
It is based on the premise that you should not work for money. But money should work for you. :-)
SN: What got you into investing, and how did you begin to learn about the market and investing in general?
Dev: There were two things which got me interested in investing.
First was when my father used to occasionally bring home a copy of The Economic Times. He had his money invested in shares of a few MNCs and would check their prices every few months.
My father told me that I could buy pieces (shares) of businesses which featured in list of stock quotes provided in the newspapers.
Being a kid, I felt excited to be able to buy part-ownerships in companies without having to setup any infrastructure or factories!
Second thing which got me excited was the constant flow of dividend cheques, which used to arrive in our mailboxes from these MNCs.
I just loved the concept that you are being paid to hold pieces of paper (physical shares). It was the concept which I am still happy to quote every now and then. :-)
You should not work for money. Rather the money should work for you. I really liked the system of getting a regular flow of passive income (cash flow) without going to work for somebody else.
SN: What would you say is one of the most important lessons you learned early on?
Dev: I don’t know how this concept found its way into my head, but I always feel that it is very important for an asset to generate regular cash flows.
Most people focus solely on capital appreciation. But I think that though capital appreciation is important, it is actually the regular, dependable and sustained incoming flow of cash, which changes one’s decision making with regard to building long-term wealth.
Suppose, one purchases a property (ex: land) to sell after a few years at higher prices. This would require a person to wait for years to sell the property and lay his hand on the cash, which can then be used elsewhere.
In contrast, if one purchases a flat or a commercial property, which generates monthly rent, then this constant flow of monthly rents can be used to purchase more cash generating assets.
One can use this rent for payment of EMIs on loan taken to create more assets. It’s once again an example of your money working to create more assets for you.
SN: How would you describe your investment philosophy?
Dev: I don’t look at my stock portfolio in isolation. I have investments in stocks, mutual funds, PPF, bank deposits & precious metals.
I always try to look at the bigger picture. Being young, I should be (theoretically) investing close to 100% in equities & mutual funds. But I consider myself to be a balanced investor and have resorted to diversification across multiple investment vehicles.
I invest regularly in mutual funds, individual stocks, PPF and bank deposits.
Mutual fund investments allow me to create a growing corpus to fund my retirement or my entrepreneurial ambitions.
The amount I invest in PPF is generally equal to the difference in annual premium amounts between term and endowment plans of LIC. Though I made the mistake of buying a few endowment plans of LIC some years back, I have corrected those mistakes by selling them (at a loss) and buying plain term plans.
These plans do not pay anything in case I survive, but are incredibly cheaper than endowment ones. Insurance is not an investment and hence, I treat the two of them differently.
I use bank deposits as war chests to fund further asset purchases or expenditures in short term (less than 5 years). If I am sure about a future cash outflow (expenditure), I start an online recurring deposit which would provide me with lump sum money at maturity to provide for the expenditure.
I use fixed deposits as emergency funds and to park cash when I cannot find any investment opportunities.
But all this does not mean that I don’t invest in individual stocks. I have been investing in them as and when I feel comfortable with their valuations or future growth prospects.
I generally follow the Core-Satellite approach for individual stock portfolio (discussed later).
SN: How do you typically find ideas and what is your selection process before an idea gets added to your portfolio?
Dev: I would say that I am an amateur and it is not I who finds an idea. It’s rather the idea which finds me. :-)
By this I mean that I invest only in those ideas which appeal to common sense, which don’t require knowledge of rocket science to simply look profitable.
An idea should be so ‘obviously’ good on few important parameters that it must just jump out of a list of stocks which I regularly track.
For example, In March 2009, buying any large cap stock was the ‘most-obvious’ way of making money. But this required one to have the knowledge to judge the overall market valuations.
So, if the index was trading close to P/E multiples of 12-14 and a large cap stock was available close to its multi-year lows, and there was enough evidence that company was not going to go bankrupt or stagnate in years to come, then it made perfect (obvious) sense to buy that stock.
It is same as waiting to buy clothes, shoes, etc. in annual sales where discounts are close to 50%.
If a person is ready to buy clothes at a discount, why shouldn’t one buy beautiful assets like stocks in a discount sale?
I stick to Buffett’s philosophy of operating within my own circle of competence. I have been an oil-man in past. Hence I understand this sector better than any other sector.
So it makes sense for me to look at all companies within this sector and to stay updated about the news and latest developments in this sector.
Though I consider myself to be a long term investor, I must confess that I do look for trends in long term data.
History may or may not repeat, but it does rhyme at times. Share price valuations are generally bound by irrational exuberances (highs) and graveyard like pessimisms (lows).
If I am able to understand these boundaries for a particular sector, then I think I will be able to make a well-educated guess about the good time(s) to enter stocks in this sector.
I also had a very short stint in steel industry where I learnt a lot about the business, its cycles and customers. I have recently started devoting some time to analysing steel businesses. But considering the complexities of this cyclical industry, I think it would take me a few more years to completely understand it.
And as already mentioned, I seemed to be programmed to appreciate the concept of dividends. And I am on same page as my self-appointed mentor John D. Rockefeller, when he said – “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
Dividends give cash to be used for buying more assets. I understand that most people prefer going for growth stocks offering lower dividends. But as far as I am concerned, I prefer keeping a balance between dividend and growth stocks.
I follow a core-satellite approach where I try to maintain a core of a few dividend stocks and satellite of few growth stocks (& few short term investments).
At first, this may seem a bit difficult because dividend produced initially may only be a trickle. But as a not-so-well-known private investor Joshua Kennon* once mentioned, being a long term investor, I can wait.
And if I can wait then this trickle can become a drip. A drip can become a flow. A flow can become a stream. A stream can become a torrent. A torrent can become a deluge. That is the very nature of compounding.
*Joshua Kennon is a very capable private investor. You can follow him here.
So, when I buy stocks for the core of my portfolio, I am looking at buying cash-generating machines, which provide me with regular dividends to fund my other stock purchases rather than trying to make money by capital appreciation.
I am not looking for multi-baggers now. As Buffett says, “I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.”
SN: How do you take care of ‘risks’ while investing?
Dev: As an investor, I know that I can never eliminate the risk of being wrong.
At the most, what I can do is to be well diversified so that my one wrong investment decision does not wipe out my entire net worth.
This issue of diversification reminds me of a quote by Shelby Davis – “We feel a portfolio is like a flower garden. As portfolio managers, our job is to plant a few seeds every year and weed out a few mature plants. It is not to uproot the garden. We have a portfolio mix where we hope that something will be in bloom all the time, but we do not expect everything to flower at once.”
I personally prefer accumulating stocks on a regular basis rather than going for lump-sum investments. 
In this way, I get time to judge my stock picks. In case, I am not convinced with the business, I can exit the stock.
In case I am convinced, I can keep on accumulating them.
SN: What have been the most challenging investment lessons you have learned?
Dev: It is really tough to be greedy when others are fearful. Really tough!
But with time and experience, one can become more comfortable with this approach.
Though people (and myself) would want a smooth, artificial upward line as returns on portfolio, the world doesn’t work like that.
We can do hours and hours of analysis and pick a stock which we feel is undervalued. But the market doesn’t know that we have put so much effort in our stock picks.
Markets are driven by fear and greed. Period.
Hence, we can never eliminate the risk of being wrong.
SN: How has your approach toward investing changed over the years?
Dev: I have been investing in stock markets for more than 10 years and I still consider myself to be an amateur and a student of the markets.
Earlier, markets seemed more like gamble. But after getting a taste of common sense based investing i.e., sticking with good companies and buying them in hard times, I have more or less remained loyal to this approach till date.
I still try to handle my stock portfolio as a whole rather than as a set of individual stocks.
I stick with dividend paying, boring and predictable businesses for the core of my portfolio.
As far as the satellite part is concerned, I try to buy companies having at least an average growth potential and a decent, predictable management.
Every now and then, I do take up some short-term positions. But these are limited to less than 5% to 10% of my total stock portfolio.
Earlier, due to my unpreparedness to handle the market madness, I used to feel a lot of pressure to buy or sell stocks. But, now I maintain a hand’s distance from the market and don’t feel the pressure to buy or sell anything.
If I can’t find anything attractive enough to buy, I continue hoarding cash in anticipation of finding something useful (this does not include my regular mutual fund investments).
Also, now I don’t feel the urge to show any activity in stock markets for the sake of activity. Though being active in stock markets is considered glamorous, I prefer my own passive ways of building long term wealth.
And to quote Joshua again, “I will only exchange cash for ownership when the price and terms put the probability of a highly successful outcome overwhelmingly in our favour.”
SN: In your personal portfolio how many stocks and mutual funds do you own on average at any one time?
Dev: I have made a conscious decision to hold less than 15 companies in my portfolio. At present, I hold investments in 13 companies, with none being more than 15% of size of the stock portfolio.
As far as mutual funds are concerned, I am presently invested in 3 schemes focusing on large-caps and multi-caps.
I follow the SIP route to invest in these schemes every month. I chose dividend payout options in the two large cap oriented schemes, as these schemes invest in stable, mature & large businesses capable of sharing their profits (in form of dividends) with shareholders.
These dividend payouts can be used to buy good quality stocks for individual stocks portfolio.
I am also planning to go for another multi-cap and a mid-cap fund. This would take my total number of schemes to five, which I consider apt for my current investment-comfort levels.
I also plan to increase my monthly contribution in at least 2 of these 5 schemes every year, till the time I retire (or join Benjamin Graham in heaven).
SN: As investors, one of the most difficult decisions we must make is with respect to selling stocks. What factors help you make “sell” decisions?
Dev: Now this is tough. I would rather say that this is a big weakness for me. Being a self confessed long term investor, it is tough to sell something when you ‘want’ your holding period to be ‘forever’.
But nevertheless, I try to bring some structure in my sell decisions.
The primary reason to sell a stock would be if I am in need of money. So, selling of stocks would be used as a last resort because I do have my funds parked in emergency funds, bank deposits etc.
Another big reason could be a negative change in the fundamental reason for which I initially bought the stock. This may be because of change (fall) in margins, rise of competitors, or a black swan event (for example, there is no point holding shares of a company managing its only asset, a toll road, which is destroyed by a freak earthquake in the region).
SN: What is the best investment advice you have ever received?
Dev: Compounding is the eighth wonder of the world. Have patience & give it a chance. :-)
SN: What is the worst investment advice you have ever received?
Dev: Take a (personal) loan charging interest in excess of 15% and invest in IPOs. IPOs are sure shot way to double your money in a few days.
Like Graham, I feel that IPOs are an acronym for “It’s Probably (or Permanently) Overpriced.”
SN: What has been your favourite investing-related book and why?
Dev: It is got to be The Intelligent Investor.
For those who have already read the book, I think I can add nothing substantial to the list of its praise. For those who haven’t, I can only say that you are really missing out on something really worth reading, at least once in the life of an investor.
I personally like the book and regularly read parts of it because it is one of those books which are grounded in reality.
It does not tell you that you can get astronomical returns in markets. It tells you that in market, you can be successful if you are able to take care of the controllables, i.e., your own emotions, actions and reactions.
One of the key ingredients of stock market success is to avoid making huge mistakes and manage at least average results. And this book lays down a framework which reduces the risk of making big mistake in markets.
The book had such an impact on me that I immediately adjusted the way I managed my money and equities portfolio.
SN: If you had one piece of advice to share with other tribesmen, what would it be?
Dev: I have three.
One, reinvest your dividends and interest incomes. It is only when you reinvest your passive earnings that the magic of compounding begins.
Two, always be prepared. You never know when the market might offer you some great opportunity. It really does pay to show some COURAGE by using CASH in times of CRISIS.
Three, while calculating future returns from stock markets, don’t use figures like 15% or 20% in your calculations. A number around 10-12% is more saner and no-nonsense one.
SN: Thanks a lot Dev! Your insights have been amazing, and especially for someone who is starting out on his/her investing career.
The interview originally featured on SafalNiveshak
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A trade that made Stable Investor lonely

Regular readers of the site would know that since inception, Stable Investor was managed by Dev & Shubhang. But both had their share of differences. Dev was more supportive of long term investing. On other hand, Shubhang’s technical skills made him suitable for fast-paced trading world.
Though both agreed on variety of issues, recent stock market corrections changed this equation. Dev continued and would continue to pick stocks for his long term portfolio (and does not plan to sell them anytime soon). Shubhang sensing different opportunities, decided to make some really profitable(!) trades in these falling markets. 

This divergence in actions has led Shubhang to focus solely on making short term bets. And hence, he has decided to part ways with Stable Investor.
From now on, only Dev would be running the show. The same would be reflected in About page soon.
PS – Dev and Shubhang continue to be friends and will keep bouncing ideas of each other.
Dev

Mailbag: 22 years old & ready to invest for 25 years!!

A young reader (Dhruv) in his early 20s asked us a question. He has 25K to spare every month. He wants to know his options if he wants to invest this money (every month) for next 25 years. As we mentioned earlier also in our previous post, we are delighted to see that people ready to commit to long term wealth building for decades and not years. 🙂
So in this post, as we promised, we will try to address our young reader’s query.
 
 
But remember, there is no perfect way. People might take different roads to the same goal. So, go ahead and do let us know of your views in comments section.
Theoretically, putting aside 25K every month for next 25 years in a simple PPF account itself would create a corpus of 2.6+ Crore. And that is without even taking any risks. These are sure-shot returns. Unless the govt. and everything else comes crashing down.
But since you are young, it makes sense to take some risks. And with time horizon which you have, many (if not all) risks of so-called risky assets can be evened out.
We don’t know much about you, your family or your financial background. We only know two things. You are ready to invest 25K every month. You are ready to do this for next 25 years. Due to lack of important information, it is fundamentally not possible (and unethical) to suggest anything concrete here. Therefore, we will make certain assumptions and then give our thoughts.
Assumptions
  1. You are ready to invest 25K every month NOW.
  2. You don’t have any liabilities NOW.
  3. Your income (salary, etc) will increase every year for next 25 years.
  4. Your liabilities will increase in future (not uniformly though). i.e., you would need to fund your higher education, marriage, honeymoon, parent’s health, property purchases, etc.
  5. Hence we assume that though your income would increase, you will not be able to increase your contribution to investments. Your investment contribution would remain fixed at 25K per month.
  6. You and your family are adequately insured.
  7. You and your family have adequate health insurance.
  8. Though glamorous, we have chosen not to include individual stocks as an asset class for your wealth creation plan. It requires effort and passion. Since we don’t know much about you, it is best to avoid it. 🙂
 
What We Suggest
  1. Before even thinking of investing, keep aside 6 month’s expenses worth of money in some liquid asset classes. You can keep it in a savings account or an online fixed deposit. These days it’s easy to make (and break) online fixed deposits when required. So this should take care of your Emergency Fund.
  2. From the 25K, you should put in 10K (8.33K to be exact as there is a limit of 1 Lac on investing in PPF each year)* every month in a PPF account. This would turn into around 85 Lacs in 25 years. Now this is separate from your and your employer’s PF contribution. Remember, you cannot touch this money before 15 years (though you can withdraw some after 6 years, let’s not get into those details).
  3. For the remaining 15K, chose 4-5 good mutual funds. As one reader suggested in the previous post, it is better to stick with index funds when considering such long term horizons. That way, dependencies on fund managers and his team are reduced to almost nil.  So you can go ahead with 3 index funds (4k, 3K, 3K = 10K). But it is also advisable to pick two well established actively managed funds (2.5K each). These funds should have been in existence for more than 10 years and should have proven the mettle in multiple market cycles. For names of such funds, check out our last post and its comment section. This 15K every month for next 25 years would create a corpus of around 2.2 Crore.
Problems which you might face in future
Now suppose that you want to buy a property after say 5 years. You would definitely be tempted to take money from this corpus which you would have created in last 5 years. Now though this approach looks sane and full of common sense, the problem would be that this would break the COMPOUNDING. Once compounding breaks and you continue to invest for next 20 years (after 5 years from now), your PPF contribution would have become 52 Lacs & MF would have become 1.2 Crore (Down from 2.2 Crore in previous case). So, you should plan your big expenses in such a manner that you long term compounding is not interrupted.
 
So how can one do this? Though it may not seem like a good idea at first, what you can do is to reduce this 25K contribution in PPFs & MFs to around 15-20K. Park the remaining money every month in some recurring deposits or income funds. This way, you would have started preparing yourself for future expenses and would not be required to interrupt compounding of your investments.


Hope that helps. Others are welcome to pour in their thoughts.

* – Thanks our reader Hemant Bhatia for bringing this to our notice.