Invest your house EMI in equity markets

Earlier I wrote a post to convince you that you should buy a house against renting, Today let’s build a case of buying house on EMIs vs investing equated monthly investment (EMI ) in capital markets

Base case

Cost of house – INR 60,00,000

Down payment – INR 12,00,000

Term – 15 years

Rate of interest – A quick search would tell you ~10% floating rate is the going rate , See below snapshot from www.bankbazaar.com

Typically as an economy scales up the interest rate goes down, See an example of South Korea , A nation which has moved from being a developing nation to a developed nation

Therefore for our base case example we can say that consumer is likely to pay a lower EMI in future however to be conservative I will assume EMI to be constant

EMI – INR 51,463 /month or INR 6,17,564 / Year

To complete my calculation I need to make few more assumptions , Rent yields let take a look at what are rent yields across the world now

In 15 years India as an economy should be closer to China / Singapore in real terms so I can only make an educated … Read the rest

May 12, 2015

How using earnings power box lets you ask right questions ?

Over my limited experience in equity markets, I have come to conclusion that earnings power box is a powerful tool to analyse authenticity of corporate earnings. While I am not going to repeat much of much I have written earlier, you can go through it here and here

One of first things I do after getting annual reports of the companies I hold is to update their earnings power box (EPB)

Updating it sets me in right frame of mind to query annual reports, let me run through an example to elucidate my point

In 2014 this is how Kitex ‘s EPB looked like

A company in wealth maximizing quadrant 2, the more number of years it continues its advance in this quadrant the more it will continue to create value for owners

2015 EPB will blow your mind away

The company made a significant advance in quadrant 2, no wonder stock market rewarded the stock in the bull market

This is where we start our investigation

First let’s look at raw data for per share earnings

The accrual EPS (one which is reported as diluted EPS in Profit and loss account) had a significant jump from INR 12.08 /Share … Read the rest

May 9, 2015

Will government’s tax rate cut be game changer ?

In last budget government announced a key intention to reduce corporate taxes to make India par with other emerging nations

Note this is only proposal and there is no guarantee that this will fructify in next 4 years. Now imagine in 2019 that this becomes a reality

How will it improve CAGR returns from companies ?

5% is big saving and can fill corporate coffers tremendously with direct impact to FCF available to owners

So I did a thought experiment on how this tax edge could impact investor returns

Read carefully – Few key assumptions that you are making when relying on this analysis

would stick to its promise of reducing corporate taxes by 5% in 4 years – To me this is biggest risk
Predicting profit growth for next few years, in most business this is difficult if not impossible
Assigning an PE exit multiple, this requires years of practice, we would be wise to be conservative on this
Margins would be remain as 2015, for cyclic business this would lead to faulty outputs again if business had an extremely good or poor 2015 then results would be skewed on either side
There would be no equity dilution, which

… Read the rest

May 2, 2015

Create an Investing checklist

Invest in creating an Investing checklist as it can save you from making fatal investment mistakes in life

Charlie munger said,

“You need a different checklist and different mental models for different companies. I can never make
it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life

Checklists in aviation and medicine aim to eliminate errors completely. They are critical since they deal with life and death situations—a minor mistake in a flight may lead to a fatal crash, In investing checklist slows down investing process thus taking impulse out of decision making. See how Harvard have developed this checklist for CEOs for big corporate decisions

Daniel Kaheman wrote

Form a checklist of criteria to consider before making a strategic decision. This can help to protect against overconfidence. For example, you might want to know the quality of the information given, whether or not there is a strong possibility of “group think” influencing this information, have any influential team members had a chance to persuade other team members, and also whether the chief decision-maker already has a strong stance on this issue. These

… Read the rest

April 24, 2015

Why you should not mix emotions and investing

I love the below quote related to emotion and investing

Emotions can be a great asset in life, but when it comes to investing, they may be a liability

Very important line and one needs tremendous patience and practice to avoid mixing emotions with acumen when making an investing decision

Let me tell you story of Anil, a retail investor,and how his emotions cost him dearly

Few years ago his friend told him about an established NBFC Bajaj Finance as a stock tip, he looked at the company’s ticker it was INR 88, he added stock to his watch list and waited for price to drop so that he can buy

A year went by and one day while browsing prices of his watch list he was stuck, Why ?

The stock suggested by his friend has moved almost 50% up, there was huge guilt in him on having missed 50% returns but then he consoles himself by saying ‘We can’t make money on every stock in markets’

He thought this would be end of his story with Bajaj finance, but almost a … Read the rest

April 17, 2015

Don’t apply scuttlebutt like this

My mistakes have been one of most important sources of my learning, See some stuff here

Today let me give you another example from my personal experience for you

In year 2010, I learned about this technique and in a minute you will know where it came from

The scuttlebutt technique is inquiring and asking questions to various people with mutual interest or are involved with a certain company or industry. Asking suppliers, vendors, customers, competition, trade association executives, research scientist from universities or in government and previous employees may all be intangible sources of qualitative information.

Phillip Fisher had first coined the “scuttlebutt” technique when he wrote Common Stocks and Uncommon Profits

Now eager to use this technique, I went ahead and started applying this on HDFC bank,

Context

Our family business had recently started dealing with a new branch of the bank and our industry is famous for squeezing the last dime out of bank in terms of service. I thought it was a perfect opportunity for me to find about culture of the bank and how it operates through its employee and fellow customers. What unfolded over next few months really surprised me; I was a … Read the rest

April 11, 2015

Few takeaways from study of wide moat companies

I started with wide moat ratings of morningstar and selected 10 companies randomly as below

Asian Paints Bajaj Auto Colgate India Dabur Cummins HUL Infosys ITC Nestle Lupin

Then I collected 10 year data on above companies from 2005 to 2014, collecting 10 year data will ensure that you can avoid sampling errors although I want to clearly point that selecting 10 companies and trying to interpret patterns in itself will have sampling errors

If you have gone through our previous posts on competitive analysis , ROE dissection or Earnings framework you know I like to understand a concept through key metrics and examples , I have selected 3 important metrics and plotted on how have they performed for 10 companies in last 10 years

Lets take them one by one

Understand this first you get rated as improved if a particular company is able to beat its own average over last 10 years in year 2014. So if year 2014 was extremely bad/good year for the company than data interpretation below could be erroneous

Gross Margin – My reason to select – this indicates pricing power

8 out 10 companies were able to improve their gross margins

Cash … Read the rest

April 5, 2015

Why I maintain a free subscriber only Model Portfolio ?

After my last monthly newsletter to blog readers, I got few questions on Model Portfolio. I am penning this post to answer most of those broad questions that came my way

What is Model portfolio ?

Model portfolio is a collection of businesses at a point in time which in my humble opinion has ability to deliver superior returns over a three to five year time frame over benchmark indices (mid cap / small cap). The operating word here is ‘ability’ (not promise)

Investors should very carefully decide his/her risk appetite and the returns expectations, as not everyone’s situations is same. As a prudent investor first

Determine your willingness to take risk – Are you an emotionally a person who can handle risk ?
Ability to take risk – Does you economic situation allows you take risk by investing in equity

There are end number of anti-impotence pills in proper way not in over or below amount overnight shipping viagra or more usual than suggested for. A full medical check-up can be completed through driver ed online viagra without buy prescription page ga. Back again discomfort and muscle cialis generic pharmacy aches can occur 12 to 24 several hours just … Read the rest

April 4, 2015

Industry Map and Profit pool analysis – Indian Auto Ancilliary industry

Did it occur to you some companies in an industry continue to make money while others barely survive. The classic case is that of airline industry where large airlines are accumulating huge losses whereas airline component manufacturers are earning above average returns on capital for last 4 decades

Can we find great investments in lousy industries or industry sub segments?

To answer above one has to construct an Industry map and do a profit pool analysis, let’s take help of Michael J. Mauboussin & Dan Callahan to understand these terms

From their ground-breaking paper on Measuring the Moat

The goal of an industry map is to understand the current and potential interactions that ultimately shape the sustainable value creation prospects for the whole industry as well as for the individual companies within the industry

A profit pool shows how an industry’s value creation is distributed at a particular point in time. The horizontal axis is the percentage of the industry, typically measured as invested capital or sales, and the vertical axis is a measure of economic profitability

Like always we will learn to create them by using an Indian example – In this post we would try to create an … Read the rest

March 29, 2015

How Inflation kills investing returns

Inflation and investing , I often revisit this quote when I am reviewing my portfolio

Inflation is a tax one has to bear irrespective of whether one is investing or not.
The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5 percent passbook account whether she pays 100 percent income tax on her interest income during a period of zero inflation or pays no income taxes during years of 5 percent inflation. Either way, she is ‘taxed’ in a manner that leaves her no real income whatsoever. Any money she spends comes right out of capital. She would find outrageous a 120 percent income tax but doesn’t seem to notice that 5 percent inflation is the economic equivalent ~ Warren Buffet

I had an opportunity to visit India after almost a year and I took this opportunity to do a dip stick test on inflation

Cautionary Note : I was in Kolkata for 15 days and my experiences may be totally irrelevant and … Read the rest