As reading and writing are essential to participating in society, a person has to be financially literate today to plan for the future. This is essential without indulging deep into technical and jargon-filled financial concepts. The ability to save and the power of compounding is not quickly understood by many people. Investment can be done in various asset classes like equities through mutual funds and stocks, Bonds through mutual funds, Gold, P2P crowd-lending, National Saving Certificate, Public Provident Fund, Fixed Deposits through Banks, NBFC (HDFC Ltd.), Post Office, Real Estate and Currency.
I have started my career in the shadow of the 2008 financial crisis and have been at the receiving ends of the global recession of 2020 due to Covid-19. Both catastrophes have revealed that we could all benefit from a clearer understanding of how markets work. Let us look at the 2007-2010 period for the fall and rise of Sensex. The meltdown in the global financial system proved to be the best time for a stock investment and by March 2009 began the greatest rally seen in equities seen this century.
Companies having good corporate governance and sustainable long-term growth across market cycles recovered from the 2008 crisis. Investment and saving for future shocks take discipline that even middle-income class struggle with. I am hereby sharing the insights before investment:
Checklist for Investment:
1. Systematic Investments (SIPs) are just a methodology to invest, not a winning formula. They are the best means to accumulate. Worst Performing Mutual Funds will deliver poor returns despite the method of investment. And the reality is that not all these investments will generate the expected returns.
2. Don't be a compulsive asset class investors. E.g. a person who loves equity will keep on investing in equity no matter the results. If returns on assets (short or long term) are unconvincing, then there is no point sticking to it. Yet, it is advisable to have a portfolio with different asset classes instead of any single asset class.
3. Get-rich-quick and guaranteed-upside schemes are incubated daily. Investment isn't a poker game! Please do avoid investment in schemes promoted by online marketing companies (Speakasia) and multi-level marketing company (QNET). Whilst investing is not the same as human life, for most people, risk of losing their hard-earned savings can be no less tragic. The moral seems to be that any approach to money-making in the stock market which can be easily described and followed by a lot of people is by its term too simple and too easy to last.
4. IPO is always released in the seller's market with a lot of buzzes and probably have overpriced valuation. Business is not a popularity contest. Avoid hype around a company that didn't even have a basic business model in place. And investment bankers to wealth managers to the media are paid to create hype.
5. Most of the high yield bonds are junk bonds. A combination of macro liquidity and market illiquidity is a time bomb. It always leads only to volatile flash crashes and sudden changes in bond yields and stock prices.
6. The mutual fund market is flooded with multiple schemes: real estate, infrastructure, pharma, technology, close-ended, mid-cap, small-cap, multi-cap, growth, value, and so on. Please do check the last 5 years' performance, exit load factor, and locking period before investment. The investment can be done through direct and distributor in mutual funds.
7. One must find a sound advisor to lay down goals according to their priority and lay emphasis on life goals such as marriage, kids, higher education, and retirement. The fees charged by the advisor should be from you rather than trail end commission from the companies.
8. Public Provident Fund (PPF) is among the best long term investment schemes available in the market. It offers tax-free benefits with an initial lock-in period of 15 years.
Demystifying Stock Investment:
1. Trading is not the same as Investing and its speculation for the majority of the people. Trading is beneficial for the broker by service fee and government through GST. Investing isn't about beating others at their game, it's about controlling yourself at your own game. The right investing process and the ability to hold on for the long term is the way to wealth creation. Not chasing fancies.
2. An individual should own between 10 to 20 stocks as this is an adequate number and avoid excessive diversification. The number can be based on the capital, risk profile, and investment objective. The financial risk lies mostly within ourselves with our habit of feeling restless or relishing a complicated intellectual challenge.
3. We all now know how prominent public and private sector banks in India fudged their NPA figures for years on end until the RBI’s Asset Quality Review forced them to come clean. The same problem exists with several companies exposing them to accounting risk. Most accounting frauds usually come to light when the stock market is tanking and the access to capital starts drying up. Hence, companies with clean management are of paramount importance for investment.
4. A sustainable competitive advantage is a mantra for a successful business. The company’s competitive advantage is the reason for domination in its industry and generates returns much higher than its cost of capital. The sustainability of the competitive advantage enables the company to maintain its dominance and free cash generation ability for long periods. Read about Nestle.
5. Nifty index is not a good representative index. The over-representation of the capital heavy sectors like Power, Construction, Metals, Telecom, Real Estate, and Oil in the Nifty is a key reason for its sluggish performance. The sluggishness of the Nifty makes it relatively easy for reasonably competent PMS managers to outperform the index and unjustifiably claim the presence of skill.
6. Never buy a stock for dividend income alone. Company management and business must be solid and its stock price must be reasonable. If a stock is good 3 months earlier with solid underlying business, it's good now also.
7. Gambling is inherent in human nature. Speculating stock (assumed multi-bagger) should not be more than five percent of the total investment money. Never succumb to the certainty that any industry (eg IT) will outgrow others in the future.
8. There are two methods of investment in the stock market either: dollar cost averaging or buying an undervalued share and simply buying shares of premium companies in a bear market.
10. Don't invest in the sectors in which there is too much government interference (aviation sector). Better to invest in US stock exchange (S&P 500 and NASDEQ) through index funds.
“Invest in businesses that buy commodities and sell brands” is a powerful idea for long-term investing propagated by Warren Buffet. For geeks who want to test this idea, I will share the process (found on the internet )of assessing a stock into a checklist (step 1: check accounting quality; step 2: check the consistency of ROCE generation and revenue growth over the past 15 years; step 3: read the last 15 years of annual reports to assess capital allocation; step 4: assess sustainable competitive advantages, etc)
Footnote: Those have read with patience can get list of companies to invest compiled with limited knowledge.
I have started my career in the shadow of the 2008 financial crisis and have been at the receiving ends of the global recession of 2020 due to Covid-19. Both catastrophes have revealed that we could all benefit from a clearer understanding of how markets work. Let us look at the 2007-2010 period for the fall and rise of Sensex. The meltdown in the global financial system proved to be the best time for a stock investment and by March 2009 began the greatest rally seen in equities seen this century.
Companies having good corporate governance and sustainable long-term growth across market cycles recovered from the 2008 crisis. Investment and saving for future shocks take discipline that even middle-income class struggle with. I am hereby sharing the insights before investment:
Checklist for Investment:
1. Systematic Investments (SIPs) are just a methodology to invest, not a winning formula. They are the best means to accumulate. Worst Performing Mutual Funds will deliver poor returns despite the method of investment. And the reality is that not all these investments will generate the expected returns.
2. Don't be a compulsive asset class investors. E.g. a person who loves equity will keep on investing in equity no matter the results. If returns on assets (short or long term) are unconvincing, then there is no point sticking to it. Yet, it is advisable to have a portfolio with different asset classes instead of any single asset class.
3. Get-rich-quick and guaranteed-upside schemes are incubated daily. Investment isn't a poker game! Please do avoid investment in schemes promoted by online marketing companies (Speakasia) and multi-level marketing company (QNET). Whilst investing is not the same as human life, for most people, risk of losing their hard-earned savings can be no less tragic. The moral seems to be that any approach to money-making in the stock market which can be easily described and followed by a lot of people is by its term too simple and too easy to last.
4. IPO is always released in the seller's market with a lot of buzzes and probably have overpriced valuation. Business is not a popularity contest. Avoid hype around a company that didn't even have a basic business model in place. And investment bankers to wealth managers to the media are paid to create hype.
5. Most of the high yield bonds are junk bonds. A combination of macro liquidity and market illiquidity is a time bomb. It always leads only to volatile flash crashes and sudden changes in bond yields and stock prices.
6. The mutual fund market is flooded with multiple schemes: real estate, infrastructure, pharma, technology, close-ended, mid-cap, small-cap, multi-cap, growth, value, and so on. Please do check the last 5 years' performance, exit load factor, and locking period before investment. The investment can be done through direct and distributor in mutual funds.
7. One must find a sound advisor to lay down goals according to their priority and lay emphasis on life goals such as marriage, kids, higher education, and retirement. The fees charged by the advisor should be from you rather than trail end commission from the companies.
8. Public Provident Fund (PPF) is among the best long term investment schemes available in the market. It offers tax-free benefits with an initial lock-in period of 15 years.
Demystifying Stock Investment:
1. Trading is not the same as Investing and its speculation for the majority of the people. Trading is beneficial for the broker by service fee and government through GST. Investing isn't about beating others at their game, it's about controlling yourself at your own game. The right investing process and the ability to hold on for the long term is the way to wealth creation. Not chasing fancies.
2. An individual should own between 10 to 20 stocks as this is an adequate number and avoid excessive diversification. The number can be based on the capital, risk profile, and investment objective. The financial risk lies mostly within ourselves with our habit of feeling restless or relishing a complicated intellectual challenge.
3. We all now know how prominent public and private sector banks in India fudged their NPA figures for years on end until the RBI’s Asset Quality Review forced them to come clean. The same problem exists with several companies exposing them to accounting risk. Most accounting frauds usually come to light when the stock market is tanking and the access to capital starts drying up. Hence, companies with clean management are of paramount importance for investment.
4. A sustainable competitive advantage is a mantra for a successful business. The company’s competitive advantage is the reason for domination in its industry and generates returns much higher than its cost of capital. The sustainability of the competitive advantage enables the company to maintain its dominance and free cash generation ability for long periods. Read about Nestle.
5. Nifty index is not a good representative index. The over-representation of the capital heavy sectors like Power, Construction, Metals, Telecom, Real Estate, and Oil in the Nifty is a key reason for its sluggish performance. The sluggishness of the Nifty makes it relatively easy for reasonably competent PMS managers to outperform the index and unjustifiably claim the presence of skill.
6. Never buy a stock for dividend income alone. Company management and business must be solid and its stock price must be reasonable. If a stock is good 3 months earlier with solid underlying business, it's good now also.
7. Gambling is inherent in human nature. Speculating stock (assumed multi-bagger) should not be more than five percent of the total investment money. Never succumb to the certainty that any industry (eg IT) will outgrow others in the future.
8. There are two methods of investment in the stock market either: dollar cost averaging or buying an undervalued share and simply buying shares of premium companies in a bear market.
10. Don't invest in the sectors in which there is too much government interference (aviation sector). Better to invest in US stock exchange (S&P 500 and NASDEQ) through index funds.
“Invest in businesses that buy commodities and sell brands” is a powerful idea for long-term investing propagated by Warren Buffet. For geeks who want to test this idea, I will share the process (found on the internet )of assessing a stock into a checklist (step 1: check accounting quality; step 2: check the consistency of ROCE generation and revenue growth over the past 15 years; step 3: read the last 15 years of annual reports to assess capital allocation; step 4: assess sustainable competitive advantages, etc)
Footnote: Those have read with patience can get list of companies to invest compiled with limited knowledge.
