A thought or two on equity investing in India (Part 2)

A thought or two on equity investing in India (Part 2)

Disclaimer: Equity investing has risks involved. Your investment capital may go to zero. Investment is strictly at your discretion. Author of this article is not responsible for any monetary gains/losses you may incur. The author is NOT SEBI registered.

Three simple questions to answer before you invest in direct equity. What to buy? When to buy and When to sell. If you are able to arrive at fair answer for these, you will do pretty good in investing. Problem? There's a huge amount of noise involved between you and a fairly reasonable answer for these 3 questions.

Consider a scenario. You want to buy a new TV. You go to a nice shop in a nearby mall only to see a huge variety in models, screen size and offers. One looks more appealing than the other and to add to the complexity, the salesperson talks about discounts on various models. All you need is just one TV and now you feel like you need to spend an hour to choose the best possible TV at your budget. Very similar thing may happen in your investing world. There are 100s of listed companies, business news channels and newspapers pour countless stock suggestions. To add to the mix, every Tom, Dick and Harry seems to have an opinion on the next big thing!

One talks about "technical" charts (I can only wonder what is so technical about imagining a shape out of stock price move- Give a bunch of people enough alcohol and you are sure to get 100s of patterns and price predictions). One "expert" gives a buy recommendation with a 30% up move and another predicts opposite direction. One tells you to buy when others are fearful and another tells you "not to catch a falling knife". Whom to follow and whom to ignore?

When a flock of sheep blindly walks in a single direction (probably towards a meat shop), advantage is for the one who dares to look up for once. You might be laughed at for not following the herd, but in the investing world, wonders can happen if you have the stomach to not "go with the flow". 

What probably matters the most in investing is to have an independent thinking. So are all the expert talks and suggestions worthless? Not really. Reading good books and watching lot of investing discussions for me is like a professional chef taking a walk on a busy spice and vegetable market. The chef might simply walk around, watch what people buy and sell, what new products are available only to get inspired. Only to get ideas. He/she samples a few, buys a few, goes home and experiments with them to see if they can bring a new taste/dimension to the food. 

India has a bunch of really good fund managers. You watch their interviews and understand that each one has a unique investing methodology. While you may see some commonality, more often than not, they have a very unique method for what to buy, when to buy and when to sell. Surprisingly, all of them seem to make decent money, a good number of them beating the index too!

Three things are of great importance to me when I first look at a stock- to decide if it's a good buy at its current price. current P/E ratio, historic ROCE and the EPS growth over the past 10 years. What is a P/E ratio? Let's take a very simple scenario to explain this. Let's say, a company has just 1 share and you own it by paying 100 rupees. Say, this company earns a profit of 10 rupees in the current year. You divide the share price by its earnings and you get the P/E ratio of 10 (100/10= 10). Another way of understanding this is, for the investment of 100 rupees, in the current year, you got 10 rupees. So if the earnings remain the same every year, you breakeven on the 10th year (10 rupees per year * 10 years = 100 rupees). Anything that you earn after the 10th year is profit for you. All else being equal, a stock with lower P/E should be more attractive- but the catch is, quite often, all else is not equal. But P/E ratio can definitely be a good ingredient in your cooking adventure!

ROCE: Return on Capital Employed simply indicates how much return the company has earned relative to the money it has deployed in a year, for its business. All else being equal, a stock with higher ROCE should be of more interest to you. One more useful ingredient for your cooking adventure!

EPS: Earnings per share indicates how many rupees of earnings per each share the company earned. All else being equal, a company with higher EPS is preferred. Check and see how the EPS has grown (or decreased) in your company year on year for 10 years. Third ingredient is ready!

There are a few more ingredients to use, but I guess I will cover them in my next blog. 

As a homework, open screener.in (a wonderful website that lists all these and more information!), enter name of an Indian company in the search option, look for these 3 values. Try and compare these 3 values between companies of the same industry. While you don't need to do investing decision right away with these, just by looking at these 3, you have decided to not follow the herd! The very important thing to do to win this investing marathon is to walk in the right direction- surprisingly, many fail to do this. You don't need to fall in love with these 3 right away! If it gets too boring in between, get a beer, enjoy sex with your significant other or watch a nice movie! You have all the time in the world to master the investing world. Compounding of knowledge takes time just like the nice bottle of beer that you have in your hand. But the fruits are sweeter when you wait for it all day long!

Happy investing!

A thought or two on equity investing in India (Part 1)

A thought or two on equity investing in India (Part 1)

Disclaimer: Equity investing has risks involved. Your investment capital may go to zero. Investment is strictly at your discretion. Author of this article is not responsible for any monetary gains/losses you may incur. The author is NOT SEBI registered.

Equity has been an interesting wealth builder for people. While traditionally, real estate would have been a place to put a bulk of your disposable income, with the recent bull move, many are drawn to direct equity investment. I try to put my thoughts around equity investing in this and next few blogs. 

Read through these scenarios and think to yourself what would you do in these cases:

1. You buy a stock and within 2 weeks, your investment value is down by 25% (or play the opposite scenario: up by 25%)

2. You buy a stock and within 2 weeks, you read news that a famous fund manager has recently sold a huge chunk of their holding in this company (or play the opposite scenario: the fund manager has recently bought a huge chunk of this stock)

What individual investors usually fail to understand is that equity investment is super personal. They also end up asking wrong questions (to themselves and to the "experts" in social media). "Which stock to buy?" "Should I sell xyz stock right now?" "What is the target price for abc stock?" etc. 

There may be 3 ways to increase your net worth via equity investing

1. You buy a stock, keep it for a relatively long term and enjoy the dividend it pays

2. You buy a stock, keep it for a relatively long term, see the value of the piece of business you own appreciate over time- because the business is doing well

3. You buy a stock, the price of the stock goes up, you sell it to make money

There is no right or wrong way among the above three. You can probably use the combination of above three to increase your net worth. 

I enjoy going to two mom-and-pop shops near my home. One sells groceries and the other is a bakery. Nothing special goes on there, but I enjoy watching them sell. Both are relatively small in size. I go to the grocery, get milk, ice cream, snacks, vegetables. I go to the bakery, get bread, cakes and guess what, this bakery has a small unit where they sell fruits and vegetables too. Both shops have similar traits. Both are literally mom-and-pop stores. Owners are the workers there. Both focus on fast selling. Whatever the customer wants is right in front of them and is quickly packed, weighed and given. Both use their limited space very well. They don't just sell what a typical bakery or grocery store would sell- but something more. Both have a car and a scooter. Car used to get things from wholesale market and scooter used for home delivery within a few kilometers- usually done by an assistant worker. 

Why is this topic even relevant to this article?

Owners of both the shops have made pretty good amount of money for themselves. Both have survived for a long time even though bigger malls and online shopping have risen in popularity. To add to this, both shops are right next to each other, selling many common items too!!

There are a lot of things to learn from this and apply in our equity investing- I will probably use my next blog for this. As you might realize sooner than later, my intention is not to provide stock tips, but to slowly enable the reader to ask the "right questions". It might take a few blogs before we reach this stage, but hang in there! 2 minutes of reading a week might not harm you!

Recently, I have gained a lot of interest in watching interview of many Indian fund managers. Available for free on YouTube and usually are knowledge rich! Also, I have loaded up on a number of books on my Kindle app. Many a times, I don't even bother to check the name of the author. I read a few pages available as sample and if I like it, I hit buy. They are not usually pricey. 

A few points that I strongly believe in (and end this blog at that. Yes, I will probably write shorter blogs, each blog appearing like a teaser, but collectively delivering some value)

1. Learning direct equity investing is a slow and interesting process (provided you are really are into it). The "kick" it gives you is slow and pleasurable. If you want a quick high, drink a carbonated drink/vodka/have sex.

2. Like any other skill, you need a keen interest and practice to master the skill of equity investing

3. Equity investing is more of an art than science. It probably needs 10% mathematics (that you learn when you reach middle school) and the rest is your interest, practice, lot of relevant reading and watching. If some of these points seem repetitive, they probably are, for a reason. 

4. There's a lot of noise around you. You become better when you master the skill of picking useful information from this noise

More to follow in my next blog. Happy investing!

  

A review on "Let's Talk Money: You've Worked Hard for It, Now Make It Work for You"

Disclaimer: 

Reviews are subjective. What I like or dislike about this book might not be the same things you like or dislike about it

This is not a paid/sponsored review. 

Name of the book: Let's Talk Money: You've Worked Hard for It, Now Make It Work for You

Author of the book: Monika Halan

What is this book about?

    A holistic guide on how to get your finances in order. The books talks about having an insurance for yourself, segregating your money pool into various accounts, investing (Equity and Debt instruments), Asset allocation, retirement planning etc. The book touches upon various investment buckets to put your money in.

I'm a beginner in financial world. Would I be able to understand this book?

    Yes. This book is written in a simple manner. Helps a beginner understand money and investing well. In fact, this book might be more useful for a beginner than for someone with a fair knowledge already on money, stocks, debt and mutual funds.

If I were to buy only one book on money and finances, would this book be sufficient?

    No. This book is a great beginner for one to understand how to get your finances right. It helps you understand various asset classes, helps declutter various financial products and gives you a path forward. The book doesn't provide you suggestions on individual stocks or mutual funds (the purpose of this book is not that anyhow). The author could have made the asset allocation part easier to understand by putting the information in a pictorial way than putting a lot of verbiage. Interestingly, the book has a dedicated chapter on Mutual funds, yet doesn't stress a lot on index ETFs- something that I felt should have been given much more importance.

Does this book suggest which stock or mutual fund to buy/sell?

    No.

Is the book worth its price?

    Oh yes, definitely! At the time of writing this review, the book is being sold for less than 300 Rupees on Flipkart and Amazon. A great bargain for an awesome book! You'll probably benefit much more than what Rs300 can get you. How to manager your money, how to plan for emergencies, what are the various investment avenues available in India are all important steps to attain financial independence. This book serves great purpose in that regard.

Any real world purpose this book has served you?

    Often, I used to get confused after visiting a branch of my bank. Almost always, a banker would talk at length about their product (usually a ULIP), show some illustrations based on my age and the investment amount. I would get lost in that clutter and fail to understand if that was worth investing. This book helped understand this product better. Helped me make an informed decision on whether to go for this product or pass it.

    I didn't understand Term insurance well, before reading this book. I didn't know if it made sense to forego the premiums you pay, for the cover they provided. This book helped understand how term insurance can fit in your overall financial stability.