Core Principles for Wealth Creation – Believe in the India Story!!

All of us invest in equities to become wealthy. We would like to cover the core principles and beliefs of those who have generated huge money from equities in a series.

Let us start this today with the first principle – “Believe in the India story”Our economy is poised to grow manifold over the next two decades. This will result in strong corporate earnings. Those who remain invested in high quality companies for the long term (ignoring all the noise and negativity) will make enormous returns.

Nilesh Shah captured this very well in a letter to Jim Rogers in 2017. It makes for compelling reading. The article was written in response to Jim Rogers expressing regret for his exit from India in 2015. This was of course gleefully picked up by our vested media who thrive on such news. Do read this Livemint article on why Jim Rogers exited.

We will show how this has generated outsized returns for great investors in India in the past and will continue to do so going forward.

India will be a global leader by 2030 and beyond

The Indian economy will maintain 7% plus growth and will be amongst the top 2 or 3 countries in the world over the next few decades. Last week Standard Chartered released their annual note on GDP growth. As per the article, India’s GDP in PPP terms will overtake the US by 2030.

For a broader picture, there is an excellent PwC report on the World in 2050. Six out of the seven largest economies in the world would be what are emerging economies today. The implications of this for investors are enormous and positive.

Titan and Rakesh Jhunjhunwala

Let us take an example of how remaining invested in a high-quality company which closely tracks the India consumption story generates enormous wealth. Titan is a great Indian company which has grown purely based on India consumption. Rakesh Jhunjhunwala had purchased 6 crore shares in 2002-03 at a price of Rs 3 per share (yes, Rs 3 !!).

Today he still holds 6 crores shares with a valuation of Rs 7000 crores!! That is the power of compounding based on the belief in the long-term story. During this period, Titan and the jewellery sector has gone through turbulent times driven by changes in regulations, consumer behavior and gold prices. But the ability of the management to adapt and continuously move into new sectors has reaped rich dividends.

Need to invest in quality companies and dismiss the short-term trends

Of course, for every Titan, there are several other investments which may have not paid off for him. But the point is that every investment need not pay off!! Identifying high quality companies which benefit from the India story will give great results over the coming decades.

This long-term journey of wealth creation will have many short-term tests. But we need to absolutely believe in the India growth story over the next two decades and continue to be invested in high quality companies which benefit from this growth.



Secret to Investing Success

As we start 2019, we would like to reiterate the importance of sticking to your long-term investment plans.  We all tend to get influenced by the near term euphoria or the gloom as per the situation and decide on our investments.  We feel very confident to invest when things look perfect and hesitate to invest when the things turn little gloomy.

But to be successful in investing, you have to overcome this euphoria or gloom mindset but rather be consistent.  As the great investors across the world have experienced and remarked, this consistency in behavior gives you a great edge, since data shows that most investors do not have this discipline and in the process their investment returns suffer. A classic example in the recent past, is the gross equity investments in mutual funds in Dec’18 have come down by 75% as compared to Dec’17 as the markets fell in 2018!!

From the data we sourced from the AMFI website, we have found that by sticking to your investment plan, you would have got an average of 25% more returns over the past 5 years.

Equity mutual fund flows between 2013 and 2018

In India, almost Rs 5 lakh crores have been invested in equity and hybrid equity funds between 2013 and 2018.

Flows/Month Rs Crore 2013 2014 2015 2016 2017 2018
Yearly Investment Rs Crore -8060 56287 84899 68573 196024 93286
Proportion of Flows -1.5% 12.25% 16.75% 13.55% 38.65% 18.45%

Some interesting data about these mutual fund investments

Whenever the stock markets do well in a year, the flows increase tremendously and the reverse when the market tanks.

  1. In 2017 when the markets were positive, investors put in a record 1.96 lakh crores
  2. In 2018 with the market falling, investments dropped 50% to 0.93 lakh crores!

Consistent investing has given average outperformance of 25% over five years

Let us compare the results based on a Rs.5-lakh investment between 2013 and 2017 in two scenarios.

In one scenario, we look at the results by splitting the Rs5 lakhs and investing it in the same proportion as the funds got invested in the equity markets by investors as above.  As the flows increased, we also increased our investment in the equity markets.

In the other scenario, we just did our regular disciplined investing.

The results based on investing in large, mid and small caps are given below:

 Portfolio Value Sensex Mid Cap Small cap
Flow Based Investing 604,683 572,111 480,153
Regular Investing 680,992 759,374 647,156

Flow based investing in small caps would have given negative returns over five years. Consistent and disciplined investing has outperformed in each scenario across categories.

Learnings for us as investors

Over this five year period, in each case, regular and consistent investing has yielded superior returns compared to flow based investing.

Often these flows are impacted by previous year returns as well as macro news (crude oil, interest rates, GDP growth, inflation) and political news. One more reason for us to ignore all this and invest in quality funds in a consistent manner. This behavioral edge will give us consistent returns in the long run.

Note to Investors – January 2019

Wish everyone of you a wonderful, healthy, prosperous and peaceful 2019!! Thank you for all your support over the years during this journey of wealth creation and we look forward to partnering with you over the long run to achieve your goals.

2018 was certainly an action-packed year dominated by macros (oil prices, currency) and government policies (long term capital gains on equity, mutual fund scheme categorization etc.).

In 2019, various macro queries persist – the general elections, global tariff wars, RBI governor change etc. How would all this impact the long term returns of our investment portfolio? As we all grapple with these queries, let us take a quick look at the 2018 results and the way forward

Quick Recap of 2018

After a steep rise in 2017 the markets were muted in 2018. While the large cap index gave 5% returns the mid cap & small cap indices had actually fallen around 15% and 30% respectively.

While the Indian markets have fallen, globally equity markets fell even more with an average 9.5% drop while Europe and other Emerging markets fell by 12 to 15% in local currency. Do take a look at these returns worldwide.

Several individual stocks had much steeper falls resulting in steep corrections in mid and small cap stock valuations. For individuals those who had significant holdings in large caps the fall was cushioned. This highlights the importance of fund allocation within equity also.

Investing in 2019

2018 was the year when volatility made a return and 2019 promises to be no different!! The correction in market along with the improved macros (falling crude oil prices), this has made long term investing more attractive in the long run.

  • Brace yourself for volatility in the short runas India faces general elections in 2019. Historical data shows that the election have some impact in the short run and minimal impact in the long run as shown by this research paper
  • 2019 will continue to be the year of investing via the SIP and STProutes
  • Mid and Small cap fundshave generated wealth for investors over the long term and will need to form an integral part of our portfolios.

As always, the golden principles of long term investing namely, appropriate asset allocation, investing in high quality companies, adequate risk management and ignoring the noise will pay rich dividends for all of us in the long run. The ability to manage our emotions and behavior is the key to long term wealth creation.

Here is wishing you a great investing experience in 2019!!

Venkat and Prasanna

Understanding recent changes to the BSE Sensex

As Indians get more comfortable with investing in equities we see large amounts of money being invested into Indian equities.  The most well-known representation of our market are the major indices – the BSE Sensex and the Nifty 50 Indices. Today let us take a closer look at the BSE Sensex and also how changes are being made to the index.

Some recent changes

Last week the BSE announced the latest changes to the Sensex which will be effective from 24thDec. Both changes are very interesting and worth examining:

  1. Wipro is being replaced by HCL. As pointed out by Livemint, this completes a full cycle!! In 2003 the BSE replaced HCL with Wipro and has reversed the decision 15 years later. Did Investors benefit from the original decision? The answer is a huge NO ! In these 15 years, HCL Tech shares have given four times higher returns than Wipro!! Yes, that is right – 4x the returns which Wipro gave.
  2. Adani Ports is being replaced by Bajaj Finance. With that the sector weightage for banks and financial services has increased to 41%. That is a very high concentration for one sector increasing overall sectoral risks.

Changes in the Past

  1. Let us look at what BSE did last November. They dropped Cipla and Lupin and added Yes Bank to the Index along with Indusind bank. As it is well known, Yes Bank has done extremely badly this year for various reasons. On the flip side, the pharma sector has begun to rally and dropping both the pharma names does not look like a great choice!
  2. In November 2015, the BSE dropped Hindalco when it was trading at 75 Rs. It is now trading at Rs 220 (up three times in three years). Similar to Pharma, the metal stock was removed at the bottom of the commodity cycle

Let us understand the diversification of the Sensex from other viewpoints

  • From a sector diversification viewpoint, the skew towards financial services is at an all-time high now. We have only 1 engineering company, 1 pharma company, no chemicals firm at all but 9 firms in financial services. There is only one non-ferrous company – Vendanta in the index
  • From an ownership viewpoint, there is only one genuine multinational in the Sensex. There are some government owned companies (ONGC, Coal India, Power Grid, NTPC)

What explains these Irrational decisions?

Even accounting for the fact that it is hard to predict future earnings, it is difficult to understand many of the decisions. The answer lies in their selection criteria (provided as an Appendix here). The selection is based purely on size (market capitalization) and liquidity (trading frequency, average daily trades, turnover etc.). Of course, there is a generic term called “acceptable track record”.

What should we be doing?

In the long run, as equity markets evolve, more mature benchmarks with superior selection capabilities will emerge. Until then, diversified multi cap mutual funds run by experienced fund managers with a strong track record and clear investment process will continue to outperform such indices in the long run.


BSE Sensex Securities Selection 

The general guidelines for selection of constituent Securities in S&P BSE SENSEX® are as follows.

A. Quantitative Criteria : 

  • Market Capitalization :The Security should figure in the Top 100 companies listed by full market capitalization. The weight of each S&P BSE SENSEX® Security based on free-float should be at least 0.5% of the Index. (Market Capitalization would be averaged for last six months)
  • Trading Frequency : The Security should have been traded on each and every trading day for the last one year. Exception can be made for extreme reasons like Security suspension etc.
  • Average Daily Trades :The Security should be among the Top 150 companies listed by average number of trades per day for the last one year.
  • Average Daily Turnover : The Security should be among the Top 150 companies listed by average value of shares traded per day for the last one year.
  • Industry Representation :The only difference between SCM and TCM is that SCM does not have the rights to clear the trades of other members he can only clear his trades, whereas TCM can clear the trades of any other member
  • Listed History : The Security should have a listing history of at least one year on BSE.
  • B. Qualitative Criteria :
  • Track Record :In the opinion of the Committee, the company should have an acceptable track record.

Global Wealth Trends

Season’s greetings to everyone as we all celebrated Diwali!! All of us work so hard to earn money and also plan our finances so that we are able to generate wealth in the long run. As we become global citizens, a good reference is the 2018 Credit Suisse Global Wealthreport which compiles and reports data on wealth generation across the world.

Global wealth trends

  • Globally wealth grew by 3.6% last year to 317 Trillion USD (adjusted for population growth) with 42 million millionaire’s world wide
  • The United States has generated 58% of incremental wealth over the last five years. This is even higher than the 40% share over the last ten years
  • Wealth distribution is extremely unequal. If you had more than 7.3 lakhs INR (10,000 USD) then you are richer than 64% of the world’s adult population

Global Wealth Trends Credit Suisse 2018

Wealth generation trends in India

  • At 6 Trillion USD, India accounted for less than 2% of the world’s wealth. This is despite a fivefold growth from 2000 to 2018
  • Wealth in India has actually grown at a slower pace than mature markets. We have 91% of our wealth in physical assets (real estate and gold)
  • We have only 9% of our overall wealth in financial assets. This is 8 times lesser than market leaders in wealth generation like the US (72% of the wealth in financial assets)
  • If you had more than 73 lakhs INR (100,000 USD) then you are in the top 1% of Indian families in terms of wealth

Key Takeaways

As we look at the trends across 15+ major economies, three key points stand out:

  1. Looking at wealth generation patterns globallythe move from physical (read as real estate and gold) to financial assets (mutual funds, insurance plans)is a once in a life time opportunity for wealth generation which has happened in mature markets. India will go through a similar trajectory and this opportunity is to be fully capitalized in the process of wealth creation
  2. We have global opportunities for wealth generation. Diversification into international asset classes is to be considered once we have built a firm base of assets in India
  3. Wealth inequality in India is worse than other markets. For many of us, education, family support, corporate growth and our skills have helped us move to the top of the wealth pyramid in India. We should be thankful that all of this has come together for us at the right time.

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Age and Equity exposure has little correlation – A study by Vanguard

Over the last five years, we have seen an increase in investments in equity. One common question is how much equity should we hold as we grow older!! There are various theories on this which range from simplistic thumb rules (equity exposure = 100 –age (in years) to complicated asset allocation models and calculators!!

What are investors doing globally

We recently came across a very interesting study in the US. A 2018 Vanguard studyof four million investors showed how the equity allocation varies with the age of the Individual.

Let us understand this better

  • The overall % of asset allocation to equity is much higher than what we expected. Equity allocation drops with age but the median still is 90% amongst the millennials (those born after 1980) and 63% for the silent generation (those born before 1945)
  • The minimum age of a person from silent generation is 73 years. And the average equity holding is 63%!!  Let us look at why is there is such a high asset allocation to equity.  Probably, those in the baby boomer and silent generation have seen significant gains from equity over the past 15 years and this has encouraged them to stay on in equity irrespective of advancing age
  • On the other hand, quite a few have zero equity exposure

It would be fascinating to analyze these numbers from an Indian perspective.NCAERand RBIhave done the most detailed research in this regard.

  • A 2016 NCAER study showed that between 70 to 90% of the wealth in India is locked up in physical assets (real estate, durables and gold bullion)
  • The interesting thing is that the asset allocation hardly seems to vary by age!! We hold 60-70% of our money in real estate and this does not reduce over time

How does this matter to us in India?

Too often our personal experience (how our equity portfolios have done for us over the last 1 or 2 years) influence our asset allocation decisions. The age of the individual or our past experience should not be the criteria to determine the level of equity exposure. More mature markets like the US are showing increased equity exposure over age and time.

As we keep emphasizing, asset allocation is a key decision which determines how we grow our wealth over time. While there are various thumb rules and calculators available, the allocation will depend on each family’s unique needs and it will also evolve over time.

Overall as Indians are making the shift from physical to financial assets like equity, an understanding of the risk adjusted returns and taking long term decisions ignoring short term fluctuations will help investor optimize their wealth and returns.