16 May 2015

Becoming a Value Investor using Nifty PE Ratio

First of all, I am overwhelmed with the responses I got for the financial concerns and issues survey conducted few days back. Thanks to you all, there are so many feedbacks that I am still reading through all of them.

And to be frank, I was surprised to see so many people being so honest and more importantly, aware of their financial issues. This awareness in itself is like a quarter (not half) battle won. I plan to regularly take up issues raised in the survey and do detailed posts around it. And here is the first one…

One of the readers had an interesting concern:

I am not a value investor. And nor can I become one as I don’t have the time to monitor or analyse stocks. But I still want to become a sensible investor who invests more when there is panic around. I have read that it’s wise to Buy Low and Sell High. I don’t want to think much about Selling-High right now, as I am pretty young. But I do want to invest more when everyone else is selling, i.e. I want to Buy-Low. But if I go for individual stocks, it can be risky. For someone like me, it makes sense to stick to mutual funds. But how can I know when to Buy More. Even if I invest regularly, shouldn’t I be buying more when markets are down and I have additional funds?

That’s a pretty reasonable concern of the reader. And I think that many among us do not really have the time to become real investors. We are better suited to piggyback on expertise of others.

So what I understand from this question is that he wants to become a Value Investor, without bothering too much about picking individual stocks.

Fair enough…I would say…

By the way, I don’t consider myself to be a value investor. At most, I am an opportunist who is interested in buying good companies, at relatively cheap prices and holding them for very long periods of time. And yes…every now and then, I do take up small short-term speculative positions as well. But these positions are small and generally not more than 5% of my overall portfolio size.

I know…the above paragraph is more like a disclaimer. So anything I say from here onwards should be considered as coming from the mouth of a self-confessed non-value investor and not an expert of any kind. :-)

But jokes apart, it’s a fact that 95 out of 100 people who invest in stocks, would be much better off if they do not invest in stocks directly. They should rather stick with well-diversified mutual funds. And I am saying this not because I consider myself to be an expert or an authority in something (on the contrary, I am a pretty regular guy as detailed in 17 Unknown but Honest Facts about me). But because successful investing is more about our own personalities and discipline rather than just about picking the right stocks.

A person may have the knack of finding great companies selling at low prices. But what is the use of it if he does not invest a significant amount in that company?

To explain this, lets take an example. Suppose your overall portfolio size is Rs 10 Lacs. Now you consider yourself to be a good investor and find a good stock selling cheaply. But you only invest Rs 5000 out of the Rs 10 lac in this stock. This stock goes on to become a multibagger (10X) – your Rs 5000 investment becomes Rs 50,000. But at an overall level, your portfolio of Rs 10 lacs only moves up by Rs 50,000 (or Rs 45,000 to be precise) ~ to Rs 10.5 lacs. Nothing much to boast of. Right?

So it is never just about picking the right stock. It’s also about position sizing and how convinced you are about the stock (and a thousand other factors).

Successful value investing is also about being prepared for the rare investment-worthy opportunities. This means that even if you have chosen the right stock, and are ready to allocate a significant part of your capital to this stock, you still need to have the cash to invest in the opportunity. Because if you don’t, you cannot become a value investor, of for that matter even a decently good investor.

So what should an individual who wants to do value investing, but not through specific stocks, do?

The answer is not very complicated. But there is a catch, which I will disclose after giving the solution.

Lets break down this problem statement into 2 parts:
  • Identify situations when it makes sense to invest additional money
  • Identify investment options where one can invest 

Here is the solution…

Part 1

It is not difficult to identify situations where it makes sense to invest more (and as much as possible) for an average investor. A real value investor can go and find undervalued stock in a bull market. But an average investor needs to be right first and then think about the return percentages. And chances of being right with individual stock picks are lower than that of being right about investing in a group of companies.

So here is an indicator (or rather 3), which give you helpful advise about when to invest more.

PE Ratio India Stocks

PBV Ratio India Stocks

Dividend Yields India Stocks

If you go through these above tables you will realize a clear correlation between these indicators (P/E, P/BV and Dividend Yields) and Returns you can ‘expect’ to earn when you invest on basis of these indicators. And here, by investing I mean – investing in a large group of stocks and not in individual stocks.


Lower the P/E Ratio when you invest, better your chances of getting higher returns. (Proof)

Lower the P/BV Ratio when you invest, better your chances of getting higher returns. (Proof)

Higher the Dividend Yield when you invest, better your chances of getting higher returns. (Proof)

It is as simple as that. And a few years back, I even found a range of P/E ratios, which seem to control Indian markets. You will be surprised to see how clear this PE Band is!! I was mightily surprised when I say it first. Here is another interesting analysis of how much time Indian markets spend at various PE levels.

Now you would want to know how to track these indicators regularly. The answer is that you can either track it using this link on NSE’s website. Or you can check out monthly updations, which I make to State of Indian Market page.

Part 2

Now comes the second part. Once you know that it’s a no-brainer to invest at a particular moment, and you have the cash power to do it, the question is where to invest.

I know you would love to invest in individual stocks, see them become out-of-the-world multibaggers and boast of being a great stock picker. But lets be honest. It’s not easy at all. Even expert investors are unable to find great stocks easily. So for all practical purposes, individual stock picking is best avoided by average investor. End of discussion.

So where does one invest?

The answer is… in a group of stocks. A well diversified selection of stocks belonging to various industries, which as a group help in mitigating the risk of getting it wrong by investing in individual stocks. Yes. I am talking about mutual funds.

When its time to invest more (identified in Part 1), you need to invest heavily in well diversified and proven mutual funds (Part 2). Done. Nothing else to do. You will be rich. :-)

So the action plan for you is:

  1. Invest regularly in a few good mutual funds through SIP.
  2. If possible, increase SIP every year by 5% to 10%
  3. Keep a regular track of P/E, P/BV and Dividend Ratio (DY) of overall market.
  4. If markets go down and with it PE, PBV goes down and DY goes up, you would do well to invest additional money in these mutual funds.
  5. If the thought of investing more when your portfolio is going down does not make sense to you, then you need to rethink whether stock markets are a place for you or not.

The above approach is like giving booster shots to your portfolio when markets are going down. I have done a comprehensive 4-part analysis on investing more when markets are down. Results of the analysis were surprising as it proved that just by keeping it simple, i.e. investing a constant amount regularly still made a lot of sense for majority of investors. But if you have additional money, which you can invest and forget for few years, don’t hesitate to put it in mutual funds.

I hope that with this post, I have been able to clarify on how to become a value investor by using just plain, simple mutual funds. Let me know if you all have any questions or suggestions for this post. It will help me improve future posts addressing financial concerns.

Note – Whenever you think about investing in stocks or mutual funds, make sure that you are doing it for atleast more than 5 years. There have been 5-year periods when stock markets did absolutely nothing.

6 May 2015

Tell me Your Financial Problems, Questions & Concerns. I want to write more about Your problems & Help You with solutions.

In recent times, I have been making conscious efforts to write more on topics which are useful for readers and not just for me. And I get numerous mails from readers asking me to help them out with following issues:
  • How (& why) to switch from safe FDs to Mutual funds?
  • How to get rid of complex insurance products and what to do next?
  • What is the best combination of safe savings (FDs, NSCs) and risky investments (Stocks, MFs)?
  • Should I buy a house or continue staying on rent?
  • Should I invest in MF when my time horizon is less than 5 years or even 3 years?
  • I have just started earning. How should I manage my cashflows?
  • Should I pay my loans and invest simultaneously?
  • Why do I end up with no money at the end of every month?
  • How to rationalize my portfolio of 30+ mutual fund schemes!!

And that's not all. I even get questions like these:

Now its really tough to reply to each one of these mails individually. There are just too many and each and every one requires, a lot more information about the individual’s finances, before anything can be said.

So I have decided to do something, which is better for all of us.

I am floating a small survey, where you can share your financial problems / questions / confusions. I will then collate all these points and start writing about as many of them as possible.

This will serve two purposes:

  • I will do the research and try to come up with a solution to the problem. I will do a post about the issue. It will help me, as well as you in getting a different perspective (if not the final solution).
  • Once the post is published, the approach can be questioned / debated and streamlined basis feedbacks and comments received from other readers.

So go ahead and click the button below. Don’t worry…it’s a short 2-5 minute survey. And it will also help you in gauging your financial fitness.

Note – You can choose not to disclose your identity if you feel like.

If the survey does not open on clicking the button above, please click here.

I plan to write on all the topics which I can gather from the requests I receive. So please share as many queries and questions as possible.

3 May 2015

17 Honest Facts You Might Not Know About Me

  1. Quite contrary to my interests now, I graduated to become an engineer. A first in a family of doctors and lawyers.
  2. Even though I am a MBA now, my legs are still pulled for being the least educated one in my family – where many are double post-graduates and PHDs.
  3. When I was young, I wanted to become a painter – then a locomotive driver – then an astronaut. As of today, I have not been able to manage any of these three.
  4. I remember being pretty good at drawing and sketching. I even got admission in India’s best architectural college. And that to without doing any preparation for competitive exams. But somehow I never thought of becoming an architect and so never went for it. You might be wondering that if I was not interested in it, then why did I even give the exam? The answer is because of forced by my friends to give all the exams, which they were giving. :-)
  5. I have the honor (which some refer to as the biggest mistake of my life), of quitting a very safe government job. I don’t regret it. But somehow, the people who come to know of it seem sadder about it. :-)
  6. Currently, I have a day job and Stable Investor is not the only thing I do.
  7. I started a financial blog way back in 2005. But somehow, it never got many readers. So I deleted it. I once again tried my hands at financial blogging in 2011 when I started Stable Investor.
  8. I have been an avid blogger since 2003 and used to maintain a personal blog till 2010. But once I started writing here, there was almost zero motivation to write on the personal one. I am once again planning to start a personal blog.
  9. In 2002, I started a free monthly E-Magazine. After 2 months, I made it paid. Any guesses on how many people bought it? Zero!
  10. My mother and wife are much better at managing money than me. I still wonder how they do it.
  11. I love travelling. And if possible, I want to move to the mountains permanently.
  12. I got interested in Buddhism (as a way of life) in early 2000s. Never converted though. But still believe a lot in simplifying life. Till now, it doesn’t seem to be getting any simple. I am still trying.
  13. When I was young, I used to maintain cricket record books. And I used to update these books everyday after reading the sport section of the newspaper. Even today, quite a lot of my time online is spent browsing through the Statistics section of ESPN-Cricinfo’s website.
  14. One of my dreams is to write a script for a movie about stock markets. And to tell you the truth, the story is already half-baked in my head. So if you know some directors or producers or someone in Bollywood or Hollywood, you now know whom to refer. :-)
  15. There are quite a few people, who think that it was after talking extensively with me, that their finances are in much better shape today. This at times, makes me feel that it is very easy to give advise, but very difficult to implement it personally.
  16. I love to write. When I was a kid, I used to write every day during my summer holidays. And that was not for completing some summer projects or homework. It was just for the heck of writing.
  17. I am a non-vegetarian. I can eat hundreds* of kebabs when in my hometown famous for world famous kebabs.
*I exaggerated. But can still manage around 20.

17 Fact About Me

Congratulations on having read through this list. I am not sure if everyone would be interested in reading a list of fun facts about a financial blogger’s life. But I still wanted to share all this with you.

So if you did manage to read all of it, I thank you. And if you didn’t, never mind…I don’t think you will miss anything important. :-)

25 April 2015

Case Study – How a 10-Year delay can Destroy your ‘Get-Rich’ Plan?

It’s not easy to become rich. And while making such a statement, I am ready to ignore the definition of ‘Rich’ too. If you don’t consider yourself to be rich, then you already know how tough it is to become one.

And just to verify the concept of ‘Being-Rich-Is-Difficult’, go out and ask someone you consider to be rich. I am sure that they will also tell you that it is not easy to become rich. And it’s even tougher to stay rich.

But no matter what anybody else tells you, my view is that the biggest tool you have in your journey to become rich is Time. If you have time on your side, even small amounts can become eye-popping(ly) huge – as you will see in this case study.

So lets get straight into a some numbers….

There are two friends named Vineet and Raunak. Both are of same age (25) and earn decent amounts of money, which theoretically gives them the option of investing a fixed amount every year (after expenses).

Scenario 1:

Vineet is frugal and believes in saving. He knows that he does not have a rich inheritance and hence, needs to save for himself and his family. Vineet starts investing Rs 1 lac every year. But he does this only for 10 years between the age of 25 and 35, i.e. he saves a lac rupees every year for 10 years and then stops.

His total contribution is Rs 10 lacs (between age 25 and 35).

Raunak on the other hand thinks that since he is quite young, he can postpone saving/investing for future. He thinks that if he does not save starting from the age 25, and does it after a few years…even then he will be able to become very rich.

So in this example, Raunak starts investing the same amount as Vineet (Rs 1 lac) at the age of 35 and continues doing it upto the age of 60.

Raunak’s total contribution is Rs 25 lacs (between age 35 and 60).

Now comes the day of reckoning. Both have reached the age of 60.

What’s your guess? Who has more money at age 60?

It might sound surprising, but the answer is Vineet. Having contributed just Rs 10 lacs, Vineet now owns a huge corpus of Rs 6.65 Crores!!

And what about Raunak? The answer is that he becomes rich too. But having contributed Rs 25 lacs, he has accumulated a much smaller corpus of Rs 2.36 Crores. And that is despite having invested for 15 more years than Vineet.

Scenario 1: Vineet (Rs 6.65 Crores) – Raunak (Rs 2.36 Crores)

Here is the calculation sheet for your reference. The return assumption in this and further scenarios is 14% per annum.

Delay in Investing Scenario 1

Lets go on and evaluate a few more scenarios…

Scenario 2:

Vineet is still frugal and still believes in saving. Like the first scenario, Vineet here also invests Rs 1 lac every year from the 25 to age 35. But Raunak has changed. Though Raunak still does not save anything between the age 25 and 35, he now does realize the power of compounding. So he decides to invest the double amount (than that of Vineet) between the age 35 and 60.

That is, Raunak invests Rs 2 lacs every year for 25 years.

So in this particular case…

Vineet’s total contribution is Rs 10 lacs (between age 25 and 35).

Raunak’s total contribution is Rs 50 lacs (between age 35 and 60).

Once again, the day of reckoning arrives and both reach the age of 60. What’s your guess now? Who has more money at 60?

Answer once again, and surprisingly enough is Vineet!

Vineet still attains a corpus of Rs 6.65 Crores as in the first scenario. But Raunak after doubling his investments is still able to reach Rs 4.73 Crores. Now you see? This is the power of investing early. And so big can be the difference when you delay your investments. 

Here is the calculation sheet for your reference.

Delay in Investing Scenario 2

Scenario 2: Vineet (Rs 6.65 Crores) – Raunak (Rs 4.73 Crores)

Lets move on to other scenarios now...

Scenario 3:

Now lets make this analysis more realistic. As we progress in life, our incomes generally rise. And so do our expenses. So shouldn’t our investments and savings also rise with time?

Suppose you start your career earning Rs 20,000 a month. And you also start investing Rs 5000 a month at that time. After a few years, your salary is almost Rs 70,000. And if you are still investing just Rs 5000, then you are fooling yourself. Investing is done for one’s own future. And it’s one’s own responsibility to maximize it as soon as possible.

So lets get back to this new scenario.

Here Vineet starts by investing Rs 1 lac at the age of 25. But over the next 10 years, he increases his yearly investment by a small 5%. So over a period of 10 years (between 25 and 35), he invests Rs 12.58 lacs.

On the other hand, Raunak starts late at 35 with Rs 1 lac a year. But he also starts earning more and more every year and is able to increase his yearly investments by 10% (double that of Vineet’s 5%). His total contribution over a period of 25 years (between 35 and 60) is Rs 98.3 lacs.

Day of reckoning…

I wont even ask you this time. :-)

Once again, Vineet has more money when he retires at 60!! Vineet manages Rs 7.94 Crores in comparison to Rs 5.08 Crores accumulated by Raunak.

Isn’t this amazing? Starting as early as possible and just investing for few years and then just waiting. And after a few decades, you have more money than someone who started late, invested many times more than what you invested.

This is indeed the 8th Wonder of the World. We need to give standing ovation to the concept of Compounding. :-)

Here is the sheet for 3rd scenario’s calculation.

Delay in Investing Scenario 3

Scenario 3: Vineet (Rs 7.94 Crores) – Raunak (Rs 5.08 Crores)

So lets move on to the 4th scenario.

Scenario 4:

There is only one change in this scenario over the 3rd one. I am making this scenario more realistic. And the change I am making in this one is based on the question that why should Vineet stop investing at age of 35? Shouldn’t he continue further and upto the age of 60?

So here is it….Vineet does not stop investing at 35. He continues investing upto 60 and increasing his contribution by 5% every year. Compared to him, Raunak increases his contribution 10% every year.

To cut the long story short, after 60 years, Vineet has Rs 13.3 Crores and Raunak has Rs 5.08 Crores.

I have nothing more to say for this scenario. :-)

Scenario 4: Vineet (Rs 13.30 Crores) – Raunak (Rs 5.08 Crores)

Here is the sheet for your reference.

Delay in Investing Scenario 4

I can go on and on with more scenarios but that would only help the case of investing early, which we have already proven in previous four scenarios. For example, we can reduce the return assumption from 14% to smaller numbers, etc. But the point which I am trying to make through this post, is, that there are some really amazing benefits of starting early when it comes to investing.

You can start later and still get to the same final corpus. But that would require you to earn much higher rates of returns…and that too for many years – which is neither easy nor practical.

And just to illustrate this, here is the 5th scenario :-)

Scenario 5:

Vineet invests Rs 1 Lac for 10 years (from 25 to 35)
Vineet’s Return assumption = 14%
Corpus at age 60 = Rs 6.6 Crores

On the other hand,

Raunak invests Rs 1 Lac for 25 years (from 35 to 60)
Raunak’s Return assumption = 20%
Corpus at age 60 = Rs 6.8 Crores

Scenario 5: Vineet (Rs 6.6 Crores @ 14%) – Raunak (Rs 6.8 Crores @ 20%)

Both have accumulated almost same corpus after reaching 60. And Raunak has started 10 years late and invested for 15 more years. But do you think 20% per year return can be attained? I don’t think so. It’s almost impossible. It is not a reasonable expectation to have.

For your reference, here is the calculation sheet of Scenario 5

Delay in Investing Scenario 5

All these five scenarios show that if you start early, you don’t need to earn eye-popping rates of returns to accumulate big sums of money. All you need is time. And when you start early, you have a hell lot of time. The earlier you start, longer does your money have the time to grow.

And to end this analysis, I leave you with a very small 4-Step guide to help you become amazingly rich:

1) Start early

If possible, invest from the day you start earning your first salary. You would be surprised at how much these small amounts can increase when invested for long periods of time.

2) Treat Investments as Monthly Bills and be regular with them.

Unless and until you have the discipline to invest regularly, you can forget about accumulating a large corpus by the time your retire. You should invest first and then use remaining money for expenses.

3) Do whatever it takes to maximize the amount you can invest

First thing is that no matter what happens, you need to invest regularly. And in case you have surplus money, make it a point to invest as much of it as possible.

4) Be patient. And in long term, you will need loads of it

One of the biggest mistakes people make is that they withdraw/touch the money they start accumulating. The biggest problem of compounding, or I should say the power (not available to many) is that it works best, when you do not disturb it. In initial few years, the results will seem extremely slow. And you will start losing your faith on it. But hold on. In a few more years, you will realize the power of compounding.

This post clearly indicates that there is price to be paid for any delay in investing. And mind you, this price is not small. You can delay and still become rich.  But remember that the biggest side effect of procrastination (when investing) is that you will not become as rich as you might have become, had you not procrastinated.

Investing Later Now Procrastination

So irrespective of your age, do not wait any further. Go on…Now is the time to begin investing for long-term. And remember that the cost of delaying your investment is enormous. Even one year makes a huge difference.

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