The underlying theme of this blog is to change the way you think about equities. If you have been lured into equities by some glib talking bank RM or IFA be aware that equity is not as sexy as you think it is. Or you were made to think. One of the biggest grouse I have against equity sales people is raising expectations. A person who is happy with 8% pa interest in bank fixed deposit need not be lured into equity with a “consistent 18%” as some well educated IFA do in their story telling! For a person earning 5.6% post tax return why is a 9% story too bad?

Explain inflation, postponing income tax, shifting from regular taxation to capital gains tax and your equity story is a best-seller, is it not? Then there is tax free dividend (ok, I am continuing the myth, dividends are expensively taxed).

As an equity investor remember even Berkshire Hathway has had a poor 20 year run -for whatever reason. WB would have been better off indexing in the value portfolio of SnP perhaps at least over the past 19 years (in 20 years there is a slight – 0.34% outperformance after fees).

Concentrating on risk is a better option than concentrating on return. There is enough proof in the world (read world war 1 stories on how German Navy used slower sturdier boats which outlasted the faster, lighter boats of the English), Cheteshwar Pujara (Rahul Dravid style) vs Sehwag style. Lasting longer in the investment field is far, far more important than running fast. It is a marathon – hence endurance is more important than speed. Direction, not speed is the determinant of creating a 40 year or a 100 year portfolio story. “Price is what you pay, Value is what you get” – the famous lines of Warren Buffett is really a classic quote.

The problem is in knowing when a share is quoting at a ‘reasonable’ value and when at an ‘unreasonable’ value. For example McDonalds used to trade at a PE of 85 in 1972. If you had bought it at that price, you would have STILL got a 40% return over the past 40+ years (looks good) but over the past 10 years McD has given only 1.75% return (Sensex would have given you a better $ denominated return). If you were a value investor who thought that a pe over 20 was over valued, you would not have been in equity markets for very long periods of time. However if you had bought Phillip Morris in 1972 at a pe of 26, you would have got 17% return over 40+ years and about 7% over the past 10 years. (data from Morningstar).

Which one would you have been happy with? over 40 years? but what over 10 years? This is the problem of the equity story telling. Just telling you what worked for me is useless. You have to see what a few thousand people are telling you, and create your own equity story. To say that X invested late in life, but got 30% cagr, or looking at successful promoter stories (Wipro, D’mart), or esop stories (Infy, Wipro, Tcs, Hdfc bank, Hdfc) and saying Esop will work for you are all bullshit. Most writers are lucky, and are perhaps outliers.

What will work for you is –

a) start early b) concentrate on risk c) invest regularly d) get good advice, at a fair price.

anybody telling you anything else is just a story teller. Of course it is a true story, but it may not work for you.

Legally it means : “Past performance is not a guarantee of future performance, AND that some of the performers here are telling you their LUCK story, not their SKILL story”.

Clearly God has given me far more than what I need. Dayenu.

ps: I have used American examples so that I don’t have to worry about our regulator saying that I am looking for brokerage business (I am not, but regulators can say anything)

 

 

 

 

 

 

 

 

 

 

 

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  1. Hi Subra sir,
    What is your comment on some of the equities like Gillette, Asian Paints, Nestle, Godrej, Dabur etc.. Which ‘NEVER’ dropped the P/E below a big number (50 to 90 range).. But still have given fabulous returns both in bull and bear runs. As soon as it falls people rush in to buy. It seems to be continuing for ever.

  2. “Concentrate on Risk rather than Return”_____ Golden advice. Will less experienced investors be able to understand if not follow it.
    But then I understood “Risk Management” after taking a beating in “Fundamental analysis based recommendations ” which were against stop loss!!

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