You Must Know
When people talk about stock markets being risky, they usually have two things in mind – i) choosing the wrong stock thereby losing money, and ii) markets going up and down (volatility). We have separated this into three parts namely Risk, Uncertainty and Volatility. To us, if there is a risk that we can identify in a business and, find that buying it can make a significant erosion of initial capital, then we simply avoid it, unless we get the stock really cheap, in which case we take an educated decision on whether risk is far far less compared to the reward associated with it. In other words, if we think the possible range of outcomes can be identified and a value can be assigned to those then we take a decision to buy the stock if we think all the risks are already valued into the price. An example may help here — Imagine, you know there is a “treasure trove” in a forest that is guarded by a lion. You can get the treasure only if you can reach there. Unless you are mindlessly desperate, we are sure you won’t venture out for it. It’s a known risk and it’s best to avoid it as the consequence of negative outcome (of you getting eaten alive) far outweighs the gain from a positive outcome (of you getting the treasure). Taking higher risk won’t increase your probability of returning back fully healthy and alive! In investments we also see risk the same way. If there is risk inherent in the business and not priced into its valuation, we simply avoid it. We only take risks if we believe all understandable risks are priced into the quote and nature of reward is highly favorable towards us.
Uncertainty and volatility are often confused with risk by small, new and retail investors. Let’s first deal with uncertainty. Uncertainty is a risk to which no probability can be assigned and it is unknowable unknown. For example, whether there would a medicine which give mankind immortality is unknown and presently no probability can be assigned to this outcome but, later on, if at all it’s being invented, one of the pharma company will bring it to the market and its certainty improbable for a construction equipment manufacturer to do so. But which of the pharma company would win the jackpot is not completely unknowable. There is equal probability for all major global pharma company to make the breakthrough if we assume today the progress in this field of research is disseminated and evaluated with same seriousness by all pharma participants. This example may look complicated but the point here is there are certain areas where our predictive power have limited ability to foresee the range of outcomes (uncertainty) and there are other areas where we can assign probability more confidently to a range of outcomes (risk). On a simpler note, if we have to assign what is the probability of a meteor hitting earth tomorrow and destroying it, would be an infinitesimally small non-zero positive number. We generally live with these types of uncertainties and don’t stop functioning and the same goes in the field of investing too. Volatility: It’s simply the rough weather and bumpy ride towards your destination. As long as our investment process and thinking are right and we know we are navigating and travelling in right direction towards our destination, we need to embrace or at least bear the vagaries of weather and road. The pleasure of reaching the destination will overshadow the excitement of the ride. You can exactly measure how many humps or potholes are there on the road or exactly how much downpour would happen but as long as you know your destination and drive carefully, the probability of reaching your home is much much higher than just getting stuck on the road. At the most your arrival may delay a bit but not aborted. It is same in investing. Volatility can be measured but can’t be avoided. Unless you can embrace it, it is fruitless to venture into field of investment. You can be guided towards the destinations and can be accompanied in the journey but you need to decide if this journey suits you. Also, there are pure randomness in daily price fluctuations which nobody can predict except TV experts and pink paper journalists!! In one sentence, there is no causality in randomness. We claim no expertise to know beforehand about market volatility but we know our investments. So, for us Risk in investing is avoidable but Uncertainty and Volatility can’t and we need to be ready to embrace it just like we embraced life in spite of many very low probability uncertainties we live with on daily basis. In reality of stock market, these vagaries at times give good opportunity to the skilled and prepared.
Of course you should diversify your investments if you want, depending on your age, investible surplus, investment objectives and temperament. We have no view on this, and do not intend to tell you what is best for you. However we can provide suggestions, based on your age and expectations, regarding the amount that you should invest in equities. (See below). All that we confidently claim is: you can demand and expect from us honest, unbiased, critical and understandable investment advice for buying, selling, holding, shifting or simply staying in cash for right opportunities if you decide to invest by becoming a part of our Trust Circle of Aveksat Equities. Suggestions, based on your age and expectations If you are looking purely for the safety of your capital for your ENTIRE investible surplus, then Bank Deposits or other savings schemes are most suitable for you. If you are looking for INFLATION PROTECTION of your ENTIRE investible capital then Mutual Funds, Tax Fee Bonds, Non-Convertible Debentures, Real Estate should ideally be your choices for investment. But if you are looking for long term wealth creation by beating inflation by a wide margin by the unique high compounding (as explained below in point no 6 ) effect of stock investment (illustrated with live examples here) then we strongly believe a significant portion of your investment, depending on your age and volatility tolerance, should be invested in common stocks of quality businesses which have enough capacity to grow if purchased at right prices. We ideally suggest the following table for asset allocation into equities for an average individual: From 25 – 30 Years: At least 75% of investible surplus From 30 – 45 Years: At least 60% of investible surplus From 45 – 60 years: At least 40% of investible surplus From 60 – 70 Years: At least 20% of investible surplus Above 70 Years: Less than 10% of your investible surplus
4. Do you provide advice on other investment options like Mutual Fund, Bonds, Fixed Deposits, Insurance and other Financial Products?
We feel that investing in equities is the best and possibly the only way to create long term wealth. To realize that goal one needs to have deep knowledge, understanding and professional competence to identify the right opportunities at the right valuations. This requires full focus in this specific domain. We feel that every individual and company has limited capacities of expertise and we are no exception. We claim no professional and expert knowledge about any area of investments apart from direct investment in Indian equities. Aveek has spent 23 years in large and medium sized companies in senior positions and has also been investing in the Indian market for last 20 years. He has seen many cycles of extreme euphoria and despair among stock investors; seen from the inside how good companies turn bad, small companies turn into great wealth-creating behemoths and how an average performer remains just that, for very long periods of time. It is his sincere belief that these twin experiences of running businesses and investing in equities has made him a better investor with a better understanding of strategic and execution challenges which take time to get captured in financial numbers. Picking stocks have been a lifelong learning experience for Aveek and his associates, and it takes our full energy and passion to separate the best from the rest. Hence, we would be content to concentrate on one big and important area, rather than trying to spread into too many fields.
Equity Mutual Funds by definition manage a large size portfolio pooling resources from small investors. For reasons of managing large portfolio they need to invest in a very large pool of stocks and to manage liquidity they also need investments into very large cap stocks. For an investor who wants to create wealth out of his investible surplus, a mutual fund reduces his return substantially due to extreme over diversification as your asset allocation can easily be put only into 5 – 10 well researched companies than into too many stocks and, into high market cap behemoths with limited growth opportunities or limited PE (Price Earnings Ratio) expansion capabilities. If you manage your portfolio yourself with help of a competent investment adviser, or entirely by yourself if you know where to invest when and how much; you can generate much much higher returns without increasing any risk. An example may be pertinent here: Suppose you put Rs. 500,000/- in a mutual fund whose total Asset Under Management (AUM) is Rs. 25,000 crores. So, your portfolio is a very very insignificant fraction of its total portfolio (0.0002%). Now for managing the large size of the portfolio it needs to buy too many stocks and front line stocks with high market cap and high liquidity like Infosys, Reliance, TCS, HDFC Bank, Wipro etc. Now these are all excellent companies but can’t really give returns which are meaningful for you. Also, the diversification which is beneficial at fund level is not beneficial at individual investor level. Instead, if you invest only in maximum 5 – 10 stocks which are well analyzed, well researched and also run by great management team in a growing market and presently much smaller than these large companies, your return can be phenomenally higher and very meaningful as it may come from two sources namely, growth of the company from a relatively smaller base and PE expansion due to the recognition of its performance by market. Also, a Mutual Fund performance is internally measured by the AUM (Asset Under Management) and Return. Bigger their AUM, better are their fees as fees are calculated as a percentage of AUM and there is a ceiling. So, certainly, they would like to make their AUM bigger. Now, larger the fund size tougher are the challenges for generating higher returns as, due to their sheer weight, they become less nimble and more restricted. If you check the portfolio of any mutual fund in India, you will possibly see that 50% or more stocks are similar in all of their portfolios. It doesn’t mean Mutual Fund industry is bad or run by incompetent people. Their business model restricts them for generating return which are meaningful for you. However, a mutual fund may be an ideal route for a person investing very small sums of money or those not interested in directly handling the investments and / or are happy with their Mutual Fund returns. Ultimately you have to decide what suits you and your long term financial goals best.
Many small, retail or first investors miss to grasp the simple principle of power of compounding and exit a good stock when it falls by 10% or 20% and miss out the long term power of compounding for a good company. In short term, day to day basis, market fluctuations are completely random. Except newspaper reporters and TV journalists, nobody else tries to assign a reason for that! However, in the medium to longer term, a good company weathers the temporary crises and come back even stronger. It is akin to health of a normal healthy human youth. One may suffer temporary cough, cold, fever, but with some medicine and rest he / she gets back to normal health and continue to grow. You don’t feel panicked that you are going to die tomorrow for common cold …. But you start worrying if your investment is down 10% or not moving as per your expectation! Please refrain from the panic and have peace with your investments. However, it is our responsibility to inform you if the temporary problem is serious, would take long time to cure or it is permanent in nature. In that case, we are unemotional about our investments and recommendations and would forthwith inform you to exit the stock. To illustrate the power of compounding a simple table is enclosed where you can see the massive difference happen to your wealth if your money grows at 7% p.a. (maximum fixed deposit rate in a bank deposit post tax) vis-à-vis 25% p.a. in a good portfolio over 3 to 5 years period. Also, please note long term equity investment is completely tax free (as on date) against bank fixed deposit which is taxable. Your end benefit seems to be significantly different and can possibly change your fortune permanently. However, our intention is not to portray just the rosy side of the picture. When you strive for higher return you face temporary volatility and uncertainty of outcome as depicted in detail above. And please note, we are no better expert than anybody else to predict these volatility and uncertainties. We are good in identifying and minimizing known “risks” associated with your investments but not the temporary “uncertainty” and “volatility” which is inherent is daily stock market fluctuations. Any serious investors should be able to understand what we are unequivocally trying to spell here out. In case you need to know more, you can always contact us.
Most of the time, the greatness of a great company is captured in their quoted price i.e. a valuation which discounts the future to a large extent; so, chances of getting desired returns out of investing randomly into some good companies are extremely limited. For example, Asian Paints or HDFC Bank or Hindustan Unilever Limited may be great businesses, run by very capable managements and have huge runways to grow their businesses in future and their PEs may remain elevated compared to the industry average for many years to come. But, these may not be great investments for non-institutional investors to grow their wealth. Moreover, these companies are well-known and well-researched and on most occasions(not always), are quoted at prices which fully discount the future growth possibilities. People often fail two distinguish between the two….. A great company may not necessarily be a great investment. At the same time, investing in an unknown company based on rumor, hearsay, sketchy analysis, management pep talk on TV, news reports or broker’s recommendation may run the danger of permanently destroying your capital. In fact between the two, we would prefer the former rather than the latter for a lay investor almost always if he decides to invest on his own. Between these two extremes, there are at least few thousand great to moderately decent companies operating in India (and the number is steadily growing) under very capable managements and with huge runways to cover in terms of growth, profitability and performance. Ideal investments come from this universe. It requires understanding of many factors beyond financials to identify a wealth creation opportunity. Also, being your adviser, it is our responsibility to guide you on a real time basis about when to buy, add or sell off an existing investment and / or invest in another company or just stay in cash and wait for appropriate opportunities to arise or shift to another asset class, depending on ground realities and overall economics. You can expect, apart from core portfolio advice, recommendations on opportunistic investments where the holding period may be anything between three months and one year, and return profile is extremely favorable. We will be happy at the end of a year only if your portfolio grows in value at a much higher absolute rate than the market returns, without incurring too much risk.
We don’t begin our research with an aim to find 10 bagger or 100 bagger stock ideas as we believe chasing for multi-bagger is futile and the word is a very oft repeated cliche and very difficult to achieve in reality. In reality multi-bagger happens when you have courage to invest in a very depressed market when almost anything is available in the market is at deep discount to its intrinsic. Real multi-bagger comes by investing in good business (stock) at a depressed market in a well-researched company with right capital allocation. Our modest aim is to look at a company or a stock with 1 – 3 years horizon and monitor both its business and price performance. So, we may continue to hold a stock for a very very long time if after our regular review we feel the value of the business is not captured in the price. In this process, we have generated many so called multi-baggers but it’s not the objective with which we made the investment in the first place. We would follow the same principle and philosophy going ahead too. It would always be a combination of investment in good businesses and trading with the trend to generate optimum return on portfolio year after year. We believe generating multi-bagger return to our money is more important than searching for multi-bagger stock ideas.
Of course you can … If you have the time, knowledge and passion for investment and business, all of you can do it all by yourselves. And it is true for all human endeavors……. You can be your own doctor or lawyer or both if you know enough of medicine, law and the associated nuances of the respective fields and have gathered enough experience to apply it in real time! So, if you think you don’t have the time or energy or passion, or are still learning the skills of identifying the right investment opportunities, the right amount to invest in a specific opportunity and the right time to exit from your stocks then we can surely be of help to you. In case you think you can do all by yourself, some websites of valuable inputs and insights are given here www.nseindia.com and www.bseindia.com helps you to get basic information about companies www.valuepickr.com helps you find very good quality discussions on investment and equity www.screener.in helps you analyze and review financials of any company www.stockie.in helps you in understanding basics of technical analysis and market sentiments www.farnamstreetblog.com helps you think smarter with frameworks and tools for thinking I write about stocks in www.valuepickr.com & you can find me there but not very frequently. You can access our regular blogs on our website on market and companies coming to our radar for different reasons but not a part of our investment or recommendation universe. At times, we also post about issues and broad ideas which may be of relevant to gauge the long term prospect of our country, economy and business environment. We are sure, you may find these updates informative and useful. If you need to comment you can, you post in our Blog.
We have no direct or indirect incentive to make you buy or sell something; the advisory service fee we earn from you is our only incentive (this may not be the case with your brokers or mutual fund advisers). We are not associated with any equity trading house or mutual Fund. We strongly believe this independence is necessary for providing unbiased investment opinions. With us, you are free do decide on your choice of broker, and the entire control of your money rests with you.
While deciding on an investment advisor you can look out for a few critical things: a) How long have they been investing? How many market cycles have they seen? The period of investing experience is critical as a larger time period evens out the chance and luck factors, and hence better helps gauge one’s pure investing skills. If your adviser has been participating in the market for less than 10 – 15 years then you may never know if his successes are based on skill, or luck and market momentum. b) What is the process being followed in zeroing down on an investment opportunity? Over the course of 20 years of Aveek’s investing career in the Indian stock market, he has seen that process and temperament are the two most critical parameters required for being a successful investor. Our investment process is detailed here ….. c) Are they selling or advising on many different asset classes like Mutual Funds, Fixed Income, Bonds and other financial products? There is nothing wrong in that but stock picking and equity investment need a considerable amount of expertise and focus and is best suited for a small team of very experienced professionals away from the crowd, as too much noise of the investment world can force one to act out of fear of missing an opportunity. To us, not losing money already earned is more critical than the money yet to be earned. So we take extreme care in dispassionately analyzing the negatives and reject 90 out of 100 investment theses that come before us for review and analysis. d) Did they put their own money in the options they recommended? Not a token sum but a significant portion of their investible surplus? This is the best way to ascertain the extent to which they are informed and knowledgeable regarding the advice offered, and the risks involved therein. However, we would like to emphasize that we don’t claim to be the best and we have also had our own sets of mistakes and may also commit mistakes in future. We try to be extremely quick in acting on our mistakes, and would inform you immediately if we think that, even after our rigorous research and analysis, things are not going as per our expectations and there are better opportunities to be exploited. We are focused only on protecting and increasing your wealth and do not, emotionally or otherwise, have any specific fascination for anything. We are committed to your and our future and nothing else.
Answer is both yes and no …. For small investors, yes it’s possible to a large extent. But for large investors, accumulation of a mid-cap or small cap stock takes longer period of time within a given price range which will be recommended. We always give a buying and selling range with our respective advises. Our effort and aim is and will remain glued to generating absolute return irrespective of market conditions. It however may include periods of long inaction which we feel are much better than taking wrong action. It is better to lose out on an opportunity than to lose money in a very volatile or uncertain market. We re-emphasize that risk is avoidable but uncertainty and volatility is to be sailed through either by inaction or by passively witnessing it and waiting for appropriate opportunity.
We think you should have full control over your money and custodial account (demat account). But In case you are looking for a new or reliable stock brokerage house for executing your trade, we can refer you to some reliable brokers and you can work directly with them but neither we are associated with any nor we get any benefit out of that and would always prefer if you decide it yourself. In case you have any problem or issue we can help you to sort it out on a best effort basis.
Those who follow Aveek’s posts at www.valuepickr.com know that he discusses openly and transparently, albeit briefly, about a few of his investments, and have been doing so for a few years now. But they are irregular and without any concrete advice (as SEBI categorically prohibits it). And over time he has realized that to help and guide investors, we need to hand-hold them through the entire investment process in an advisory capacity, in order to ensure that they benefit the most, with timely, concrete and concise investment recommendations to buy or to sell. He believes it would be much easier for a non-professional investor to make money and create wealth if he gets specific recommendations on how to act, and gets regular updates on how his money and investments are performing in the market. There are many free research reports available online; TV and business newspapers come every day with a plethora of stock recommendations; there are many blogs running freely on the web providing a multitude of recommendations. So, if you think that people are out in the market, on TV, writing in newspapers and on blogs with the sole objective of making you rich by providing you free advice then all the best!But please be cautious as Equity Research and Advisory is neither easy nor a zero cost exercise …. It requires field research, travel, data gathering, regulatory, overhead and infrastructure costs, as well as quality experienced manpower. However, you can always refer your blogs for updates on market, economy, general business environment and some stock ideas which we find interesting for open discussion.
Though we are quite confident of the long term prospects and business quality of our investment recommendations, and hope to generate much higher absolute returns than the market, we feel that, in order to maintain caution, unless you have pooled together an investible surplus of a minimum of Rs. 3 – 4 lakhs, which you can invest for a minimum period of 1 – 3 years, it would not be suitable for you to pay the proposed advisory fees, as your advisory outflow adjusted returns may not be sufficient for us to suggest you to avail our services. Though our aim is to generate high returns by assuming a fiduciary responsibility, we should not suggest you something which may harm your interests. We shall only be happy and content if you gain handsomely and by a wide margin after paying our advisory fees.