May 23

MONEY DOES NOT GROW ON TREES BUT GROWS LIKE A TREE !!

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As a child, I had often heard that money does not grow on trees. One had to work hard for it. There was never a free lunch in life etcetera, etcetera. Then one got caught up in a career, a family, kids, savings and one fine day one realized that money may not grow on trees but it actually grows as a tree would. Caveat, one needed to have the patience to see the tree of money grow from a sapling to a fruit bearing stage. And then lo behold, you may just find it growing on that tree.

In 1991, my parents died under tragic circumstances. I inherited some savings. I was a green horn in stock markets. But,  thanks to Harshad Mehta, God bless his soul, he made stock markets like Amar Chitra Katha comics to the common man. Interesting and Available. I also jumped in into the deep end. I knew about  profit and loss statements as much as I knew about navigating an aeroplane. EPS and PE ratio could have been  terms associated with music systems like PMPO or with  Orient Fans like PSPO .

I was into some money and I just picked up a financial weekly paper sold on the streets of Delhi, I still remember the name — The Financial Wizard. On the front page was a screaming “BUY HDFC”. Like a dodo, without knowing a thing I rang up Mr Jaivir at BharatBhushan & Co, Delhi , my brokers and asked him to buy 10 shares of HDFC. It was a Rs100/- face value share  and was quoting at  Rs585/-. After three months HDFC was at Rs 1500/- a share and I bought another 50 shares. And HDFC declared a rights offer. By Feb 1992, HDFC was quoting at Rs 2400/- . I thought I had made a killing. I sold off the entire 60 shares, pocketed the gains of approx 64000/- and bought shares like GoldStar Steel & Alloys , supposedly a company run by Narsimha Rao’s son and ATV Projects a company owned by an honourable MP. Both of these stocks were also recommended by the same paper–Financial Wizard. So much for the predictions of magazines and papers.  Both Gold Star & ATV were de-listed. I lost all the gains I made on HDFC.  I still have physical shares of these companies equivalent to ‘raddi’.

But the story I started was about money and trees. So, I got 54 fully convertible debentures(FCD)  of HDFC at a price of Rs 750 per FCD as a  rights offer. They were convertible into one share per debenture.  After a few years HDFC Bank was launched and HDFC gave a preferential offer of 700 shares at Rs 10/- a share. Seems like a fairy tale !!!

I sold off the HDFC Bank shares at Rs 70/- a share  and 50 HDFC shares at Rs 3000 . My total capital  gains from HDFC were approx Rs 206,000.

If the reader has noted, I was allotted 54 FCDs in rights and sold off only 50. Why? 4 was an odd lot in those days. The market lot was minimum 10 shares. Today market lot, which is the minimum quantity which can be sold or bought freely by a retail investor,  of all shares is 1. Odd lots were sold at a discount. Laziness caught the better of me and I let those 4 shares remain with me. Today those 4 shares have become 400 shares. Post bonus and splits. And last I saw, HDFC was at Rs 640/-. (It was only in 2011, when I read the Prospect Theory of Kahneman that I realised that I had sold my winners too soon due to  the biases which govern our decision making. That’s another story for another blog).

It takes about twenty years for a tree to mature and give copious shade, fruits and wood. The same time has elapsed between my HDFC buy and today. I had accidentally purchased shares of a great company. If I had the patience to nurture my sapling and not do anything, I would be holding 10400 shares of HDFC(adjusted for rights, splits and bonuses) and 700 shares of HDFC Bank. Total value approx Rs 90 Lacs. In my 26 years of service I have not been able to save Rs 90 Lacs cash so far.

That’s how I believe money grows on trees, provided you do not cut the tree prematurely.

For value investors who have the patience, Piramal Healthcare at current price of Rs 413 and ILF&S Investment Managers at RS 27 could be such saplings which will grow into huge trees with time.

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8 comments

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    • manoj on May 27, 2012 at 12:11 pm
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    Dear fauji,
    Met your father-in-law..while swimming in dsoi pool……..will be calling on him in his office at WTC…may be sharing some trade secrets.

    All the best sir

    1. Dear Manoj,
      Great. He is a pro in this field. Beware, he is a big derivatives player too 🙂

    • Sunil Purohit on May 24, 2012 at 8:10 am
    • Reply

    Dear fauji,
    Great work. Since the blog is predominantly meant for faujis, why don’t you add a blog on managing the lumpsome u get after retirement.

    1. Dear Sunil,
      Thank you for your encouragement. I shall cover that topic too. But it will be with certain assumptions, since the cash flow required by every “fauji” would be different.

    • bhogal on May 24, 2012 at 2:38 am
    • Reply

    Hi fauji,
    Kudos for the blog, some recommendations,
    1. keep it simple and straight( I mean angrezi)
    2. plz do recommend some reading material seperately for beginners and part experts.
    3. cover a bit on myths , dos and donts.
    4. can incl something on property investments.
    Gr8 reading the blog thanks ………………..

    1. Thanks Bhogal. Shall cover the aspects listed by you. Books will be the first.

    2. You’ve captured this pereflcty. Thanks for taking the time!

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