It has been a while, since I wrote last. In the meantime markets have shown a sharp rally. The Nifty and Sensex have made all time highs. They are just numbers. But for an intelligent investor what is important is, what should he do? I myself am facing that dilemma, so I thought from that angle. I wrote my first post in May 2012 and since then we have had just 13 days when one should have made an investment in stocks. Surprised !!!
I was also surprised.
I came for a training in July of 2010 and it was around that time, that I started reading more and more on value investment philosophy of Munger, Graham and Buffett. I had bought the Intelligent Investor of Graham in 2006 but I never followed it. My financial decision making was still governed by my emotions. Then from 2010, I spent two years just reading and researching and then unlearned whatever I had learnt so far in past 20 years (mostly wrong things from various sources like Magazines, Financial Tabloids of 90s, TV Channels and even the internet). I then restructured my complete portfolio. I booked a lot of losses. That was the price of learning. I then BOUGHT BUSINESSES WITH MOATS. I have made profits on all my buys except two (out of 30 companies) since then. I am talking not of absolute gains, but compounded gains over 4 years.
I have put a hurdle rate of 17% for myself. I would be very happy to get this return for next 40 years. Though I may not be around by the end of those 40 years, I hope to leave something for my next gen and some for charity. 15 of my buys have given me more than 17%. 10 have given between 9-16%. 3 have given between 1-6% and 2 have given me compounded losses. I just sold off my loss making shares on 12 Mar 14. Why did I sell? I analysed my logic and realized that I had made a mistake by only concentrating on one parameter and the stock had come down so much that I would require more than 200% gains to reach my buying price and make up for the opportunity cost (because alternately I could have put the money in PPF and earned 8.7%).
I could have improved my returns if I had followed what I preached in my post on 19 May 2012. What is the Right Level of Sensex to Buy. What did I say in that post? That the best level to buy is when Nifty or Sensex PE is below 16. I took data from 05 Jul 2010 till 13 Mar 2014. The findings are interesting. Only on 25 days out of the total 930 trading sessions was the Nifty at a level < 16.5. And out of that on just 13 days, it was below the mean PE of 15.62. And that was probably the time to invest during the entire almost four years. Ideally, one should invest below PE levels below 14.4. The rest of the time an Intelligent Investor should have been just sitting tight with his money.
The tabulated data for those 25 days is below.
|Date||Nifty Price/Earning||Price/Book||Div Yield|
Charlie Munger (Net Worth $1 Billion) says– “If you took our top fifteen decisions out, we’d have a pretty average record. It wasn’t hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor.”
If I had Rs 1 Million to invest in equities an I had been rational, what was the right thing to do?
STEP 1 : PUT Money in Liquid Funds Earning 8.7% from 05 Jul 2010 to 25 Jul 2013.
STEP 2: Transfer money from Liquid Fund to own Savings Account on 26 Jul 2013.
STEP 3: Invest money from 08 Aug to 28 Aug 2013 in either
(a) Axis Bank . This would have given me a CAGR of 23.34% from 01 Jul 10 to 14 Mar 14.
(b) Asian Paints. This would have given me a CAGR of 14.06% from 01 Jul 10 to 14 Mar 14.
(c) Bosch. This would have given me a CAGR of 12.05% from 01 Jul 10 to 14 Mar 14.
(d) NIFTY. This would have given me a CAGR of 12.85% from 01 Jul 10 to 14 Mar 14.
(e) Noida Toll Bridge. This would have given me a CAGR of 15.85% from 01 Jul 10 to 14 Mar 14.
(f) Any other stock with a moat and selling cheap.
If I were a passive investor, I could have simply earned 12.85% with just one buy in four years and if I were an aggressive investor I could have got a post tax CAGR of 12-25% depending on which stock I bought. Cool.
Prognosis for now: JUST SIT TIGHT ON YOUR CASH. NIFTY is at 18.3 times earnings. It has moved into expensive zone. I am doing step 1 above.