The Last Post : Fauji Finance

I have been writing this blog on personal finance  in an on and off sort of way. When I started this journey, exactly 8 years ago to the day (I posted the first blog on 18 May 2012), there were few Indian blogs or material on personal finance and stock markets from the perspective of a common layman kind of investor. But in the last few years, there is so much of reading material that one gets overwhelmed. I myself get overwhelmed. And there is better content and presentation than what I write. So, I thought that just like nature gives everything a defined timeline, the time has come to give this blog also a decent burial.

I have grown from a senior rank to a very senior rank in the army during this period, as I am sure you too would have in your careers and personal lives in this period. It has been great to interact with a lot of you and get your encouragement from time to time and also learn from you.

There are so many investors, advisors, hedge fund managers, mutual fund managers — more qualified people than me in this field who are posting so much of material on the web that my attempts were a drop in that ocean of knowledge. And for professionals, it is their bread and butter because of which they post more frequently to keep the reader interest alive and get eyeballs to earn some revenue through direct or indirect means. I was neither a professional finance guy nor was I an old fogey with plenty of time. Therefore, I thought of killing my idea  myself. That said, this will be my last post.

Investing in India in the past 30 years, I have realised that the game is rigged against the common investor. You will find ample number of elders in your own families, could be even you who has been cheated in some real estate scheme, some gold scheme, some plantation scheme, some derivatives trading scheme. Some or the other scam in every asset class. Sounds familiar? Has anything ever happened to people who swindled you?

Indian financial markets are a maze, they are more manipulated and complex than other countries. They are actually a jungle. As a nation, we are a little more than a banana republic and a little less than an African tinpot dictatorship. It is a very strong statement to make. But I will hold my view. If you read my blog of 16 May 2014   MODI CHOSEN PRIME MINISTER OF INDIA AND RISE OF A NEW HOPE, I was very optimistic. Six years down the line under the same leadership, I am skeptical. The reason is the society as well its leaders. Both are products of the socio-cultural environment of the times. Great nations do not happen by accident. They are created by people. Look at Japan, Singapore, Germany, USA. It’s the people. Warren Buffett in his last shareholder meeting of Berkshire Hathway said, “I have great hope from America. My money is still on US and its people, despite Covid”. We as a people still have miles to go before we reach there.

I am mainly pessimistic on India’s social capital and rule of law. And not on India as a nation. We have huge markets. Huge consumer base and a young intelligent population. Good companies with good governance in India may be in a minority but they will keep growing. What is difficult, is to dig out good governance and management in businesses in India. Promoters, even the reputed ones, manipulate their stock prices, manipulate the bankruptcy code to swallow the net worth and loans, they then declare bankruptcy and after that use the back door to bid for the same business which they made bankrupt in the first place by paying 1/10th the price. It never ends. The small investor is just left holding the can.

One of the main reasons is that in India, there is no punishment for wrong doing. (Read my blog, India in 2020…) Most of the finance professionals, companies and the CEOs in this country play the game — Now I Have Got You Sucker — with the common investor. Rahul Batra is a good friend, a retired veteran working with the United Nations, he has Rs 25 Lakhs stuck in one of the six Franklin Templeton Debt Funds which were frozen. That money is not coming back in a hurry. Before that another friend had some money in Yes Bank AT1 Bonds. That money also vanished.  And lakhs of investors like them suffer.

The modus operandi in Mutual Funds is simple. An AMC is formed by a reputed financial house. A Fund Manager is appointed.  The Fund Managers/CIO comes with a pedigree of IIT+IIM or is a rank holder CA or a CFA. They attract assets by slick marketing and a lot of mis selling. The honest ones like Quantum AMC are left with a meagre fund base. The CIO is working for his/her million dollar bonuses, yes in India also they are paid Bonuses equivalent to millions of dollars. Upwards of Rs 15 Cr a year as bonuses. Incentive is to attract more funds and get a big salary and a huge bonus. Financial scams go under the radar. You steal Rs 500/- from a purse , the police will lodge an FIR and will catch you. You steal Rs 500 Cr from investors/ banks/government. Nobody gives a fuck. Let alone catch you. You can keep 100 Cr for lawyers, judges, police and the system. And balance you can enjoy. So that’s the harsh reality of India and its markets. A common investor is walking through a mine field constantly. If you make some money it is by chance and not skill.

Do a small research. Own Time Work. All mutual funds till a while back were charging 2% as expenses. Gradually they have reduced but still they take anything upto 1% as expenses in Direct schemes and upto 2% in Regular schemes. For SBI or HDFC or ICICI AMCs  which manage about US$50 billion each. A 1% expense ratio means they earn about $500 million from you and me every year for managing our money. And 2% would mean a Billion Dollar. If you invest Rs 50000 per month in Mutual Funds through someone ie (regular route ) you are charged about 1.5 to 2% of 6 Lakhs or Rs 12000 per year. I have no cribs in the MFs taking this fees from me and my agent getting that money, the corollary is that they should also give you a return which is at least 2% more than the returns of the Index.  Do they? Check the returns on each of your MF schemes over last 7 years. The Index has returned about 15% in the last 7 years. Has each one of your MF schemes (Equity) given you a compounded return of 17% or more? I don’t think so.

By and large all big brokers in India became rich initially through insider trading. Those who followed an honest path are still not in the Forbes List.  After making the first 100 Cr, through less fair and more foul means,  they all become long term honest value investors and give gyaan to the rest of the world. I always remember Balzac, he said something like ‘Behind every great fortune there is a crime’. At least it is true for India. From Nirav Modi to Ambanis nothing happens to anyone. Once in a  while, they make an example of someone to just prove a point to the gullible public.

It is our greed to beat the average which kills us. It has been great learning curve for me. What am I going to do for the next 20 years? I am readjusting to the new realities.  

I have been keeping 2 months expenses always in bank mainly because my salary is secure. That’s a drill I have followed ever since I started earning. If you are working in the private sector, where jobs are not secure, then keep 12 months requirements in short term liquid funds/bank term deposits.  And park 12 months requirements in RBI Bonds. Out of the balance surplus, invest 10-15% in Quantum Dynamic Bond Fund (Debt fund). From debt funds I only desire Bank equivalent returns. I prefer debt funds over bank term deposits only for the reason of tax savings. Quantum AMC of Ajit Dayal is the rare fund house in India which is HONEST. Their Bond Fund invests largely in Govt backed debt and not paper or debt of shady business houses like Dewan Housing or Zee Adlink.

The balance 70-80% of your surplus money which is not needed for next five years or more by you should be invested in any Index ETF or stocks which constitute the Index.  I would suggest that you pick the MNCs or pedigreed Indian firms out of the Nifty for your portfolio. Because honesty in Corporate India seems to be a rare virtue.

I would suggest that you pick up 1.Kotak Bank, 2.HDFC Bank 3.HCL Tech 4. HDFC 5. Britannia 6.HUL 7.Nestle 8.ITC 9. Asian Paints 10.Cipla 11.Dr Reddy and 12. Titan . That is my Dozen. Don’t look for any more ideas trying to beat the markets. You can compare the returns after 20 years. You may or may not have any multi baggers here but you will keep compounding your investments overall at about 17 to 18% (provided you have invested at a Nifty PE level below 18)

Confession Time. I went wrong on some of my picks in the last eight years. In Noida Toll Bridge & ILFS Investment Managers, I sold at a loss on the price but still managed an overall return of 9% mainly due to dividends. In Kitex Garments, I overestimated the capital allocation capabilities of the management. I booked losses and lost 60% of my capital. And in Wonderla Holidays, the promoter is clean, business is good but demonetisation followed by Covid has almost killed the business temporarily. I am sitting on a loss of 66% on purchase price of Wonderla but have not yet booked losses. Will read the annual report of 2019-20 before I take that call. All of these losses were about 6% of my capital. Some stocks which went nowhere were United Spirits, Thomas Cook and Gateway Distriparks. I sold them with an opportunity cost loss. No loss of capital. The dividend in case of Gateway Distripark was good and gave me a 3% overall return.

Apart from these losses, I had a number of multibaggers — Indraprastha Gas, Godrej Consumer Products, Mphasis, Hinduja Global, Axis Bank, National Peroxide, Piramal Enterprise, Swaraj Engines, HEG, IPCA Labs and Relaxo. I have beaten a lot of mutual funds in my own way by managing an 17.68% XIRR as on date and shall continue to invest for the long term. Most of the businesses I sold were after 4 to 8 years of holding period.

Currently, ITC, Lupin and Cadila Healthcare are works in progress for me, so is Mahanagar Gas Ltd. But I am also sitting on some cash since last one year which I generated by selling my multibaggers. I will deploy it into the thirteen stocks identified when the time is ripe. Though, I did buy some shares of ITC, HDFC Bank and Bajaj Finance on 23rd March 2020. I have never had more than 10 stocks in a single folio in a portfolio. So between my wife and me, we shall continue with only 20 stocks.

Were you to follow my advice, what would be the right time to buy? When the Nifty PE multiple is below 18. Incidentally, 23rd March 2020 was the day when Nifty reached a level of 18 PE multiple. It was after four years, last it touched a level of 18 was on 11 Feb 2016. As of yesterday it was at 21. Such opportunities will come once in 3 to 4 years so invest at that time. In my last 30 years there were only ten occasions worth investing, which would have resulted in upwards of 20% compounded returns. My emotions and inability to sit on cash without doing anything led me to invest even at slightly higher levels. And such BUY occasions come after a scam/financial crisis/biological scares/wars. 9/11 and SARS/Covid are the only Black Swan events out of those “Crisis Events”. We could not predict them.

Rest all were predictable.

Currently, the opportunity to buy will be when Nifty goes below 7400 points. Till then just sit tight. My learning of the past 30 years in this market is that most of the time in the stock markets one should just sit and relax, and not be tempted to invest all the time. BTW SIPs were invented by the MF industry to suit themselves, if you are a prudent investor you should be investing only on dips. Therefore, if you need activity you need to do a simple chore, every day when the Sensex or Nifty corrects by 1% or more, buy some units of an Exchange Traded Index Fund/Index Fund.

It has been great knowing a lot of you and may you all grow your portfolios and finances stronger. Please draw your lines for How much is Enough? Each of us has his own desires and dreams. Generate just enough money to meet those desires and dreams. Beyond that, money has little value.
I started with Rs 750 a month as my pay. And have generated enough for my self and my family and a bit of charity for the underprivileged. I don’t need more than that. Be Happy, Be Safe and God Bless. Hasta La Vista.

PS:  I may still revive faujifinance after I retire or if I plan to run some investor education classes for the Young Generation :-)) . For the present STAY SAFE.