The Illusion of Returns !!!

Dearest investor and friends,

How are you all doing? I hope you & family are safe & sound. 

In March 2020, when we had a market crash due to Covid-19, there were many people & articles talking about Market under-performing Bank Deposit Returns in the last 10 - 15 years time-frame. And this was INFACT TRUE.

So if this was true, are Bank Deposits really better Instruments than Funds or Equity? Are the Returns really better? Then how come, the wealthiest people and most financially independent people invested in Markets? 

I call this - THE ILLUSION OF RETURNS !!!

Recently, I was reading slogans like "Stock Market Sahi Nahi Hai" or "Mutual Funds Sahi Nahi Hai" etc. You would be surprised to also note that, I received hundreds of emails during that time, asking whether SIP should be stopped or whether we should exit all the stocks in loss. People started talking about Importance of Selling in a Downmarket etc. Comparisons were made to the Great Depression. Whatever we read, it was Negative. 

But a very few of us were encouraging everyone to continue investing in Markets and in Mutual Funds in-spite of returns looking crazily bad. Why were we giving this advice during those times? Why?

I was just looking back at some of my tweets in March. It was so much fun to see that every tweet was received well and we all faced the crash together and came back stronger. Love you all for that.

Also, I got some tweets from few friends saying that their investments have not yielded the returns they were looking for. Why did they not get returns? Is there something really missing? I call this - Illusions of Returns.

Today's article will provide you a much needed perspective.

Compounded Annual Growth Rate (CAGR) or Internal Rate of Return (IRR) is perhaps one of the most less understood terminologies and also, the most misused. In a Fixed Instrument like Bank Deposit, it doesn't fluctuate much. But, in a dynamic Market Based Instrument, the beauty of CAGR/IRR is that it can be made to look really good or really bad, based on the start & end point of the calculation. So, we can feel Really Bad or Really Good based on when we look at it.

Before we begin, please take 10 minutes to read through this article to get a basic understanding of CAGR. Click here to read. If you have not clicked this link, please do. It will be worth your time, before you continue.

As we are all aware, the Stock Market is never Linear. It moves up & down daily. And that what makes Market an easy target for Fluctuating Returns. I keep saying that, in Stock Market, Returns Fluctuate Daily, Value Doesn't.

Assume that on Jan 1st 2010, Kiran started a SIP (monthly Rs 10000) in the following instruments. She knew that RD would give around 5-6% and hence decided not to invest in a Bank Deposit. This is what she did:

She decided to invest monthly in 4 different Mutual Funds - Large, Mid, Small & Index (Rs 2500 each). Here's a small Table for us to refer while I communicate the message.

NOTE: I have taken average Real Funds for this Table (I don't want to Name). Focus only on the Message & the Essence. Try this for your own Funds and see how it co-relates.

She reviewed her Investments Regularly but didn't Churn at all. She did not change her Funds. She Stuck On. In Jan 2019 (after 108 months), she noticed that her Return was around 11% - 19% (across 4 funds). She was Happy. She continued. In March 2020, the Market started Collapsing. She checked her Return. It has down gone to 8%. She didn't Stop. 

In April 2020, her return was almost 0%. Oh my God. She was Devastated. She had absolutely No Returns. It was as good as just putting her money in a Locker at home with 0% interest. She lost all her hope. Her total investment was exactly the money she had put. 

Everyone Laughed. Twitter was full of Jokes against Stock Market. People were Laughing at Long Term Investing. There were commentaries that people should just Sell everything and never Invest in Markets Again.

But, Kiran had great Friends. She had an Amazing Association. She ignored the Trolls. She Didn't give up. She continued her Investment. In Aug 2020, her return is above 6%. She is confident that in the next few years, she will definitely Reach Her Goals.

So, to Summarize:

- Bank Deposits are always Better in the Short Term. I always say - Never Invest Something in the Market which you need in the Next 15 years.

- Taking CAGR below 10 years, according to me, is Misleading. This is because of the fluctuating Nature of Market Instruments. Please keep this in mind.

- When Market Fell drastically, the returns diminished to almost ZERO. Just by NOT STOPPING Investing in Bad Times, the Returns became better as Market Picked Up.

- As Indian Growth Story is Always Intact, the Trajectory is always UP in Long Term. Question is - Are we Ready to Look Beyond Small Time-frames? Can we look at Decades instead of Quarters?

- Association Matters. Absolutely. If we are in the Right Circles, we can Take the Right Decisions. And we can Avoid the Wrong Decisions.

- Have Reasonable Expectations. In an environment where Interest Rates are going towards Zero, the Goal should be to Beat Inflation and Meet all our Goals. If the Expectations are Reasonable, we will Not have the Pressure to Beat Someone's Returns.

- Today, there are Rockets Flying everywhere. Do not get Carried Away. People are looking at 3 month returns & extrapolating. Be Calm. Composed. Stay Long.

- If we can manage Returns of over 10 - 12% over 15 years, that means we are doing Really Well. Focus on the Amount Invested, Time Horizon. Returns will Follow Automatically. Don't Despair.

I sincerely hope that the point is clear now. So next time, if someone says that something is Sahi Hai or Not Sahi Hai, let us use our own wisdom to evaluate.

So friends, Enjoy this wonderful Journey. Keep going. You Can !!!

Let's enjoy what is in store for us. Downturn or Uptick, let's chill.

All my articles are in this link. Click here.

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Love,
Fundamental Investor

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Top 5 Questions before investing in a Stock or Business

Hello investors & friends,

How are you all doing? I hope you are all learning by reading the content here. I also sincerely hope that you are passing this on to your loved ones.

Before reading this, please have a look at the Fundamentals of Investing in the Stock Market (Click here to read)

It's result season and the companies which zoomed without reason are getting punished. Also, investors who invested without substance are getting bankrupt - I am serious. There is heavy panic in the retail investing community especially after the Bloodbath in the Markets (Click here to read)

I am sure all of you are definitely invested in a few businesses/stocks in the market or atleast preparing to do so. Is it the Right time to Invest in the Market? Click here to find out :-)

Now, in this article, I bring out 5 Important Questions you need to truely and consciously ask yourself before buying a business or a stock. If you do not have the answers, start finding them out NOW :-) Digest each question thoroughly.

The five basic questions which you need to have answers are the following:

Question 1
Do I understand this business well enough to make a good decision on buying the shares? If yes, what do I know about the business?

This is the raw basic question you need to have the answer for. If you are an expert in one field, stick to it. If you are not an expert in anything, try to look at companies which sell products which you use everyday. When you go to a shopping mall, or watch an advertisement, or eat something yummy, keep your ears and eyes open and see which company is giving you that product. If it is listed, study it.

Question 2
Who are the promoters and their experience in this business? Are they transparent and investor friendly? 

Let me tell you from my experience, that the management is everything in a business. We have seen so many companies rise from the ashes due to a great management. Please remember that even the best companies have gone through hard times. But, if the management is sincere and determined, they will overcome these hiccups. Now, how to do you know if a promoter is good or bad? How do you know their intentions? First, find out who the promoters are. Try to google them and read everything you can about them. Go to Linkedin and see their profiles. See if they or the company has ever been in the news for unethical or bad reasons. Also try to see if they have given dividends which shows their investor friendliness.

Question 3
What is the future for this business?

Friends, please remember that the past is just a guidance but the future is everything. If a company was awesome but the future looks bleak, you are most definitely entering at the worst time possible. So when you are picking the business, try to figure out the future of the business. Every company will have to innovate in order to sustain. Closely observe if the business has a future requirement in the market? Is it saturated? Even old solid companies keep doing new things to keep in pace with the world. This is a very important question to be answered.

Question 4
How has the business fared in bad market times compared to its competitors?

There are times when a particular sector is going through tailwinds or multiple problems. Sometimes, currency issues, slowdown, low demand, bad margins etc can be challenging for any business. How has the company fared when its industry is going through a hard time? Today, there are many companies which are still performing well in spite of their sector immersed in problems. Maybe their margins have reduced. But if their integrity is not compromised, they are doing a great job. This is extremely key in valuation.

Question 5
How much does the business performance depend on changes in micro and macro economic conditions?

The world is never perfect. Sometimes, there are situations which are out of our hand. Geopolitical problems in Europe, Greece finance issues, Unemployment in US, Currency devaluation in China, Slow growth rate, Real Estate Problems, Diseases, Dumping etc have hit the world markets in the last few months. In these times, unfortunately, even the quality companies get punished for no reason of theirs. But their bounce back will be equally quick. Try to keenly observe these movements in the past tough times. Strong companies have a beautiful upward chart if you see the last 10 years.

Now, you need not stop with these 5 questions. But these are the basic ones which you should definitely have the answers for.

Start searching for every possible detail about the company which you can gather. Do not look at the stock with a clean eye. Try to scrutinize it from every angle. I am sure that if you start hunting for information, you will definitely be able to get a lot of inputs. Try to send emails to the company (see the email ids in their website) or call them and bug them. They will respond if you have genuine questions. You just need to be a shareholder to get in touch with a company.

I believe this is the best time to start your research if you have not done it yet. Most of the high quality stocks are beaten by more than 50% from their high. Do not miss this opportunity.

I would also love to help you out in case you want me to review your thoughts. Click here to get my details in About FI page.

If you happened to like this article and want to continue learning, please subscribe for free email updates by clicking on the box below

Please share this post on multiple public platforms so that many more can get benefited and master the art of Investing in the Stock Market !!!

Good luck,
Fundamental Investor

Choose the Perfect Stock Broker for Wealth Creation

Hello investors and friends,

Hope you are having a relaxed weekend. This week, let us try to understand a key element in the process of trading or investing in the Stock Market. This is extremely important since you need to know how you are actually able to buy or sell shares which are listed in the exchanges.

We have heard of different kinds of brokers - Marriage broker, Real estate broker, Online broker, Insurance broker etc. Typically if we want to buy or sell a house or property, what do we do? Instead of trying to find potential buyers or sellers, we ask a broker to help us out. What are the primary advantages of this?

1) A Real estate broker is experienced in the Real Estate field and understands its dynamics
2) Broker would have a sound understanding of the Real Estate scenario and hence would have an upper hand
3) Broker would have a good database of Buyers and Sellers since that is his daily job
4) Broker would also be able to help in smartly estimating the value of the deal so that we can save some money
5) Broker would take a commission for helping us out, but it saves us the effort of actually trying to market our property or go house to house on our own to buy one.

So in simple terms, a Broker is basically a middleman, who is an expert in a particular field of service and links the customer and service provider for a commission.

Now, who is a Stock Broker? Wikipedia defines as follows. A stockbroker is a regulated professional individual, usually associated with a brokerage firm or broker-dealer, who buys and sells stocks and other securities for both retail and institutional clients, through a stock exchange or over the counter, in return for a fee or commission. 

Please note that in India, the Stock Broker or Brokerage Firm needs to be registered with the Securities and Exchange Board of India (SEBI) which is the regulatory body for the fair activity of the Stock Market.

So, if we want to be a trade or invest in the Stock Market, what is the first step? We need to identify a good Stock Broker. The first thing a Stock Broker would do, is to get a Demat account created for us. 

Decades ago, the shares were all in Materialized form. Imagine holding a big file full of Stock Certificates for every stock you own. Those were the days when it was a long process to even check the market prices of a business. It was an arduous task to buy or sell a stock since information was very slowly reaching the retail investors. Also, transparency was not very high in those times.

Those days are over now, thanks to the revolution of the internet. Today, we can all hold shares of companies in a Dematerialized account, where everything is electronic. Once the Demat account is created, the account holder can now invest in the Stock Market by buying quality shares.

There are many advantages of the Demat account:

1) Firstly, there is no physical certificate for the securities/shares. Everything can be seen online with a Username and Password
2) Extremely secure way of holding securities - No risk of natural hazards, theft etc
3) Bonus or Right shares allotted to the investor are credited automatically to the account
4) Dividends are also credited instantaneously
5) Change in address updated in a Demat Account are automatically updated to the businesses we own. Hence any communication (AGMs, Presentations etc) from the company will come to our updated Address
6) Most important advantage is that an investor can check the balance and make trades from anywhere in the world if he/she is connected to the internet.

Now, there are thousands of Stock Brokers in the market today with a huge number of customers transacting through them. Now, I personally have seen and transacted through a good number of brokers and here are a few points which mark a good Broker:

1) I like brokers who are open about their costs. Many of them come up with lots of offers etc. and they swindle you with some hidden costs later on. It is good to get to know what is the Account Opening Fee and Maintenance Fee moving forward. 
Remember to Read the Offer Document Carefully Before Opening an Account with the Broker.
2) A Transaction Fee or Brokerage is the commission the Broker takes for every transaction you make through them in the market. So its good to compare the Fees with various brokers before making a decision.
3) The Brokerage is generally different for Intra Day trades, Commodity Trades, Futures/Options and for Delivery. So you need to choose a broker based on your needs. For this you need to know yourself very well. Which category do you fall in :-)
4) Its always good to choose a broker who gives you a very good User Interface. By this, what I mean is, there are many brokers who make it very difficult to see your portfolio, make a buy or sell, check the current price, charts, make account transfers etc. Its very important that we choose a broker who makes our transacting life easy and simple. Some brokers whom I know have an extremely easy to use User Interface and it gives all kinds of information to the user in REAL TIME
5) Profit and loss statements (Long term and short term capital gains/losses) are very very important for paying tax every year. I have seen only a few brokers who focus on calculating this accurately for the investors. Especially, when we have bought a share during one Financial Year and sell it within one year in the next Financial Year, it becomes extremely tricky to calculate on our own. Here, good brokers stand out since they do the calculations for you and help out.
6) Its good to choose a Broker who has a good customer care support. This is very important since Service is very vital in this business. Sometimes, we need their support when we never get it :-)
6) Finally, it is important that the broker has a good reputation in the market. A seasoned Brokerage House is much more advised compared to a new one. This is because, there have been instances in the past where Brokerage Houses which are functional suddenly disappear. Today, the chances are less since SEBI ensures that these kind of things do not happen. Everything is more secure and transparent.

Please remember that a Brokerage which is extremely cheap might not be the Best. Do your homework well.

So what you are you waiting for... Pick the RIGHT Stock Broker and open your Demat Account now. Get in to the wonderful World of Investing and Wealth Creation :-)

If you already are registered with a broker, it is worth to see if it covers all the points mentioned above. If not, see if you can move to a more user friendly broker.

Wish you all the very best my friends. Enjoy your Sunday.

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Please share this post on multiple public platforms so that many more can get benefited and master the art of Investing in the Stock Market !!!

You can comment below this article as well :-)

Good luck and keep learning,
Fundamental Investor