Experienced Voices

The Legendary Teacher 01: Invest & Compound

“The greatest investment a young person can make is in their education, in their own mind. Because money comes & goes. But what you learn once stays with you forever”W. Buffett

Warren Buffett does not need any introduction to any person in investing community. His record of investment performance is quite public in form his letters to the shareholders. In the 55 years of historical record, Berkshire Hathaway grew at a compound rate of 20.3% vs 10.0% growth of S&P 500. Before you think that anyone can beat the index easily, let me remind you that may be they can beat index but not so consistently. To put in context, $1000 invested in Berkshire in 1965 would have turned into $27.4mm vs $190k in S&P 500 Index. Also, he has advised that anyone starting his investments is better of buying a low cost Index fund or a ETF. He proved it using his famous bet against hedge funds. In 2007, Warren bet a million dollars that an index fund would outperform a collection of hedge funds over the course of 10 years, which he won hands down.

Warren was born on 30th August 1930 in Omaha, Nebraska. He had developed an interest in business and investing in his youth, he bought his first stock at the age of 11. The book that inspired him to become a businessman and an investor was “One Thousand Ways to make $1000.” The first of his business ventures included selling chewing gums, Coca Cola bottles, and weekly magazines from door to door. He talks about his early life and tells those who see him as a role model that, “Without passion, you don’t have energy, without energy, you have nothing.”

He attended the Wharton School of the University of Pennsylvania under his father’s pressure. He then took a transfer to the University of Nebraska from where he graduated at the age of 19 with a Bachelor of Science in Business Administration. Though the major turning point in his education was studying under Ben Graham @Columbia Business school. He worked as a security analyst at the Graham-Newman Corporation. Then he became a general partner of the Buffet Partnership Ltd. and stayed there from 1956 to 1969. He has been serving as the chairman of Berkshire Hathaway since 1970.

Warren Buffet became famous for his strong and heavy adherence to value investing. He is a strong believer of investing in business that one understands. He had his periods of criticism, when he stayed out of Tech stocks in the run-up during Y2K but his portfolio outperformed the market during the dot com bubble burst. For every 10yr investment period since 1965 to 2019, he outperformed the returns of S&P500 except for 4 occasions all in last decade. This could be mainly attributed to increased prominence of tech stocks in the market and his apprehension towards the current monetary policy of Fed.

Even though Ben Graham is the Dean of wall street & value investing philosophy, his star student Warren Buffet, who brought Ben’s teaching to masses through his success. I am yet to find a serious value investor, who has not read Warren’s letter. In 2008, Warren became the richest person in the world as per Forbes. I was in middle of my own Post graduation, when I first got to know about him. Currently he is the 4th wealthiest person as per the Forbes Billionaires 2020 and has a total real-time net worth of $82.4bn as on Sep 5, 2020. So far, he has given away ~$41bn in charity. He has pledged to donate 99% of his wealth. In 2011, the highest civilian award of the United States was awarded to him, The Presidential Medal of Freedom.

He has been quite open about his investing philosophy and approach in all these years. He is patient, when it comes to his investments, to wait for the right opportunity to strike. His first television interview is still something worth listening to understand the pillars of his success. It was taken in 1985 and after listening to him, you will realize how timeless these principals are. If you are in your quest to be a successful investor, you can always start from his letter’s. for last 15years letter are available on the website of Berkshire Hathaway just keep changing the years. For more reading you can refer to few books; The Essays of Warren Buffet, Back to School or Warren Buffet on Business.

let me leave you with two of his quotes to provoke you to start saving & start your investing journey. “If you buy things you do not need, soon you will sell have to sell things you need.” & “If you do not find a way to make money when you sleep, you will work until you die”. Lot of my learning in the investing journey could be attributed to him and other prominent investors like him.

This Teacher’s day, I decided to share the list of such legendary teachers to help you on your investment journey. Look out for this section for more legendary teachers on Investing & learn a thing or two from them. The article was prepared with the help from Naren Anchalia.

Mutual Fund

Category Review: Large & Mid cap Funds

Today after a couple of months break due to all the various reasons including the impact of nCoV, I am trying to be back to your queries. Lot of people reached out to me after reading reviews of various category of funds and pointed out that i didn’t review the Large & Mid-cap category. Let’s talk about Large & Mid-cap Funds and try to understand about what these funds offer and what to expect from them along with our screening of the fund category. let’s start with the disclosure that the below funds are not a recommendations but the broad comparison of the funds in same category to help us shortlist the consistent funds. Selection of a fund in your portfolio is dependent on lot of other factors including your asset allocation, time horizon and risk profile.

What are Large & Mid-cap funds? What is their risk & return profile?

As per the latest SEBI guidelines, Equity & Equity related instruments with minimum investment in large cap companies 35% of total assets & in mid cap stocks 35% of total assets. An open ended equity scheme investing in both large cap and mid cap stocks. The CAGR return for the category has been in range of 6-14% over the last 3  and 5-15% over the last 5 years. This shows that there is a huge variance in performance across various funds so its important to pick the right fund as well.

If Nifty valuations stays high and earning growth does not return to double digits, the returns might stay in the similar ranges or lower range over next few years. (Read about how to project probable market returns: Three Drivers of Market). Also, These funds tend to be on par or slightly more volatile then pure large cap funds but superior in terms mean returns. Their volatility is quite similar to Multi cap funds so i personally find this category redundant because for similar volatility and better flexibility to Fund Manager, i expect Multi-caps to perform better or at par.

Who & when should we invest in these funds? 

If you are new to equity investing and still have not figured out your asset allocation, risk appetite etc, it is throwing darts in the dark. Though the ask is that you should hold your investments for at least 5 years+, even though it does not guarantee the good returns but the chances of loss will be very small. If you have a long investment horizon (7 years+), and can stomach some short term volatility of returns then this category can also be part of your core portfolio (Read: Core & Satellite Portfolio).

Which are the best funds in this category?

Looking among the fund with at least 5 yrs of history and >1000cr of AUM. Here are my Top picks in order of preference

  1. Canara Robeco Emerging Equities Fund
  2. Mirae Asset Emerging Bluechip Fund
  3. SBI Large & Midcap Fund

Data is as of Feb 14th 2020, Source: Value Research & Morning Star

Fund Performance L&M

The top 5 highlighted are the winner based on expense ratios, lower turnover, higher returns, better upside capture vs downside capture & limited max draw-downs. It is a good screening exercise, if you have seen my other category reviews you might be familiar with the approach as well. Below chart shows you the range of historical returns for each of our top 5 picks, Returns are annualized geometric mean returns calculated on a rolling basis for a 5 year investments during last 10 years period vs their volatility. (Used Regular funds returns for longer historical data)

Risk vs Return

Canara Robeco Emerging Equities Fund has the lowest volatility and 2nd best returns among these top 5 funds. Mirae Asset Emerging Bluechip Fund is much more volatile in the group but the extra mean return vs other in the lot makes it another good pick (More risky though). SBI Large & Midcap Fund has the second lowest volatility, consistent performance along with lower Max draw downs in recent history is the last pick. 

Those of you who hold the funds other than suggested, if your fund is in the top 5-10 of the category you can continue to hold it or think of opting from one of the Top 3 picked based on your preference. Though you should plan your exit form the bottom performers in a tax efficient manner.

Do write to us for your feedback, queries and suggestions. if you like it, don’t forget to subscribe it. Read more category reviews: Aggressive Hybrid Funds, Large-cap fundMulti-cap fundSmall cap fundValue funds.

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