Investment Objectives & Advice

Anyone can be a Millionaire

“If you think you can do a thing or think you can not do a thing, you are right.” – Henry Ford

When I first spoke about this to my friend, it ended up being an argument. I don’t want that again so let me elaborate on this. When I say anyone can be a millionaire, I do not mean that everyone will be a millionaire (Though it might happen when the value of currency goes down drastically, and you can be a zillionaire in Zimbabwe’s currency or billionaires in Venezuelan Bolivar.) but what I mean is that if someone put an effort and is determined to be a millionaire, he will be a millionaire one day and probably before many of his peers.

Over the last few years, one of the regular report I read, has been the global wealth report by Credit Suisse. Even though it was published in Late 2018, I got the chance to read it during my recent long-haul flight. As every year, I am startled by the disparity between the rich and people at the bottom of the pyramid. Let’s check some facts from the report on global wealth:

  1. Total wealth of Households is $317trillion, roughly 4 times of the worlds GDP $80 Tn
  2. 45% of the wealth is with <1% of the working population of 5bn, who have >$1mm net-worth.

Isn’t it insane? That <1% of the population controls so much wealth. This fact becomes more disturbing when I see for our own Country.

  1. Roughly 90% of the people have net-worth of <$10k (INR 7.2lacs), while in China there are 33% people in <$10k category.

This is so disturbing that I felt like doing something about it and as my father always say, Charity begins at home. Hence here is my take from the personal finance perspective:

Observation 1: Growth of the debt has been 13.3% vs 4.3% growth of non-financial assets and -2.5% of financial assets

It is satisfying to jump on debts, credit cards and EMI schemes to fund your aspirations like buying the car you need or the TV you wanted or the foreign vacation you dreamed off, though in long run it always hurts. One need to be very thoughtful about the debts he is binging up on. Are you using debts to fund your future liabilities or consumption only or you are using these debts to fund your assets which will bring you cash flow and increase your net-worth?

Half of the people think that house is an asset and buy it with humongous loan and keep repaying it for half of their working life. Is it really an asset? Have you checked the Yield? Does it generate a cash-flow for you?

Observation 2: Financial assets still form only 20% of an individual’s net-worth vs 75% in US or 45% in China.

We as Indian always love to buy real-estate, plots or gold, without thinking the value we will get out of those investments. It is more for prestige than a financial sense. The person who become rich, when we buy our expensive low-yielding houses, are real estate companies, agents or Banks but not us. Though I am hopeful this will slowly change as our new generation is more mindful of large ticket consumptions like this.

So, what should we do? Be aware and educate yourself on finance, there is no excuse for being financially illiterate. One simple tracking or plan can put you on right track, just be aware of your return on assets (RoA). Assets are all your possessions, Home, Car, The MF investment you have made, The traditional insurance policy you took, the shares you bought, The plot you own or the deposits you had made and minus the Loans you have currently (Home loan/ personal loan, CC loan, education loan etc). If you do not add any new penny on all these assets, will it grow by 7-8% after a year to match inflation? If not, you need to change your selection of assets. In my experience of doing this exercise, 95% people are in <5% YoY returns (Small sample of 60 people so might not be representative). Probably it is true that >90% people have a net-worth of <$10k in India. Once you can achieve >8% RoA, you are on the right track to be a Millionaire.

Don’t wait, start thinking & Happy Investing!

Investment Objectives & Advice

Portfolio Management: Understand the move of Market P/E

Roughly the 5% fall in a week has shaken up lot of investors. Most of the people, who were being prudent and telling that stick to your asset allocations, are now getting call that “when you knew market is overpriced, why did you advise to invest in equity and not stay in Debt.” Let me know one of the known investor in India market Vijay Kedia “Only two people can predict the top & bottom of the market; God & a Liar“. For last few quarters, I have been telling all my people to respect their asset allocation as well as that markets are overpriced so stay vigilant and do not invest a lot in markets. I was getting calls to tell that see market is touching new highs and you are missing the profit opportunity. Now i am getting the similar reactions but reverse that why did i not push them to stay in fixed returns vs equity if i knew markets were overpriced. I wrote about P/E ranges to show the trend over last 18-20 years and how to use it (Read), also i spoke about how much equity you should hold is dependent on 4 parameters as Risk Appetite, Risk Capacity, Time Horizon & Market Valuations. Today, i will try to redeem myself and other investment enthusiast from such blames.

Can i interpret the market move for tomorrow or 3 months or 6 months? Answer is simple no. Can i comment on current scenario probably yes. It is similar to driving, If i am driving from Mumbai to Goa, Can i say how fast i will drive constantly? No, it depends on the traffic but during the journey based on the parameters like congestion, traffic signals etc i can say reasonable speed limits. Similarly looking at high P/E ratios i can not say that market is going to correct and stay out or market will grow faster invest more. Mathematically P/E just the ratio of two variables but in reality it is driven by whole lot of variables like investor sentiments, macro economic scenario, liquidity conditions, international markets, economic growth cycle etc. Still let’s stick to maths as it helps you simplify the complex things. The movement of P/E value has only three possible scenarios;

  1. The value of P/E increases, if the growth of price is faster than the growth of the earnings. If price is flat and earnings are decreasing (-ve growth) then also the P/E will increase or if the price is growing at +20% and earning are growing slowly at +10%
  2. The value of P/E is range bound, If the growth of price is similar to the growth of earnings. It can be either both are moving at +20% or both are falling at -10%. P/E value will still be similar
  3. The value of P/E decreases, When the growth of earning is faster than the growth of price. Earnings might grow at +20% which prices are growing at +10% or Earnings might stay flat while prices are falling by -10%

Since P/E in absolute terms do not tell us anything for concrete, why are we looking at it. let me tell you the words of the dean of value investing, “In the short run, market is like a voting machine, tallying up which firms are popular and unpopular. But in long run, The market is like weighing machine, assessing the substance of company.“So in all three circumstances One can not predict that what will be return in next few weeks, months, quarters or years. The only thing that can be said that P/E will try to move towards the theoretical value.

Let’s address the main question, what should we do? My boring suggestions as below:

  1. If the prices are increasing but earnings growth is slow or flat or negative, it is not a very healthy market and P/E will increase above the mean value. You will see price correction if the earning growth faster than price growth do not come by. It is best to invest slightly less in markets during such scenarios compared to your ideal asset allocation
  2. If you see the prices has been flat to decreasing and you see the earning growth coming or staying intact then you should opt to increase your allocation to equities compared to your usual asset allocation
  3. In all other scenarios stay with your own asset allocation

Those who are looking for thumb rules, let me share the updated P/E chart to follow as thumb rule.

PE Range as of Oct 05, 2018

Read more on Mutual Funds & Investment Planning, Happy Investing!!