We all know the significance of books. And still most of us are not able to read books as often as we’d like to. There could be various reasons for that like
- Which book to read
- Lack of time and energy
- Short attention span (due to social media distraction)
- Boring content
This article or blog will help you with the right summary of good investing books. Coffee Can Investing is the first book chosen in this series
- It is critical to nail down objectives and build your financial plan around them
- Equity remains the most powerful driver of long term sustainable returns
- Do not get trapped in Real estate investments and gold and fixed deposits
Choose Stocks based on below Filter
- Mcap > 100 cr
- ROCE > 15% & every year in last 10 years
- Revenue Growth >10% every year in last 10 years
- If its a bank, then choose ROE>15% and loan growth >15%
Hold Stocks identified through filter for 10+ years
Why ROE and ROCE are important parameters
Over the long term, it’s hard for a stock to earn a much better return than the business ,which underlies it, earns.Charlie Munger
Why 10 years holding is important
- Multiple back testing on above filter shows that there is higher probability of profits over 10+ year holding periods
- Power of compounding comes into picture
- Neutralizing negatives of noise over longer periods. There could be blips in stocks prices which emotionally drives us to make exit.
- By keeping the portfolio untouched, one will keep the transaction costs minimal
Earning growth of a company is dependent on two factors
Growth in capital employed and Return on Capital Employed
Look for companies where ROCE is decent or high and less capital requirement like
- Low Capital requirement and high ROCE e.g. HUL
- High Capital Requirement and decent ROCE e.g. HDFC
Avoid companies where
High Capital Requirement and low ROCE e.g. Telecom sector in last 10 years
Share price of company= Earning Growth * P/E multiple
Look for companies where earnings growth contributes to increase in share price and not simply re-rating of P/E multiple
Coffee Can portfolio is skewed towards
- B2C businesses ( vs B2B)
- Structural Businesses (vs cyclicals)
- Avoiding companies that borrow a lot to grow
- Companies with lot of intangible assets
Expenses matter everywhere be it brokerage costs or transactions costs or MF entry, exit loads or yearly expense ratios
It always pays in longer run to pay for advisory
Real estate is a dangerous asset class for investors
- Huge investment size needed
- Its an illiquid asset class. You may not be able to see at the right price when needed
- High transaction costs like stamp duty, registration charges bump up the prices
- Its a non standard asset. Prices vary in different cities, different regions for same land area. Returns are mostly by luck
- Its one of the least clean sectors, although after RERA law and Demonetization, things are better
Small Cap Stocks are beautiful
- They can outperform broader large cap universe
- They can grow much faster when credit availability is plentiful and economy is accelerating
- They have less sell side analysts as number of companies are large and are yet to be discovered
- Big players stay away due to sizing or liquidity issues while selling
- Drop in capital costs helps small caps disproportinately as generally they have higher lending rates
How can Investor do not regret equity investment?
For an investor to stop regretting investment in equity markets, his probability of earning profits should be twice the probaility of generating losses
and that period of holding is minimum 1 year
Further, As the investor’s holding period increase from one year to 10 year, his portfolio or positions moves from high risk, low return to low risk, high return position
Even for a short term, investors have to rely on quality companies as many thesis shows that lower the investment horizon, lesser should be the volatility in your portfolio to meet the desired outcome and that’s possible with quality companies only. Longer the holding period, lesser is the volatility of high quality portfolio
Investors who are able to combine patience with high quality portfolio constructions should be able to pull off outstanding return with low levels of volatility
For a portfolio, invest in Large cap, mid cap and small cap stocks
Large cap stocks should be invested through ETF
Mid cap stocks can be chosen as Coffee Can portfolio approach
Small Cap stocks should be chosen from Clean and Good framework
Clean Framework can be determined from quality of accounts published and corporate governance records
Good Framework comes from judicious use of Capex and return of surplus capital. It can be seen as how much capital invested and turned into sales into profit turned into balance sheet strength turned into free cash flow and invest again that cash flow leading to a cycle.
While a Coffee can portfolio generates a stronger return relative to Sensex returns, please make a note that not every stock has generated stellar returns
Essentially what this book highlighted is :
Investing for long periods of time in high quality portfolio….
….with a higher weightage to high quality small cap companies….
….while ensuring that you don’t pay much by way of fees….
….and avoiding investment traps like real estate and gold….
….should lead to significant and sustainable wealth creation.
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Enjoy the day and your life. Don’t forget, we are alone in this grand universe and may not get a chance to live again.