Prime Takes

Short essays on assorted topics from the Prime Team

Investing and watching India play cricket

I like to approach my investing with the same mindset that I approach watching India play cricket abroad. The keyword there is ‘abroad’.

See, when India plays abroad (and I mean the SENA countries – South Africa, England, New Zealand and Australia), my expectations are low. When they do better, I am elated, and when they lose, I don’t get too depressed.

watching cricket

I think watching our investment portfolio should be the same. Having realistic expectation means, a boom market (like now) makes us real happy, but a downturn does not faze us much. There is, let’s just say, downside containment of our disappointments 🙂

On the other hand, if we look at our portfolio like watching India play at home (like right now), we expect too much, every defeat is a an unexpected disaster, and a win feels like just ok.

Not good feelings; And makes us act rashly with our portfolio (like ‘resting’ Rohit Sharma :-/ )

How do we form the right expectations, you ask? Glad you did – please read this article from our archives – it’ll set you right!

Prof Scott Galloway

It’s not easy to impress me.

OK, that’s not true. I am not that hard to impress; so let me rephrase that.

It’s not easy to impress me a lot in a short time.

But that’s what happened today – I did not wake up on a Sunday morning looking to get impressed by the writings of a boomer professor in New York.

scott galloway

First, I watched a clip from Friday’s Bill Maher show (big fan) – one guy that spoke was very animated, and very impressive.

So I looked him up. Turns out he’s a NYU Stern professor, has written a few books, and has a blog.

I went to the blog, and started reading – and did not stop for a long time.

(links below)

The guy’s name is Prof. Scott Galloway, professor of Marketing at NYU Stern.

  1. He speaks well
  2. He writes fabulously
  3. He thinks broadly, and where appropriate, deeply
  4. His ideas resonate (with me), and
  5. He’s funny

I recommend you watch, read, and follow him as you find time.

The Youtube clip I saw today: https://www.youtube.com/watch?v=0H8AshEYrKw (Scott’s the guy who speaks con furioso)

Link to a blog article that you can start with: https://www.profgalloway.com/the-algebra-of-wealth

(This article is about the ‘algebra’ of wealth. He has written a book called ‘Algebra of Happiness’)

Happy reading!

Short take: What the SEBI’s circular on perpetual bonds means

SEBI’s recent circular on restrictions on both valuations and holdings of perpetual bonds by mutual funds has created a storm – not just among the fund manager community but all the way up to the Ministry of Finance.

The circular on perpetual bonds

The circular, broadly, states the following:

  • A mutual fund scheme cannot hold more than 5% of its assets in a perpetual bond issued by a single issuer. It cannot hold more than 10% of its total AUM in perpetual bonds in a single scheme.
  • No AMC can own more than 10% of the perpetual bond issued by an issuer.
  • Closed-end funds shall not invest in perpetual bonds.
  • The maturity of all perpetual bonds shall be treated as 100 years from the date of issuance of the bond for the purpose of valuation. Currently, MFs follow the call/put option date to value the yield.

The circular shall be made effective April 1, 2021.

What the circular means

The circular, if applied, shall mean 2 things:

  • Many funds will not be able to hold such a perpetual bond if their mandate restricts them. For eg. An ultra-short-term fund can’t meaningfully hold such an instrument.
  • Funds may need to revalue the bonds, and this can lead to mark-to-market losses as yields will be marked up if one considers the date of maturity as 10 years as opposed to 2-3 years.

Funds across the spectrum hold these funds. Banking & PSU debt funds, Low duration funds and balanced advantage/dynamic asset allocation funds are among the larger holders of this instrument. We will put out a more detailed report on fund holdings, if this circular remains.

It is noteworthy that, AMFI, in a response to this circular, has stated that the ‘100-year valuation’ will apply only if there is no traded value to the instrument. Now, this may provide some respite.

But here’s the bouncer. Media reports quote a communication from The Ministry of Finance (MoF) to SEBI – raising concerns about this proposal and the possible panic selling. It has also stated that perpetual bonds are used for bank’s capital needs and requested that the revised circular on valuation of perpetual bonds be withdrawn.

This being the case, we will wait for clarity on what is to happen before we write about it for you. As of now, restraining mutual funds from taking exposure to a highly risky category like perpetual bonds is a good move. However, the valuation norm, at an extreme 100 years, can cause impact on your NAVs. We’ll keep you posted.

Just doing it

When I read non-fiction books, I keep myself daily minimum targets to get through it in reasonable time – at least 100 pages a day, or in some tough reads, 50 pages a day.

With Phil Knight’s ‘Shoe Dog’,  I had to set for myself daily maximum reading targets – not more than 150 pages a day – so as to not let my other work suffer.

shoe dog

I could not, however, hold myself to the target – I finished the 400-page tome in a day and half flat. In one word, it’s ‘unputdownable’.

Chandra, my partner from FundsIndia, gave me the book 2 or 3 years ago and exhorted me to read it, and I’m ashamed that I just got around to it. Of course, as with the other books I am reading these days, I am wishing this book existed and that I read it, 15 or 20 years ago.

‘Shoe Dog’ chronicles the advent of Nike and the adventures of Phil Knight. It captures the period between 1962, when Phil first embarked on the journey (literally, actually), and 1980, when the company went IPO and Phil and his company, finally, made it.

It took 18 years to become an overnight success.

The tribulations that they went through during these years are, at the same time, totally pedestrian and incredibly arduous. From backstabbing partners to disloyal employees to relentless problems with bank and cash flow to lawsuits to fighting government bureaucracy – there is not a stripe of a problem they seem to have quite missed out on.

Through it all, they – Phil and his coterie of carefully assembled colleagues – persisted somehow – with a sleight of hand here, a slice of good fortune there, and honest to goodness hard work everywhere – to realize their vision and dreams.

It is a tale of dogged perseverance – and Phil alludes to it often in the book – the Oregon spirit. The state of Oregon is famous for the trail that it’s named after it – the Oregon trail. The path followed by migrating settlers who moved west in the early 19th century. The adage that accompanies the legend is that “The cowards never started and the weak died along the way. That leaves us, ladies and gentlemen. Us.”

And it’s not a dry business book either. As an autobiographical memoir, Phil opens up with extraordinary candour about his personal life as well. And it will be hard to be dry-eyed at the end of the book. And the quality of writing – the style and the narrative flow – is absolutely top-notch. It has all the flair and cultivated skill of a well-published author. The language is alternately poetic or dramatic as the narrative calls for. Not a dull moment.

I have a bit of a personal connection as well. Nike was my first “employer” – I interned at their sprawling headquarters in Beaverton, Oregon for two hot summer months in 1994. I caught a glimpse of Knight only once – as he walked by with his lunch tray in the cafeteria. By then, he was a god among men, at least in that campus. The road that led up to the main building from the outside world was called Bowerman drive (I used to cycle to the office – I would ride up this drive to the security block where they would hand out canteen coupons for people who biked to work). Back then, I had no idea about that name or the other names that the remaining lanes in the campus were called. 

I wish I did – the streets are all named after the people who were instrumental in the founding of Nike – all who are the protagonists of the story in the book.

My key takeaway from the book is this one thing, that is not said out loud in the pages. Phil Knight did not invent anything – sneakers were there before him, his partner invented waffle soles, people outside the company came up with the Air idea, and heck, even the name Nike was a colleague’s idea. But he had one thing – a passion for running and good shoes. Essentially, he had taste in footwear- he could tell bad shoes from good shoes. And he turned that love into a business and he never, ever let go.

‘Shoe Dog’ in Amazon

(Not an affiliate link)

Wealth in a Coffee Can

Few books have caught the interests of the Indian investing public as well as the book ‘Coffee Can Investing’ by Saurabh Mukherjea and others.

Fewer still investment methods have found a fan following as the stock picking process recommended in this book.

coffee can

Admittedly, I am a bit late to this party. Nevertheless, when I picked up the book and read through it, I could see why investors were enamored with it. The sub-title of the book captures the lure well – ‘The low-risk road to stupendous wealth’. Who would not find that enticing?

There are few problems with the book – more on that in a bit – but, the book is definitely a good read and worthy of recommendation. Please note that I am recommending the book, and not necessarily the investment process detailed in there. Please read and adapt it to your needs as you see fit. (Side note: Please don’t ask when PrimeInvestor is going to come up with a CC portfolio – we have our own philosophy and methods 🙂 )

The book’s premise is beguilingly simple – pick stocks that have a proven track record (of 10 years or more) of growing their revenues and have high return on capital employed (ROCE). The formula undergoes some changes when applied to financial services companies (looking at loan growth). But that is the simple step.

The tougher part may be to hold on to this portfolio without disrupting it for a period of 10 years. No profit booking in peak markets, no discarding of ‘losers’ – no activity in it at all. If you read the commentaries on this book, you will find many people taking issue with this hands-off approach. For example, when companies have governance issues as they often do, should we still keep holding? Or get out and find a new CC stock? That’s a tough call to make. 

But Saurabh and co present this method with conviction and by backing the conviction with data from the past. The book is replete with tables of returns from various such portfolios created at different points in time, all showing the merits of both the stock picking methods and the virtue of patient holding. 

The book also touches on some tangentially related topics along the way – about the Indian real estate market, on mutual fund expenses, investing in small-caps etc. Most of you, I think, will skim along these chapters, as I did. There is not much new there.

The book is a bit outdated though, in some respects. The authors keep mentioning that long term capital gains on equity investments is zero. We all know that since 2018, that has not been the case. Similarly, they advocate, in a specific case, investing in the dividend option of a mutual fund, which is also an anachronism for today’s world. Given that it’s been 3+ years since these changes came to effect, one would have thought that the book would have seen an edited version published.

And while they recommend mutual funds for small-cap investments, they provide little guidance on how to go about picking those funds (of course, PrimeInvestor subscribers have ready access to the top funds they should invest in).

Nevertheless, I liked this book for these reasons:

  1. The stress on the virtues of patience in  long-term investments – which is the achille’s heel of investors in general and Indian investors in particular.
  2. The commitment to a diversified portfolio – including other non-equity investments as well.
  3. The emphasis on looking at the costs of investing – like expense ratio, brokerages etc.

And, I have to mention a word about the writing style – it is top-notch. The book makes for an easy read – not necessarily a quick read, since there are many concepts to be digested on the way.

Readers of this book will come out with a better understanding of the Indian equity markets and will be more informed about stock-picking methods. And just those make the book a worthy read.

Coffee Can Investing in Amazon

(Not an affiliate link)

Everything Compounds – “The Compound Effect” by Darren Hardy

I picked up this book thinking that it would be an in-depth thesis on the power of compounding in financial investments. But it turned out to be more than that, and the better for it.

compound effect

“The Compound Effect” by Darren Hardy explores the power of compounding in our everyday lives – our habits, our goals, our routines, our successes, and failures. The central premise of this book is simple enough – “Everything compounds. It is up to us to choose the direction that it happens in our lives”.

It is a motivational book, no doubt. I am not a keen fan of this genre of books, but when I started reading the book, I could not stop – even after realizing that the thesis had little to do with personal finance.

Hardy starts off with explaining the power of compounding in our lives with examples, and shows the readers methods, tools, and techniques to follow to harness this power to become better versions of ourselves.

The book is peppered with great anecdotes (some of which are well-known) and motivating quotes (some of which are a bit cliched). The one quote I liked had a bit of a Gandhian vibe – “Don’t wish it were easier; wish you were better”. 

But it’s hard to agree with the exhortations of the author 100% – especially in places where he advocates using these methods in our personal and family relationships (have a weekly ‘relationship review’? Seriously?). However, bulk of the book is quite immediately usable and could serve as a guide to streamlining of day-to-day routines and habits to re-orient ourselves in the right direction. 

The foundational thesis is that if we have a plan to make a small degree of improvement in the right direction and persist with it over the long-term, miraculous things could happen. A bit of ‘Kaizen’ for our everyday lives, I suppose.

The first two chapters lay the foundation – about the choices we make in life (and take responsibility for) and the habits that make us who we are. The next two chapters – on momentum and influences were very interesting and (for me) eye-opening. The last chapter on acceleration seemed a bit overbearing, though. The book also comes with a companion website which provides tools and templates that we can use to adopt the methods prescribed in the book.

At times the author comes off like that over-enthu, hyper-fit fitness trainer who keeps saying that you too can get a six-pack if you follow his instructions. But, as we know, even if we don’t get the six-pack, we would at least get fitter and healthier if we follow the routines he prescribes. It’s the same with this book as well.

In the earlier book that I wrote about – The Psychology of Money – Morgan Housel mentioned that compounding is really a hard concept for human brains to get a grip on due to its astounding ability to deliver growth (or de-growth) of outlandish magnitude. This book, if not anything else, would help us to internalize the concept by relating it to our regular lives.

All in all, an interesting, short read – one that we can dip into whenever we need a jolt of positive energy. 

The Compound Effect in Amazon

(Not an affiliate link)

Psychology of Money: What we think about when we think about money

Most best-selling books on investing and personal finance are from the west (mostly US). With such publications, readers in India will need to do some sifting through and quite a bit of mental arithmetic before deriving value from the book.

psychology of money

Rarely does a book come along that is readily accessible and relevant to the Indian audience. “The Psychology of Money” by Morgan Housel is one such book. I heartily recommend it.

Morgan distils the enduring wisdom about the relationship between people and their money in 20 chapters. Some of these chapters are about stocks and the market, but most of them are about people – about the games they play with money.

Each of these chapters can, as the author notes, be read individually as well. But they are not disjoint essays. Each essay pushes the narrative farther, and helps the reader to get a fulsome understanding of how the relationship with money works for people – all the misconceptions about money and wealth and all the traps and pitfalls investors land themselves in time and again.

That said, this book is definitely not a litany of “don’ts”. For every single admonition that the author makes, he points to the right way as well.

The concepts themselves are simple and time-tested – the role of luck in investing, why timing the market will not work over long periods of time, importance of patience, the right way to do planning and more. 

But Morgan writes about them with a straightforward clarity and with persuasive arguments, and always keeps it interesting. To illustrate the power of compounding, he goes all the way to the geology of ice ages. To show the power and importance of luck, he cites an example from the early life of Bill Gates. And he uses examples from his own youth to tell readers about how people perceive being rich.

The most important point that the author makes is about why one should strive to build wealth – why one should save and invest. If one reads the book and takes that single point to heart, it would have served its purpose.

I would recommend the book especially to young people – the sooner they understand these points, the better the rest of their lives would be.

The book is definitely worth the time and effort (It is neither long – 240 pages, nor expensive Rs 285). However, if you don’t want to spend the time/money to get the book, you can read a synopsis of the book here in Morgan Housel’s website.

Link to the book 

(not an affiliate link)

Where to invest your Franklin debt fund proceeds?

You would have started getting the locked money from 5 of the 6 debt schemes of Franklin India Mutual after a stressful 10 months. Now that the money has started flowing in, where should you invest?

After all the hassle, you would likely not be in a mood to park it in any risky asset – for a while at least. So, FDs may be your natural choice and rightly so.

All FD investment

Where capital preservation scores over everything else, do not scout for options. Simply opt for bank FDs of large banks. But broadly, at this juncture, locking into FDs would mean entering at very low rates. So, if you do enter FDs, remember to enter for shorter periods of 6 months to 1 year and lock in later for longer periods when rates go up. You could go with your bank or check other FD options in our deposits section.

If your amount is large and you wish to build a portfolio, then consider using the options below. Some of them will have debt funds that you can opt for or choose to ignore.

#1 Income need

If you are a senior citizen and in need of income, it is best to stick to traditional options. Please check our retire income portfolio that has a mix of FDs and govt. schemes. https://primeinvestor.in/portfolio-life-situation-retiree/

For others (not senior citizens) who depend on income from your corpus please check our income portfolio https://primeinvestor.in/portfolios-need-based/ but make sure you have some liquidity by parking in short-term FDs.

#2 Liquidity need

If liquidity is a priority for you, then lock some amount into short-term FDs of 3-6 months and the rest in highly liquid and low risk debt funds. Our emergency portfolio will fit this bill.  https://primeinvestor.in/portfolios-need-based/

#3 Asset allocation need

If your Franklin proceeds were used as part of an asset allocated portfolio, and you still have faith in debt funds, then you can consider low risk funds. Check out our very short and short and medium duration funds listed in Prime Funds. These categories will readjust to the higher rate scenario (there will be some volatility for few months) and will settle to benefit from higher coupon in the new instruments they will add over time. Choose the category appropriate to your time frame.

Welcome to Prime takes – Short-takes on assorted things

We’re happy to get started with a new, experimental section in the PrimeInvestor platform. We are calling it ‘Prime Takes’ – short essays published in an ad-hoc fashion (meaning, whenever we feel like 🙂 ) about things we find interesting.

You can access these by going to https://primeinvestor.in/short-takes

Please note:

  1. There will be no specific email notifications about these essays. However, we will include them in our digest mail on the weekends.
  2. These will not be in-depth research articles – they will be opinion pieces (i.e not really recommendations) or observations about markets and personal finance that we think are worth sharing, but not quite worth a detailed write-up
  3. There is no set schedule for these articles

The rest – we’ll figure out as we go along! 🙂

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