This is one of the best articles I have come across on HNI Investing and the mistakes we are making following conventional myths.
More importantly he has given the formula to identify good investments.
Extract from the above article:
How to compound with relatively low risk.
No one that we have met can time the stock market. Neither can we, and we make no attempt to do so. We know of only one way to generate significant real returns in a consistent manner – buy clean, well-managed Bharatiya companies selling essential products behind very high barriers to entry. We call it the Consistent Compounding approach, and have seen it work, both in theory and in practice.
To build the portfolio without using any human judgement each year on June 30 we invest in stocks which in each of the preceding 10 years have grown revenues in double digits and delivered pre-tax-ROCE of at least 15% per annum (throughout the 10-year period). Then hold these stocks for the next 10 years. If you had invested Rs 100 using this method on June 30, 2000 then in mid-May 2020 your wealth would have compounded to Rs 1,463, a compounded return of 14.4 per cent per annum.
In contrast, the same exercise with the Sensex would have yielded Rs 673 implying a return of 10.1 per cent per annum (both expressed on a total return basis.) In short, in the space of 20 years, using the most rudimentary of financial filters, this method of investing would give almost 15 times compounding as opposed to a mere 7 times compounding from Sensex.
Invest in consistently dividend paying stocks that have paid at least 8% annual dividend (on current market price) over the last 5 years and are quoting at a discount to current audited book value and are generating positive free cash flow to equity.
If free cash flow to equity has come down, but it is still generating positive operating cash flow, then that also can be considered.
I have arrived at my formula after trying various alternatives over the last 26 years and losing money and now finally making money using this formula.
My immense opportunity loss in MRF is living proof of the virtues of this method.
My formula applies to the Bharatiya stock market.
In Western markets anything with a 3–4% dividend yield is equivalent to a Bharatiya stock paying an 8% dividend yield.
You miss the forest for the trees if you speculate in equity futures and options and do short term trading.
Instead have a longer term view of at least 10 years.
I probably was one of those rare people who made money shorting Amazon in the dot com collapse of 2000.
But if I had a long term vision, I would have invested Amazon for at least 30 years during the dot com collapse of 2000 and made many multiples of the amount I made with my short term vision of shorting Amazon in 2000.
This painful opportunity loss of not investing in Amazon in the dot com collapse of 2000 has now made me abandon shorting, and equity futures and equity options and have a long term vision of at least 5 years, if not 15 years for promising and fundamentally sound stocks.
To make you feel even worse, if I had only invested the money my father loaned to me in the early 1990s in a first investment of MRF Tyres IPO which was recommended to me by a good knowledgeable friend, instead of trying to make a fast buck on a tip of HOEC from my other speculator like me friend, I would have had more than Rs 500 crores by now, more money than my father ever made in his extremely successful business.
I did not invest in the MRF IPO in the early 1990s, even though my good friend recommended it to me, because who wanted to invest in a boring tyre company when I could strike gold tomorrow investing in the far more exciting field of oil exploration.
Also why trust a good friend, when you get hot tips from stockbrokers who are supposed to be far more knowledgeable about the stock market than anybody.
On April 27, 1993, the company’s share closed at Rs 11 compared to the current price of Rs 54,488 on BSE. The scrip hit its lifetime high of Rs 81,423 on April 30, 2018.
My mistakes and more importantly the lessons I have learnt should give you a good lesson on the follies of speculating in futures and options, short term investing, hot tips from crooked stockbrokers, and foolishly choosing exciting instead of boring.
Instead now have the wisdom I now have of focussing on and learning the virtues of long term positive free cash flow to equity investing.
Both in Bharat and the USA, March and April of 2020 was a very good time to buy such consistently dividend paying stocks with positive free cash flow to equity since they were trading at multiyear lows and below book value.
The overall stock markets have run up significantly from March and will fall below their March lows by the end of this year 2020.
It will again be a good time to pick up such consistently dividend paying stocks with positive free cash flow stocks after November 2020.
Above is just my opinion and I could be wrong.
One can only make calculated guesses with proper risk management, the stock market is completely unpredictable.
The most evergreen sector to invest in is the power sector. This includes power generation, power distribution and sectors that deal with power solutions.
Of all the types of power generation, hydro power is most appealing since it has a high moat of entry into this sector and currently is the lowest cost of power generation and will remain so for the next 10 years.
They are on the road to obsolescence and most solar and wind projects in Bharat are just to recycle black money into white.
The power sector is known as the “Widows and Orphans” sector for the last 100 years because it is the only reliable source of income for people like widows and orphans.
Please note the above comments of mine has my vision window of only 10 years (upto 2030).
Who knows, someone may invent a backyard nuclear fusion power plant by 2030 which will fit under your staircase or barbecue station, generating the worlds cheapest power which will render all existing power infrastructure obsolete.
If that happens, then transfer your investments to that firm which pioneers and more importantly establishes itself and leads in low cost decentralised power generation and distribution.
The existing power sector is more than 150 years old. I see its life limited to another 10 good years.
Decentralised power grids are the future. Centralised power grids like those of today are extremely vulnerable to Electromagnetic Pulse (EMP) attacks and will be the first to go down in the time of a war.
Other evergreen sectors are puncture proof tyres, agricultural commodities, agricultural food products for daily use, fast moving consumer goods (FMCG), steel, aluminium, healthcare, pharma, established innovative software behemoths that generate sales from innovation, services and product sales, and not mainly from advertising, and definitely not from the low cost outsourcing IT coolie model, industries involved in the water sector(infrastructure, treatment, pollution control and distribution), telecommunications, video communications and any firm that comes up with teleportation like the original Star Trek series.
Star Trek was one of the most visionary TV series I have ever seen.
If you asked anybody in the 1960s, they would say cell phones and video conferencing is science fiction only possible in Star Trek.
But it came true in 2020.
I chose to trust Star Trek based on their past track record.
This publication is for informational purposes only, it should not be considered Financial or Legal Advice.
Consult a financial professional before making any major financial decisions.
Before you take their advice, make sure the financial professional has a significant portion of their own, and if possible also their children’s net worth, in the investments that they are recommending to you, just like I have done, and publicly displayed at www.artofrealwealth.com.