Coffee Can Investing

I don’t know the answer. For each of you it will be different. So you need to find it out for yourself.

So why this post.

Recently I was having lunch with one of my colleague who is just crossed 60. He was talking about how he had a discussion with a relative on what is needed after retirement.

So he had the following calculation:

If he needs Rs100000/- per month then he will need Rs12,00,000/- in a year.

If he is in the 30%+ tax bracket then he has to account for tax, which means he should make approximately Rs18,00,000/-.

If he has a fixed deposit which will give him 7% RoI then he will need a corpus of Rs26,000,000/-. Now since he is no where close to this figure he was getting depressed on how he will handle the situation.

For all of you who live out of India, the retirement age in India in most offices is either 58 or 60. Some jobs do have 65 as the age. Private companies do have people working after the age of 58 but that is on contract, not as a full time employee with all the benefits. Even in India the average age of both males and females has been going up every decade. In the cities especially with access to better medical treatment, the average age has crossed 70 now. Which means a lot of people in the cities will now live to cross 85.

Being an absolute optimist I highlighted a few things that were flawed in his argument.

The tax rate is different once a person crosses a certain age level in India.
30% tax on the whole amount does not include the deductions which the government allows as standard to all citizens. So the taxation is rarely on all your income.
While its good to have a large portion of your money in a fixed deposit, so that you are saved from the fluctuations of the stock market, it does not mean that you should have all your money in such low interest yielding paper. There are a lot of decently safe options which could give you safety as well as a higher rate of interest.
You need to account for inflation especially medical inflation in India which is going crazy.
You need to have a financial advisor who can suggest you ways to come into the lowest tax bracket.

If you were to take all the above items into account then the figure may not be the depressing number of 26,000,000/- given above. It could be almost 30-40% lower. That got my colleague a little relaxed.

Having given the above example however the fact remains that after retirement, you may want to travel across the country or abroad. How do you finance those spendings?

For an India perspective, I would suggest you read the book by Saurabh Mukherjea Coffee Can Investing. He has taken some very specific cases and built a hypothesis of how you should be investing to get to spend your old age well. At a broad level his belief is that for taking part in the stock market without risking majorly, ETFs are the best bet because they have low expense ratios(in one of my earlier post I have shown how an incremental 1-2% difference in returns because of expenses charged by mutual fund houses can impact your returns dramatically). However for the small cap stocks he still recommends using some of the renowned mutual funds.

For all my readers from the US and Canada, I will not tire of recommending Tony Robbins’ book Money Master the Game. Its a thick book but it’s a book which will give answers to a lot of your queries. Most of the so called advisors don’t answer the questions adequately well. Tony has been able to get you answers from some of the best people in the world who handle trillions of dollars combined. He has also given a perfect asset allocation breakup. Also all the advisors are very clear first on not losing money. And last they all suggest index funds again because of low expense ratios.

All of us have to retire one day. Death and taxes are the only 2 realities of life. How you manage your taxes and investments so that you live well, till you die. The earlier you start investing the better off you will be in the later stages of your life. I have been giving various examples of how compounding can do magic even if you don’t earn much – if you start early and invest in decently size returns.

Till next time then…find out how much you would need to retire and then work backwards to achieve it. Have a life.

Carpe Diem!!!

I was re-reading the book – The Start Principle: How it can make you rich by Richard Koch. If you have been following my posts you will know that I am quite a fan of his writings and have almost all the books that he has written. Each time I re-read them, I identify something which I had not noticed earlier.

For all those of you who haven’t heard of Richard Koch, he was the first one to write a book on the 80/20 principle, also known as the Pareto principle. He has written a lot of books related to the application of the 80/20 rule but in addition to that his basic slant has always been on strategy and has a lot of wonderful books written with strategy as the back drop.

If you want to read an author who simplifies strategy, not only for corporates but in real life, then he is one author you should read.

This time while I was reading the Star Principle once again, one aspect which leaped out of the book was that the Star Principle is so very similar to the Coffee Can portfolio which is covered by Saurabh Maukherjea in his book – Coffee Can Investing.

As per Richard if you invest in a company which is a leader in the market place and the market itself is growing at more than 10% compounded, then you will make money hand-over-fist if you can see that the market itself has longevity. His logic is- if you invest in such a company in its early stages, then the possibility of making massive returns is even higher. These companies are very few and far between and hence are STARS.

The concept of Stars, Cash Cows, Dogs and Question Marks was first propagated by the consulting company BCG (Boston Consulting Group) where Richard had his first job.

The concept of the Coffee Can portfolio was first espoused by Robert Kirby in 1984. It was serendipity because Kirby had recommended a certain portfolio to a friend’s husband who did not sell any shares in the portfolio over a period of 10 years while Kirby did. The amount of wealth that the portfolio created was way higher than what Kirby created in his portfolio. This is the central concept of compounding which I keep harping about in each of my posts. If you let something compound over long periods the amount created is enormous.

Saurabh takes the concept further and shows us examples with research, done over multiple blocks of 10 year periods, on companies which grew every year at a minimum of 15%. If you had bought shares in those companies and then forgotten all about them for the next 10 years you would have got a very large return on your investment. The number of such companies would be quite small. If you extend the research to 15 year periods then the number of companies which had such consistent growth would be even smaller, but the certainty of returns would be much higher.

At the end of the day if there are only a few companies which can grow consistently year on year over such long periods of time then thats only possible if they are market leaders in the niche they occupy. They also cannot continue to keep growing over long periods of time at such high rates, if the market itself is not growing fast enough. Which then end up being STARS by the definition given by Richard.

The one difference which I perceive is that the Coffee Can portfolio does take into account the fact that some of the companies may close down or lose market leadership by emphasising that you need to have a “portfolio of companies” with these characteristics.

So its not only about compounding but about creating a sensibly constructed portfolio of STARS which can create enormous wealth.

Wealth generation is not complex if you follow some simple rules….its not easy either though.

Till next time.

Carpe Diem

ANIMESHJMATHUR

How much do you actually need for retirement

The Star Principle & the Coffee Can Portfolio -looking at the same picture from different angles