Motilal Oswal

Asset Allocation – concentration within an asset class

Abundance, compounding, Financial Independence

Today I am writing on financial advice after quite a long time. I have written multiple times earlier also about how asset allocation is important to buffer you against shocks in one asset class. Especially when you look at it, when you are in a debt instrument like a Fixed Deposit or Term Deposit with a bank then the amount promised (or interest rate promised) is almost guaranteed.

On the other hand prices of stocks and commodities keep going in cycles and real estate also moves in cycles. As they move in cycles they also have a tendency to go down multiple tens of percentages during down markets. On the other hand they also spike up multiple tens of percentages and can over many years give a massive inflation adjusted return.

But keeping your portfolio balanced between different types of assets is critical because being concentrated in one asset class can totally destroy your wealth.

Today however I will talk about why it’s important to concentrate your allocation within an asset class.

As Garrett Gunderson says, being diversified means lack of knowledge / conviction. If you are not confident of the items within an asset class on which you are confident of growth then its better to invest in ETFs or mutual funds for that asset class. These are designed to generally be diversified so that the individual risk is avoided an average return can be delivered. These are however also at risk of market fluctuation.

On the other hand if you see when the news reports talk about a market being at a high or low, they always talk of a certain “bucket” of stocks. Which means it is the average of all the stocks in that bucket.The Nifty or Sensex or the S&P 500 are all examples of buckets in different markets . These buckets are also called index.

As in any average there are things which are way above the average number as well as way below. If you have invested in the stocks which are way above the average, then you can make returns which could even be more than 10 times the index over a period of time.

However the amount your portfolio can grow is determined by the quantity of these “peaking” stocks that you have in your portfolio. If these are only say 1% of your portfolio then even the growth of the 1% by leaps and bounds will not be helpful if the remaining 99% is not growing. If you want to get compounding to work for you, to help you create abundance, then the stocks that you have should be the ones that have the ability to grow faster

I learnt this lesson when I was reading the Motilal Oswal Wealth Creation studies and its a critical aspect for your investing, of you are doing it on your own. If you don’t have the conviction or heart to do this kind of work to build your portfolio then its better that you focus on mutual funds and / or ETFs.

Till next time then.

Carpe Diem!!!

Fractional Reserve System

Banks, cash flow, Debt, Leverage, Liabilities

When I was a kid, I always wondered how banks operate. Yes I did know they take money from us and lend it to someone on a higher interest, compared to what they give us. The difference in the two helps them make money. Because they allow you to keep the money on “tap” they give almost negligible interest rates. On longer duration deposits they give a slightly higher rate of interest because the chance of the money being asked earlier is reduced.

While this is simple I still could not understand how banks could lend so much money and how defaulters could have so much money with them.

A few years back I was sharing a ride from Indore to Bhopal – two cities in the state of Madhya Pradesh in India – with a banker. During this 4 hour journey, I happened to get talking with him on the same query. His logic partially answered my question.

The logic was that at any point in time the banks don’t allow you to withdraw All the money from a savings bank account. So they will put clauses – that in case you need an ATM facility then you need to maintain a certain amount, if you need a cheque book then you have to maintain a certain minimum amount in the bank, otherwise they penalise you. Due to this there is always money available to the bank even in savings bank deposits which will not go out of the bank in most situations. This becomes one source of low value funds. In addition there are the long duration deposits etc.

This had partially answered my questions but I was still not able to get my mind to understand how these deposits can create such high value lending capabilities for banks.

I don’t know if you have heard this term Fractional Reserve System before. If you have, then the remaining part of the post will be uninteresting to you. I first read about this in the book Second Chance by Robert Kiyosaki. Then I did some research on Google, Wikipedia etc. This got me most of the answers.

So now over and above what the banker above told me, the banks are allowed to lend a “multiple” of their deposits of various kinds. The key word is multiple. To ensure that the banks don’t go “bust” in most countries they have to hold a certain amount of their deposits with a central bank so that there is always a safety net for the depositors in case the debtors default and a bank has a run on their money.

Due to the ability to lend multiples of the deposit rate , say just for argument sake 10 times the deposit rate – if a bank has 1 million retail customers who have to maintain a minimum deposit of $100 then they have $100 million (1m*100) as the amount which would generally always be available to the bank. Now because they are allowed to lend 10 times the deposit rate, they can therefore lend $100m *10 = $1000m.

Since they always get a much higher rate on lending, and they only pay out a much lower level of interest to the depositors, the difference is huge amount of money for the bank. So on the 100m they are paying 2% per annum – which will mean giving out 2m as cumulative interest to the depositors. On the other hand they may lend at 10%. So 10% of $1000m is $100m. So at a gross level the bank has just made $98m using your $100m. I am sure there are other expenses involved, I have used 10 times just for demonstration purposes.

The challenge for the bank is when people default on paying their loans and the amount is much higher than the deposits. Therefore banks ask for collateral to protect their downside.

This was such a huge revelation for me because this is such a huge cash generator. They have so much leverage on the money which you have lent to them with very little liabilities. The key in this is the ability of the bank to have a good process to understand risk on a loan. This is why I now remember in one his interviews Raamdeo Aggarwal of Motilal Oswal, mentioned that if you want to buy the shares of a bank look at their loan underwriting process. The stronger the process the better the bank in getting its money back and the higher the profits.

I get elated when I am able to solve a query which has been at the back of my head for such a long time.

Let me know if you have had Aha moments when a query which has been long standing gets solved.

Till next time then.

Carpe Diem!!!

Marketing is Education – Part 3

education, Marketing, Methodologies, Technology

In this part today we will look at another set of great marketing successes who have used education as a method to differentiate themselves and made me their customer.

Example 1: Jay Abraham. I referred to him in the first part of this series. He is big time into giving away knowledge free of cost. There’s so much knowledge which I have gained from him, that when I could afford I started investing in his programs. Due to him I learned that there are only 3 ways to grow a business. The strategy of pre-eminence. The marketing Parthenon etc.

Example 2: Motilal Oswal.This is one of the biggest brokerages in India. When I was starting to learn about the stock markets, I read a lot of the Berkshire letters to the shareholders by Warren Buffet. I read a massive amount of books on the subject. The only challenge was that all the content was international. I was looking for content specifically for India.

That’s when I found the Wealth Creation studies that have been authored by Raamdeo Aggarwal each year for the last 20 odd years. These studies don’t talk about their company at all except maybe for the methodologies they use. Due to that, you gain trust.

When I read those twenty odd reports, I was able to understand the Indian stock markets. So when I had to choose my brokerage, I chose motilaloswal. There were others who were offering cheaper options but because I had trust in motilaloswal, I took them.

Its however difficult to create pure education based content and put it out. Even though I am so much in favor of creating educational content around your offerings, its especially tough when you are in the technology space where there’s so much happening. So I also struggle to get this to happen.

Having said that, I would still think its the best way to build trust with customers.

Till next time then.

Carpe Diem!!!

Other articles, reports and videos that helped me

Financial Independence, Uncategorized

 

Photo by Pixabay on Pexels.com

If you have been reading my blog posts regularly, will remember that I saw one of my mutual fund investments suddenly after 15-16 years and the Rs2000/- I had invested had over the years become close to Rs90000/-.

After this I became a regular at trying to identify various mutual fund schemes and slowly building SIPs (Systematic Investment Plans – where monthly a small amount of money directly gets withdrawn from the bank and invested in the respective schemes). Even today this is an important piece of education for me.

This was a very good mechanism because it brought about a lot of financial discipline into my life and I slowly started accumulating wealth.  The good thing was that in 2013 when this dawned on me, the Indian equity markets were at a very low level and subsequent to that there was a rally over the next 5 years which helped me gain a lot in terms of reaching my goals.

Around 2014-15 I read the Tony Robbins book Money Master the Game. While this book is focused towards the US economy and the shares and financial markets in the US, there were some nuggets of wisdom in a few areas which stuck with me.  One of the items was how even a 1-1.5% reduction in interest over a long period of time can make a very large difference in the compounding machine.

In India the mutual fund industry is quite regulated by SEBI and the total expense ratios of schemes are quite well controlled.  Inspite of that the MF schemes can be charging upto 3 odd percent as their fees.  This got me thinking how far I can be from my goals because my compounding machine has this leakage of about 3%. ( I even had a whole blog post related to how small differences in interest rates over long time periods can have massive impact on your wealth)

But I did not know, how to pick stocks myself.  So how could I invest in equity.  That’s when I started scouting for books on investing.  These were the books I wrote about over the last few posts.  However most books were US based stock market related and I could not relate to the Indian markets.

While searching for some simple inputs I came across people talking about the letters written to the shareholders of Berkshire Hathway by Warren Buffet.  I would recommend anyone anywhere, if they want to learn about basics of investing in simple terms then this is one of the best sources and is free of cost.  These letters are available on the Berskshire website and tabulated so you can search for them by the year they were published.

Inspite of these letters being written so well, I was a novice and was not able to relate to a lot of concepts with respect to the Indian companies, because American companies have different kinds of share holding patterns.

Accidentally I happened to chance upon the Wealth Creation studies created by Raamdeo Aggarwal Jt. Managing Director of Motilal Oswal.  These were similar to the Berkshire Hathway reports in that they came out each year but were better because they were talking about Indian companies and the Indian stock markets.  And to top it, they were also free.

I devoured on these reports and now am a big fan of Mr. Raamdeo Aggarwal who authors these reports.  Recently they have released the 23rd wealth creation study.

Most channels also get Mr. Aggarwal to discuss on the stock markets on a regular basis.  On YouTube you will see episodes of ETNow or CNBC TV18 where he is featured on a regular basis.  However last year the channel Bloomberg Quint ran a 4 part series with him on investing.  This is the best 4 hours you can spend on learning investing from one of the stalwarts of investing.

There is another person whom I admire from seeing his interviews on television.  he is Riddham Desai of Morgan Stanley India.  You can also see his interviews on either ETNow and CNBC TV18 or on Bloomberg Quint.

Between Riddham and Raamdeo the difference is the fact that one can distill the macro perspectives of the Indian economy so simply and present while the other can focus so well on the micros amazingly.

Have a look at these reports and videos and you will get a great input on how to evaluate stocks.

However stock picking is a tough call and if you don’t want to put in the hard work, then Mutual Funds and ETFs are the best route for you to take.

Till next time….