Long Term Buys

 Long Term Buys

Why Young Investors Should Stick With Stocks

The occasional, inevitable stock market crash tends to drive some investors away -- some more permanently than others. Alas, those who stay away will probably wish they hadn't, especially if they head for the exits while they're still young.

Read more

Earn your million

Getting really rich has always eluded the middle class. It always seems like you are just a few steps away, but your monthly salary does not seem to be enough to catch up with the elite crowd. If there were just a few simple rules to follow!

Albert Einstein once said that the power of compounding is indeed the eighth wonder of the world. Making your money benefit from the compounding that you learnt during your school days, is the key to hit a million.

We chalk out a few key points to help you build that million in your bank account.
Do your number crunching

As you start on the million rupee project, you first need to have clarity on how much you can set aside towards this key goal in life. For this you need to assess your net earnings (the amount that gets credited monthly to your bank account) — pull out the household expenses/commitments towards liabilities thereof and arrive at the net savings. Of this, you can set aside about 10-15 per cent as a buffer towards contingencies.

If you are a 25-year-old and in a position to set aside Rs 5,000 a month on a regular basis, in precisely 10 years with an achievable 10 per cent return, you would hit a million.
Chalk out your plan of action

Once you decide how much you can put aside, all you’ve got to do is settle on where to put the money. Stacking them up in your bank account is a sure way not to achieve the required corpus. Employ your money to work for you and pay you — that’s the best scenario to be in.

Now that your goal is fixed, evaluate your risk appetite and based on that, start scouting for the best investments to achieve the returns. Equity as an asset class provides superior returns, especially in the long term.

Statistics point out that globally they have been able to provide a 10 per cent compounded annual returns.

However, if a pure equity portfolio appears risky, arriving at an appropriate asset allocation is important. Strike a balance between direct equity, equity mutual funds, debt mutual funds, bonds etc.

The key factor in asset allocation is that one should not get carried away when the going gets good in equities and overexpose the portfolio to stocks.

Stay disciplined, focussed and at the end of the tenure, you will have what you set out to achieve. Always have a part of your investment into equities, with higher exposure while you are young and gradually reducing the same as you get older.
Buy right, hold tight

In the investment, time is your only ally — buy what you understand, hold on to it irrespective of all the intermediate glitches. Often, one tends to react emotionally; but fear and greed are the party poopers in the world of equities.
Get a reality checK

Being realistic is hard especially in the world of investments. If you have picked the wrong stock, don’t hold on to it till eternity — miracles don’t happen often.

Let go of the bad ones as soon as you are convinced that things aren’t getting prettier with your holding, its time to say your ‘goodbyes’.

Keep monitoring your portfolio, bear in mind that ‘Rome was not built in a day’ and this applies to your wealth creation as well.

(The author is CEO & Founder of Right Horizons Consulting.)

via BL

Longterm, we have a bull ride on

Indian equity markets are dancing to subprime tunes, giving investors sleepless nights. But if you are a mutual fund investor, you might as well take a vacation. In the past five years, 81% of diversified equity funds managed to outperform (give higher) Sensex returns. This is an encouraging statistic, underscoring the need for investors to look at a long-term investment horizon.

For short-term investors though, there are lots of grey areas. In fact, there is only bad news, since the extent of outperformance has been widely fluctuating. In 2007, 68% of equity funds have managed to outperform the Sensex. This is an improvement from the 21% level in 2006 and 40% in 2005.

A historical study reveals that fund managers have traditionally relied on mid-caps to beat the Sensex. So equity funds gave higher returns than the Sensex whenever mid-cap indices outperformed large-cap indices. Mid-caps, as measured by the S&P CNX Midcap, gave higher returns than the Sensex in the calendar year 2002, 2003 and 2004. And in all these years, the extent of outperformance was high, with upwards of 90%.

But subsequently, in 2005 and 2006, the Sensex ended up giving higher returns than mid caps. This led to many equity fund managers, especially those heavy on midcaps, underperforming the Sensex. Only 40% of equity funds managed to beat the Sensex returns in 2005 and 21% in 2006. During 2007, midcaps have managed to give slightly higher returns than the Sensex so far and the extent of outperformance has improved tremendously.

Is the fact that equity fund performance is linked to mid-cap performance a cause for concern? Not really for long-term investors. While over the single year periods, there has been greater vacillation in performance, the statistics are encouraging over the long-term periods. For instance, in the past five years, 81% managed to beat the Sensex returns. It is 59% and 58%, respectively, for one and three year periods.

Another interesting trend has been that of fund managers finding it relatively easy to beat the Sensex in a bull run than in a bear run. In the past 15 years, there has been four years of 10% plus correction in Sensex values in 1995, 1998, 2000 and 2001. And except during 1998 — when the outperformance was 90% — in all the other years, the outperformance figures were 50% or lesser. With bearish phases existing in the current market, this is a cause of concern for the short-term investor.

With the launch of many variants of equity funds, outperformance might become a tad tougher. This is because a mid-cap fund would be benchmarked with a mid-cap index and not Sensex or BSE 200. Similarly, a broad-market fund would benchmark with a broad-market index like BSE 200 and not a large-cap index like Sensex. While there used to be only one equity fund in the past, which invested across market caps, now there would be a greater focus. Expect lot of action ahead for active fund managers in the equity market.

Long-term investing - Chetan Parikh

In a classic, Classics II, there is an interesting article by Jack Treynor.

“The investor who would attempt to improve his portfolio performance through unconventional, innovative research is currently being challenged on three fronts: (1) The efficient marketers say he will be unable to find any ideas that haven’t been properly discounted by the market. (2) Lord Keynes says that even if he finds these ideas his portfolio will be viewed as “eccentric” and “rash” by conventionally-minded clients and professional peers. (3) The investment philistine says that even if he stands by his ideas he won’t be rewarded because actual price movements are governed by conventional thinking, which is immune to these ideas.

Successful response to the first challenge lies in distinguishing between two kinds of investment ideas: (a) those who implications are straightforward and obvious, take relatively little special expertise to evaluate, and consequently travel quickly (e.g., “hot stocks”); and (b) those that require reflection, judgment, special expertise, etc., for their evaluation, and consequently travel slowly. (In practice, of course, actual investment ideas lie along a continuous spectrum between these two polar extremes, but we can avoid some circumlocution by focusing on the extremes.) Pursuit of the second kind of idea—rather than the obvious, hence quickly discounted, insight relating to “long-term” economic or business developments—is, of course, the only meaningful definition for “long-term investing.”

If the market is inefficient, it is not going to be inefficient with respect to the first kind of idea since, by definition, this kind is unlikely to be misevaluated by the great mass of investors. If investors disagree on the value of a security even when they have the same information, their differences in opinion must be due to errors in analysis of the second kind of idea. If these investors err independently, then a kind of law of averages operates on the resulting error in the market consensus. If enough independent opinions bear on the determination of the consensus price, the law of “large numbers” effect will be very powerful, and the error implicit in the consensus will be small compared to errors made on the average by the individual investors contributing to the consensus.

Under what circumstances, then, will investors’ errors in appraising information available to all lead to investment opportunities for some? As the key to the averaging process underlying an accurate consensus is the assumption of independence, if all—or even a substantial fraction—of these investors make the same error, the independence assumptions is violated and the consensus can diverge significantly from true value. The market then ceases to be efficient in the sense of pricing available information correctly. I see nothing in the arguments of Professor Eugene Fama or the other efficient markets advocates to suggest that large groups of investors may not make the same error in appraising the kind of abstract ideas that take special expertise to understand and evaluate, and that consequently travel relatively slowly.

According to Fama, “disagreement among investors about the implications of given information does not in itself imply market inefficiency unless there are investors who can consistently make better evaluations of available information than are implicit in market prices.” Fama’s statement can best be revised to read: “Disagreement among investors due to independent errors in analysis does not necessarily lead to market inefficiency.” If the independence assumption is violated in practice, every violation represents a potential opportunity for fundamental analysis.

The assertion that the great bulk of practicing investors find long-term investing impractical was set forth almost 40 years ago by Lord Keynes:

Most of these persons are in fact largely concerned not with most superior long term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of evaluation a short time ahead of the general public. They are concerned not with what an investment is really worth to a man who buys it for keeps, but with what the market will evaluate it at under the influence of mass psychology three months or a year hence.

Obviously, if an investor is concerned with how the “mass psychology” appraisal of an investment will change over the next three months, he is concerned with the propagation of ideas that can be apprehended with very little analysis and that consequently travel fast.

On the other hand, the investment opportunity offered by market inefficiency is most likely to arise with investment ideas that propagate slowly, or hardly at all. Keynes went on to explain why practical investors are not interested in such ideas:

It is the long term investor, he who most promotes the public interest, who will in practice come in for the most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

Thus Keynes not only described accurately the way most professional investors still behave; he also supplied their reasons for so behaving. He was careful never to say, however, that the long-term investor who sticks by his guns will not be rewarded.

But is the price of unconventional thinking as high as Keynes alleges? Modern portfolio theory says that an individual security can be assessed only in the context of the overall portfolio: So long as the overall portfolio has a reasonable level of market sensitivity and is reasonably well diversified, the beneficiary has nothing to fear from conventional holdings—and still less to fear from conventional holdings bought for unconventional reasons. There is, of course, marketing advantage in holding securities enjoying wide popular esteem but, as investors as a class become more sophisticated, they are less likely to be challenged on specific holdings.

There is, finally, a school of thought that asserts that research directed toward improving our analytical tools is automatically impractical because it does not describe the behavior of a market consensus based on opinions of investors unfamiliar with these tools. This line of arguments puts a premium on investment ideas that have broad appeal or are readily persuasive, while rejecting the ideas that capture abstract economic truths in terms too recondite to appeal to the mass of investors.

The investment philistine who assets that it is impossible to benefit from superior approaches to investment analysis if the market consensus is not based on these approaches misunderstands what appraisal of a security means: An analyst’s opinion of the value of a security is an estimate of the price at which, risk-adjusted, the return on the security is competitive with the returns on other securities available in the market. A superior method for identifying undervalued securities is therefore tantamount to a method of identifying securities that at their present prices offer superior long-term returns. The mere inclusion of such securities in a portfolio will guarantee a superior investment performance.

___________

___________

To the threefold challenge, a threefold is offered: (1) The efficient marketer’s assertion that no improperly or inadequately discounted ideas exist is both unproved and unlikely. (2) Keynes’ suggestion that unconventional investing is impractical is no longer valid in the age of modern portfolio theory. (3) The investment philistine who says good ideas that can’t persuade the great mass of investors have no investment value is simply wrong.

The skeptical reader can ask himself the following question: If a portfolio manager . . . [is consistently right when the consensus is wrong, while] maintaining reasonable levels of market sensitivity and diversification, how long would it be before his investment record began to outweigh, in the eyes of his clients, the unconventionality of his portfolio holdings?”