Some thoughts on creating wealth- Putting money behind consumption themes- If we know where money is being spent, it should lead us to making money too.

(This appears in Deccan Chronicle- yesterday/today)

http://epaper.deccanchronicle.com/articledetailpage.aspx?id=11326168

IKEA, a global furniture seller, opened his shop in Hyderabad this week. The videos of the crowds tell us a story. That we Indians are compulsive shoppers. Over the last few years, we have seen an explosion in retail shopping. Whether it be malls or online or offline. A new comer like Patanjali has become a challenger to the Levers and the Nestles. And the other thing to notice is that new comers have not, as a group, taken away size from existing players. They have added to the market size.

As per reports, the ‘average’ per capita of an Indian is Rs.80,000 per year. For a family of four, it is Rs.4 lakh per year. Of course, the average is misleading. Maybe half our population is below this line. However, each day, more and more people are moving up in terms of per capita income. We are an aspiring population.

The inequalities also mean that more and more money is being ‘saved’ or ‘invested’. The flow of monthly “SIP” money in to Mutual Funds is at record levels. NBFCs that are lending in spaces like Housing Loans, personal loans, gold loans are growing at furious rates. Branded food outlets are also expanding at exponential  rates. Everyone is fighting for the money from the consumer. An extra rupee snatched from each one of us is Rs.130 crores!

There are two things to consider-  One is that there is an overall increase in disposable income. The second and more important thing is that the inequalities are also increasing. Thus, the spending increase will be more visible at the upper end. At the lower end, growth is dissipated due to the presence of the unorganized sector, leading to fragmentation. While nominal per capita income growth will be in two digits, we do not see the consumer giants report volume growth in two digits. There are also sectors where we are all spending big money, but companies are struggling- Telecom, airlines, etc- This is because there is regulatory intervention of a high magnitude. Wherever there are regulatory uncertainties, it is best to keep away.

At the upper end- beneficiaries seem to be in the high spend zones- luxury cars, jewellery, up market brands. At the middle, consumption and white goods seem to be the big winners. In many of these industries or businesses, the road to profits is long. Many miles to go. Thus, for most companies, staying the course is key.

Thus, when it comes to investing, the logical choice seems to be to pick up stocks from the “b2c” segment. It could be automobiles to toothpaste. Or lenders like Banks and finance companies. Housing finance companies, building materials. It is a huge space.

The one thing that strikes us that all the listed stocks in this space appear to be very expensive. However, those of us who thought of buying them at better or cheaper valuations are still waiting since long. There seems to be a premium attached to proven quality. The quality is also reflected in the high ROEs the companies earn and the regular dividend payouts, low to no debt and strong balance sheets.

With stocks remaining expensive in this sector, how does one build a portfolio of this over time? I believe that this sector can create a portfolio that can preserve your wealth and also beat inflation. We can pick from sectors like FMCG, Housing Finance, Banks, Building Materials, Automobiles, Branded apparel etc.  Once we start to make a list, it starts to grow and will rival a mutual fund portfolio. However, if we want to limit the number to fifteen or twenty, then the task is somewhat easier. Simply pick two from each segment. The two that have delivered the highest average ROE over the last ten years and in the last three years, have not seen a big decline in ROE.

This can be a ‘CORE’ portfolio. As regards timing, it is not easy. These stocks will not run away like some speculatives nor will crash. In a sense, they will give you ten to fifteen percent compounding over twenty years. One way to build such a portfolio would be to start a SIP for ten years or more in those stocks. I would put equal rupee amounts in each of them. If I have much smaller amounts at my disposal, it may make sense to stick to a large cap mutual fund. And one more thing would be to add to your stocks when there is bad news and the price reacts in a manner that is not justified.

And once you put this plan in place, additional moneys that you have could be used to bet on stocks that are still young and you become like a ‘venture capital’ investor in these.

 

 

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7 thoughts on “Investing – Picking themes

  1. Thank you Bala Sir.
    I have learned a lot from you & MoneyLife.

    I like your approach & want to follow it.
    You had mentioned similar approach in older posts as well.
    However, I have a small confusion.

    Question)

    Nifty PE Ratio is hovering around 28 !! (13/August/2018)
    And I want to execute SIP in stocks your way.
    Sir, what is better in your opinion?

    – A) But should I wait for PE to come at fair value (18 to 20) & then start SIP in Stock? And when PE is hovering above 24, I should SIP in liquid fund?

    …or..

    B) I should start SIP in stock now.

    Sir, please reply when you’ve time.

    Like

    1. Ben Graham has recommended a way to do this.

      When Index P/E is above fair value invest only 25% in stocks & balance 75% go in Debt/FD/Cash/Liquid etc – Rationale being, index could remain in higher range for long periods of time.

      Liked by 1 person

  2. Thanks for the post. MF returns have been very disappointing last 2 years.The whole intention for a MF portfolio is to a balance but the fluctuations seem to mirror stocks. Your suggestion of picking 2 stocks n each sector will definitely work better in long term than MFs(with the exorbitant fees etc)

    Like

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