Saurabh Mukherjea is a highly respected individual in the financial space and is popularly known as the founder and CIO of Marcellus Investment Managers. Apart from being a Fund Manager, he's also a reputed author.
The best part about his books is not only the simple language that he uses to break down financial concepts which even a layman could understand but also the valuable and actionable tips that he provides for investors. This is a part which many investment books often tend to ignore.
A few weeks back I stumbled upon one of his books Coffee Can Investing and I couldn't stop myself from finishing the book quickly and share my learnings with you guys. The book in its true sense is a masterpiece from every aspect because it goes on to cover various concepts and perspectives around investments with the help of two fictional characters named Mr. Talwar and Mr. Sanghvi. And I'm sure that most of the readers will relate to them as I did because the book goes on to explain various investment mistakes that every person makes (at least one if not all) in their investment journey. And then the books also share the ways to rectify & avoid those mistakes while also clearing the various myths surrounding investments.
A majority of Personal Finance or Investment Books that we read are written from the perspective of the American economy, however, the fundamentals of the American economy and Indian economy are nowhere close to similar.
If I were to put it aptly both are like Chalk and Cheese.
However, this book is one of the few well-written books completely in the context of the Indian Financial Markets. This book in many ways changed my perspective towards investing and certainly is an eye-opener for those who have been looking at investing the wrong way. And so today I bring to you my learnings from the books that I found worth sharing. Let's go!
Real Estate is best avoided as an Investment Option
Real estate does not require a place in one’s portfolio because for multiple reasons outlined
Rental Yields in India are one of the lowest in the world. (In the range of around 1-3%)
Real estate prices saw a magnificent bull run from 2003-2013 that has taken the prices of residential real estate to stratospheric levels after which prices have rather remained subdued and it is expected to be that way in the foreseeable future.
Real Estate regulations have been tightened after the introduction of RERA, however scrupulous builders have always found ways to dump the buyers thus this sector remains very opaque. Frauds and scams are very common in this sector.
Real estate is an illiquid asset and cannot be liquidated immediately because it takes a few months to find a good deal, if it has to be liquidated immediately it will have to be sold at a heavily discounted price.
Real estate and Stocks historically have a high co-relation (75-80%), meaning that if the stock market rises the real estate prices rise and vice versa thus it does not offer any kind of “diversification".
Residential Real Estate in India is one of the most expensive in the world thus most retail investors will have to opt for a loan which indirectly affects their ability to experiment with life because now they have to keep their job (even if they hate it) to pay for the EMIs.
The 'Coffee Can Portfolio' has historically beaten Sensex every time
Saurabh Mukherjea applies very simple filters to identify quality companies. And he creates a Portfolio with such quality companies to make his own Coffee Can Portfolio. Below are the criteria to find your Coffee Can Portfolio stock. Let's take a look.
FOR COMPANIES IN THE NON-FINANCIAL SECTOR:-
The minimum market capitalization of ₹100 Crores because the reliability of the information of the companies below the threshold market cap is always a question and often subject to manipulation.
The Revenue over the last decade should have grown at a CAGR of 10%.
ROCE over the last decade should have grown at a CAGR of 15%.
FOR COMPANIES IN THE FINANCIAL SECTOR:-
The minimum market capitalization of ₹100 Crores.
The Loan Book over the past decade should have grown at a CAGR of 15%.
The ROE over the last decade should have grown at a CAGR of 15%.
A portfolio constructed based on the above parameters if held for 10 years has historically outperformed the Sensex every time. A handful of stocks will qualify for the portfolio and many of these handful stocks may remain flat or produce a negative return, the portfolio return will be driven by only a very few stocks.
Not only has the coffee can construct outperformed the Sensex every time but it also has had lower drawdowns compared to the Sensex because the companies that form a part of the Coffee can construct have sustainable moats along with competent management.
The filters mentioned above will help you narrow down to quality companies but an investor should perform in-depth research in these companies to build conviction and stick it to them for long periods.
High Expenses can be a huge drag on the Portfolio's return over the long term
The portfolio return can be heavily impacted because of the high expenses and over the long term, the difference can be mind-boggling.
For Instance, there are two funds: Fund A and Fund B, both the funds have delivered a CAGR of 10% over 30 years, however, Fund A has an expense ratio of 0.5% whereas Fund B has an expense ratio of 1%
If an Investor invested ₹1Lakh in Fund A the fund value after 30 years will be ₹15.22 Lakhs but if he had invested in Fund B then the fund value would have been ₹13.26 Lakhs
In other words, a mere 0.5% difference in the expense ratio of both funds resulted in the investor receiving ₹1.95 Lakhs less or a 15% shortfall. The difference in the maturity amount will only magnify as the holding period increases
There are a bunch of mutual fund schemes whose expense ratio is as high as 2-2.5% and in my opinion, it is astronomical because the fund performance is not guaranteed but the expenses surely are.
Trading frequently only makes the broker rich and not the trader however Investing makes the investor rich and not the broker.
Avoid trading in the first place would be my advice because very few traders are successful in the long run and even if you do, avoid over-trading. The best way you can expect to earn healthy returns is by taking a long-term view and leaving the stock or fund untouched for decades.
A Mix of Active & Passive Investing works the best
The ability to generate alpha by fund managers of large-cap schemes has hugely narrowed down over the years mainly because of the internet. Since the large-cap companies are regularly tracked by the market participants, any new development in these companies is known to everyone in a matter of seconds, thus the fund managers have no information advantage that they earlier used to have.
If you want to invest in large-cap companies it is best to use the passive approach by investing in Index Funds or ETFs, however, that does not mean an investor should completely shun the active approach as well, because the mid and small-cap segments are where the diamonds are found and a huge wealth creation opportunity exists.
The mid and small caps stocks are very risky thus in my personal opinion it is best to invest in this category via a mutual fund and let the fund manager take his call, one should also have the conviction to stick to the fund and not be afraid of the volatility by keeping a time horizon of at least 7-10 years.
The allocation between large, mid, and small caps depends upon a host of factors thus it is best advisable to consult your financial advisor before making the final decision.
Patience 🤝 Quality Portfolio = Deadly Combo
If you aren't thinking about owning a Stock for 10 years,don't even think about owning it for 10 minutes.
- Warren Buffett
Investors who have a quality portfolio along with the patience to hold on to it for decades pulls off the holy grail of investing- outstanding returns with the lowest level of risk possible.
The parameters mentioned to find a Coffee Can Stock can help investors create a quality portfolio but they should also have the patience to stay invested for a decade or more to see sizeable gains. Patience coupled with a quality portfolio can perform wonders, however, every investment decision that you make must be aligned with your Financial Plan irrespective of how juicy the opportunity is.
Form a Financial Plan with a Fee-Only Advisor
The very first step of Financial Planning (and often the most ignored) is making a written financial plan with the help of a Fee-only financial planner.
Fee-only advisors charge a fixed fee from the client and do not earn any commission from selling products; this ensures there is no conflict of interest, full transparency, and lower cost than going to distributors selling regular plans.
As per an RBI report in the year 2017, an average Indian holds around 88% of their wealth in the form of gold and real estate even though both these asset classes have failed to generate substantial inflation-beating returns over long periods.
There are a host of reasons for the same; however, the first being that people are not rightly educated about the power of equities and, the second I believe is because of lack of planning
Investors may end up investing all their money in gold for a goal that is 10-15 years away but what they need could be equities, all because the investor did not take the time to get clarity of their goals.
Investing without a written Financial Plan is like going on a trip without the destination in mind.
It might feel adventurous at first but can go haywire anytime.
Just the simple act of constructing a simple written financial plan can give you clarity about the path forward and a roadmap to achieve the goals.
Reading a book review is no substitute for actually reading the complete book thus I would suggest you pick up the book and start reading because I assure you that you will not be disappointed at the end of it. Pukka wala Promise:)
The book not only has data to support every finding but also has the details of every “Coffee can portfolio” that was created up to the date the book was written. If you are keen to read another masterpiece written by Saurabh Mukherjea then check out The Unusual Billionaires
If you have any doubts, want further clarity regarding a particular point, or want to write your opinions feel free to comment. This is Jinay, signing off...