Thursday, July 07, 2011

Big idea for the small ones

I am really excited with the concept of 'anticipated growth' of certain types of businesses that operate with special economics. Imagine if our parents had invested in one such. We would have inherited a fortune. This gave me a though that I must open an account for my son. A DMAT in the name of a 7 year old. All I would need is a PAN card. I have been recommending this thought to a lot of my friends. The obvious question is how is it different from ours? The mind is very clever, it will differentiate this for the long-term and refuse to get anxious with short term volatility. This idea of a long term holding coupled by researching stocks with a 20 year growth anticipation will work to build a fortune. This is easier said than done. How do we identify such stocks that will display earnings growth into the future? What are the businesses of the next decades? Tomorrows TITAN and Nestle would be small mid caps today. Stocks have a price but businesses have a value. prices fluctuate but value of a business grows over time. They need long runway to grow into a blue chip.

A business that grows very fast for a long period of time can some times offer no benefit to share holders if it requires constant Financing to grow. If the business requires huge equity financing to support growth, then the larger number of shares outstanding will reduce the earnings per share for existing stockholders. There is no benefit from this anticipated growth. When the growth aniticipated is higher than cost of capital required to grow, Blue chips emerge. Like BHEL, Titan industries, Axis Bank all of which took time to grow but went to create wealth in order of more than 10 times in a decade.

These are conceptual ideas that have the power to multiply and foster wealth. These are rarely advised by the broker or wealth manager as there is no profit to be made for them. As with the quaint exchange traded Niftybees, this is like investing in the NSE index itself. Available from benchmark, Niftybees has returned 8.06 % over one year which is similar to the index returns at low cost. In advanced markets, fund managers find it very difficult to beat the returns from index or the broader market itself. This is because as markets mature, opportunity windows become shorter. It makes for an easy yet diligent job to get into an SIP of an Index itself. Again this is a simple idea that no broker can profit from and hence never recommended. Do you have any such ideas?

last week we learn something very interesting from the story that developed at Padmanabha temple in Trivandrum. For those of you who are not cued into it, a lot of treasure was discovered in the cellars sree Padmanabha swamy temple in Trivandrum. The treasure is valued at more than 100,000 crore, roughly the size of total business of a large PSU bank in a year. The treasure consisted of a lot of gems and gold jewelery. The royal famly of the erstwhile princely state of Travancore had left behind these with the Deity. They talk of a symbolic practice of the royal families dusting sands off their feet when they emerge from the shrine after worship. Meant to convey that wealth of lord Padmanabha should remain with lord and the family will not misappropriate. This is a great lesson for today's politicians who have amassed a lot of wealth belonging to the tax payers and government coffers. Greed knows no limit. There is another great lesson from this for the financially inclined. The magic of compounding. The fascinating effect of compounding gathers up momentum over longer periods of time and becomes an avalanche of wealth. The 100,000 crores accrued as the prices of gold kept inching up over the years. Time as they say, is the best healer. There was this company that came out with an issue in 1983 at Rs 100. An investment of Rs 100 per share at Rs 10,000 is worth about Rs 100 crores. Magic of Compounding. Any guesses?

Happy Investing!

1 comment:

Rahul Paliwal said...

Nice article Naresh on behavioral aspect of human beings. When we think about a trade and investing in child future, we used to have 2 different personality in ourselves.

Why don;t you start a service which can invest in child future where one can invest in potential opportunities of future. I think lots of people would like this Idea..

well it is fascinating to know about 10k to 200 crore miracle.. It really mesmerizes.
If I am not wrong it is Wipro...Also would like to know who all are the people who made such money in Wipro...

Keep posting..