Long Term Investors & Stock Market - 8 Lessons

"If you are a long-term investor, you should own high- quality stocks and close your ears to the siren song of those who say a rate rise will cause you problems.*

If you are not a long-term investor, I wonder what you are doing in the stock market at all, and so will you one day."*

- Terry Smith.......The "Buffett of Great Britain"

Terry Smith, often known as the English Warren Buffett, has once again shared his annual letter encompassing ideas on investment strategies positioned to do well, views on specific stocks and thoughts on the current financial world. 

Well-known in the UK among retail investors, Smith’s Fundsmith Equity fund returned about 18.6% in 2021 and holds 28.9 billion pounds ($39.4 billion).

Here are 8 lessons that we must take from his vision :

*1) No investment strategy will outperform in every reporting period and every type of market condition. So, as much as we may not like it, we can expect some periods of underperformance.*

*2) In investment, as in life, you cannot have your cake and eat it, so it is difficult if not impossible to find companies which are resilient in a downturn but which also benefit fully from the subsequent recovery.*

*3) In our view, it would be a mistake to sell some of these good businesses in order to invest temporarily in companies which are much worse but which have greater recovery potential.*

*4) Someone once said that no one ever got poor by taking profits. This may be true but I doubt they got very rich by this approach.*

*5) We invest in companies, not indices or countries and in our view, the country where a company is listed is largely irrelevant.*

*6) We continue to apply a simple three step investment strategy: Buy good companies, don't overpay, do nothing (i.e., minimising portfolio turnover to minimise costs)*

*7) You may have heard a lot talked about the so-called 'rotation' from quality stocks of the sort we seek to own to so-called value stocks, which in many cases is simply taken as equating to lowly rated companies.*

 

*8) Inflation: It is a bit like trying to light a bonfire or a traditional BBQ on a damp day. If you put an accelerant like gasoline on it you can go from no fire to a loud ‘Whoosh!’ and find that you have also set fire to the garden fence.*

The good news is that we do not invest on the basis of our ability to forecast inflation or any other macroeconomic factor. We invest in companies not countries, indices or macroeconomic forecasts.*

Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com

Is Paying Dividend, a Healthy Reinvestment favouring Shareholders

 

Paying dividend may not always be the best option. Many investors are very serious about dividends and they consider receiving Dividends is very important part of their Investing. They invest only in companies that have a good dividend history and avoid other that are not generous enough with their dividends payouts. But a high dividend-pay-out ratio may not always be the best take for investors. A healthy dividend pay-out is often lapped up by markets. The stock gets a thumps up and all parties, the company and its shareholders are happy about the outcome. But dividend largesse may not always be in the favour of investors value creation mechanism. Companies could deploy that cash into existing growth opportunities to remain competitive and best in the game. According to our investing matrix, a company can utilise its cash in four ways.

First, Reinvest the proceeds back into the business

Second, Go in for related acquisition

Third, Repurchase shares and…

Fourth, finally pay out dividends

See how paying no dividend could impact the fortunes of companies; If Infosys had paid no dividends and simply repurchased shares, or developed new software and IT centres, it would have created more value for its Stakeholders, since ROI of their funds / business management is much higher that money in the hands of shareholders. Since investors will use their dividend money to buy other shares, or to buy bonds or to make bank FDR or spending. Other than spending, all other modes of reinvestment by shareholders will be lower than using that money by companies for betterment of their businesses. This concept that Utilising cash for other than dividends, is not the standard thing that is taught in the corporate finance department of our major universities. Why do we debate negatively, rather than applying this simple idea to make business stronger with internal accruals. Fund manager’s preference for no dividends do’not mean that they disapprove dividends that they gets from their investments…. but they vote in favour of more deeper value creation for shareholders.

The one thing I will tell you is the worst investment you can have is Cash. Everybody is talking about cash being king and all that sort of things. Cash is going to be come worthless over time, but good businesses are going to become worth more and costlier over time.

Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com

Investment with Moats Risk Management

 

While investing in equity, How to safeguard a Good story suddenly going bad, leaving no profitable exit…. lets choose companies with #unbreachable_moats. Capital flows to the point of maximum returns. When a company delivered outsized profits, its success attracts #competition. Other entrepreneurs enter the field with their own setup, often with #lower_priced_offerings, and take away the #first_movers market share. Competition forces the leader to cut prices and this whittles down his margins, impacting their bottom line directly.

Thus, over the time, the profits of most companies tend to regress to the mean. Legendry investors liked to invest in, the companies with big moat surrounding their business model and brand equity. Wealth creators in equity market guide big moats consists of following #matrix of

#early mover advantage

#high switching costs

#intangible assets

#network effect

# economies of scale.

If investors choose a company based on these moats, and do keep a close watch to ensure that the stocks script unfolds along the expected lines. One reason is that over the time lot of moats got breached, so timely moat tracking is must to keep value alive in equity. Next is to keep a watch on competitive advantage, other things could go wrong, say the management could slip up on execution, thus when you invest in a company with a visible economic advantage, you still cannot afford to let your guards down and let bottom line screwed up unknowingly. Its like building your investment castle, surrounded with big moats, having crocodiles within to create real value for your portfolio. One build, keep #tracking developments on the matrix of five, as mentioned above.

Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com

Importance of Digital Literacy in Education & Economy

Digital literacy is the ability to learn, understand, and adapt to technology-inclined changes in a constantly evolving digital world. The pandemic has re-emphasized the importance of being equipped with the right skill set to efficiently use technology to sustain and even preserve the “normalcy” of our day-to-day lives. The idea is to have in place a system so resilient that, despite severe disruptions, life can carry on without having to come to a screeching halt. Today, digital literacy is just as important as any other subject that children and young adults are taught at educational establishments and could even be leveraged as a teaching platform in itself.

The future has enormous potential to be transformed into a digital world; in fact, we are already witnessing a technological revolution. From ordering medicines to delivering shipments using drones, the future is set to be one where digital solutions are going to be able to cater to a myriad of requirements. The youth of today should be educated and well-versed in tech-enabled solutions as it is going to be their future. Industries across verticals have already begun adopting automated solutions that reflect a strong impact on numerous facets of their business, both internal and external. Tech will continue to govern numerous facets of our lives, from becoming a medium of teaching in itself to adopting digital solutions that provide better career and life prospects. Going forward, digital literacy is going to be an imperative aspect of our education system.

Companies which are consistently been investing in and adapting to new technology, which includes redesigning ERP to a microservices-based design and launching future-ready solutions. The intent is to make sure that decisions are based on data and not just instinct. Deploying ML also enables us to drive operational efficiencies through optimised routing, address correction, and also aids in operations by predicting volumes and manpower requirements. We keep exploring new avenues and areas where we could make use of AI and ML to impact operations and drive efficiency and optimization.

How the youth can be digitally empowered, what kind of exposure and engagement opportunities in the educational curriculum can educational institutes implement to raise the interest of youths to up-scale their digital skills, and should it become a must for schools, colleges, and other educational institutes to conduct workshops or crash-courses programmes to drive the importance of technology for businesses ???

Teaching and learning is a two-way street. The future necessitates individuals who can remain resilient by adapting to the needs of the hour efficiently. Therefore, schools and colleges must start building a technologically inclined foundation for students to help them adapt better to the world of tomorrow. The in-school curriculum must be tailored to include programmes that induct individuals into adopting tech solutions; this in turn will help them leverage their strengths to do more rewarding tasks. Currently, some institutes have an IT component as a pre-requisite course. However, the level of depth with which the subject is being taught needs to penetrate much further to truly make an impact. Courses to familiarise children with such subjects can also be introduced at an earlier stage with a much simpler explanation provided. We all begin school by learning the alphabet in order to speak fluently in any language; technology and automation should also be considered a language, allowing children to learn the basics, setting up a strong foundation for them and then banking on it to further increase their knowledge and agility in the long-run.

Having said that, schools and educational institutes can only do so much. Growth can only be witnessed if the individual is also willing to learn and invest well in themselves by looking online, finding the right courses, and actively working towards the pursuit of When asked what advice as an IT leader would he give to the youth considering their career in the technology industry, what should they know about the industry before starting their career, and what challenges they could face and how do they overcome the challenges, he said, to anyone looking to begin their careers in information technology or any of its sister streams, my only insight on this front is: opportunities and more opportunities! The industry is growing at an exponential pace, and the opportunity for career growth is optimal. Especially in a post-pandemic world, the significance of the industry has been propelled to much greater heights and shows immense promise. My only advice would be to grasp every opportunity coming your way and consistently invest in updating your industry knowledge.

Children of the present and in the future too, have and will grow up alongside technological leaps. Having said that, networking across industries and age groups will also be incredibly important. While technology and digitalization are the future of tomorrow, it is crucial to not entirely eliminate the element of human touch while interacting with a customer. Challenges on this front could arise. However, leveraging the insight of your seniors and curating solutions that are a combination of artificial and augmented intelligence is the best way forward to negate those challenges.

Getting introduced to learning more about industries and businesses early on is also a very important aspect of bridging the learning curve. This will assist students in connecting theory to real life and comprehending the impact of technology on actual business. Mentors also play an important role in guiding youth to take the right steps to achieve their goals; their experience and wisdom enrich one’s learning.

Understanding design concepts is another important step in this journey, and the earlier one begins, the better. Mathematics and physics are also important subjects to master, particularly for engineering, AI/ML, and analytics.Understanding the concepts in detail can help develop better solutions for businesses and customers in the future.

Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com

Saving Economy v/s Spending Economy; which is better……

Indians wastefully save…. Ask them to spend, on imported cars and, seriously, even on cosmetics!  This will put India on a growth curve. This is one of the reason for MNC's coming down to India, seeing the consumer spending. Does it not look true, with our traditional thought, let’s examine the same with global facts…

The Japanese save a lot.  They do not spend much.  Also, Japan exports far more than it imports. It has an annual trade surplus of over US$100 billion. Yet the Japanese economy is considered weak, even collapsing.

Americans spend a lot and save very little. Also United States of America (USA) imports more than it exports.  USA has an annual trade deficit of over $400 billion. Yet, the USA economy is considered strong and expected to get stronger.

But where do Americans get money to spend? 

They borrow from other countries like Japan, China and even India. Virtually others of the world have to save for the Americans to spend.  Global savings are mostly invested in USA, in dollars.

India itself keeps its foreign currency assets of over $50 billion in US securities.  China has sunk over $1.1 trillion in US securities.  Japan's stakes in US securities is in trillions.

RESULT :

The USA has taken over $5 trillion from the world.   

So, as the world saves for the USA - It is the Americans who are spending freely.   

Today, to keep the USA consumption going, that is for the USA economy to work, other countries have to remit $180 billion every quarter to the USA, which is $2 billion a day, to the USA!

A Chinese economist asked a neat question. Who has invested more, USA in China, or China in USA?   

The US has invested in China less than half of what China has invested in the USA.

The same is the case with India.  India has invested over $50 billion in the US.   

But the US has invested less than $20 billion in India.

Why is the world after USA?

The secret lies in American spending, that they hardly save for.  In fact they use their credit cards to spend their future income.  That the USA spends is what makes it attractive to export to the USA.  So USA imports more than what it exports year after year.

The result is…..The world is dependent on USA consumption for its growth.  By its deepening culture of consumption, the USA has habituated the world to feed on USA consumption. But as the USA needs money to finance its consumption, the world provides the money.

It is like a shopkeeper providing the money to a customer so that the customer keeps buying from the shop.  If the customer will not buy, the shop won't have business, unless the shopkeeper funds him. The US is like the lucky customer….and the world is like the helpless shopkeeper financier.

Who is America's biggest shopkeeper financier? Japan and China of course.  Yet Japan is regarded as weak economically.  Modern economists complain that Japanese do not spend, so they do not grow.  To force the Japanese to spend, the Japanese government exerted itself, reduced the savings interest rates to almost zero, even charged savers for keeping their money in the bank.  Still the Japanese did not spend (habits don't change, even with taxes, do they?).  Their traditional postal savings alone has over $1.2 trillion.  Thus, savings, far from being the strength of Japan, has become its pain.

CONCLUSION: That a nation cannot grow unless the people spend, not save. Not just spend, but borrow and spend.

This is a very Interesting article written by an Economist about the world economy. Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com

Indian Women in Saving and Investment Economy

One fine day, I was asked a perplexing question,

Why do Indian women play no role in savings and investments ?????

I replied it's not true and following will be sufficient enough to prove my views :-

Women in their inimitable manner, have played an important role on the savings front in Indian households. This is a popular misconception, because women's investment choices are possibly more traditional. Being wired differently than men, women place great importance on factors like safety and tangibility, which amply reflect in their saving & investing preferences.

##GOLD, most of the yellow metals in Indian homes is purchased and owned by women. Even the gold inherited, reflects women's choices, rooted in our society since time inmemorial. No wonder, how Indian household own enough gold to meet America's requirement for next 100 years. You will notice the emotive appeal of every gold loan advertisement, is always directed towards a female gender. This asset has helped finance and mushroom many small and medium businesses across the country. These precious assets are powerful hedging instrument that women safeguard for helping economy in business.

##PROPERTY, DIAMONDS, same is the case with property, diamonds, art and collectibles, which are investable assets of measurable value. The likes of Cryptos / Bitcoins have a long way to go before they can earn a ladies trust as lifetime asset creation.

##FIXED INCOME INSTRUMENTS, when it comes to fixed income, I bet most of the post office deposits and Kisan Vikas Patra instruments are driven by women savings.

##CASH is actually queen !! Women are adept at best cash management. All will agree that during demonetisation in India, most cash was deposited by the woman members of the family.

##SHARES, coming to Equities, there is a big difference between low participation and no participation by women. But this too is changing.....It is heartening to note that indian study found that proportion of women equity investors too have grown from 16 % to 24% in just last two years in India stock markets.

##INTANGIBLE ASSETS, last but not the least are the intangible assets. Our little kids are the most precious assets to us. Need not to be mentioned, who plays the pivotal role in nurturing our future generations for individual, or for the nation.

Is there a need for more equal opportunity ?? 

Yes, But no one can deny the immeasurable role women play in our finances, saving economy and our overall life.

HAPPY WOMEN'S DAY !!

Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com

CryptoCurrency- Legality & Taxation in India – Budget 2022

It’s still a yaksh question, Why Taxation of Virtual Digital Assets (VDA) doesnot make it Legal in India ? 

Trading of crypto currency, NFT and other virtual digital assets (VDA) is rising on a rapid pace. The tax proposals by the Budget 2022 will achieve some level of certainty for the Income Tax Calculation. However legality of such transactions are yet to be blessed by the Indian Government. Taxation of VDA is being clarified by inserting section 115BBH in the Income Tax Act.

HIGHLIGHTS:

--Income from sale of VDA, such as CryptoCurrency, NFT etc would be taxed at base rate of 30% in India.

--No other expenses would be allowed as deduction, other than cost of acquisition.

--Loss from any other source cannot be set-off against income from VDA.

--Loss arising from sale of VDA cannot be setoff against any other income.

--Loss arising from VDA cannot be carried forward.

Still, cost of acquisition and sales consideration has not been defined, it is unclear whether brokerage paid, will be part of cost or will be deducted from sales consideration or not. This amendment will be applicable from 01-04-2022, hence the taxability of income from VDA is still open for interpretation for FY 2021-22.

Provision of taxability, does not itself makes the transaction legal. For determining legality of Cryptocurrency, it will be left to The CryptoCurrency and Regulation of Official Digital Currency Bill, 2021. The scope of income tax act is restricted to provide for taxability of any transaction and even illegal transactions are being taxed.

Gifting of virtual digital asset have also been brought under tax ambit, by including it in the definition of property, under section 56. Therefore any gift of more than INR 50,000 (except few circumstances) would be taxable in the hands of recipient of such digital asset. It is generally seen that tax base is widened if tax is collected by way of TDS. Therefore, section 194S is proposed to be inserted which provided the following:

TDS deduction to be 1% on transactions. For specified persons TDS only to be deducted if value of the transaction exceeds INR 50,000 in a financial year. For other than specified person, TDS to be deducted if value of the transaction exceeds Rs. 10,000 in a particular financial year.

Important thing about Crypto Taxation is, the way Crypto transactions are conducted, buyer is not aware about the whereabouts of the seller. Therefore it will be impossible to deduct TDS of seller. In this case buyer may deduct TDS of the intermediary portal and take a reimbursement from them, which will be very cumbersome process. It would have been better, if the TDS would have been deducted by the crypto-portal itself, as an e-commerce operator under section 194-O.

If a NRI purchases VDA from a resident, it may have to take a TAN number in India and deduct the TDS. This will be again a very onerous responsibility.

Trading of crypto currency, NFT and other virtual assets is rising on a rapid pace. The above proposals by the budget will achieve some level of certainty of the Income Tax calculations only. However legality of such transactions are yet to be blessed by the government of India. Additionally, its taxability with relation to GST transaction is also not very clear. It will be great, if government clarifies its position and rest this controversy, once and forever. Shall conclude with the words, Earn & Pay Tax…...….let them fix Legality issues.

Disclaimer : This is purely a knowledge sharing article, not offering or influencing any deal or transaction or investments.

CA Yogesh Birla

Director
Birla WP Management Co.
read my blogs : www.YogeshBirlaCA.Blogspot.com