Let me share the story a young guy who has just graduated. He recently got a nice job with a company and is able to save around 2 lacs per annum after all his expenses.

Now this guy is quite similar to all his peers, but different from his hot blooded brethren only on one small point. He believes in saving and investing, but does not want to chase stock market returns. In the last few years, he read a few books on investing by john bogle, and decided that he was going to invest in some decent mutual or index fund and then leave it at that.

You see, this young guy has a girlfriend and wants to spend time with her. In addition, he also wants to use his spare time pursuing hobbies like painting and travelling.

He sets up a simple plan:
– Save 2 lacs per year and invest it in a few index/ mutual funds
– Increase his savings by 5% every year to match inflation
– Invest each month via an SIP to put it on autopilot
– Avoid financial news on TV and use the spare time on other pursuits

Ten years later this guy who is now married, decides to have a look at his investment account. During this period, the overall market has delivered around 15% per annum for the last 10 years. He finds that his account is now around 67 Lacs. Not bad!

He goes back to his usual life and forgets about this whole stock market thing. The only time he checks is to extend the SIP in his account as most banks don’t provide a 10 year SIP option

Its twenty years now since he started and one day his wife asks him if they have decent savings which can be tapped for their daughter’s education, 10 years from now.

He goes back to his account and is pleasantly surprised to find that the account now has 3.7 Crs. He is confidently able to tell his wife that they truly afford a good quality education for their children.

At the age of 55, its time finally to fund their daughter’s education. Our guy, who is no longer as young, decides to look at his account and finds that the account has 16 crores!! This is far more than he ever imagined. Both he and his wife now start thinking of taking an early retirement. They figure that in 5 years’ time, the account would grow to around 29 Crs ** at the current rate if they can fund their daughter’s education from the liquid cash they have been holding on the side. This amount would be sufficient to retire and lead a comfortable life

Now I know some of you would raise objections like

– 15% consistent returns are good in theory, but the actual returns are more lumpy.
– Not everyone can save 2 lacs or do that without fail every year

Let me handle them both –

If you save consistently and do not withdraw the capital from the account, a smooth or lump 15% would still amount to the same in the end. It is only when people act smart and try to time in and out of market (and change the amount invested), that the eventual amount depends on the pattern of returns.

In addition, our overall stock market has delivered around 12-13% return in the last 20 years and if you add dividend and the effect of monthly cost averaging, a 15% CAGR is quite reasonable

On the second point, 2 lac saving per annum may not be possible for everyone, but I am sure a lot of two income professionals can muster this level of savings. In addition, I have assumed that the contribution rises only at 5% per annum. In most cases, earnings and hence savings can rise faster than that.

So my point is this – If the objective is to meet your personal financial goals, then discipline in saving and investing consistently is far more important than chasing the next hot sector or hot stock. Ocourse, higher returns will get you to your goals faster, but beyond a level of wealth, it more about flaunting than about its utility.

However, If the reason for chasing returns in the market is to get on TV or twitter to show the world how smart you are, then we are talking of a completely different objective. In such a case, the actual returns have nothing to do with the money or financial goals.

** If you wondering about the impact of inflation , a 6% inflation would still mean a nest egg of around 3.8 Crs in current money terms. In my books, even this is a good amount of money.

 
 

Ask any serious, long term investor on the type of company he or she would like to invest and you will almost always hear something along the following lines – A high quality company with sustainable competitive advantage (aka Moat) and long term growth prospects, available at a cheap or reasonable price

So what’s wrong with the above statement? It’s almost a truism and a guarantee of great results ….

This is a long post and I am trying out a new approach. Instead of posting the entire post with all the headache around the formatting, I have converted it into a pdf. please download this post from below

The search for a free lunch

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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

 
 

I recently tweeted the following

Untitled

The current assumption is that the local corner retailer (kirana) which has survived the large retail chains will continue to do well inspite of the online threat. Let’s look at some of the arguments made to support this thesis

Convenience
It is undeniable that the local kirana store offers a lot of convenience and personalized service. My own mother continues to buy grocery from the local guy and he is able to provide personalized service and home delivery at the same price. What can really beat that?

My point – is this a real differentiator for all products? The current mobile carrying generation may really not care as much about it. Now it’s true that rice, oil and other staples will still be bought from the local kirana store, but what about the higher value items – both FMCG and otherwise ?

Will the consumer not use a blend of these two options? Buy the bulky staple from the local guy as it cheaper to do so, but buy the higher value (read higher margin) items online where the price could be lower and selection larger.

What happens to the profitability of the local store which uses the staples as a loss leader to drive sales for the other products?

Credit
That’s true for a large portion of the poor/ unbanked population. But is that also true for the middle class? What happens when newer forms of banking and credit options start proliferating? Does the local kirana store still have an edge?

Personalized relationship
This is a difference no online retailer can meet ..right? Welcome to the world of data analytics. Look at Netflix and Amazon who are now able to look at your purchases and make recommendations. With the improvement in data analytics, mobile and AI, this will only get better

Trend in other markets
There is a consistent trend in several markets towards the following

– Big box stores such as Costco/ Walmart etc which sell high volume staples at very competitive prices which no online retailer can beat (yet)
– Convenience stores such as 711 which are able to provide quick convenience at a much higher price/ margin. These stores usually cater to impulse buying (snacks, coffee etc) and also stock a small assortment of staples for emergency purchases (milk, eggs etc)
– Ongoing pressure on brick and mortar stores to match the pricing of their online counterparts

The retailer’s point of view
Till now we are talking of the landscape from the customer’s point of view. If you turn this around and look at it from the retailers’ point of view, the situation can appear quite bleak.

What happens to the profitability of the physical retailer if the high value/ high margin items continue to migrate online and all that remains are the bulk and low margin items which are more efficiently served by the high volume/ low margins chain stores such as D-mart ?

The retailer still has all the overheads for inventory, real estate and labor costs which are rising, whereas the margins keep shrinking. The end result is a drop in the return on capital. What does this do to the small time and marginal store?

I have tried to raise highlight some of the points one needs to think about when trying to answer this question. I don’t think that the small store/ kirana will disappear completely, but it is quite likely that they will keep shrinking and their share of the economic pie is surely to go down.

In addition this trend will not remain limited to the local grocery stores. One can extend the same logic to any other goods which has some level of standardization and does not require a high level of touch and feel.

The above speculation is based on the current level of technology. Now combine that with ongoing developments in Artificial intelligence/ Machine learning, advances in drone tech to reduce delivery costs and finally 3D manufacturing.

Does it still mean that retail as we know now, will remain the same?
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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.