the potential of equity investments

A Reliance Capital company

Chicken Soup For Equity Investor’s SOUL


DEFINITION OF EQUITY

OWNERSHIP OF BUSINESSES?

OR

FAST MONEY MAKING GAME???!!!


Who are the wealthiest people on earth? William Gates III Jr. Warren Buffett Lakshmi Mittal Sam Walton’s family (owner of Wal Mart Stores)

Closer Home… The Ambani’s Azim Premji The infocians YOU ????????

The Secret of their wealth..?


Why does the promoter create wealth for himself

and ordinary people keep losing

money in their stocks ……………

Do you have an answer ????


What happens when you hold equity ? You own business TO THE EXTENT OF YOUR SHAREHOLDING.

Few questions to be asked

Can the business grow overnight ?

Can the wealth be created overnight ?

Was Rome built overnight?

Is there a shortcut available to any place worth going to?


Life Vs Equity

Can a new born baby become adult overnight ?

Can a baby attending preschool , get an admission in IIT next day ?

Can a management trainee become chairman of an organisation in few weeks/months?

Can a business start giving you profits within first week itself ?

Are there businesses that shall do well over next few years but may not be able to make profit next quarter?


Psychological Pitfalls-Common to all

Fear factor

Greed

Omniscience : I know it all

Confusion between Expertise and familiarity

All golden eggs in a single day

Risk or volatility

Behaving on extremes


Risk and Opportunity

Opportunity is directly proportional to the Risk

Larger the Risk , larger the opportunity

However many individuals do not see them in COEXISTENCE

We see only one of them at a time , which drives our investing decisions

RISK OPPORTUNITY


Power of Equity

Unbelievable

but it happens….


Just imagine… How much can you make in 27 years by just investing Rs.10,000 initially

in any of financial instruments ?

Take a wild guess ???

Let us look at the real example…


If you have subscribed in 100 shares of ________ company with a face value of Rs. 100 in 1980…

In 1981 company declared 1:1 bonus = you have 200 shares In 1985 company declared 1:1 bonus = you have 400 shares In 1986 company split the share to Rs. 10 = you have 4,000 shares In 1987 company declared 1:1 bonus = you have 8,000 shares In 1989 company declared 1:1 bonus = you have 16,000 shares In 1992 company declared 1:1 bonus = you have 32,000 shares In 1995 company declared 1:1 bonus = you have 64,000 shares In 1997 company declared 1:2 bonus = you have 1,92,000 shares In 1999 company split the share to Rs. 2 = you have 9,60,000 shares In 2004 company declared 1:2 bonus = you have 28,80,000 shares In 2005 company declared 1:1 bonus = you have 57,60,000 shares


At the end of 2005… You have 57,60,000 shares of the company

Any guess about the company ? (Hint : Its an Indian company)

Any guess about the present valuation ?


The result of ‘Power of Compounding’

Your present valuation is about

Rs. 330 Cr.+

&

The company is ‘WIPRO’


If you had subscribed in 100 shares of CIPLA with a face value of Rs. 100 in 1979…

In 1980 company declared 1:1 bonus = you have 200 shares In 1986 company declared 1:1 bonus = you have 400 shares In 1988 company declared 1:1 bonus = you have 800 shares In 1992 company declared 1:1 bonus = you have 1600 shares In 1993 company split the share to Rs. 10 = you have 16,000 shares In 1994 company declared 1:5 bonus = you have 96,000 shares In 1999 company declared 1:2 bonus = you have 2,88,000 shares In 2005 company split the share to Rs. 2 = you have 14,40,000 shares In 2006 company declared 2:3 bonus = you have 36,00,000 shares

So Rs. 10000/- in 28 years have become close to

Rs. 82 Cr+


If you had subscribed in 1000 shares of INFOSYS with a face value of Rs. 10 in 1992…

In 1994 company declared 1:1 bonus = you have 2000 shares In 1997 company declared 1:1 bonus = you have 4000 shares In 1998 company split the share to Rs. 5 = you have 8,000 shares In 1999 company declared 1:1 bonus = you have 16,000 shares In 2004 company declared 1:3 bonus = you have 64,000 shares In 2006 company declared 1:1 bonus = you have 1,28,000 shares


Rs. 26 Cr+


If you had subscribed in 1000 shares of RANBAXY with a face value of Rs. 10 in 1980…

In 1980 company declared 1:1 bonus = you have 2000 shares In 1988 company declared 5:2 bonus = you have 2800 shares In 1991 company declared 3:2 bonus = you have 4480 shares In 1993 company declared 2:1 bonus = you have 6720 shares In 1998 company declared 1:1 bonus = you have 13440 shares In 2002 company declared 5:3 bonus = you have 21500 shares In 2005 company declared 1:1 bonus = you have 43000 shares


Rs. 1.8 Cr


How does this Happen?!What are the fundamental Factors that Drive Share Prices in the

Long Term?

Is it Sentiments?

Is it Demand / Supply forces?

Are Global Factors directly affecting our markets?

Is it performance of companies – Topline / Bottomline?


PROFIT GROWTH DRIVES SHARE PRICESHYPOTHETICAL EXAMPLE

Risk free returns (G-Sec / Bank FD) = 5%Expectations from Equities (Riskier Asset class) = 10%

Year I – If a Share of Rs. 100/- has expected EPS of Rs. 10/-

Suits expectations from Equities – INVEST!

Year II – If EPS expectation rises from Rs. 10/- to Rs. 15/-. With same requirement of a 10% return from Equities what will be the maximum price at which I am willing to Invest in this share?

Rs 15050% Rise in profits = 50% Rise in Prices

THIS IS EXACTLY WHAT HAPPENS TO SHARE PRICES IN THE LONG TERM


Lets define Long term – How Long ?? As long as One can afford

Can not be put into a standard frame , as life and requirements for all the investors are different

Yes the objectives can be divided into Long term and Short term , E.G. If someone has a 2 year old daughter , her marriage can not be classified as a short term objective.

Are there short term and long term objectives in your life ?

Are there short term and long term objectives in your investor’s life ?


But Why Long Term????? Because life is a long arduous Journey

Over long term , things work out themselves , like the horses’ flying

Risk of loss reduces tremendously or put in other words the chances of making huge money increase manifold.

Because every one has long term objectives; a corporate , a housewife, a child , a father …. Everyone .

Because MAKING MONEY IS THE MOST DIFFICULT THING IN THIS WORLD.


But Why Long Term????? Business Cycles change

Earning capacities change

Bottoms shift

Markets/Stocks/Economies……………get revalued . India has grown over last 10 years , economically and politically ……An example of Re rating….

These shifts can only be captured over long hauls

Ask warren Buffet

Compounding effect


INDIA – PAST, PRESENT AND FUTURE

Salaam Bombay

Vs

Slumdog Millionaire


Few Observations about India Why Salaam Bombay and Why Slumdog Millionaire

Guru Vs Deewar

How Many Beauty Pageants have we produced in last decade

How many booker prizes

A successor to Warren Buffet

Now Oscars ….

Obama’s Statement – CHILDREN FROM NEW YORK SHALL HAVE TO COMPETE WITH CHILDREN FROM SHANGHAI AND BANGALORE


Few Observations about India How many acquisitions have been done by Indian businesses over last 10

years?

Can u guess the number of Kisan Credit cards in this country ?

How many Indians in the super rich list ?

Can a pink Slip be given to a farmer

Is recession a fashionable word?

Does your maid servant have a mobile phone ?

Had you started investing in equities when you were 11 years old , could there have been another WARREN BUFFET


Nothing is More Powerful than the

IDEA

whose time has come


How the wealth has been

created for

AMBANIS,BIRLAS,TATAS

Bill GATES,MITTALS……???


Few Observations about Wealth Creators.

Is promoter a investor in his business?

Is he an investor like you and me ?

How long does he hold onto his shares?

Does he watch CNBC like you , me and our Mother In laws?

Does he have Entry / Exit price targets ?

Does he focus on price movements or business growth?

Does he not lose money when markets fall?


Few Observations about Wealth Creators.

Why there is only one Warren Buffet?

Why only one Peter Lynch ?

Out of 40 , How many stocks have fared well in Warren Buffets’ portfolio ?

If there is one thing , that sets WEALTH CREATORS apart from you , me and many others , it is their holding period and conviction ………Even their

investment decisions have gone wrong at times.


But ……..How can I create wealth ?I get a small salary

every month …..


Few Simple Things need to be done

Herd’s follow leaders with a lag , Which means a leader is always alone when he begins his journey…….who heard of Warren Buffet when he was 11 years old?

Fear is the biggest enemy , its dominance in any aspect of our lives is detrimental to growth

If Jamal can do it despite all the hardships ……….think ….

Greed leads to unrealistic expectations, which plays spoilsport…….one can not enjoy his achievements in such a scenario……..

Small contributions over a LONG PERIOD ( 5/10/15 years) towards equities shall help


Ask Yourself everyday ………..

WHAT DOYOU WANT TO DO ?

MAKE MONEY

OR

CREATE WEALTH


Wealth Creation is as much about intelligent investing as much about hard work , patience,

conviction and self belief ………..We shall get a lot of time to change the world ……but Only one shot

to create wealth for ourselves and our families……..And the time is NOW.


Overcoming Fear shall be the Key

Throw fear out of your dictionary ……

Don’t be afraid of being alone or losses….

Do not over commit in any asset class….

Our job has been made easier by promoters and Fund managers ….

Equity investments can create huge fortunes if followed and adopted as religion….


I HAVE MANY EXCITING IDEAS ABOUT MAKING

MONEY …BUT ONLY ONE BORING WAY TO CREATE

WEALTH ……


India is a strong domestic story…

Gearing levels are low for India Inc.

A growing middle-class

Rising incomes and purchasing power, rapidly growing middle class, favorable demographics, and strong Indian corporate sector are key to India’s long term growth.

India is a young nation

Rising global purchasing power

Household distribution by annual income

-5%

0%

5%

10%

15%

20%

ID CN IN KR TH MY PH SG HK TW JP

Average annual GDP growth, 2000-07, nominal USD terms


(Source: www.abnamro.com, CEIC)

# These are only estimates & actuals may vary

* Savings rate is estimated to grow in line with the GDP growth rate, which is estimated at 8% CAGR

Indians among the highest savers…

10%

15%

20%

25%

30%

35%

40%

1970 1980 1990 2000

India

Asia high growth

Gross domestic saving, share of GDP (%)

Asia

India

Year 2,008 2,009 2,010.0 2011 2,012GDP 1,120 1,254 1,404.9 1573.52 1,762

Savings @35% 392 439 491.7 550.732 617

Savings include individual, corporate and govt savings


Key Risks:

Prolonged global recession.

Political uncertainties till general election in India

Geo-political concerns


A GREAT OPPORTUNITY EXISTS!!!

The whole world is convinced about the India Growth story. Very Few Indians are!


NIFTY 1990 - 2008

0

1000

2000

3000

4000

5000

6000

7000

1 325 649 973 1297 1621 1945 2269 2593 2917 3241 3565 3889 4213

Nifty @3000CAGR : 14.01%


In the last 28 years - - - -

we’ve seen ….

•Two wars•Numerous Tension situations with hostile neighbors•At least three major financial scandals•Assassination of 2 prime ministers•At least 3 recessionary periods•11 different governments and•An unfair share of natural disasters,

Equity markets are still reasonably up!!!!


Time in the Markets - - - - - !NO. YEAR

ENDSENSEX ROLLING

1 YR GROWTH

ROLLING 3 YEAR

GROWTH

ROLLING 5 YR

GROWTH

ROLLING 7 YEAR

GROWTH

ROLLING 10 YR

GROWTH

ROLLING 15 YR

GROWTH

0 Mar-79 100

1 Mar-80 129 29

2 Mar-81 173 35

3 Mar-82 218 26 30

4 Mar-83 212 -3 18

5 Mar-84 245 16 12 20

6 Mar-85 354 44 18 22

7 Mar-86 574 62 39 27 28

8 Mar-87 510 -11 28 19 22

9 Mar-88 398 -22 4 13 13

10 Mar-89 714 79 8 24 18 22

11 Mar-90 781 9 15 17 21 20

12 Mar-91 1168 50 43 15 25 21

13 Mar-92 4285 267 82 53 43 35

14 Mar-93 2281 -47 43 42 22 27

15 Mar-94 3779 66 48 40 33 31 27

16 Mar-95 3261 -14 -9 33 35 25 24

17 Mar-96 3367 3 14 24 25 19 22

18 Mar-97 3361 0 -4 -5 23 21 20

19 Mar-98 3893 16 6 11 19 26 21

20 Mar-99 3740 -4 4 0 -2 18 20

21 Mar-00 5001 34 14 9 12 20 19

22 Mar-01 3604 -28 -3 1 -1 12 13

23 Mar-02 3469 -4 -2 1 1 -2 14

24 Mar-03 3049 -12 -15 -5 -1 3 15

25 Mar-04 5591 83 16 8 8 4 15

26 Mar-05 6493 16 23 5 8 7 15

27 Mar-06 11279 74 55 26 17 13 16

28 Mar-07 13072 16 33 30 15 15 8

10/28 5/26 3/24 3/22 1/19 0/14Probability of Loss


SUMMARY Equities are the best asset class for long term

investments

India Growth story to continue for many more years. Indian equities - Amongst the best in the world!

Mutual Funds: One of the best ways to participate in our country’s Growth


Thanks

the potential of equity investments

Investor Relations

ar ia ca

long term objectives

asset class

short term

long term

wealth creators

warren buffet

present valuation