Over the past couple of years, ITC (read as Indian Tobacco Company) has been in the news, as it moves to demerge the hotel business from other core operations of the company. For retail investors like you and me, this is a mega event because ITC is a behemoth and when they decide to separate their businesses, we get to learn a lot more about investing by studying them rather than listening to ‘10 best investment picks this year’ from some fin-influencer.

This is a detailed account of my thoughts on the stock. 

But first, an honest confession.

The first draft of this article was absolute bullshit. Since, I was more interested in drum beating about my investment prowess of buying the stock when no one wanted and keeping it in the portfolio for the last 3 years in which the stock has nearly tripled in value.

That’s where Mr Nandish Desai reminded me that I didn’t merely hold it because I didn’t have anything else to buy. I held it because I was completely sure about the value and potential of the business. And demerger was a great way to unlock it. Like an elder brother, he told me that our job is to share our learnings and not chest-thumping.

Without wasting much of your time, I will start with the article now. There are certain sections where you might feel that you already know this information, in that case, feel free to skip that section and move on to the next.

The intention of this article is to create a masterclass in understanding demergers via ITC.

ITC a Behemoth – A Brief History

The company’s roots can be traced back to the humble streets of Kolkata back in 1910. In those days, Kolkata was the hub of businesses due to its close proximity to the Bay of Bengal as it enabled overseas trade.

Spanning over 115 years, the company has expanded its product portfolio from cigarettes to hotels to agriculture to beauty products. The company 

Source: Jagoinvestor, ITC

Very few companies can be relevant for 100+ years. This extended time period speaks a lot about the company’s management and the way it’s being run.

Sometimes as investors, we get completely blindsided with the kind of work it takes to keep such a large company moving. We are always interested in our money growing and there’s nothing wrong with it. It’s our expectations that are completely incorrect to such a degree that we expect a large cap to move like a small cap.

We look for 30% to 40% growth in such companies year on year. Well, let me be honest with you, it’s not possible at all. Regardless of which fin-fluencer says, it’s simply not possible.

Visionary companies don’t just stick to one product line along the way, they diversify. There’s a school of thought in many seasoned investors that diversification should be in related industries only. Else, it becomes a cash guzzler of sorts.

But here’s the difference.

India’s economy opened up in 1992. That means, Indian companies had to be under License Raj from 1947 to 1992. Those were tough times. Unlike today, when any founder from the Rural parts of India can challenge a large institution based on his or her own merits. We don’t need family names anymore in order to move ahead.

You don’t need to be an Ambani or Birla to disrupt any particular sector anymore. Look at how Mr Deepinder Goyal of Zomato has disrupted how we experience food and grocery delivery. Same goes for Mr Bhavish Agarwal who is redefining Ola from a transport company to an auto manufacturer and slowly putting his feet into the evolving semiconductor industry.

It’s funny how Mr Rajiv Bajaj of Bajaj Auto isn’t able to reconcile with this change, since they are the businesses of a generation that thrived when there was simply zero competition.

ITC in its own way is in a very long battle. Right from hotels and agriculture to IT and personal care products, this company is facing a massive amount of competition.

It’s the Cigarettes business which is the cash cow of the company that is helping to fight these battles on multiple fronts.

Think about it – the cigarette business is responsible for close to 80% of operating profits (or EBIT) of the company. And yet, it needs just 8% of capital every year to keep it going.

Suppose this year the company did a sale of Rs 10 lakhs. Out of this Rs 8 lakhs comes from cigarettes business alone. And how much does this business division require to run itself?

Just Rs 80 thousand only. 

With Rs 80 thousand or as I wrote earlier – 8% of capital, the company is able to operate its plant, supply its products to the end consumers, pay for their salaries and everything.

But here’s an interesting take in this – Hotels business

In similar light, Hotels consume close to 22% of capital every year but only contribute 3% of operating profits (or EBIT) for the company.

These are not just numbers, it’s a point at which an investor’s blood should boil.

Because ITC has been doing massive capital expansion (‘capex’) for the last 10 years. Here’s a chart for you to look at.

Source: Jagoinvestor, screener.in

This is a bit technical, if you don’t wish to read it – please skip to the next section.

In Capex we define money that is left after for buying and selling of fixed assets such as land, building, plant & machinery, acquiring new businesses and some other selected investing items from the Balance Sheet.

So every year, the money that is used for expansion of business is taken into account and divided by ‘depreciation’ which is wear and tear on these assets.

If this capex / depreciation = 1, then every new addition is equal to the one that is replaced.

When it’s around 2, then it means some real capacities are being added.

But first, a quick word on ‘depreciation’.

When you buy yourself a nice car, you will not sell it for the same price right. Suppose you bought a Maruti car for Rs 10 lakhs and after 3 years of driving it for 50,000 odd kms, you will sell it for Rs 6 lakhs.

Simple math tells you that the car lost Rs 4 lakhs in value. 

NO.

Simple math doesn’t apply here. In the accounting framework, we get the invisible hand of depreciation that accounts for your use of the car, repair and maintenance work, etc – in short wear and tear. 

So, after 3 years, after depreciation when your car’s value is Rs 5 lakhs, then you have made a gain of Rs 1 lakh on the sale of your car. Truth be told, you will be TAXED!!

Now back to ITC’s chart.

In the last 10 years, ITC has been on a capital expansion spree. And most of this money has gone into building its world class hotels which has resulted in very little revenue growth for the company.

Pouring too much money to earn very little is the reason why most Institutional Investors stayed away from the stock. 

Here’s the proof.

 

From 2015 to 2021-22, return on the stock was 0. 7 years and the stock price return = 0.

And then something happened!

The rumours of demerger began. The Hotels business was going to now be separated from the other businesses of the company.

The stock price slowly started moving up.

In July 2023, Board of Directors of ITC Ltd, approved of this demerger. And this was a mega event. Something that everyone was waiting for.

 

Source: Jagoinvestor, ITC Presentation

Following this news something else too changed. Let’s take a look.

 

Foreign (FII) and Domestic (DII) Institutional Investors jumped at this opportunity. The stock began its movement after 7 years of stagnation.

It caused many retail investors to just sell the stock and exit. Because they were not tired and bored of holding this stock in their portfolio. For them, it was a permanent value trap. Hence, as soon as they got some good gain, they exited.

At this time, the Indian equity market was in the middle of a small and mid-cap boom. So retail investors were more interested in cashing that opportunity out and as a result their shareholding which was 45% before the announcement dropped to a mere 15%. While FII went up from 12% to 43%. DII largely remained the same.

The stock price jumped from Rs 200 to nearly touching Rs 500 in a matter of 2 years. 

The reason why FII bought the stock is because Demerger unlocks Value.

ITC’s non-hotels business consists of Cigarettes, FMCG such as Ashirvaad Atta, etc., paper industry, agriculture and IT are tremendous cash generating machines. When they will be accounted for separately, they will dish out good profits that will benefit the shareholders over the long term.

Hotels business on the other hand will now be subjected to a litmus test of performance. So the management will now have to be very careful about how much money they are investing and to what extent they are making profits.

The real test for Hotels will begin now. While the other businesses will be free from having to carry the burden on their shoulders.

Conclusion

As retail shareholders, we often miss the point of demergers. Maybe because we don’t fully understand the kind of stock price return it can generate for us.

Plus, demergers are long drawn corporate actions that take a couple of years to fructify. In such a time, it’s our impatience that tends to get in the way. Something else is always going up and someone is always making more money. We just miss out on our portfolio that can compound massively.

As retail investors, we should always check for these special situations and look for an incremental institutional ownership. If that happens, they all we need to do is fasten our seat belts and enjoy the ride!

Jinay Savla, Jagoinvestor

 

What superpower do you have as an investor?

When we think of the word “superpower,” we often picture iconic figures like Superman or Batman—individuals with extraordinary abilities that set them apart from the rest. But in the world of investments, superpowers aren’t confined to a select few; they are qualities or circumstances that give us an edge in our financial journey.

They are powerful traits or situations that can set one investor apart from another, whether through luck, hard work, or strategic decision-making.

These superpowers can significantly elevate your financial life and place you ahead of others on the path to success.

Recently, I posed the following question to our clients only whatsapp group

What are your superpowers as an investor that are helping you create the financial life you truly desire?”

The responses were enlightening, revealing how some superpowers were common for most people while some superpowers were almost missing in that group of investors.

I’d like to share the results with you. This was a multiple choice question, so we don’t have data on how many people exactly took the poll, but we expect it to be around 140-150 people participated in the poll.

Let’s dive in.

Poll Question

What are your superpowers as an investor (multiple choice) that are helping you to create the financial life you truly desire?

Super Power	Number of Votes
I am highly disciplined in saving/investing.	115
I am debt-free	63
I live well below my means.	42
I don’t feel guilty spending a good amount of money on things that enhance my enjoyment of life	30
I have a very well-balanced life	29
Money does not control me	7
I already created a good net worth early in life	6
I don’t get stressed due to money issues	5
I earn a very high income.	3
Luckily, I am going to get a good amount of wealth in Legacy	2
I don’t worry about the future	1

 

Superpower #1: I am highly disciplined in saving/investing.

(Votes: 115)

This superpower received the highest number of votes, likely because it was evaluated by a special group—our clients, who are accustomed to regular guidance. This is a disciplined group in itself, which explains why it garnered the most votes. However, I suspect that if we conducted a similar poll among a more general audience, the number of votes for this superpower might not be as high.

This superpower reflects the ability to consistently prioritize saving and investing over immediate gratification. It involves making strategic decisions that ensure long-term financial growth and stability.

Discipline in saving and investing is the cornerstone of wealth-building. It allows investors to benefit from compounding returns, navigate financial challenges, and achieve financial independence more quickly than those who lack this focus.

Superpower #2: I am debt-free.

(Votes: 63)

Almost everyone around the age of 40-45 has some form of home loan or car loan. People often buy a house by their early 30s or mid-30s and then pay off the loan over 15-20 years. A significant portion of their income goes toward EMI each month, which could otherwise be directed toward saving for the future.

Living debt-free is liberating; it provides more financial flexibility and reduces stress. I am pleased that the second-highest number of votes went to this option.

Superpower #3: I live well below my means.

(Votes: 42)

A lot of people also said that they are living below their means, which simply means they are spending much less than they are earning. It involves making conscious lifestyle choices that prioritize saving over spending.

This superpower is crucial for accumulating wealth. By controlling spending, investors can save more, invest wisely, and avoid debt, leading to a more secure financial future.

Even with a moderate income, some people can achieve this. It also means adopting a lifestyle that does not require a large corpus at the end. This may be why many people with less wealth than others may feel financially free compared to those with more wealth.

Superpower #4: I don’t feel guilty spending a good amount of money on things that enhance my enjoyment of life.

(Votes: 30)

This was an interesting one.

This superpower reflects a healthy balance between saving and spending. It represents the ability to enjoy life’s pleasures without guilt, knowing that financial obligations are met.

India is predominantly a savings-oriented economy, and we are all taught to save, save, and save. Many of us didn’t experience much wealth in our childhood, and spending was often seen as an irresponsible trait. As a result, we tend to develop a highly negative view of spending, making our default approach one of “not spending.”

This is ironic because we save precisely for that retirement phase when we can finally spend our money.

Financial wellness isn’t just about accumulating wealth; it’s also about enjoying life. This balance ensures that investors can pursue happiness while still being responsible with their finances.

Having a lot of wealth without this superpower means that your wealth has less meaning for you.

Superpower #5: I have a very well-balanced life.

(Votes: 29)

Not many mentioned this, but those who did report that they lead a well-balanced life, which simply means managing work, finances, health, and personal time effectively. It indicates a holistic approach to life and financial management.

Most people focus so much on earning money that they lose their own identity and neglect their health and other important aspects of life, thinking, “I will do it later.”

This can lead to burnout and damage both mental and physical well-being.

It’s important to have this superpower, where you consciously avoid letting money dictate your schedule.

Now, we are moving towards those superpowers where we didn’t get enough votes and this gets interesting

Superpower #6: Money does not control me.

(Votes: 7)

This superpower signifies that a person does not let money control their mind or actions. Financial decisions are made without being driven by greed, fear, or societal pressure.

When money doesn’t control you, you can make rational decisions that align with your values and long-term goals. This detachment helps avoid impulsive choices that could jeopardize your financial future, whether related to career moves, major purchases, or displaying assets.

For much of our lives, we strive to accumulate wealth and increase our income, often engaging in actions that we don’t genuinely desire.

It’s noteworthy that very few people voted for this superpower.

Superpower #7: I already created a good net worth early in life.

(Votes: 6)

Few people feel they created a substantial net worth early in life. Similarly, fewer individuals believe they were fortunate enough to accumulate a significant amount of wealth in the early years.

A strong financial start is crucial for long-term success, as it allows compounding to begin earlier in life. For example, if someone saves ₹10,000 a month, in just 10 years, they could accumulate ₹20-25 lakhs. At this point, the corpus itself might generate an additional ₹2-3 lakhs annually through returns, without any further contributions from the investor.

However, it’s possible that many people compare themselves to high earners and feel that their early start wasn’t as advantageous in comparison.

Superpower #8: I don’t get stressed due to money issues.

(Votes: 5)

Very less people said that they dont get stressed due to money issues.

It’s natural! Money is an important part of life and money-related stress is common. It takes huge control and an amazing mindset to not get disturbed due to that aspect. If you also get stressed about money issues, it’s natural and dont worry, just see that it does not hugely impact your well-being.

Superpower #9: I earn a very high income.

(Votes: 3)

Only three people reported feeling they possess this superpower.

The challenge with this superpower is that our perception of “very high income” is often relative to what we currently earn. For someone earning ₹10 lakhs a year, ₹25 lakhs might seem very high, while for someone earning ₹25 lakhs annually, ₹1 crore could feel like the benchmark for high income.

My guess is that many clients earn substantial incomes but struggle to recognize it as such because they constantly compare themselves to others who earn more.

However, if you have the superpower of earning a high income, I believe that about 75% of financial issues are effectively addressed. Most financial problems can be traced back to having a lower or limited income.

Superpower #10: Luckily, I am going to get a good amount of wealth in Legacy.

(Votes: 2)

Only two people indicated that they expect to receive a substantial inheritance.

Receiving a legacy can provide a significant financial cushion, offering opportunities for further investments or securing one’s financial future without having to earn everything independently.

However, many people come from middle-class families and are doing significantly better than their parents, making it unlikely that they will receive anything substantial from them. In some cases, inheritances are complicated, often consisting primarily of real estate, such as a family home, which must be divided among siblings.

Superpower #11: I don’t worry about the future.

(Votes: 1)

Everybody worries about the future.. some more some less.. hence no comments

However, this superpower reflects confidence in one’s financial planning and overall life trajectory, leading to peace of mind. Not being preoccupied with future concerns allows for a more enjoyable present. It indicates that an individual has taken proactive steps to secure their future, thereby reducing anxiety and enabling them to focus on other aspects of life.

I am curious to know who that one person is—we could all learn a lot from them!

Dear “1 crore” aspirant,

This is Nandish Desai from Jagoinvestor.com. If you’ve chosen to read this article, I assume you are serious about creating your first one crore. If you have already crossed the one-crore mark, this article can still provide insights for achieving your next financial milestone.

This article is written in a coaching format, drawing on my years of experience working closely with investors from all walks of life.

Our team has worked one-on-one with several thousand investors, and we’ve identified key aspects that explain why many people struggle to reach their first one crore.

The cheese (Rs. 1 crore) has moved for many 🙁

Getting cheese ( 1 crore) is EASY and hard at the same time.

We live in a world where it’s easy to be fit – gyms in every building, access to top dieticians and coaches, a wealth of information on health and fitness online, diet food delivery services, running clubs, and smartwatches to track your steps.

Yet, it’s just as easy to become unfit with binge-watching, food delivery apps, partying, smoking, and excessive drinking. Similarly, it’s easy to read a book, and equally easy not to. Forming good habits is just as accessible as forming unsupportive ones.

In the same way, creating your first one crore can be easy, but for many, it’s a challenging reality (referring to liquid money in equities, not real estate).

Many people struggle because their approach to accumulating wealth has become outdated, and they’re unaware that their “cheese” (ways to create one crore) has moved. Their habits around money might not be supporting their goal, or their overall approach to life may be hindering their ability to create their first one crore.

How did I create my first 1 crore?

There was a time in my life when nothing was working out. My income was unstable, I wasn’t investing regularly, and I had no focus on building my net worth. One crore seemed like an impossible goal. I felt like I was at ground zero, negative about life, and upset about many things.

One of my mentors came to my rescue and said, “If you are lying on the ground, you must use the ground to raise yourself. If you are negative, use those negativities to succeed in life.” His words struck hard, and I decided to restart my life’s journey. I realized I had nothing to lose and needed to dedicate myself to changing my financial situation.

It took a lot of time, effort, and failures to reach my first one crore. The question I kept asking myself was, “Nandish, is life predestined or a result of my self-effort?” This is a powerful question to ponder. If you believe life is predestined, you might feel helpless about achieving your first one crore. But if you believe your first one crore is a result of your self-effort, you can continue reading further.

10 pointers why it gets hard for people to create their first 1 crore

Below I want to share 10 reasons why most people are not able to create their first Rs 1 Cr and it gets hard for them to continue on their path of wealth creation.

#1 : Because what you believe may not be ALWAYS true

What you believe may or may not always be true. We all have our internal strategies for earning, saving, and investing, and as human beings, we tend to be very righteous about them.

Many people believe that only through real estate can they become rich, or only by doing business, or only by investing in gold. There are no right or wrong ways, but there are certainly newer and more effective ways.

You need to keep an open mind for new ideas and approaches. Being rigid in your beliefs about how to reach your first one crore can limit your potential. Understand that there can be a thousand more ways than what you currently believe to help you achieve your goal.

If you choose to be fixed in your thinking, you’ll miss out on new possibilities. People who grow faster in life are open to new possibilities, they are coachable, and they are not overly attached to their personal strategies for reaching their goals.

#2 : Low SAY-DO Ratio

Many investors begin their journey with the intention of never redeeming their investments until they reach their financial goals or target wealth. However, data from AMFI reveals that more than 50% of investors stop their SIPs within the first two years.

This discrepancy between what is said (X) and what is done (Y) with their money highlights a low say-do ratio.

To build your first one crore, you need to maintain a high say-do ratio. Trust me, no platform or YouTube video will stress the importance of this principle as much as it deserves. Ensure that you make strong financial commitments and learn to keep them, no matter what.

A high say-do ratio is crucial for achieving your financial goals.

#3 : Your Blood Cells Are Not Yet Enrolled in Creating 1 Crore

When you examine the life stories of champions, you’ll see that their entire being is committed to their goals. Most people wish or hope to create 1 crore, but their commitment isn’t fully internalized. Remember, your self-effort shapes your financial future.

It’s crucial that you fully embrace the goal of creating 1 crore, committing every part of yourself to this future. This commitment is not just about external actions but an inner game, an inner calling, and an inner commitment to yourself.

#4 : Poor Relationship with Your Own Rhythm

Everyone has a unique financial journey because we each have a different rhythm. It’s important to respect your personal pace on the path to creating your first 1 crore. You’ll understand rhythm when you listen to music or go for a run.

I realized the importance of rhythm while learning guitar from my music coach, Nishant, and also while running. You need to identify, acknowledge, and respect your pace in achieving your financial goals.

I recently heard from a friend in Mumbai about how she helped someone from a slum create his first crore through small savings and significant efforts.

Despite starting from different backgrounds and job profiles, everyone has their own rhythm. Don’t worry if your pace is slow; what matters is that you are actively working towards your first 1 crore, taking shots on goal.

#5 : Most People Forget to Bounce Back

Many people begin their SIP or monthly investment journey due to a breakdown in their career, health, or other uncontrollable situations. It’s perfectly fine to pause investments temporarily, but most people forget to bounce back.

Just like it’s hard to maintain consistency in the gym during the first year, the same applies to investing. Excuses (even valid ones) can derail your efforts. In the journey of compounding, breakdowns are inevitable, but it’s crucial to bounce back.

Many of our clients restart their SIP journey or reinvest after redeeming their money, demonstrating resilience and commitment.

#6 : You Need to Have a Thick Face

Having a “thick face” means building a shield against those who doubt your wealth creation goals. People around you may always doubt your ability to create massive wealth. Your thick face is your shield that prevents these doubts from affecting you.

Be clear about what you want to achieve, your goals, and your next milestones. Keep taking massive actions in your financial life. Remember, your only access to your first 1 crore is through consistent action and nothing else.

#7 : Fear Is Your Best Friend

The 13th-century Hindu philosopher, Shankaracharya, mentioned that even the greatest warrior, when standing in the midst of battle, sweats with fear.

You will face a lot of fear before and even after creating your first crore. Fear is a constant companion, and there’s no escaping it. Markets will have corrections, scams will happen, companies will fail, financial crises will hit, and wars will continue.

Despite all this noise and news, you must stay consistent on your path to creating your first crore. These events are tests of your commitment to wealth creation. Are you truly interested in wealth creation, or is it just a casual dream?

#8 : Lack of Self-Inquiry

Lao Tzu, in Tao Te Ching, says,

“Conquering others requires force; conquering oneself requires strength.”

Without self-inquiry, progress is impossible. It’s not just about accumulating one crore; it’s about conquering something within yourself that you may not currently see. You are not the first to aim for one crore, ten crore, or even one hundred crore.

Many have done it before, and the key lies in self-inquiry. It may seem spiritual, but it’s essential to elevate your wealth creation game.

Spend time alone, perhaps on a beach, with a blank sheet of paper, and capture the thoughts that come to mind. This process is about discovering your own strengths and new ways to succeed in wealth creation and life.

I often take such breaks for self-reflection, and this article is a result of my self-inquiry. Share this article with others who might benefit from it, and become a partner in helping individuals create their first crore.

#9 : Kill the Chicken

We all remember the story of the chicken that laid golden eggs. Out of greed, the owner killed the chicken, ending his supply of golden eggs. While it was presented as a story of greed, it’s actually a lesson in financial freedom.

The chicken represents your corpus, and the eggs represent the interest you earn for the rest of your life.

Many people start investing and build up a few lakhs (the chicken in the making). Then, an enticing expense arises, and they kill the chicken by redeeming all their accumulated money. This is a major reason why most people don’t reach their first crore.

They have the ability, knowledge, and money to create the corpus, but they redeem their investments for various reasons, leaving the goal unfulfilled. Check the redemption data of all mutual funds, and you’ll find that most redemptions are not genuine and often harm the investor’s wealth creation journey.

#10 : Not Maintaining a Journal: Experiences Worth One Crore Hit Us Every Day

I learned about journaling from the legendary motivational speaker Jim Rohn, whose words had a lasting impact on me.

My brother and I discovered journaling through one of his YouTube videos. Journaling is powerful and can surely help you achieve your first crore or any significant goal. Every day, your actions lead to experiences, and capturing them allows you to learn from them.

Every day, new ideas that can help you reach your goals will come to you, but if you don’t capture them, you miss out. Journaling might seem outdated or old-fashioned, but it can be a crucial tool in your wealth-creation journey.

How it feels when you reach Rs 1 Cr mark?

We always congratulate our clients when they reach their Rs 1 Cr mark after years of hard work and dedicated investments and its always very satisfying to read what they think about this milestone. I would love to share a snippet of what they said after achieving this milestone!

Testimonial #1

Testimonial #2

Conclusion

Your first crore is your game, and we are here to help and encourage you to play it.

If you want our team to help you design your first crore game, we would be delighted to have you on our client list. We will share how you can fine-tune your wealth creation game. Many of our clients are playing for portfolios of 50 or 100 crore.

Asking for external help is a sign of strength, and we are ready to pour our experience and expertise into your financial life.

Contact Jagoinvestor Team for Wealth Creation Services

Don’t forget to share your experience of reading this article, and share something from your life that could help someone else create their first crore.

Post Covid-19 hit lockdowns, India has seen a surge in demat accounts being opened. 

Around 114 million demat accounts were opened in 2023 alone which is around 2.8 times of 2020 number. Such has been the craze of the bull market we are witnessing.

As a result, there has been an unprecedented increase in the number of traders offering tips for undisclosed fees. Add to that, there are so many YouTube videos where people knowing very little about finance and how stock markets operate have now become overnight financial influencers. Too much irrelevant information is now floating around for no reason at all.

In short, the drama around stock markets is increasing.

Think about it.

Stock prices of several railways and infrastructure companies have multiplied in the last couple of years with absolutely no change in their earnings or their fundamentals. Whereas a high quality bank like HDFC Bank which has been holding the ship steady has lost around 18% in January 2024 alone.

So now you get people on YouTube and television trying to justify everything.

• If the market goes up, there’s enough justification.
• If the market crashes, there’s enough justification.

So what should an investor do in such a scenario?

It’s simple, just keep buying!

In the long run, stock markets are a net positive indicator for wealth creation. They cannot become zero. It’s not in their nature.

Check this chart out

It’s a simple chart of Sensex, Mid cap and Small cap index performance over the last 20 years.

You don’t need to go into tremendous details to understand that in the long term, markets keep going up. We have seen the fall out of the 2008-09 debacle, the 2013 crisis of India being a Fragile 5 nation and the Covid-19 meltdown.

Yet, the prices keep going upwards.

Take HDFC Bank for example.

Over the last couple of weeks, there has been a considerable amount of discussion around this stock. A lot of the youngsters who were born alongside the Bank’s launch date are declaring that this Bank’s future is over.

I believe some of these youngsters mindlessly comment via Telegram and YouTube, their careers are in grave danger.

Because if you take a 3 year horizon, then HDFC Bank’s stock has not gone anywhere.

But if you look at the last 2 decades, then the story is completely different.

It’s been a massive wealth-compounding machine for investors. I’ve written my own story of owning the stock which is up 30x now. (read here)

Now let’s take another example: Bharat Heavy Electricals Ltd. (BHEL)

In the last 3 years, it has become a darling of the stock market. Some people want to own it and some people are wondering what stopped them from owning the stock.

Let’s see the charts.

This chart makes your heart melt by missing out on the stock. 

Just look at the chart, if you had owned it for the same period as you would have owned HDFC Bank.

It would have been your worst nightmare of a stock in the portfolio.

Agree to disagree?

So as an investor, you would have made money if you had simply invested with your mutual fund or a portfolio manager whose one of the top holdings has been HDFC Bank and not BHEL.

The shareholding pattern of both companies give a clear insight.

HDFC Bank

BHEL

BHEL has had a very low ownership from institutional investors (FII +DII) with 25% at best vs HDFC Bank with an ownership of 82% as of Dec 2023.

Yet, we often get swayed by making a quick buck. So we tend to make a mistake of timing the market. This never works. As a result, in 2024 itself we are going to see too many people closing their social media shops or being financial influencers.

One fine day they would vanish into thin air leaving your trading capital in the red zone.

So what should you do if you don’t wish to be in red?

So all you need to do is switch off from the markets and keep investing all the way through. If you don’t need your money for the next 15-20 years, then why bother about what’s happening today.

Just leave it to the experts.

Conclusion

With the information flow increasing with each day, it’s hard to understand what is signal and what is noise. It’s even harder when you have a full-time job or a business to run. Such stress tends to take a toll on our family lives too.

Some of us might even be thinking of making a quick buck in this bull run so that we can retire early. That can be a big pitfall too. Because you are trying to make immediate money without understanding the very nature of the beast.

So it’s best to leave it to the experts to navigate the bulls and the bears, while you take a good vacation on the beaches of the Bahamas. At the end of the day, what’s the use of money if we cannot spend it.

This article is written by Jinay Savla, Jagoinvestor

Today we will talk about interest rates and inflation, the two hot topics of conversation in the investment world. I will try to simplify these two topics in a simple way and link it with your financial life.

The vast majority of views that we read in newspapers and blogs offer some form of asset allocation advice based on these 2 parameters. A simple retail investor like you and me will definitely get confused.

“To complicate is simple, to simplify is complicated. Everybody is able to complicate. Only a few can simplify.”  ~ Bruno Munari

Before we discuss interest rates and inflation, a story comes to mind. 

My wife and I really like to go for long drives. It just relaxes both of us. In fact, it’s the only common interest between the both of us.

For these long drives, we do some basic checks with the car and environment – whether it is raining or not, food, water and comfortable clothing. Since music is now streamed via the Internet, we don’t need to worry about CDs or cassettes, etc. Sorted.

Now when we start the car, Google Maps tells us that we will reach a particular destination in the next 7 hours with an average speed of 80 kmph based on the traffic. So we simply add a couple of hours of rest, washroom breaks and some lunch or dinner along the way. Effectively our journey becomes 8.5 to 9 hours.

Those of us who constantly drive on highways know the unpredictability of accidents. It’s like you are strolling and suddenly there’s a whole lot of traffic that you have to sit through. The crazy part is that there’s just no washroom or food mall available. So you are stuck in traffic listening to music and praying to God that the traffic clears very quickly.

Some uncles who are strolling around in such situations often become the messengers of bad news. It’s their duty to update every car whether there’s an accident, a fire, arrival of the ambulance, or police and then leave us with the hope that the traffic gets cleared quickly.

These unpredictable events lead us to a delay in reaching our destination and if we are not careful, these events also cause a bit of mental instability that leads to irritation.

But when the traffic clears, we drive as if our school’s last bell has rung and it’s time to go home. That feeling of relief. Some of us even want to cover the time wasted by driving at ridiculous speeds. It’s just different strokes for different folks. But if you just drive, you will reach your destination. It’s not rocket science.

Rocket science is what you do with your peace during these unpredictable events. That defines the happiness of your journey, not the destination.

Similarly, when you have planned your financial journey of life, there’s a destination set in your mind. Our financial independence is when we are no longer worried about looking after the expenses of our home and fulfilling the expectations of our loved ones.

There will always be some unpredictable events that will cause you to rethink your entire investment strategy. My humble request here is to understand the gravity of the situation before jumping into a complete restructuring of our financial plans. Because sometimes, the situation is made to sound a lot more horrible than it actually is.

Please keep an open mind and allow me to simplify these concepts to the best of my ability.

Inflation

This term has become the most used and highly abused in the world of investment today.

Some people talk about it as an end-of-the-world apocalypse in the making. It’s then linked to consumer spending and how things that are getting expensive won’t be consumed, so let’s stay away from the fast-moving consumer goods (FMCG) sector, and so on and so forth. It’s hilarious and disturbing at the same time.

So let’s understand what inflation really is and what it means to common people like you and me.

Simply, inflation is understood as a simple rise in the price of a particular commodity or service. Suppose, the price of milk goes up from Rs. 75 per litre to Rs. 80 per litre, the extra Rs. 5 is attributable to inflation. If you add human intervention to it, such as putting the milk in a bottle and charging extra won’t be considered as inflation.

To track inflation, the Reserve Bank of India (RBI) uses the metric of the Consumer Price Index (CPI). The idea is to capture the rise in price experienced by roughly 140 crore Indians. It’s a tough job, to be honest. That’s precisely the reason why such macroeconomic numbers should always be seen with a pinch of salt.

In the chart below, we capture the last 10 year’s journey of India’s CPI inflation. RBI has set a mandate to keep the CPI in the range of 4% to 6%.

Currently, CPI is inching towards 8% which is out of RBI’s comfort zone of 4% to 6%. There are multiple explanations for this and in my opinion, every explanation is valid. Because in macroeconomics, data is always supported by a story that we create.

However, if you come to think about it, our yearly expenses don’t rise by a mere 4%. They tend to be well above 18-20%. We call this luxury inflation.

RBI constructs its CPI with the following constituents.

Don’t be surprised! This is how the RBI budgets itself. Our household budgets are different.

The major pie of the CPI basket falls into Food and beverages. It constitutes a good 45.86%. So any unusual price hikes in onions, tomatoes, etc. have a direct impact on the inflation rate. Housing is 10.07% which is largely stable in price.

We don’t see massive fluctuations in a matter of a few months. Fuel & Light does have a lot of impact on our wallets but for RBI’s CPI it’s barely 6.84%. So a whopping rise in petrol prices might not directly affect the inflation rate so much.

So it’s safe to say that RBI’s expectation of the inflation rate and the inflation rate that we experience are two separate things. Yet, we give a lot of importance to inflation and base our investment decisions on it too.

We should really reconsider it.

Next in line is Interest Rates!

Interest Rates

When an investment professional speaks about interest rates, he generally refers to the Repo rate published by the RBI in its Monetary Policy Meeting.

In layman’s terms, the Repo rate influences our fixed deposit interest rate that we receive from the banks and the loan interest rate that we take for a house, business, car or bike.

Inflation and interest rates are interdependent. When the inflation rate goes high, RBI generally prefers to hike the interest rate. When the inflation rate is low, RBI prefers to bring the interest rate down.

Why does this happen?

Think about RBI as a head of the family, someone like a grandfather who looks after the entire family’s budget. He is constantly strategizing about which child of his should go out on his own and which child will stay together. Plus, business decisions even when they are independently run by his children, he is there to keep guiding constantly.

Suppose our monthly budget is Rs. 3 lakhs for a family of 10 people, and suddenly the entire family wishes to go for a small vacation.

How will he do it?

There are 2 options, to either tighten the household budget for a few months so that he doesn’t need to withdraw from investments or ongoing business. Or he will borrow from the bank to fund the small vacation and recover it later from the investments or business.

In the first case, the entire family will have to go through a tough phase because their expenses will become less for a while. In the second case, there will be too much pressure on the grandfather and his children to recover the money.

Similar is the case with RBI. When inflation goes out of its comfort zone, like a grandfather, it has the option to limit the supply of money in the economy so that people spend less. Or it has the option to print more money that will have to be repaid at a later date to avoid currency depreciation.

In a nutshell, whenever we see interest rates going high, we have to assume that inflation is higher too and vice versa.

Let’s look at a brief history of RBI’s Repo rates (interest rates).

Right from 2014, interest rates have been slowly coming down as inflation eased. However, in the last few months, we have seen them going back up. Home loans have become a bit expensive and so have our day-to-day expenses. But they are not so significant as to affect our budgets. If the price of tomatoes goes up, we will consume a bit less. It’s not a life-and-death situation for us.

Even if the interest on a home loan or car loan gets expensive by a couple of percentage points, most of us simply yawn. It’s not a material impact.

We are not macroeconomic forecasters who will tell you what is going to happen in the future. The intention of this article is different.

Yet, we take these 2 numbers seriously when considering our investments. Isn’t it so?

When interest rates are high, banks offer a very high fixed deposit rate. So we tend to move our money from equity to fixed deposits.

Contrary, when the interest rates are low, we move our money from fixed deposits to the equity market.

We forget the most important principle here.

The equity market is a completely different beast to conquer. Fixed deposit is a completely different financial instrument. They are not supposed to be interchanged due to some temporary economic factors.

What is an equity market then?

In simple terms, the equity market is a place where you get ownership of a business. So suppose, you want to own the growth of Reliance Industries. You will go to the equity market and buy some shares of the company. And if you want to sell because you don’t see any further growth in the same, then you can go and do that.

Companies like Zerodha, Upstox, etc. merely offer a platform to enable such a transaction. They are not the equity market themselves. They are merely enablers.

The factors that make you buy or sell a particular company’s stock is a completely different discussion that we will keep for a later date.

The biggest mistake that we see investors making today is simply moving their money out of fixed deposits and pumping it into equity markets. If you ask them why? That’s because equity markets will make better returns than the interest rates on fixed deposits.

Yes, we agree that equity markets will always make better investment returns than fixed deposits. Here’s a question I want to leave you with.

Will these interest rates and inflation make you a better investor?

Think about it.

Hint – We will cover this answer in the next article. Stay hooked.

The article is written by Jinay Savla, Jagoinvestor.