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Issues with compounding

When so many people talk about compounding in mutual funds and how easy to earn 1 crore,10crore ,100 crores easily over years, My question is why many have not achieved it so easily? Some of the answers I could think of 1) Lack of discipline: From time to time, we switch mutual funds to some other purpose. It could be purchase of an asset, consumption or try to do a small business or direct investing. Sometimes we assume market will be definitely overvalued only to realize later that it was not. 2) Withdrawal due to Fear factor : What if market plunges 30 pc. What if there is a war between Taiwan and China getting escalated to China US war. What if many lose jobs in a pandemic like COVID. We take out at least some of the funds. What if X,Y,Z party forms the Central Govt. What if US will have 2008 type recession in 2026? 3) Not having enough liquidity: Liquidity will look like a burden, but its like fire safety equipment. When Buffett can hold a huge fund waiting for correct opportunit
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Transfer Money without knowing the account

Agent A and B are given 100 million dollar each. Agent A will go to a peaceful location. Agent B will be deputed in troublesome location for a covert operation. A needs to transfer B 1 million dollar every month on average. But the catch is, it needs to be online but B will not disclose his account number as it can be traced by enemies or proven in the court. How can you device a mechanism to do it ( No crypto currency)?
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Moat companies

Highly profitable companies are sure candidate for investments. One has to deploy the resources where the return on investment is maximum. But highly profitable companies soon attract competition from other companies in capitalism, resulting in profit erosion over the years. Buffet said ,“if you've got a wonderful castle, there are people out there who are going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it." For a company that needs to protect it’s business (market share) and it’s profits from its competitors and grow, it needs a Moat. Pat Dorsey says moat for a company can be achieved in one of the following factors 1.Product differentiation – Company comes up with top notch products/services 2.Low cost production – Company has found a way to produce goods and services at low cost which competitor cannot copy easily. It may be due to Network effects. 3.Customer Locking - In the
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Value Investing

‘Intelligent Investor' is one of the oldest books written on Value Investing. Penned by Benjamin Graham , recent editions carry foreword of Buffett. Graham , father of value investing, lived in the post-depression US. He has suggested rigorous valuation procedures for buying the stocks in his book. It includes analysing earnings of companies for 10 years for earnings growth and the price should not be greater than 15 times three years average earning. The price you pay should not be greater than 1.5 times the book value etc. Buffett , who was mentored by Graham moved away from such valuation techniques. Buffett emphasized on the quality of the company rather than having strict quantitative measures .He says that it is better to invest in wonderful companies at fair price rather than investing in fair companies at wonderful prices. The price you pay is still very important. But it’s not the important factor. Charlie Munger, another pillar of Berkshire Hathaway, doesn’t mince w
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Magic of leverage

I have seen many families fail because of liquor and leverage- Warren Buffet Badly managed leverages not only destroy individuals; but also they bankrupt companies including investment banks. They put many out of their jobs as a consequence. We see even nations struggle if they have too much debt. But what is the impact of well managed loan? It may make you fly. Leverage acts as financial amplifier. You can see lot of business papers write about virtues of prepaying home loans to save interest cost without giving a thought about underlying asset's expected returns or the amplifier effect of the loan. Leverage improves the profits, if the returns are in excess of interest rate you pay. It destroys your capital if the underlying asset returns cannot exceed the interest outgo. Assume a person who bought a land for Rs 10 lakh in 2015. After 2 years we will consider 4 scenarios and compare the returns below. In one he makes prepayment and another is EMI for 2 years with 1
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Real estate returns in India (written in 2017)

I invest 50 lakh in an apartment that fetches me 2 lakh rent in the first year. I expect the rent grows approx. 5 percent a year . I want to sell the apartment after 20 years. What should be the apartment price after 20 years to make a 15% compounded return on my investment? We will use compound interest formula P(1+r)^n = 5000000(1+0.15)^20 =8.18 crores. Its 16.37 times the initial investment. Now we will calculate the rental return we could have got . Rental increase form a geometric series. We use geometric series summation formula to get 20 years rental accumulation. Say initial year interest is R. For 20 years, the sum of rental returns is R+ (1.05)R + (1.05)^2 R + ...(1.05)^19 R = R(( 1.05)^20-1)/(1.05-1) if we fix 200000 as the initial year return this gives us 6613190 Rs for 20 years. See that this rental amount also could have been saved every month, say at 8 percent interest. For simplicity if we assume savings are made at end of the year. The total amount we have in the
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Yield curve and sensitivity

  If you assume there is no default risk, fixed coupon bonds pay fixed ( predictable) cashflows throughout its lifetime. That doesn’t mean it is risk-free. You can make capital gain or loss on fixed coupon bonds depending on the prevailing market rate. Quantifying it, can help in risk mitigation. For example in US rate is expected to go up in future and in India it is widely expected that rate needs to come down. This will have impact on all bond prices. In such cases, we need to know how the yield changes of a bond affects its prices.   Assume a coupon with 100 face value , with 10% annual coupon rate for 10 years. For simplicity, On day one , let’s assume interest rate is so volatile and it can vary between 0-24% rather than staying at 10%. What will be the bond price at each yield? We can use yield to maturity equation below to calculate bond prices at each yield and we can plot it in a diagram( java program attached. Raname priceyield.txt to jar and double click to launch if you ha
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