An Equity

Investment Model
for the Common
Investor
1
 Equity as an investment
avenue
 Equity is a legitimate investment avenue.
 Equity is as legitimate an investment
avenue as any other.
 Equity is the best investment avenue for
a common sensed and disciplined
investor.
 The problem is, equity can also be used
for speculation.
2
Investment Versus Speculation
 Investment: the purchase of an asset for
the conservation of wealth and the
increase of wealth, with the emphasis on
the conservation of wealth.
Speculation: the purchase of an asset for
the conservation of wealth and the increase
of wealth, with the emphasis on the
increase of wealth.
3
Investment Versus Speculation
 Short-term speculation Vs Long-term
investment
 100_____102_____104_____106_____124
1st Jan 31st Jan 28th Feb 31st Mar 31st Dec

 Senseless speculation Vs ‘Sensible

speculation’ – short-term investment would
be a good example of ‘sensible’ speculation,
provided the investor can hold for the time
horizon if necessary.
4
Investment Versus Speculation

“A trader reacts to price. An

investor, to fundamentals.”
Today, an investor is someone
who reacts to the
fundamentals of investment,
rather than fundamentals of
the stock market. 5
Doubling your money!
“The safest way to double
your money is to fold it
over once, and put it in
your pocket.”
- Frank M Hubbard
6
The Folly of Speculation
“Ninety per cent of
speculators lose.
And the ten per cent
who say they don’t,
are liars.”
7
The Folly of Speculation
“Markets reward investors
and punish traders.”
“Bear markets are when
stocks are restored to
their rightful owners.”
- J P Morgan
8
John Pierpont Morgan (1837 – 1913)

9
 Sir John Templeton
I never ask if the
market will go up or
down next month. I
know there is nobody
who can tell me that.
10
Si r John Templ eton (b orn
19 12)

11
 Mark Twain
There are two times in a man’s life
when he should not speculate:
when he can’t afford to,
and when he can.

12
 Mark Twain
 October. This is one of the
peculiarly dangerous months
to speculate in stocks. The
others are July, January,
September, April, November,
May, March, June, December,
August and February.
13
Mark Tw ain (18 35 -191 0)

14
 Sentiment
Basic human irrationality
Crowd behaviour
Greed Vs fear syndrome
Hype
Over-reactions
Mistakes 15
 Sentiment
Overconfidence
Mistaking pure luck for expertise
Using the stock market to fulfill
the need to be entertained
Mixing up the willingness to take
risk with the capacity to take risk
16
 Common Mistakes of Common
Investors
 They treat the stock market as a speculative
avenue, not as an investment avenue.
 They fall prey to market sentiment.
 They indulge in short-termism, like asking
for, and investing on tips and rumours.
 Having made wrong decisions, they refuse to
exit and cut their losses.
 There is no plan, no discipline, no model and
no strategy in their equity investment.
17
 Why Equity?
Government support for equity investment:
 Dividends on equity shares are tax-free in the
hands of the recipients even though there is a
14.025% dividend distribution tax payable by
the companies.
 Long-term Capital Gains Tax exempted on
equity, although there is STT at 0.125% on all
delivery based transactions.
 Short-term Capital Gains pegged at 10.2% with
STT.
18
 Why Equity?
 Exemption of all financial investments including
equity from wealth tax
 Holding period of equity & equity mutual funds for
long-term capital gains eligibility is 1 year as
opposed to 3 years for non financial assets
 Abolition of stamp duty on demat purchases
 Minimum market lot is 1, under the demat regime
 Stock lending
 Brokerages and demat charges are reasonable
19
 Why Equity?
The one reliable truth of equity
investment is that in the long
run, the market always goes up.
The rate of growth of equity
investments comfortably
exceeds the rate of inflation.
20
 Why Equity?
 Equity and real estate are the only
asset classes that have consistently
delivered genuine wealth
enhancement over the long run.
 The long-term rate of return on
equity investments is the total of the
dividend yield and the long term rate
of earnings growth.
21
Understanding the Stock Market

 ‘Stock Market’, ‘Investment’

 The stock market is a mirror of the economy.
 The economy consists of major divisions like
agriculture, industry and services and distinct
sectors within each of these divisions.
 The stock market reflects the current state of
the economy and future expectations of
economic performance.
22
 Four ‘normal’ stock market
scenarios
 Weak current economy +
pessimistic future economic
outlook = prolonged stock market
recession
 Weak current economy + optimistic
future economic outlook = beginning
of a stock market boom. Volumes
increase, stock prices stop declining
23
 Four ‘normal’ stock market
scenarios
 Strong current economy +
pessimistic future economic
outlook = end of stock market boom
with declining volumes and stock
prices and often high volatility.
 Strong current economy +
optimistic future economic outlook
= prolonged stock market boom.
24
 Four ‘normal’ stock market
scenarios – a quick recap
 Bad current economy + bad future
expectations = prolonged recession
 Bad current economy + good future
expectations = beginning of a boom
 Good current economy + uncertain
future expectations = beginning of a
slump
 Good current economy + good
expectations = big, continuing boom
25
 Therefore…..
 Investing in the stock market is
investing in the economy of the
country.
 No one can call himself/herself a
stock market investor, unless he/she
invests in the economy of the country.
 Anyone doing anything else, is a mere
punter.
26
 Therefore…..
 The world’s best writers on equity
investment will always urge you to “buy
the market.”
 That is another way of saying, “Buy the
economy or “Invest in the economy.”
 In this era of globalisation, the time will not
be far away when equity investment
means investing in the global economy
through the medium of equity.
27
 An Equity
Investment Model
for the Common
Investor
28
 Introduction
 Investment is a strategy.
 Speculation is also a strategy.
 Investment is a strategy based on the
fundamental principles of investment.
 Speculation is a strategy based mainly on
greed and a get-rich-quick attitude.
 The objective of a good investment strategy
is to get above average returns at below
average risk.
29
Six Rules and a Recommendation

Six Rules:
1. Diversify across 10 to 20 major
economic / industry sectors.
 Select only the top blue chips from
each sector.
 Allocate equal amounts to each
sector.
 Reinvest dividends. 30
 Six Rules.…..

 Review the portfolio at least once in 3

months, making additional purchases
upon a drop of 25% in the index from
the date of investment and if need be,
liquidating the portfolio wholly or partially
when targeted returns are achieved.
 The time horizon for equity investments
is at least 5 years.
31
 …..and a recommendation

Systematic investment
is recommended,
both for equity,
as well as equity mutual funds.

32
 Rules 1& 2: The Concept of
Economic Impact
 Diversify across 10 to 20 major
economic / industry sectors.
 Select only the top blue chips
from each sector.
 Why major sectors?
 Why top blue chips?
33
 Warren Buffett
It’s far better to buy a
wonderful company at
a fair price than a fair
company at a
wonderful price. 34
Warren Edward Buffett

35
 Rules 3 & 4
 Allocate equal amounts
to each sector.

4.Reinvest dividends.
36
 Rule 5
 Review the portfolio at least
once in 3 months, making
additional purchases upon a
drop of 25% in the index from
the date of investment and if
need be, liquidating the portfolio
wholly or partially when targeted
returns are achieved. 37
Rule 5 – Quarterly Reviews

Three portfolio performance

scenarios:
Under-performance
Tracking
Out-performance
38
Rule 6 – Equity Time Horizon

The time horizon for equity

investment is at least 5 years.

“Be greedy, but be long-term

greedy.”
- Rakesh Jhunjhunwala

39
Rakesh Jhunjhunwala

40
 Warren Buffett
I never attempt to make
money on the stock market. I
buy on the assumption that
they could close the market
the next day and not reopen
it for five years.
41
Rule 6 & the recommendation
 The time horizon for equity
investment is at least 5 years.

 The recommendation:
Systematic investment is
recommended, both for equity and
equity mutual funds.
42
Three reliable facts of equity
investment

Fact 1:
In the long run, the
market always goes up.

43
Actual Movement of the SENSEX
Source: Research of Sundaram Mutual Fund
46
Three reliable facts of equity
investment
Fact 2:
In the long-run, the rate of
growth of equity investments,
comfortably exceeds the rate
of inflation.
47
48
 Cumulative annualised returns of different asset classes
(1985 - 2006) Source: CLSA

Equity 17.9

G Sec 11.3

Bank FD 10.4

Gold 7.2

Inflation 6.8 (% Annualised returns)

0 5 10 15 20
49
Three Reliable Facts of Equity
Investment
Fact 3:
The long-term rate of return
on stock market investments,
is the total of the dividend
yield and the long term rate
of earnings growth.
50
 A quick recap of the equity
investment model
The Rules:
1. Diversify across 10 to 20 major
economic / industry sectors.
2. Select only the top blue chips from
each sector.
3. Allocate equal amounts to each
sector.
4. Reinvest dividends. 51
 A quick recap - The Rules
5. Review the portfolio at least once in 3
months, making additional purchases
upon a drop of 25% in the index from
the date of investment, and if need be,
liquidating the portfolio wholly or
partially when targeted returns are
achieved.
6. The time horizon for equity
investments is at least 5 years. 52
 A quick recap –
the recommendation

Systematic investment
is recommended,
both for equity,
as well as equity mutual funds.

53
The Equity Model – based on PIP
 The increase of wealth
 Tax-efficient income
 Liquidity
 Safety
 Diversification
 Investment Time horizons
 Systematic Investment
 Reviews
54
 Warren Buffett
“To invest successfully over a lifetime
does not require a stratospheric IQ,
unusual business insights, or inside
information. What’s needed is a
sound intellectual framework for
making decisions and the ability to
keep emotions from corroding that
framework.”
55
 Benjamin Graham
“The defensive (or passive) investor
will place his chief emphasis on the
avoidance of serious mistakes or
losses.
“His second aim will be freedom from
effort, annoyance, and the need for
making frequent decisions.”
(‘The Intelligent Investor’)
56
Benjamin Graham

57
 Warren Buffett
There seems to be
some perverse human characteristic
that likes to make
easy things difficult.

58
Warren Buffett

59
 Albert Einstein
“Everything
should be made
as simple
as possible.”

60
Benjamin Graham
Buy stocks like
you buy groceries,
not like you buy
perfume.
61
Benjamin Graham

62
 Testing the Model
Portfolio of 15 sectors and 30
blue chip stocks.
Two periods of 5 years each and
one period of 4 years.
Based on closing prices of
stocks quoted on the BSE.
63
 First Test: April 1992-1997
 Why this period?

 Bias against the portfolio:

 Dividends ignored
 Rights ignored
 Investment made at the worst possible
time, starting on the day the Harshad
Mehta scam came to light.
64
 Equity Portfolio Invested from April 1992 -
1997
No. Sector Company No. of shares as
on Apr 92

1 Paints & Chemicals Asian Paints 24

BASF 19
2 Two Wheelers and Bajaj Auto 19
Lubricants
Castrol 8
3 Food and Dairy Products Britannia 18
Nestle 25
4 Hospitality and Indian Hotels 24
Travel Thomas Cook 9
5 Cement Guj. Amb. Cement 19
L&T 29
 Equity Portfolio Invested from April 1992 -
1997
No. Sector Company No. of shares as
on Apr 92

6 Aluminium & Steel HINDALCO 14

TISCO 18
7 F.M.C.G. HLL 25
P&G 20
8 Banking & Finance HDFC 4
ICICI 4
9 Fertilizers & Chemicals Indo-Gulf Fert 109
Tata Chemicals 28
10 Agricultural Products ITC 12
Tata Tea 13
 Equity Portfolio Invested from April 1992 -
1997
No. Sector Company No. of shares as
on Apr 92

11 Pharamaceuticals Dr. Reddy’s Labs 25

Ranbaxy 19
12 Four-Wheelers TELCO 17
M&M 63
13 Power Tata Power 4
BSES 27
14 Engineering & Forging Ingersoll-Rand 13
Bharat Forge 24
15 Diversified Reliance 24
Grasim 16
 Portfolio Performance 1992-1997
Basic Portfolio With one With 2 additional
additional investments
investment

Model Portfolio + 21.35% + 53.66% + 61.76%

Gross Return
BSE Sensex Gross - 19.45% - 1.05% + 14.45%
Return
Model Portfolio + 4.27% +10.73% + 12.35%
Annualised Return
BSE Sensex - 3.89% - 0.21% + 2.89%
Annualised Return

68
 Second Test: Jan 1998 – Jan 2003

 Same bias
 Screen Based Trading
 Demat
 Software boom and bust
 Increased globalisation, regulation,
liberalisation
 Movement towards convertibility of the
rupee 69
Second Test: Jan 1998 – Jan 2003

 Indian multinationals, in software

and pharma
 Abolition of carry over or badla
 Introduction of derivatives
 ‘Ketan Parekh Scam’ of March
2001
 Rolling settlements, T+3
70
No. Sector Company No. of shares as on
15-Jan-98
1 Paints & Forging Asian Paints 34

Bharat Forge 149

2 Two Wheelers and Bajaj Auto 18

Lubricants
Castrol 14

3 Food and Dairy Products Britannia 25

Nestle 36

4 Hospitality and Indian Hotels 18

Travel
Thomas Cook 16

5 Cement Guj. Amb. Cement 41

L&T 52
No. Sector Company No. of shares as on
15-Jan-98
6 Aluminium & Steel HINDALCO 15

TISCO 80

7 F.M.C.G. & Software HLL 8

Infosys 9

8 Banking & Finance HDFC 4

SBI 42

9 Fertilizers & Chemicals Indo-Gulf Fert 294

Tata Chemicals 74

10 Agricultural Products ITC 17

Tata Tea 25
No. Sector Company No. of shares as on
15-Jan-98
11 Pharamaceuticals Dr. Reddy’s Labs 30

Ranbaxy 14

12 Four-Wheelers TELCO 41

M&M 35

13 Power Tata Power 90

BSES 64

14 Engineering & Forging Ingersoll-Rand 24

ABB 20

15 Diversified Reliance 64

Wipro 20
 Portfolio Performance 1998-2003
Basic Portfolio

Model Portfolio Gross Return + 110.39%

BSE Sensex Gross Return + 0.24%

Model Portfolio Annualised + 22.08%

Return

BSE Sensex Annualised Return + 0.05%

74
Third Test: Feb 2000 – Feb 2004
 Why this period?
 11-Feb-2000, BSE Sensex – 5933
 Tech boom ended on 11-Feb-00
 Ketan Parekh scam was in March 2001
 25-Apr-2003, BSE Sensex – 2924
 Stock market recession ended on 25-Apr-03
 11-Feb-2004, BSE Sensex – 5949
75
 No. of shares
Purchased on
No. Sector Company 11-Feb-00
TISCO 720
1 Steel & Metals Hindalco 115
L&T 215
2 Cement Guj. Amb. Cement 317
Tata Power 1265
3 Power ABB 369
IOC 411
4 Petroproducts Castrol 298
Telco 602
5 Automobiles Bajaj Auto 285
 No. of shares
Purchased on
No. Sector Company 11-Feb-00
Ingersoll Rand 384
6 Engineering Bharat Forge 416
Ranbaxy 106
7 Pharmaceuticals Dr. Reddys 71
Paints & Tata Chemicals 1913
8 Chemicals Asian Paints 219
HLL 42
9 FMCG P&G 149
ITC 103
10 Agro Industries Tata Tea 185
 No. of shares
Purchased on
No. Sector Company 11-Feb-00
Confectionery Nestle 229
11 & Food Britannia 141
Banking & SBI 403
12 Finance HDFC 285
Infosys 10
13 Software Wipro 16
Hospitality & Thomas Cook 112
14 Travel Indian Hotels 390
Grasim 262
15 Diversified Reliance 279
 Performance (Year 2000)

Date 11-May-00 11-Aug-00

BSE Sensex -28.35% -29.34%
Portfolio -24.78% -22.41%

Date 13-Nov-00
BSE Sensex -35.61%
Portfolio -28.13%
79
 Performance (Year 2001)
Date 12-Feb-01 11-May-01
BSE Sensex -25.74% -40.01%
Portfolio -6.83% -22.73%

Date 13-Aug-01 12-Nov-01

BSE Sensex -44.60% -47.85%
Portfolio -23.87% -24.13%
80
Performance (Year 2002)
Date 11-Feb-02 13-May-02
BSE Sensex -40.76% -41.99%
Portfolio -17.32% -13.84%

Date 12-Aug-02 11-Nov-02

BSE Sensex -49.32% -50.31%
Portfolio -19.19% -21.86%
81
Performance (Year 2003)
Date 11-Feb-03 12-May-03
BSE Sensex -45.04% -50.41%
Portfolio -13.90% -10.62%

Date 11-Aug-03 11-Nov-03

BSE Sensex -34.38% -15.22%
Portfolio +20.96% +56.47%
82
Performance (Year 2004)

Date 11-Feb-04
BSE Sensex -0.27%
Portfolio +86.11%
83
 John C Bogle
Buy right,
and
hold tight.
85
 Indices Versus Portfolios
 An index is also a portfolio.
 However, a narrow index is constructed to give
a fair idea of how the stock market moves.
 An narrow index is not constructed to enable an
equity investor to invest well.
 Therefore, always remember that the
movements of indices and the movement of
investment portfolios can differ vastly from
each other.
86
 Indices Versus Portfolios
 A good stock market investor does not get
fixated about movements of narrow
indices.
 A good stock market investor does not get
obsessed with constantly benchmarking
the performance of his portfolio.
 A good stock market investor aims to
mitigate risk and obtain inflation beating,
wealth enhancing returns in the long run.
87
 Equity risk and return
 In equity, the uncertainty of return reduces
with time.
 In most other investment avenues, the
uncertainty of returns increases with time.
 Therefore, a proper time horizon is of vital
importance in equity investment.
 Systematic investment can help an equity
investor cope better with uncertainty.
88
Returns with one additional
investment:
+ 130.67% absolute,
+ 32.65% annualised
“Unless you can watch your
stock holding decline by 50%
without becoming panic
stricken, you should not be in
the stock market.”
- Warren E Buffett
90
“Much success can be
attributed to inactivity. Most
investors cannot resist the
temptation to constantly buy
and sell.”
- Warren Buffett
91
 Warren E Buffett
“Lethargy, bordering on
sloth, is the hallmark of
our investing strategy.”

(Sloth: indolence; extreme laziness;

habitual disinclination to exertion.
92
“Always invest for
the long term.”
- Warren Buffett

93
“If you are not willing to
own a share for ten
years, then don’t own it
for ten minutes.”
- Warren Buffett
94
Warren Buffett

95
“History shows that time,
not timing, is the key to
investment success.”
- Sir John Templeton
96
Sir John Marks Templeton

97
“Sell when they yell,
Buy when they cry.”

98
“The stock market is
a mechanism by which
money is transferred
from the impatient
to the patient.”
- Warren E Buffett
99
The Perils of Concentration
In February 2000, most stock
market “investors” were almost
fully concentrated in either only
software or “Telecom-Media-
Technology” stocks. This ‘sector’
was popularly called TMT or ICE
(for Information technology-
Communications-Entertainment).
100
The Perils of Concentration
 To show the folly of this type of concentrated
investment, we picked a portfolio of 14 “TMT”
or “ICE” stocks which were in the ‘A’ Group of
the Bombay Stock Exchange on 11th February
2000.
 We assumed an investment of Rs 30 lakhs
equally distributed between these 14
stocks.The performance (or perhaps the non-
performance!) of this portfolio is as follows:
101
 11-Feb-00 11-Feb-04
Name of Company Amount (Rs.) Amount (Rs.)

1 Aptech 211,633.25 2,385.60

Hexaware NA 10,596.60
2 Digital Equipment 213,300.00 132,380.30
3 Global 212,940.00 12,624.30
Telesystems
4 HCL Infotech 213,418.50 116,319.60
5 Himachal 213,259.00 2,772.20
Futuristic
 11-Feb-00 11-Feb-04
Name of Company Amount (Rs.) Amount (Rs.)

6 Infosys 209,221.95 114,857.40

7 MTNL 214,259.30 77,966.50
8 NIIT 213,510.50 14,903.00
9 Pentafour 213,642.00 1,892.40
Software
10 Satyam 211,244.70 19,389.40
Computers
 11-Feb-00 11-Feb-04
Name of Company Amount (Rs.) Amount (Rs.)

11 Silverline 213,927.00 1,246.23

Industries
12 SSI 212,355.00 8,698.50
13 Wipro 212,282.00 56,325.50
14 ZEE Telefilms 213,060.00 24,032.85
Total Portfolio 29,78,053.20 5,96,390.4
Never forget that…
The movements of indices
and the movements of
investment portfolios can
differ vastly from each
other.
106
Never forget that…
Portfolio returns are
important, not the
returns of individual
stocks in the portfolio.
107
 Never forget that…
 Investment is a strategy.
 Speculation is also a strategy.
 Investment is a strategy based on the
fundamental principles of investment.
 Speculation is a strategy based mainly on
greed and a get-rich-quick attitude.
 The objective of a good investment strategy
is to get above average returns at below
average risk.
108
 Old Chinese
Proverb
Fish see the bait,
but not the hook;
men see the profit,
but not the peril.
109
 Warren Buffett
Risk comes
from not knowing
what you are doing.
110
“There are old pilots.
And there are bold pilots.
But there are no old,
bold pilots!”
111
 Warren Buffett
“Its only when the
tide goes out, you
know who’s been
swimming naked.”
112
 Aldous Huxley

Facts do not cease to exist,

just because they are ignored.

(Aldous Huxley was an English writer,

essayist and philosopher,
who later emigrated to the United States.)
113
Aldous Huxley

114
 A lot of ‘bull’!
Bull market: A random market
movement, which causes an
investor to mistake himself for a
financial genius!
Market correction: What
happens the day after you buy
stocks!
115
 Sir John Templeton
Bull markets are
born on pessimism,
grow on skepticism,
peak on optimism
and die on euphoria. 116
Sir John M Templeton

117
“Do not confuse brains
with a bull market.”
(Sign in a fund manager’s office)

118
 Warren Buffett
“The sillier the market’s behaviour, the
greater the opportunity for the
business-like investor.
“ Follow Graham and you will profit
from folly, rather than participate in it.”

- From the preface to the fourth edition of ‘The

Intelligent Investor’ by Benjamin Graham
119
 The perils of concentration

“The investor’s chief problem –

and even his worst enemy –
is likely to be himself.”

- Benjamin Graham
120
“In the short run, the stock
market is a voting
machine, and in the long
run it is a weighing
machine.”
- Benjamin Graham
121
Benjamin Graham

122
 ‘Risk’ in Equity
 Maximum Sensex risk despite tech
meltdown and Ketan Parekh scam
was approximately 50%.
 Maximum ‘model portfolio’ risk was
approximately 30%.
 Maximum risk during the 1992-97
period did not exceed 40%. 123
 ‘Risk’ in Equity
Risks in equity investment
may be considerably less
than you fear.
Risks in equity speculation
can be greater than your
wildest imagination.
124
 Conclusion
In a rising market, you do not
need the advice of experts to
make money. Any trash you
buy will appreciate.
In a falling market, the advice of
the best experts will not prevent
you from losing money.
125
 Conclusion
 What then is the role of an equity
investment advisor?
 To manage risk
 To ensure that investors “buy the market”
 To put in place investment strategies that
deliver fair returns over a stipulated time
horizon
 Above all, to make investors comfortable
with risk in ‘risky’ investments.
126
Conclusion – N J Yasaswy

“Safety first.
Returns, later.”
127
N J Yasaswy

128
 Conclusion – Warren Buffett

“The first rule of investment

is, don’t lose.
And the second rule is, don’t
forget the first rule.
And that’s all the rules
there are.”
129
Conclusion – Warren Buffett

“We’ve long felt

that the only value
of stock forecasters
is to make fortune tellers
look good.”
130
Jesse Livermore (notable early
20th century stock trader)

Wall Street never changes.

The pockets change, the
suckers change, the stocks
change, but Wall Street never
changes because human
nature never changes.
131
Jesse Livermore

132
 Recommended Reading
“Reminiscences of a Stock
Operator”, 75 Anniversary Edition
th

By Edwin Lefevre
A book on the life and times of
Jesse Lauriston Livermore
Email: investments_sac@yahoo.com
133
 Conclusion
“Wall Street people
learn nothing, and
forget everything.”
- Benjamin Graham

134
 Conclusion
“It is not necessary to do
extraordinary things,
to get extraordinary results.”

- Warren Buffett
135
 Equity Vs Real Estate
 Real Estate is one of the major sectors of
the economy.
 The availability of real estate is limited,
but the demand for it is not.
 Being one of the sectors of the economy,
real estate oriented companies can easily
be included in a well diversified equity
portfolio.
 But the reverse is not possible. 136
 William J Bernstein

The concept of
the “coward’s
portfolio”
137
 Five Simple Equity Investment
Strategies, Using the Model
Strategy 1: Simple diversified
portfolio
 Buy and hold a diversified portfolio, by
purchasing at least Rs 20,000/- worth
of shares in each of the companies
numbered 1 to 30 in the list.
 A portfolio of 60 stocks would be ideal.
138
“The time to invest in equity,
is when you have the money.
“History shows that time, and
not timing, is the key to
investment success.”

- Sir John Templeton

139
 Warren E Buffett

“The stock market

is a mechanism,
by which money is transferred,
from the impatient,
to the patient.”
140
Strategy 2 – Systematic Investment

 Invest at least Rs 10,000/- per month

/ once in two months / per quarter, in
the companies numbered 1 to 60 in
the list, at the rate of one company
per investment interval.
 Whatever investment amounts and
intervals you choose, stick to them,
because regularity is of vital
importance. 141
Strategy 3 – Systematic Transfer -
Aggressive
 Invest Rs 6 lakhs in a liquid avenue.
 Buy Rs 10,000/- worth of stock of each
company, at the rate of one stock per
month.
 Increase the frequency of purchases to
one stock every 15 days, if the index
falls more than 25% from the index on
the date of your original investment.
142
Strategy 3 – Systematic Transfer -
Aggressive
 The increased frequency is to be
maintained only so long as the
index remains at a level of 25%
below the index on the date of your
first purchase.
 Variations ……………..

143
Strategy 4 – Systematic Transfer
- Conservative
 Invest Rs 12 lakhs in a liquid avenue.
 Buy Rs 10,000/- worth of stock of each
company at the rate of one stock per
month.
 Buy Rs 10,000/- worth of stock of each
company, at the rate of one stock
every 15 days, if the index falls more
than 25% from the index on the date of
your original investment. 144
 Strategy 4 (contd.) – STP
Conservative
 Buy Rs 10,000/- worth of stock of each
company, at the rate of one stock every
week, if the index falls by 50% or more
from the index on the date of your original
investment.
 The increased frequencies are to be
maintained only so long as the index
remains at or below the stipulated lower
levels.
145
 Strategy 4 (contd.) – STP
Conservative
The chances of danger to capital
in this strategy are so remote as
to be virtually non-existent,
provided the liquid avenue
returns at least 5% p.a.
Variations……….
146
 Strategy 5 – For those who long to
‘actively’ manage portfolios
 Invest Rs 12 lakhs in a liquid avenue.
 Buy Rs 10,000/- worth of stock of each company at
the rate of one stock per month.
 Buy Rs 10,000/- worth of stock of the next company,
each time the index drops by 1% from the index on
the date of your initial investment.
 Note that these additional purchases may or may
not be independent of, and in addition to, the
regular monthly purchases.
 The same strategy, with Rs 6 lakhs…….
147
 Conversion of existing portfolios
to the Equity Model
 First, value the portfolio that you are
intending to convert.
 Second, divide the portfolio value by
Rs 10,000/- or Rs 20,000/- to select the
number of ‘model’ stocks you are going
to pick.
 Rs 20,000/- may be a reasonable
amount to invest in each stock, by
today’s standards. 148
 Conversion of existing portfolios
to the Equity Model
 Third, pick the ‘model’ stocks that are
already in your portfolio and calculate
the number of ‘model’ stocks to be
bought and sold.
 Fourth, sell off ‘model’ stocks held in
excess.
 Fifth, sell off all ‘non-model’ stocks.
 Finally, purchase the required number
of ‘model’ stocks. 149
 A Simple Tabular Aid to Portfolio
Conversion
Model stocks:
Company Required Qty Existing Qty Qty to be +/-
1.
2.
3.
Non-model stocks:
Company Existing Qty Qty to be sold
1.
2.
3.
150
 Booking profits
“Our time horizons are for ever.”
- Warren Buffett
 Profits in quality equity portfolios
need never be booked.
 A lifetime of steady investing will
probably provide more than enough
dividend income to comfortably take
care of ordinary needs. 151
 Booking Profits
 When dividends take care of normal
expenditure, partial portfolio liquidation can
be resorted to only to take care of
substantial capital expenditure or
unexpected expenditure.
 A strategy of booking profits in order to
migrate to lower risk equity investment
avenues is okay.
 However, profits must be booked only
when reasonable profits are made. 152
 Booking profits
 Reasonable profits can be say, a
doubling of the portfolio.
 There is certainly no need to book
profits before a portfolio doubles,
otherwise the investor may get into
a trading mentality.
 Booking partial profits……….
153
 Churning
 Frequent churning of an equity portfolio is an
excellent way of making stockbrokers wealthy!
 The stocks in our model portfolio are reviewed
once or twice a year, and minimal changes may
be made.
 Churning to the extent required to realign your
portfolio with the current model portfolio is okay.
 However, even such minimal changes need to
be made only once a year, at the most.
154
 You and ‘Mr Market’
 Fair estimates of the damage Mr Market can do
to you:
 In leveraged speculation, infinite damage
 In concentrated non-leveraged speculation, 100%
 In lump sum narrow index investing, 50%
 In lump sum quality portfolio investing, 35%
 In systematic investment strategies, 25%, 17%
and 10% in 1, 2 and 3 years respectively
 In 60 month systematic transfers, 10%
 In 120 month systematic transfers, zero.
155
You and ‘Mr Market’
Sizing up ‘Mr Market’:
 PE Ratios of the:
 BSE-30: H-22 L-10 M-16
 NSE-50: H-22 L-10 M-16
 Capital Market-2000: H-20 L-09 M-14.5
 Historic Boom-Recession periods
since 1979
 ‘Health’ of ‘Mr Market’
156
Negotiating with ‘Mr Market’
 Dividing a 50% fall from peak, into 4 quarters:
 13,505 points (16th November 2006) divide by
2 = 6,753 points
 So, if 13,505 was this boom’s peak, and if the
next fall is going to be to the extent of 50%,
the Sensex can fall down to 6,753 points.
 13,505 minus 6,753 = 6,752. This 6,752
divided by 4 = four one-quarter segments of
1,688 points each. 157
 Negotiating with ‘Mr Market’
 The possible fall from 13,505 to 6,753 can be
divided into four one-quarter segments of 1,688
Sensex points each, as follows:
 13,505 – 11,817 : ‘Zero risk’ STPs recommended
 11,817 – 10,129 : Five year STPs are okay
 10,129 – 8,441 : Three year STPs are okay.
Lump sum investments are
okay for the risk tolerant.
 8,441 – 6,753 : Lump sum investments may be
actively considered.
158
 Committing lump sums to ‘Mr
Market’
 13,505 – 11,817 : Not more than one-third of
the amount reserved for
equity investment
 11,817 – 10,129 : Not more than half the
amount reserved for
equity investment
 10,129 – 8,441 : Not more than half the
amount reserved for
equity investment, except if
your risk tolerance is high.
 8,441 – 6,753 : Full amount can be committed.
159
Benjamin Graham

160
 Daniel Kahneman
The idea that any single
individual without extra
information or extra market
power can beat the market is
extraordinarily unlikely. Yet the
market is full of people who think
they can do it. 161
Daniel Kahneman

162
Anthony M Gallea, senior portfolio
manager, Smith Barney

Investing is a strange
business. It’s the only one we
know of where the more
expensive the products get,
the more customers want to
buy them.
163
Conclusion - Benjamin Graham’s
Core Equity Principles

“A stock is not just a ticker

symbol or an electronic blip;
it is an ownership interest
in an actual business, with
an underlying value that
does not depend on its
share price.”
164
Conclusion - Benjamin Graham’s
Core Equity Principles
 Obvious prospects for physical
growth in a business do not translate
into obvious profits for investors.
 The experts do not have dependable
ways of selecting and concentrating
on the most promising companies in
the most promising industries.
165
 Benjamin Graham’s Core
Equity Principles
“The market is a pendulum that forever
swings between unsustainable
optimism (which makes stocks too
expensive) and unjustified
pessimism (which makes them too
cheap). The intelligent investor is a
realist who sells to optimists and
buys from pessimists.”
166
 Benjamin Graham’s Core
Equity Principles
 “The future value of every
investment is a function of its
present price. The higher the price
you pay, the lower your return will
be.”
 “No matter how careful you are, the
one risk no investor can ever
eliminate is the risk of being wrong.”
167
Benjamin Graham’s Core Equity
Principles
“The secret to your financial
success is inside yourself. If you
become a critical thinker who takes
no Wall Street ‘fact’ on faith, and
you invest with patient confidence,
you can take steady advantage of
even the worst bear markets.”
168
Benjamin Graham’s Core Equity
Principles
“By developing your discipline and
courage, you can refuse to let
other people’s mood swings
govern your financial destiny. In
the end, how your investments
behave is much less important
than how you behave.”
169
170
 Conclusion
“The ultimate objective
of good investing,
is to obtain
above average returns,
at below average risk.”
171
 Conclusion
“It is not necessary to do
extraordinary things,
to get extraordinary results.”
- Warren Buffett

172
 Conclusion
Investment is a marathon, not a
hundred metre sprint.
“Someone’s sitting in the shade
today, because someone
planted a tree a long time ago.”
- Warren Buffett
173
 Final evaluation of the Equity
Investment Model
 Strength 1: It is a proxy for
‘buying the market.’
 Strength 2: Optimum
diversification – approximately 20
sectors and 60 blue chip stocks
 Strength 3: Virtually eliminates
unsystematic risk
174
 Final evaluation of the Equity
Investment Model
 Strength 4: Has never failed to
outperform the popular indices
during bear markets.
 Strength 5: Beats mutual funds
hollow on costs.
 Strength 6: It is a ‘no-churn’
strategy, which is less expensive
than a low or high churn strategy 175
 Final evaluation of the Equity
Investment Model
 Strength 7: Based on sound
investment principles and risk
management tools
 Strength 8: Incorporates an element
of real estate, the only other avenue
of investment that has a long-term
track record of beating inflation.
176
 Final evaluation of the Equity
Investment Model
 Strength 9: Can incorporate
exchange-traded real estate and
bullion exchange traded mutual
funds (ETFs).

177
 Final evaluation of the Equity
Investment Model
 Weakness 1: Large commitment
of funds needed.
 Weakness 2: Strategies like SIPs
and STPs are not implemented
automatically.
 Weakness 3: Rebalancing
strategies are difficult to carry out.
178
 Final evaluation of the Equity
Investment Model
 Weakness 4: In SIP & STP
strategies, you buy a stock each
time, whereas in a mutual fund,
you buy a portfolio each time.

179
For the amateur investor…..
 The best way to invest in equity, especially
for a rookie investor with limited resources, is
through a mutual fund asset allocation
strategy like a systematic transfer plan.
 Mutual fund investment is recommended not
because it is superior to direct equity
investment, but simply because mutual fund
asset allocation strategies are automated.
 Rebalancing strategies are also far easier in
mutual fund investments.
180
 Final evaluation of the Equity
Investment Model
 Owning a diversified portfolio of blue chip
stocks is different from owning just units in
diversified mutual funds.
 Direct stock market investing has a certain
charm.
 For those who succumb to this charm, and
have not yet found something better, this
model could be a sound, low-cost method
of investing directly in the stock market.
181
Warren Edward Buffett (born 1930)

182
 Warren Buffett
 An investor who does not understand the
economics of specific companies but wishes
to be a long-term owner of American industry
should periodically invest in an index fund.
 In this way, the know-nothing investor can
actually outperform most investment
professionals.
 Paradoxically, when ‘dumb’ money
acknowledges its limitations, it ceases to
be dumb. 183
Burton G Malkiel (born 1932)

184
Dr William J Bernstein

185
Benjamin Graham (1894 – 1976)

186
Benjamin Graham

187
John C Bogle (born 1929)

188
Sir John Templeton

189
A N Shanbhag

190
N J Yasaswy

191
Sundar Sankaran

192
Thank you!

193