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Money Matter
Dalton Capital Advisors' UR Bhat recommends 'Coffee Can Investing' to investors facing a dilemma

India has a rather poor record of successful people and the icons of Indian society writing about their successes — whether in business, public service, teaching, investing or indeed, even in journalism. Among investors, the very successful ones are largely recluse and the ones who have a media presence are either short-term traders or others who have rarely articulated their investment philosophy. This is unlike developed countries where there is abundant literature on almost every type of investment philosophy — whether short-term trading or long-term investment — written by several successful practitioners. Now, in the post-demonetisation era, more Indians are getting drawn into equity investments and this book fulfils the massive knowledge gap that exists in judicious asset allocation and in realising long-term financial goals. 

What distinguishes this book is the intellectual rigour with which each of the investment insights is analysed with contemporary Indian examples. This should convince even the most cynical investor about the enormous significance of these insights. For example, even though it is well known that equity is the most powerful driver of long-term sustainable return, several investors get hurt in their first foray into the investing world because of inappropriate advice. The so-called “myopic loss aversion” syndrome where investors intuitively regret over losses at about 2.5x more than similar-sized gains, and this results in investors exiting equities for several years thereafter. They come to realise that have fallen prey to wrong advice and therefore need to learn more about investment. This book may be a good read for such once-bitten-twice-shy investors. The book systematically demolishes, with live examples, a few rather widely held misconceptions, such as, starting period valuations having a large impact on long-term investment return or that most long-term investment return come out of stock re-rating or that even in a long-term portfolio of quality stocks, one can substantially improve return by regularly selling when the market appears expensive and buying back after a market correction.

The lopsided allocation to real estate that is endemic with most Indian families has shown to be leading to poor long-term investment performance. Mutual fund performance has been well dissected to demonstrate that one in nine equity schemes have been consistent top-quartile performers over a short period of seven years and that increased market efficiency has led to the “alpha squeeze” where it has become rather rare for mutual funds to deliver outperformance over the broad market indices. Even where there is modest outperformance, the inconsistency of such occurrence highlights the wisdom in the statutory warning that the past performance of a mutual fund scheme is not indicative of what the future holds. The importance of keeping a close watch on fund expenses and the wisdom in shifting to low-cost index ETFs have also been well articulated.

The book makes a cogent case for long-term investing in a Coffee Can portfolio — a portfolio of quality stocks that one keeps under the mattress in a Coffee Can and virtually forgets about for a decade. It discusses the rationale and methodology of constructing such a portfolio of stocks of medium-sized companies with say, a market cap of 100 crores+ that have consistently, every year over the previous decade, shown growth in top line of 10%+ and have delivered a pre-tax return on capital employed of 15%+. It also demonstrates the superior performance of such portfolios over several iterations. It is important to note that typically such companies never get distracted from their core business focus, relentlessly improve its offering to stay ahead of the competition and follow a sensible capital allocation policy.

Even though India took the early steps in its journey towards becoming an open economy almost a quarter of a century ago, investing continues to be seen as a rather speculative activity bereft of any intellectual content. Aspiring to become rich by investing in equities is seen as not a very respectable thing to do. While all the advice that the book proffers is well known to investment professionals and has been proved in several academic papers in the developed markets, the retail Indian investor needs to be convinced that such advice indeed works in the Indian context. The case studies that have been highlighted in the book bring to bear the real dilemmas that retail investors face and the solutions offered have simplified investment for new investors.

It is likely that new investors would find some portions of the book a bit too technical but investing is a serious business and it is essential that new investors should get these concepts and insights right, very early in their investment journey. The key takeaway is that to meet long-term financial goals, a well thought-out financial plan is an essential starting point and to become rich, an investor has to let a sensibly constructed portfolio stay untouched for a long period of time. This is a book that had to be written for the good of the Indian investor and would-be investors and the authors need to be commended for doing their bit for investor education.

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