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Time and again, the stock market offers many valuable opportunities and lessons to investors. It is perfectly okay for investors to miss some of those opportunities, but it is crucial not to miss out on the lessons.

One of the most important lessons which every investor should know is the perils of investing in debt-laden companies and why it makes sense to steer clear from such companies.

Why companies go for debt?

Businesses need capital for expanding or diversifying their business. In case the company’s earnings are not generating a surplus, the next option is opting for loans. However going overboard with debt can be disastrous, at times for businesses as it puts too much pressure on them, especially when there is economic distress.

Videocon, a classic example of how massive debt can destroy a business and shareholder wealth

I am sure you might have heard of Videocon, which ruled the Indian consumer electronics market long before Samsung, LG and Sony entered the scene. Videocon was a household name across India until a few years back with a vast product line-up which included washing machines, refrigerators, air conditioners, televisions and home entertainment systems.

Everything was fine as long as the company was dabbling in consumer electronics in the ’90s. However, in the 2000s, the company went on a rapid expansion mode by entering into new verticles of business such as DTH, energy and telecom. And for this, it took massive debts.

On one side while the company’s debt started piling up, on the other hand, the company’s capacity to pay off the debt started weakening as the new businesses were highly capital intensive and were not making enough revenues. Despite Videocon’s diversification to multiple businesses, consumer electronics was still the biggest revenue generator. However, Videocon’s consumer business too suffered a considerable setback with intense competition from international brands.

With falling revenues and rising interest costs, Videocon was unable to service its debt. Selling off its DTH and oil and gas business did not help much. As a result, the company ended up with more debt than value.

Massive debt for expansion turned Videocon Industries from a profit-making company to a bankrupt company which is currently undergoing insolvency proceedings under the National Company Law Tribunal (NCLT).

An investment of Rs. 1,00,000 in shares of Videocon Industries on 1st Jan 2008 would be worth just Rs. 176 today. Can you imagine the extent of investor wealth the stock has eroded?

Don’t invest in debt-laden companies: A timeless lesson at Dalal street

Unitech, JP Associates, Reliance Power and Suzlon are some of the best examples of debt-laden companies which have destroyed investor wealth by huge margins. It is a well-known fact that debt-laden companies take the biggest hit during a phase of an economic slowdown.

In an economic downturn when earnings of businesses fall, the interest payments on debt don’t stop. As a result, there could be a default of payments, piling up of additional interest. As a last resort, businesses may even have to resort to selling assets. On the other hand, cash-rich companies have enough funds to withstand the recession, which at the most, may last for a few months or a year or two.

Investors often make the crucial mistake of selecting their investments based on market capitalization. However, market capitalization does not denote the actual value of a company as it does not include vital factors like the company’s debt and its cash reserves.

To give you an example of why investing based on market capitalization is a bad idea, let’s take a look at the case of Tata Motors and Maruti Suzuki, which are market leaders in their respective segments in the auto industry.

Tata Motors has a market capitalization of Rs. 49,258.17 crores whereas Maruti Suzuki has a market capitalization of Rs. 216,159.43 crores. At Rs. 170.20, the stock of Tata Motors looks quite cheap compared to the share of Maruti Suzuki which trades at a high price of Rs. 7130.90.

But does this make the stock of Tata Motors a better buy among the two?

The answer is no. Because the total debt of Tata Motors stood at Rs. 28,826 crores as on Mar 2019, as compared to Rs.149.60 crores of Maruti Suzuki during the same period. So despite trading at a higher price, the stock of Maruti Suzuki offers better value to investors.

To conclude, not all companies with high debt may turn out to be bad investments. However, as an investor, you need to invest only in those companies which have a debt to equity ratio of zero or less than one. For some companies, loans may be necessary to expand and grow. Still, from an investor’s perspective, it is essential to undertake thorough due diligence to avoid debt traps like Suzlon or Videocon Industries.

Click here to know more about investing in fundamentally sound companies which can multiply your wealth creation by 4-5 times in 5 years.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

In our previous article, we spoke to you yesterday about 2 types of investors, let us start by showing you 2 charts showcasing Automobile Production in India and how you are forced to think negatively with the noise outside.

Chart 1 showcases the trend line over the past 18 odd months.

Chart 2 showcases the trend line over the past 20 odd years.

Chart 1

Chart 2

Chart 1 shouts out that India is going through an extremely rough phase, and if the chart is to be believed, doom is something we would see ahead.

Chart 2 shows a longer trend and shows a completely different picture. The trend line shows what to expect in the future.

Let me highlight a couple of pointers to you on this:

1. 1. To start, check the phase between 1997 & 1999, automobile production was flat and then had a fall. And after that, they jumped up. The same has got repeated each and every time the line dips for a short period.
   2. Every time there has been a dip, there is usually a big jump up that follows.

The automobile production has had a CAGR increase of 10%+ if I look at the data over the past 19-20 years.

It really amuses us when all the noise out there is only about short term happenings and spelling doom for the future.

The good part of the story – every time this has happened – in 1999-2000 or in 2008-2009 – if an investor ignored the noise and preferred to be Type 2 investor, he would have been a participant in the big bull runs that followed.

But, if you are a Type 1 investor who invests only when everything looks green and wonderful… not sure what I can say to that approach.

And in view of the phase that we are at currently going through, data suggests that we will see a repeat of or rather see a bigger bull run in the coming few years.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

Portfolio management is all about guiding your investments in the right direction.

Wealth creation is not an easy job. But with the right guide to steer your investments in the right direction, it can be a very simple task.

This reminds me of a story from the great epic, Mahabharata. Before the start of the great war, both Arjun and Duryodhan went to Krishna to seek his support. Arjun chose Krishna over his large and powerful army known as the Narayani Sena.

When Duryodhana heard Arjun’s choice, he was very happy. He was foolish enough to think that Krishna, who wouldn’t even fight in the war, would be of no use to Arjun, but Krishna’s huge army would certainly be of great help to him.

We all know the outcome of the war. It was Krishna’s guidance and support that led to the Pandavas victory in the war.

Time and again, we have heard of many such cases in the past, where expert guidance can make a huge difference between success and failure in any field. And trust us, stock market investing is no different.

The primary objective of portfolio management services is to ensure that your investments are performing as expected and that they are moving on the right track to achieve your financial goals.

Portfolio management includes:

• Identifying fresh investments to achieve your financial goals
• Evaluating the performance of your investments regularly
• Exiting those businesses which are not performing as expected
• Identifying new opportunities, wherever possible
• Risk management

Now let’s take a look at the different benefits offered by portfolio advisory services:

Make the right investment choices:

Not every investment can create wealth for you. Hence, it is very important to invest in the right business opportunities that can multiply your wealth over a period of time. Portfolio management can help an investor to invest in the right business opportunities for maximum wealth creation with minimal risks.

Tracking performance and rebalancing the portfolio:

In today’s world, you can no longer afford to invest and forget. There are multiple variables that affect your investment, and hence, it is very important to track the performance of your investment and rebalance it as and when required. Portfolio rebalancing includes exiting those business opportunities which are no longer performing and replacing them with better-performing stocks.

Regular and disciplined investing:

Serious wealth creation requires regular and disciplined investing. When you invest on your own, the discipline and effort to invest regularly often takes a backseat due to other priorities in life. However, when you invest through portfolio advisory services, you have a dedicated expert who ensures that you invest regularly in a systematic way to achieve your financial goals.

To conclude, portfolio advisory services is one of the best ways to multiply your wealth. Portfolio advisory services can help you to effectively plan for a wide range of financial goals, including retirement, child’s education, house and wedding.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

As an investor, you may think that equity is all about having a torrid affair with excel sheets and complex trading algorithms. However, here’s a little revelation that may surprise you!

Most of the times, investors fail in the markets not because of inadequate technical skills, but their unfavourable daily habits which are driven by their thoughts.

Here we debunk 4 phrases which you may think is completely okay to use, but are outrageous crimes when it comes to stock market investment. And, a small warning – These phrases are definitely preventing you from creating wealth.

1. Is baar time alag hain!

A panoramic view of the stock markets reveals that markets have been volatile before and shall remain so. They have been swathed by the most powerful bulls and the most frightening bears before, and it’s not going to change ever. Crisis such as Harshad Mehta scams, Lehman Brother fallout, demonetization, soaring crude oil prices, and trade war fear had their transient control before their effects wiped out.

The point is no one has been able to predict these events, not even an astrologer. These events may change the course of direction of the markets for a transient time. However, it fails to change the fundamentals of a strong company.

So my dear friend, no time is different unless you make it different. Focus on investing in the right stocks. If required, hire a credible expert to guide you, rather than leaving it to your destiny and hoping markets would favour you. Markets don’t give two hoots to your hopes and emotions. They only favour investors who are addicted to rigorous research and sound stocks and remain invested in such stocks for a long term.

2. Kal invest kar lenge. Jaldi kya hain!

Rs. 10,000 invested every month at the age of 30 for the next 20 years aggregates to Rs. 75,75,332 at 10% interest p.a. compounded on a quarterly basis.The same amount sums up to Rs. 20,55,685 if invested for 10 years.

Numbers never lie! The sooner you start, the better the rewards. And, anytime is a good time to start when the rewards are lucrative!

3. Kitna returns milega ek saal main?

Yes, annualized returns and impressive CaGR are always the ultimate objectives of any investor. However, when you are investing in stocks, you are actually investing in businesses. Businesses take time to grow and definitely, that is not a chapter which will last just a year. With returns, the correct question to ask your advisor would be the strength of the fundamentals to stand the test of time in a long run.

4. Lastly, yeh stock kharid lete hain, kisine bola hain toh acha hi hoga.

There are only three golden rules of investing. 1. Research 2. Research 3. Research. If your friend / relative / broker is recommending a particular stock, check the investment rationale before you put your hard-earned money in the stock.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

Kaun Banega Crorepati (KBC) is one of the most viewed shows on Indian television. The immense popularity of the show even today reveals that everyone desires to become a crorepati.

When KBC first aired on Indian television, two decades back, one crore was a considerable amount. It still is. No doubt. But from an investor’s perspective, the more relevant question one should ask is “Kaise bane crorepati? (How to become a crorepati)?

Do you know that getting selected for the KBC game show is very difficult and there’s only a one in a 10 million chance of it according to estimates? Even if one does get shortlisted and reach the hot seat, the probability of eventually winning the full prize money is very less.

But don’t worry, there are many other ways to become a crorepati, and the easiest way is to give up those habits which are stopping you from becoming a crorepati.

Here some things one should give up to become a millionaire:

Thinking small:

Thinking big is the key to becoming financially successful. If you ask any average person, what they want to do in life, their answer would be to work up to the age of 60 and retire with enough savings to last their lifetime.

It is imperative to think big because that is what the wealthy do and makes them even more prosperous. According to ancient wisdom, we get what we expect in life. Many people limit their thinking and refrain from thinking big to protect themselves from failure.

Investing too much in traditional life insurance policies

There is no doubt that life insurance is essential for every individual who has dependents. But to be honest, in our country, life insurance is sold and purchased more as an investment and tax-saving product.

I know a lot of people who pay several thousand and even lacs every year for traditional life insurance policies which offer meager returns in the range of 4-6%. The best form of life insurance is term insurance, where one can get a high-risk cover for a marginal premium.

Buying things we don’t need can’t afford

Impulsive buying and buying unwanted things on credit can be the most significant deterrent to creating substantial wealth for the middle class.

“If you buy things you don’t need, you may need to sell things you need” – Warren Buffet.

In spite of being the world’s third-richest person, Warren Buffett believes a lot in frugal living. He still drives a 7-year-old car and prefers to stay at his modest three-bedroom villa in Omaha, ignoring the hustle and bustle of living close to the Wall Street.

In his best selling book ‘Rich Dad, Poor Dad’, Robert Kiyosaki reveals the reason why middle-class people are unable to move the ladder of wealth. He states that it is because they spend most of the money they earn on necessities and luxuries, many of which they don’t even need. On the other hand, the wealthy invest first to create streams of wealth and buy luxuries from it.

Depending on a single source of income

It can be challenging to become a crorepati with a single source of income for most middle-class people. One of the most sure-shot ways to become rich is by developing multiple streams of income. A recent study on self-made millionaires has revealed that most of them had anywhere between three to five or more streams of income such as rental income from property, dividend income from stock markets, partial ownership in multiple businesses.

Not investing in equity

Bank fixed deposits and small savings like PPF and post office deposits have been traditionally the preferred first choice of investments for most Indians for several decades. However, with interest rates in a downtrend, these investments have lost their sheen. Despite this, many investors prefer to invest in these investments, primarily due to the less risk associated with them.

While the risk associated with them is low, so are the returns. On the other hand, equity has given the highest returns till date among all asset classes. I am not saying that one should stop investing in bank fixed deposits or small savings schemes altogether. However, it is equally important to allocate a significant portion of your investment portfolio (at least 50%) to equity. Equity has the power to generate double-digit returns in the long run which means the chances of becoming a crorepati are far higher by investing in equity as compared to all other investments.

Read more:  How Long-term investing helps create life-changing wealth – TOI.

Hi,
Let me start with a question today…
Which category of investor do you belong to?

1. I will not invest now because the Nifty has fallen to the 10,700 levels.
2. This is the best time to invest because the Nifty has fallen to the 10,700 levels.

Why do I ask this question? Let me tell you why I ask this in a bit.
With what we are experiencing in the overall economy these days, is something extremely similar to what the economy had experienced in 2001-2002.

What are those similarities?

1. Auto sales are down
2. Consumer sentiments are extremely weak/poor
3. The growth rate is down
4. Banks are facing the NPA roadblock

And also take a look at the table below:

How similar was it then to now? Extremely similar right?

• 1999 was a year with a negative EPS growth – 2016 was a year with a negative EPS growth

• 2000-2002 were slow years. Similar to the slowdown we are witnessing from 2017-2019.

And then what happened between 2003 and 2007 was every investor’s dream run.
Unfortunately, not many investors benefitted from this bull-run.
Coming back to the question I asked at the start, the investors who fell in category 1 probably repented.

But for investors who fell in category 2, they would have created a fortune for themselves and their family during that phase.

Coming now, the past 3-4 years have witnessed negative to slow growth in EPS because of the much-required cleaning process initiated by the government. And this seems to be the time when the economy should be reaping the rewards, and these rewards look a lot more certain and sustainable going forward.

In view of this, we do not want you to miss out on starting your wealth creation journey during such times.

Read more:  How Long-term investing helps create life-changing wealth – TOI.