What will your 'Lohe Ki Almari' portfolio look like?
(Mar 20, 2015)
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In this issue:
» Are Asian currencies revisiting the crisis of 1997?
» Should markets prepare for Fed rate hike?
» Impact of black money crusade on real estate
» ...and more!
For those of us who grew up in middle class India in the 1980s-90s and before, there was one particular piece of furniture practically no household could do without. The metal wardrobe or what we in Hindi know as the 'Lohe ki almari'!
Besides being a storing place for things like clothes, the almari also doubled up as an in-house locker, with valuables being stashed away in one of its many corners. The theory being that in times of crisis or severe financial crunch, the valuables could be relied upon to bail oneself out of trouble.
Now here's an idea. How about we designing our portfolio in such a way that it resembles the valuables in the once ubiquitous 'Lohe Ki Almari'. To put it differently, buy stocks and forget about them until you've run out of other options to bail you out financially. Or how about buying stocks with the intention of holding them for a minimum of 10 years?
This thought occurred to us while we were sifting through articles and came across an interesting looking concept called as the 'Coffee Can Portfolio'.
The originator of this concept was a man who answered to the name of Robert Kirby, then a portfolio manager at Capital Group. Writing in The Journal of Portfolio Management back in 1984, Kirby opined that the Coffee Can Portfolio concept harkens back to the Old West. That was the time when people put their valuable possessions in a coffee can and kept it under the mattress. That Coffee Can involved no transaction costs, administrative costs, or any other costs. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.
Of course, very few people in India would be able to relate to the idea of stashing away valuables in a coffee can. Therefore the metaphor of 'Lohe Ki Almari' instead. However, the concept remains the same. Have a portfolio of what you think are the best 10-12 stocks out there. And then forget about them for at least 10 years.
Well, once you know about the biggest challenges in investing, you will understand why hugely positive surprises may await you 10 years from now.
For starters, this rule will force you to have only your best ideas in the portfolio. Second, you will be compelled to take a long term view of things without your judgement getting clouded by things like quarterly results or near term economic outlook. And if this is not all, there will be no more checking of daily stock prices.
There are other benefits of course of approaching investing this way. However, the bottomline is simple. The 'Lohe Ki Almari' portfolio is designed in such a way that it provides a fantastic shield against our biggest enemy while investing which is nothing but our own natural impulses.
In fact, what it also does is helps us focus on the right things. Using this approach, we don't waste our time watching business channels or get too worked up when our favourite stock falls a few percentage points in our day. Instead, our focus is on finding the best businesses out there that we can make a part of our 'Lohe Ki Almari' portfolio.
So, what stocks will form a part of your own 'Lohe Ki Almari' portfolio? Let us know your comments or share your views in the Equitymaster Club.
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Another reason why you may want to be very careful about your portfolio is the sharp volatility in Asian currencies. Something that brings back the horrors of Asian financial crisis of the late 1990s. The Singapore dollar, for instance, considered as one of the strongest currencies in the region, is expected to depreciate at the fastest clip against the US dollar, since 1998. The island state is one of Asia's main financial centers. Hence its currency tends to be more resilient than say Thailand's baht or Indonesia's rupiah. In the Asian financial crisis of 1997-98, Singapore's currency dropped 15%. This was about half the loss suffered by Thailand's baht and South Korea's won and a fraction of the 70% decline in the rupiah. The fall in the Asian currencies reflect investor concern that Asia may struggle to withstand an interest rate hike by the US Fed. Now, whether and how soon will the US Fed decide to hike rates is anybody's guess. But in the meanwhile, the currency volatility may not bode well with companies dependent on exports.
The US Fed rate has not changed since December 2008. And while the latest policy stance seemed dovish, a hike in rates is ruled out until June. However, the fact that the US central bank will change the rates, that have been left untouched for the past 6 years, sooner than later, is something that markets should be worried about. And investors, in particular, should prepare for. The hike in Fed rate will for certain lead to a flight of FII money, albeit temporarily. This means that valuations of stocks in India could see a correction. And while the very expensive stocks could lose their shine, it could also bring opportunities to invest in solid companies with a reasonable margin of safety. So it is important that instead of timing the change in Fed rate, you as an investor, prepare yourself to invest in the best stocks when the valuations are right.
Should Indian markets prepare for a change in Fed rate?
And if you thought, all you have to be careful about is the stocks in your portfolio, think again. The Fed rate cut since 2006 gave birth to the property market bubble, not just in US but also in India. But more importantly, the practice of investing unaccounted black money into real estate is what led to the surge in property prices. And despite being ripe for correction, prices in the sector never saw a downside due to the resilience amongst investors to liquidate black money. The latest Budget proposed rules to get black money, which as per estimates accounts for 30% of realty transactions in India, under the tax net. This is expected to lead to a forced but needed and healthy correction in realty prices.
The Indian stock markets were trading weak today on the back of profit booking in engineering, banking and power heavyweights. At the time of writing, the BSE-Sensex was trading lower by around 209 points. Gains were largely seen in few IT stocks.
"Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety". - Ben Graham
|| Today's investing mantra
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