How much is good enough?

Over the last decade, I had the opportunity to manage the money of a lot of successful people in the corporate and startup world. The equity stake sale, high compensation, inheritance, and in general India’s growth are often the reasons for the excesses. In this article, I will try to explore what is the limit of those excesses.

How much money you need to navigate your life comfortably?

Our nature is abundant in resources and there is no dearth of asking for more. However, at some point we define the limit to our race, it can’t be forever.

How to find peace at work?

One of the ways is to be meaningfully involved in your work every single day. The challenges should be just enough for a person to be motivated. If there is no challenge, there is no motivation and if the work is too challenging, again the motivation declines.

Money is an outcome of the quality of work. As far as you continue to improve your craft, your command to ask for more money increases. Not every lawyer, doctor, or other professional is paid the same, what they bring to the table, they command appropriate compensation.

Most people, if not directly but indirectly work for money. Lack of money can be quite demotivating. However, an abundance of material success is no guarantee of finding peace.

How much money is good enough to find peace? Once you attain that stage, you can still strive to earn more, but you don’t have to work for the basics of life.

Everyone should break their life goals into needs, wants, and aspirations. Your personality defines what kind of goals you have. For one, going on an international vacation may be a need and for the other could be an aspiration. This breakup of goals is the first step to defining what is enough.

What is good enough?

The funds that you require to meet your needs are ‘good enough. After working with so many investors, I have realized that the baseline of needs is usually common.

1. Retirement

Everyone at one point will retire. You need to have sufficient funds to meet your retirement needs.

Retirement fund = Living expense X (Life expectancy – Current age)

Someone in his 40s with a living expense of 1.5L will need a retirement fund as:

(1.5 X 12 months) X (90 – 40) = Rs 9 crores

2. Kid's College

A lot of people want to send their kids abroad for higher education. There must be a financial corpus to meet this goal, but how much?

Indian College (four years): Rs 50 lakhs (inflation 10% pa)

US College (four years): Rs 2 crores (inflation 5% pa)

Depending upon how many years, you can define the corpus.

3. Parents care

At some time, our parents become dependent on us. As a moral duty, we must take care of them both physically and financially. If the housing need is not there, 40-50k per month is sufficient to meet parents’ financial needs.

Parents fund = Living expense X (Parent’s Life expectancy – Parent’s current age)

= (50k X 12 months) X (85 – 70) = Rs 90 lakhs

4. Primary house

People may aspire to own many houses, but one house used for primary residential purposes is a ‘need’. The cost of the house is part of the ‘need’.

A sum of 1, 2, 3, and 4 would provide a broad number of what is enough. As you progress, your goals keep changing and so will the definition of ‘what is enough?’.

Based on the above examples:

1. Retirement fund: Rs 9 crores

2. Kids fund: Rs 2 crores (today’s cost)

3. Parents: Rs 90 lakh

4. House: Rs 2.5 crores (assumed)

Total good enough funds: ~Rs 14-15 crores

You can bookmark this page. This has all the calculators to determine what is enough at each stage of your life.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

Knowing the expectations treadmill trap

Just like a treadmill, if you continue to increase the speed, at one stage you either push the ‘emergency stop’ button or you may fall.

The Expectations Treadmill

People born in the 1980s saw India changing during their teenage and people born in the 1990s, saw only the new India.

The colonial mindset is now reduced, and boundless energy is unleashed. Today’s generation wants to conquer the world.

When you want to conquer the world, the expectations are extremely high. The treadmill is running at a high speed.

Here are a few of my observations:

Employment

When you work for 14-16 hours a day for promotion and/or increment, sooner than later you reach a dead end. Either the increments moderate or the frequency of promotion reduces.

You start to feel disconnected from the organization and eventually start to look out thinking that the outside world is a fair place.

The change of job starts with fresh energy, but it is just about time, again the treadmill speed becomes too high, and the fallout happens.

Corporate

Satyam’s fraud started with a tiny amount of showing dubious cash in the bank. The expectations from the shareholder and management greed continued to push the treadmill until it reached massive suspicious cash in bank entry of $1 billion. And one fine day, it all crashed.

A similar pattern can be observed in the Bernie Madoff scandal. It started small but, in a few years, became the largest Ponzi scheme in history, worth about $65 billion.

Bernie Madoff “I didn’t know where to stop”

Economic bubbles

Markets move as a pendulum, from optimism to pessimism. It all starts with positive market sentiments, lower interest rates, and in a few years, the world faces high inflation, then an increase in interest rates, and finally recession.

Stock market

Expectations drive a company’s stock price as well as its actual performance, so the higher your expectations, the faster you must run to keep up. However, there is a limit to how fast and how long you can run. Eventually, either a fraud will emerge, or the growth will taper down.

The concept of the expectations treadmill can be applied across non-financial matters too including, dieting, marriage, etc.

“the secret to a long marriage is lowering your expectations” - Warren Buffett

How do you see others being trapped?

Moderate behaviour is difficult to spot, however, extreme behaviour is relatively easy to spot. Look for extreme behaviour.

In the case of employment, if someone is excited about his/her work, he/she tap dances to work. However, in case someone is unhappy, you will see fewer smiles and more sick leaves.

If the economy is doing good, news across the media is filled with optimism as if nothing bad can ever happen. This is a cue, to apply caution in these situations.

If the management is unethical, they would often avoid answering questions, show arrogance and position themselves more than the business. Avoid dealing with these businesses.

the flamboyant fugitive Vijay Mallya

There’s never just one cockroach in the kitchen - Warren Buffett

How do you avoid being trapped?

The fear of a fall should not prevent you from setting goals. You should look up with your eyes on the ground. The focus should be on the present, each day should be spent refining the process.

Expectations are linked with the future and outcome. As far as you focus on the task at hand without any focus on the outcome, while improving your process every single day, you will avoid falling.

A good state is somewhere in the middle of fear and greed.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337

How to identify consistent compounders?

Before we understand how to identify consistent compounders, we need to know what consistent compounders are. These are those companies that have grown their earnings at a healthy level over a long period without equity dilution.

How to identify consistent compounders?

Stock price performance over the long-term mimics earnings growth. If a company has grown at a healthy growth rate, it is expected that over the long term (> 5 years) the share performance of this company will be similar to its earnings growth rate.

In this article, I will explain how to identify these consistent compounders. There are a few criteria that we need to follow:

1. For simplicity, market capitalization > Rs 50,000 crores.

2. Average 5-years Return on capital employed (ROCE) > 15% per year.

3. Average 5-years Sales growth > 7% per year.

When we apply the first condition, we get a list of hundred companies. Out of those hundred companies, we exclude companies that do not meet our criteria numbers two and three. The list reduces to under 30 companies. Out of those, we remove cyclical companies including commodities and financials.

NSE100, Consistent Compounders

Please note that these companies are tracked not only by Indian institutional investors but also by foreign institutional investors. Therefore, it is extremely hard to outsmart these investors. However, you can understand the mood of the market. Once you know the mood, you can develop your investment thesis.

We all know it is impossible to predict the future, yet we focus our energies on this useless activity. Thousands of economists publish forecasts every day. If they can exactly predict the future, they would be millionaires by now, but we see them peacefully employed. This indicates that even the most trained lot cannot predict. We spend our valuable time reading what these PhDs have to offer. There is no harm in reading these reports, the problem is when we start acting based on these opinions.

To avoid this trap, I prefer using a tool to understand the mood of the market. To understand the mood, I assume the current price is fair price. Then I estimate what the market is expecting from a ‘growth’ point of view.

People use discounted cash flow model to estimate the fair value of a company. I prefer using the same model but in reverse form. This helps in understanding what the market expects from the company and if the current price is assumed to be fair, what is the growth baked into the current price.

The first step is to understand what the free cash flow of the company is. Simply speaking operating cash flow minus purchases of plant property and equipment is an indication of free cash flow. You can also arrive at free cash flow through a profit and loss account. Operating profit (Net operating profit after tax NOPAT) add non-cash charges less working capital investment less Capex will be free cash flow.

Assuming a certain discount rate, also called the weighted average cost of capital (WACC) and a terminal growth rate of 7%, I calculate implied growth. For a set of robust companies with predictable cash flows a low WACC is justified. A 10-year government bond yield is 7.3% if you add 1.5% to 2% so approximately a 9% discount rate is fair for these ‘great’ companies.

I prefer using a terminal growth rate of 7%, a 3% real growth rate plus inflation of 4%. Additionally, I assess over 10 years. A company that is operational and growing for the last 30-40 years, is expected to survive for the next 10 years.

Initial cash flow along with terminal growth rate and WACC helps in arriving at the value of the company. I model ‘implied growth” i.e., the expected growth over the next 10 years.

Nestle India Implied Growth Nov 2022

At this stage, it is only a plug-and-play analysis. We find out that 15% is the implied growth rate of Nestlé India. We compare this implied growth rate with the last five-year average NOPAT growth rate of 19%. The market expects the company to grow a little less than what it has grown in the past five years. If there is a big disparity between what the market expects and what it has delivered in the past, the analyst must spend time analyzing it further.

So, when we apply the same analysis across our chosen companies, we see a trend.

Implied Growth NSE100

HAL and BEL are both government-owned defence companies and have delivered well in the last five years. The market still expects negative growth. Is it because these are government owned?

Similarly, we see all the IT companies have a big difference between what they have delivered and implied growth. Is it due to negative global sentiment?

In the last two years due to China +1 strategy, a lot of chemical companies have seen traction. As you can see the chemical companies have extremely high implied growth, indicating that the market is euphoric about the sector. It is time to apply caution for this sector.

When you do this kind of assessment you understand what the market expects. When the market expects extremely high growth or low growth, it is indicative of some opportunity.

This assessment should not be treated as a complete analysis. It is just a better screening tool. Over the last few years, there are a few investment professionals who have promoted consistent compounders at any price, it is not a good idea.

The analyst must spend time understanding the industry dynamics, business potential, management quality, and future growth prospects more deeply.

Disclaimers

• Investment in securities market are subject to market risks. Read all the related documents carefully before investing.

• The securities quoted are for illustration only and are not recommendatory.

• Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

Details of the advisor

• Advisor: Ankur Kapur

• SEBI RIA No.: INA100001406

• BASL Member ID: BASL1337