A matter of Trust

It’s a matter of Trust

The Webster Dictionary describes ‘Trust’ as the assured reliance on the character, ability, strength, or truth of someone or something.

It is an expectation that another party will not allow you to be harmed at a time when you are vulnerable. 

Most of us are willing to exhibit some level of trust for others until given a good reason not to.  And I’d argue that the propensity to trust others is also a personality trait, i.e., some of us tend to generally be more willing to trust others.  So while some people may be too cynical and unwilling to trust others, some others may be naïve or gullible.  I’d like to believe that I am neither of the 2 extremes.

In any event, as part of making investment decisions, we continuously rely on information provided by management (besides of course, its ability) and hence it is of utmost importance that we have the fullest trust on their integrity.

For instance when Warren Buffett buys a new business for his Berkshire Hathaway empire, he places his trust in the executives of the company he is taking over. Rather than dismissing them immediately, or easing them out after a short interval, as many other firms do after acquisitions, he only buys companies with executives he would want to keep and then leaves them alone – trusting them to make money for him. Mr. Buffett’s headquarters staff is only about 20 people, who oversee 77 operating companies and over 250,000 employees, a sign of the trust in the leaders of those companies.

But Buffett’s trust is not blind trust. It is smart trust, which combines the propensity to trust with analysis, experience and a bit of instincts to make sure the trust doesn’t go awry.  Ergo, using the Russian proverb “Trust, but verify” to its fullest.  Perfect.

Bajaj Electricals

Consider the following story line of the company:

1.     Part of one of India’s premier and reputed family groups with a 100 year history and 27 companies under management with a Group Turnover of USD 7 bn.

2.     Leader in small appliances – their largest business stream (the group also has ~15% market share in fans, 8% in lighting and17% in luminaires)

3.     Good return ratios – last 10 year ROCE ranging between 20-40% and ROE ranging between 18-40% (most notably, the lower range in ROE has been despite its recent problems); high growth company (has had a revenue CAGR of 22% + over the last 10 years)

4.     Low debt (0.3:1) despite the issues related to capital getting stuck in some of the projects

5.     Temporary problems on the Engineering and Projects (E&P) division (possibly bad project management is one of the likely reasons of the issues)

6.     Old projects being closed, costs being taken upfront.  By the end of the year (by March 31^st, 2013), only 6 of 24 projects will be pending

7.     Consistent message from the management:

a.     we are done with the bad projects,

b.     all new projects have good margins and there is constant vigil on timely implementation,

c.      other businesses are doing well

8.     Core business ex-E&P is an excellent play on the Indian consumer growth story

9.     Established reach with over 400,000 retailers in Lighting, 40,000 retailers in Appliances and 50,000 retailers in Fans.

10. Reputable management.  One of the only groups that I know of that size whose top person has publicly challenged the Government to point out any incidence of tax avoidance or corruption.  Company’s visiting card says: ‘Inspiring Trust’.

BTW, I am already sold on the idea (I bought the stock almost a year and 20% ago), but even at this point in time, I feel that the company’s valuation is nowhere close to where it should be – mostly because they have continued to clean up their act on the E&P business and the profits have been depressed due to the resultant losses.  But I believe that the future potential of the company is excellent and is foreseeable in the near future. 

To elaborate:

High growth company

Temporary problems with the E&P division

The following 2 tables show the declining fortunes of the E&P business.  The division provided ballast early on but clearly since then the business has become commoditized.  Part of the problem seems to be the economy and the growing bidders for a declining business pool but the other part seems to be that there were delays in implementation and bad estimation of remaining costs etc.  In short, bad project management.

Meanwhile, the rest of the divisions focused on direct consumer interface are increasing their share of revenues and profits.

 

 

As per the management, sometime during this year the company will reach its trough as far as delivering the bad news on the E&P is concerned.

And that’s where the trust element comes in.  Can we trust that the management will be able to clean up its act on all the old projects (the ‘bad boys’ as the management called in one of the interviews) sometime in the next couple of quarters, do a better job of project management in the future projects and bid for income accretive projects henceforth?  Do they have shareholder interest in mind?

Given all the information and knowledge that I have about the business and the group, I am willing to provide that trust on the management.

Accordingly, this is how I estimate the future to look like (I have to state that I abhor working on future financials because of the obvious uncertainties, but I am making an exception in this case – and as one can see, giving a very high level view rather than getting into details).

Notes:

      1.  Growth estimates of the various businesses are as follows:

a.     Consumer Durables: 20% (based on past)

b.     Lighting: 10% (based on past)

c.      EPC: None – based on expectation of normalization of business

      2.  EBITDA estimates are as follows

a.     Consumer Durables: 10% (based on past)

b.     Lighting: 8% (based on past)

c.      EPC: 4%

      3.  I have mentioned the EPS estimates of some of the brokerages that I could find.  As one can see, the issue is not so much on 2014.  The issue seems to be on the current year!  So either the brokerages are over-estimating the company’s earnings for the current year or I am being conservative.  If it is the former, then a) its not because of what the management has been saying as they have been quite clear on the fact that there are issues left to be tackled in the E&P business in the rest of the year and b) we can look forward to a nice price correction when the current quarter results are announced.

      4. Notwithstanding.  I want to be focused on the 2014 and 2015 figures. What’s the value of a company’s stock price that has an EPS of ~ 18/- (there is near unanimity on the later year EPS figures); is growing at 20% (+); has high ROCE and ROE (which will jump further once the E&P is fixed); has the catchy Indian consumer story with it and will be a turnaround story once the E&P is fixed?

You know what – I believe it is much more than the 208/- price it was being quoted for as of Friday, December 28, 2012.  How much more?  Well, we don’t have to match Bajaj Electrical’s PE to the consumer based companies of the likes of Hawkins and TTK to figure out what it should be.  Important thing is: will the ‘E’ in the PE work out?  Coz if it does, then the ‘P’ will take care of itself.

Over to you Mr. Bajaj!  You have inspired my trust.  Now the tougher part of retaining it!

Is NBCC a company with a sustainable moat?

Is NBCC a company with a sustainable moat?

I was asked this question recently and I used it as an opportunity to get back to my blog, something I had quite forgotten!

Before we dive into the answer, a short word on: 1) what is a moat and 2) what is NBCC all about.

Moat

It was Buffett who, in saying the following, introduced the investing world to the term ‘economic moat’:

" In business, I look for economic castles protected by
unbreachable ‘moats' "

 An economic moat then, is a type of sustainable competitive advantage (due to entry barriers, low costs, high switching costs etc.) that a business possesses that makes it difficult for rivals to attack its market share and profit. The term is derived from the water filled moats that surrounded medieval castles. The wider the moat, the more difficult it would be for an invader to reach the castle.

National Buildings Construction Corporation (NBCC)

The company:

1. Is a Government entity – a Mini-Ratna (implying more leverage in decision making by the Government), which came out with an IPO in early 2012 in the price band of 90-106/- (current price hovering around 100/-).
2. Has a current market cap is 1200 cr., no debt and ~ 1500 cr. in cash (of which one could assume ~ 600 cr. as excess cash since rest of it are against payables/ advances); this implies an EV of 600 cr.
3. Has ROE of > 20% for the last 6 years and a negative working capital (company takes advance from its customers) 
4. Has an average 6 year Free cash flow of 200 cr. Additionally has interest income (which should be considered as operating income assuming the current financials and business model continues) of 70-100 cr.; EV/ FCF of ~ 2x.
5. Is in the following businesses:

• Main business comprises of project management and consultancy for civil construction for Government (Ministries/ Police/ Army etc.) as well as for PSUs (including public sector banks etc.) 
• Other business consists of Real Estate development for both Residential and Commercial properties

Does the company have a moat??

The company’s Project Management Consultancy division's model is rather simple. It:

- gets orders from Government/ Government undertakings
- takes advance from the customer
- gives the contract to a sub contractor
- provides any advance to the contractor if required (but backed by bank guarantee)
- supervises the work and
- earns anywhere from 6-10% on such contracts

Reading the above, one view could be that the company is surviving due to the preferred treatment given to it by the Government. And we don’t know whether this is sustainable.

And as per me, that’s a correct view. The fact is that the company’s business model is entirely dependent on the preferred treatment from the Government.

But it is also true that doing Governmental construction is their Raison d'être – that’s why the company was created. For the company, this creates a large, virtually recession free market. And as an investment opportunity, I have no problem with that – none, zilch, zip.

Now coming to the question on whether this is a sustainable moat (I would say that this is a moat). If the quality of the construction was outstanding or there was some great value addition in what they were doing, then I'd say yes.

But if one were to see any of their constructions, one would realize that it’s nothing to write home about (though you may ask legitimately – how many Government buildings does one know for which one could write home about??). Hence, I would conclude that this is not a moat that cannot be breached tomorrow (in the sense that there is nothing to stop the Government from allowing others to do all these jobs).

Then why do I still like it?? 

Because while it is not an unbreachable moat, I am not certain why the Government would want it to be breached!

To understand my logic, lets reverse the argument – why would the Government want to change the arrangement? The margins that NBCC charges are small - so I don’t see an incentive there. Additionally, in the current environment where bureaucrats want to save their backsides from any decisions that can be questioned later, there may be an inertia towards asking someone other than a 'Government' company (read NBCC) to do work for them, even if the quality is not so great.

So while I'd say that the moat is not the strongest, I think the unique arrangement due to which NBCC gets its business may be around for enough time for us to take advantage of the situation.

The Real Estate (RE) division, on the other hand, is different than the PMC in that it gets good margins - 40% and more - because it buys land, builds on it and then sells it. But the profitability depends on whether there are any projects that they are working on. As of now, they have a couple on hand: the Okhla commercial complex that is close to completion and a couple of sectors in Gurgaon. They still haven't opened the booking on these, but when they do, that will drive their profits over the next few quarters. There are other projects that will also be worked upon, so while the inflows will be bulky, we should expect a decent inflow in the immediate couple of years.

The potential crocs in the moat

Another couple of aspects of the company that we need to be aware of before we think everything is nice and dandy about the company:

• The nature of company's business is such that it is susceptible to allegations of corruption. When a Govt. company works with multiple contractors, corruption is forever a lurking possibility – though as per the company, they have recently taken certain precautions like moving to e-bidding above a certain contract size. They are also working on a whistle blower policy. 

• Contingent liabilities as at March ’12 were in excess of 1000 cr. on account of ‘claims against the corporation not acknowledged as debts’ (the amount is 1/3 of their Annual revenues and ~5x their PAT). However on more thorough investigation, it became clearer that these are more in the nature of posturing by some of their customers (of the total amount shown as contingent liability, Rs 570 cr. is on account of a single account – Canara Bank – for which NBCC did some work at Mumbai. NBCC made a claim of Rs 356 cr. and Canara Bank put a counter claim of Rs 570 cr.). In other words, these are the result of some disputes that ran into arbitration. Some of these came to light at the time of the IPO’s due diligence. For one, the management is working to bring these amounts down by settling the disputes. Secondly, their agreements with the sub-contractors are commercially quite strong and protect NBCC from risks arising out of claims of non-performance. And lastly, as per the management, most such arbitration cases in the past have resulted in a net recovery in favor of NBCC, rather than a payment. Ergo, I’d say that these are part and parcel of the nature of their business and something that can be managed with some more focus and attention. Net-net, I am not losing my sleep over the contingents. 

• Management’s notes to accounts included the following comment: ‘Balances of Trade Receivables/ Trade Payables and Loans and Advances are subject to reconciliation and confirmation’. (For information as at March ‘12, the Trade Receivables and Payables are to the tune of ~ 850 cr. and ~ 1170 cr. and ~ 550 cr. respectively – each one being a scary number by itself). Regarding this, my view is that the company’s management has been rather lackadaisical about it. This is a comment that has apparently been carried on for years (and has more to do with reconfirmations rather than reconciliations) and one that the management did not realize the import of, until the analysts questioned it. Again, there is every hope that they will work on getting the reconfirmations so that this doesn’t have to resemble a time bomb on every Annual Report. I am not completely comfortable about this but am willing to give the company some time to clear the cobwebs. At the same time, I don’t think the company is following some banana accounting policies with no controls whatsoever. 

In summary, I'd say that the company doesn’t exactly have the moat of the quality of a Colgate or an HUL. But it looks cheap, quite cheap. And recession free to a large extent. And in light of the RE income that is likely to come soon, it could show bulky profits as well. So there is opportunity to make money though it may not be a multi-bagger and I wouldn't hold it for a very long period.

Hope that makes sense.

Buy Gold anyone?

(Warning: This post is unlike some of my others as this one contains an overdose of Tabular information)

Bloomberg: Feb 17th, 2012

“LONDON: Gold traders are getting more bullish after billionaire hedge-fund manager John Paulson told investors it's time to buy the metal as protection against inflation caused by government spending.

Speculators in US gold futures are now their most bullish since September after the Bank of England and Bank of Japan said they will buy more assets and the Federal Reserve said it was considering purchasing more bonds.”


I agree. While the world’s macro-economic fundamentals have improved, the markets too seem to have run up a lot over the past few weeks. And though not all companies are over-valued, one can see quite a few where the price rise seems without any fundamentals. In such a situation exercising caution wouldn’t be out of order. Hence, one could consider Gold as an investment.

Except that my definition of Gold is teeny-weeny different.



I like STOCKS that are equivalent of gold. Something that serves as a flight to safety when all else is disintegrating.

I had bought and had recommended Colgate in 2008. I had also commented about its stock performance during the crisis period in one of my blog articles (dated April 11, 2010).

Now allow me ‘lay’ down the reasons as to why I believe that it may still be a stock worth buying and retaining.

1. Play on the long term potential of India

In any company’s valuation, one of the toughest things to do is to forecast the future growth. In other words, we need to look for predictability of the earnings.

The FMCG sector is one where, especially in a country like India, given its demographic and GDP growth potential (no need to elaborate), the sales growth is almost a given. Hence, that is a logical place to start the research.

The BSE’s FMCG index has 11 companies listed and the table below shows the sales and profit growth for each of them over the last 3, 2 and 1 year periods. What we are looking for is consistency.



In case you thought 3 year figures are not long enough, pl. see below the EPS figures for the key companies (the ones not mentioned in the table do not have figures worth mentioning, hence deleted. In the case of Jubilant, the figures are only since 2007, hence ignored for the purpose of the analysis).



Just in case the print is not too legible, Colgate, Godrej and Nestle have provided long term (7-9 years) EPS CAGR of 22%, 27% and 21% respectively.

2. Good Dividend payout

Confession: I like companies that pay regular dividend and I have regularly used dividend yield as one of the themes for my investments. (I agree that this is at variance with Buffett’s teachings but maybe it’s a hangover from having worked on a regular income for so long in my life). The table below shows the dividend payout ratio for each of these companies.



In this respect, Colgate and Nestle are the noticeable standout leaders, distributing over 70% of their PAT as dividend. Colgate has the highest dividend yield (2.4%) amongst these companies.

Regular high payout % + increasing profits = increasing dividend

3. Leadership in the line of business

A commoditized business is typified by low profit margins, low return on equity, absence of brand name loyalty etc. In such a case, only the low cost producer wins. Even there, the business is faced with cyclicality, often debilitating the performance in the event of a glut or shortage.

It doesn’t have to be that way with a consumer monopoly (a ‘franchise’ in Buffett’s words). Colgate was awarded the # 1 brand position in India and was reported to have ~ 60% market share in the oral care market.

To state the obvious, oral care has low weightage in a monthly budget and hence has less price sensitivity. And with more money flowing to the rural sector, more villagers are likely to substitute their local concoction with a Colgate toothpaste and brush. And this is actually happening. Whenever I happen to travel through far-flung villages (especially in the hills, which I love to visit every once in a while), I see the evidence of Colgate’s distribution. (As an aside, toothpaste consumption in the country is at 0.07 kg per capita as compared to 0.40 in Thailand and 0.61 in Brazil).

I also like the fact that Colgate’s is a mono-line business unlike, say, an ITC, which sells tobacco as well as runs hotels and has a paper related business AND also sells Bingo potato chips.

4. Superior economics of business: High return on capital employed

Last year, there were only about 40 listed companies in India above the market cap of USD 100m (and with debt to equity of less than 0.1X), which reported a return on capital employed in excess of 30%. (There is no logic for my benchmark of 30%, it is just a high enough figure for a country like India which has had inflation levels of 10% in the not so distant past).

Obviously then, a company that can make returns in excess of 30% consistently is bound to be unique. (Why is having a high return on capital important? Well, for starters a consistent high return on capital is an indication that the management is not only making money, but is also employing the retained earnings to make more money for the shareholders. It’s just about the power of compounding! Higher returns will mean more profits – it’s as simple as that).

Amongst the FMCG companies, the table below shows the returns on capital over the last 7 years. Amongst these, Colgate, HUL and Nestle tower above the rest.




5. Consistent performance in the stock price

Carrying on from the previous points, if a business does well shouldn’t the stock follow? The following is what these stocks have provided their owners in excess of Sensex returns (without including dividend).



There are a couple of things I’d like to bring out of the above table:

a) At the risk of repetition, these are the returns above whatever the sensex has returned
b) Companies like Colgate (and Godrej, Marico, Nestle etc) have performed well (business and stock performance wise) even during the uncertain period of 2008/ 2009, earning themselves the status of safe haven or ‘Gold’ stocks
c) Performance of most of these stocks have faltered in the stock market over the last month or so, as the liquidity has chased the most undervalued (and in some cases speculative) stocks. In this respect I remind the readers of Ben Graham’s adage that in the short term the market is a voting machine, but in the long term it is a weighing machine. Performance will eventually win, which means that this may be an opportunity at the current moment.

6. Low beta

The safe haven status on some of these stocks implies low beta, as shown below. This is something I wouldn’t mind in case there was to be crash tomorrow (and I am not saying there will be).



7. Valuation

I haven’t forgotten that price is everything in a purchase! Below is a table that compares the companies by the ratio of their Enterprise value to PBDITA (essentially EV to cash generated).



Before the conclusion, let me recap.

I have tried to demonstrate that in terms of the earning power, dividend payout, consumer franchise, return on capital employed and stock returns, Colgate (and Nestle if I were to add another name) truly make a mark. At the same time, they have also proven to be all-weather friends even when Mr Market decided to go into a manic mood.

So for all the benefits listed above, is paying 24X cash for Colgate expensive?

Well, let me put it this way – it is not cheap… Yet, simplistically, if Colgate grows it’s EPS at 22% p.a., with all the other attendant benefits as explained earlier, then 24X on EV to cash doesn’t sound so bad. The 1994 purchase of Coca Cola by Buffett was at 22.5X.

But having said that, if the growth doesn’t happen the way it has had – for whatever reason – then the market could be unforgiving. Remember that the HUL stock languished between Rs 200 and 250 from early 2006 to mid 2010 because of performance issues.

But… all said and done, we are talking about Gold here! And Mr Paulson says ‘Buy’! So I plan to add a bit in my portfolio, if only as an experiment.

Readers will obviously need to decide for themselves.'

Noise

NOISE



Nowadays whether the markets fall or rise, the experts tend to be equally surprised.

I have no hesitation in admitting that I have been as surprised by the stock market upswing as any other bloke.

And I am not even an expert.

Problem is, whenever there is a major movement in the markets, vividity takes me right back to the dark days of 2008 and a rise or fall seems equally fraught with danger. Dusk and Dawn are similar to look at after all.

The feeling of ‘Deja moo’ takes over. What if the rise is a dead cat bounce? What if the fall is the first step towards the 55% fall in 2008?


Meanwhile the experts all over the world are laying down their arms. As per a report on Bloomberg, strategists at the biggest banks are capitulating on their bearish forecasts after the best start to a year for global stocks since 1994.

Two weeks after saying that investors should “remain cautious,” Larry Hatheway, the chief economist at UBS AG, raised his recommendations on global shares and high-yield bonds in a Jan. 23 note to customers entitled, “Wrong, but not too late.”


As per a book called ‘The Zulu Principle’, both bull and bear markets have several different stages. In a bear market for example, stage 1 is usually a sharp fall during which economic conditions remain positive.

In stage 2 economic conditions deteriorate but the market becomes over-sold.

There is then a sucker rally, powerful enough to persuade most investors into believing that the market has bottomed.

During stage 3, the economic news becomes awful. Investors panic and sell at any price. The market declines very sharply as the downward spiral becomes self-feeding. Stage 3 is only over and ready as a springboard for the next bull market when investors abandon all hope for the future. The first positive sign will be that shares no longer fall on bad news.

That’s fine and dandy. But how does one figure out if this is a sucker rally or the end of Stage 3?


And what’s caused the recent rise anyway?

It’s almost as if people were just waiting for 2011 to be over before they wipe off the cobwebs on their cash piles and jump into the markets like this is all they were forever waiting for.

Meanwhile:

Did the European crisis get solved? Well, not really, no.

Did Greece, Spain, Portugal and the others manage to pay off their debtors? No..

Did the Israeli PM just tell Iran ‘let bygones be bygones’; Iran is Israel’s long lost brother? Er.. No.. There are enough indications that there could be a unilateral strike by Israel sometime in March.

Did US and UK’s debt levels come down? Of course not!! ‘Austerity drive’ everywhere is just polite noise from politicians. Everyone has one eye on the elections (the statement could be true from Greece to US to India).

Did China’s GDP just go up by 10%? No.. Recent reports suggest that China’s GDP could fall by HALF if Europe goes into a turmoil.

Did India’s Government just decide to be investor friendly and were the ‘policy inactions’ fixed by the Government? NO! (I don’t even want to elaborate on this.. you trying to embarrass me??)


OK, so what the heck is going on?

Niels C. Jensen of the Absolute Return LLP is someone whose writings I follow carefully.

In a recent note he writes: “The ECB’s balance sheet has expanded almost 50% in the last six months to €2.7 trillion and it doesn’t stop there. The balance sheets of the 17 eurozone central banks have grown even faster and now add up to €1.7 trillion, creating a consolidated balance sheet in the European central bank system of €4.4 trillion, almost twice the size of the Fed’s balance sheet.

“There is no question that the liquidity made available by the ECB has eased the liquidity squeeze in the European banking system and thus provided some much needed energy to the equity markets.”

He further makes an interesting differentiation between Economists’ Hypothetical Time (EHT) versus Real Market Time (RMT): basically suggesting that market practitioners (those who manage money and thus have an effect on markets) are forced to operate in RMT if they have any desire to make money for their clients.

Thus, as per him market practitioners no longer care about Greece or about Portugal. Instead they are now entirely focused on whether Italy and Spain can ride out the storm. And as per him, on the evidence of the recent performance of European markets, the verdict is that they can.


There you go.. The last of the dominoes just fell. The above, in my view, very eloquently explains the reason for the increase: The heady mix of liquidity and money managers’ frustration at being made to look like fools by holding on to cash while the markets went up.


As for me, purely by instincts since everyone is now positive, I tend to be the reverse. It helps that I am not answerable to too much ‘external pressure’ as of now.

I recently did a review of the portfolio under my management; tactically exiting some stocks that I felt had reached their optimal value. These included some mistakes, eventuating into losses. This freed me up with some cash in case some good opportunities come knocking.

Yet, I am holding on to the ‘long-term positions’. These are stocks that in my opinion will accrue positive returns to me over the longer period of time, notwithstanding the short-term blips. A list of such stocks is the topic for another note. More important for now is to explain my rationale.

Forget the Noise. Think longer term.

Firstly, like I said, after the 2008 knockdown in the markets, I am able to sleep more peacefully by being more conservative. Hence keeping cash on the side helps in case 2012 becomes 2008.

On the other hand, longer term, there is nothing better than equity in my view. This is one of the only asset class where the underlying value can be assessed closely. One can decide whether to pay 3x or 5x or 10x the earnings/ cash for a stock. But the underlying the valuation is visible: earnings (or cash on books or whatever). How does one decide the optimum value for Gold, for example?

For a company that is likely to have a growing trend on earnings or one which has some other hidden value, one has to stick on, no matter how the market behaves.


Prof. Shlomo Benartzi, an authority on behavioral finance, in an interview differentiated between Loss aversion and the myopic component of investing. We all suffer from one or another every once in a while.

Loss aversion refers to the fact that people think illogically about losses, so the pain of suffering a loss is about twice that of the enjoyment and pleasure of having an equivalent gain.

The myopic component occurs because people tend to count their money very often they tend to be myopic, i.e. they focus on short-term gains and losses, rather than taking a long-term perspective.

As per him, the “typical” investor has a horizon of about one year (BTW, one amazing stat quoted in Niels Jensen’s note was that the average holding time of a stock in US is now 22 seconds! Blink an eye and the stock got sold. Go to the loo and the entire portfolio got bought and resold!).

Prof. Benartzi goes on to say that if people count their money less often they would put more money into equities and the equity premium would probably be lower. Accordingly, he tried to focus on how to stop people from focusing on short-term losses.

To do this he conducted a few experiments. In one of them people were presented with an annual return on a stock fund and a bond fund and asked to decide how much to put in each fund. In this case they put about 40% in stocks.

In another version he showed people what the returns would look like over a 30-year horizon. Now they put 90% in stocks.

That’s because they stopped thinking about short-term losses.


Returns Since %

1992 (20 years) 778%
2002 (10 years) 420%
2006 (5 years) 95%

And these are just the sensex returns. Any individual stock picking strategy should yield much more.

Need I say anything mooore?