November 21, 2015
Time: 4 pm
Compound Annual Growth Rate:
What is Compound Annual Growth Rate?
What we can learn from that?
If you deposit Rs 1 Lakh in a bank which pays 10% interest per annum, you get Rs 1,10,000 at the end of one year. That is Rs 1 Lakh of your investment and Rs 10000 interest which is 10% of Rs 1 lakh.
Here I am assuming, for the sake of simplicity, that the Bank is calculating interest at the end of one year which is called annual compounding. But in realty, Banks do calculate the interest once in 3 months which is called Quarterly compounding.
You get Rs 10000 interest for one year. Does it mean that you will get Rs 20000 as interest for 2 years? No, you will get Rs 21000, which is higher than Rs 20000. Why?
When you deposit Rs 1 Lakh, at the end of one year, you are entitled for Rs 10000 interest. Then at the end of one year, your money is Rs 110000. Then for the second year, you get 10% interest for Rs 110000, not Rs 1 Lakh. So 10% interest on Rs 110000 is Rs 11,000. So you get Rs 10000 interest first year and Rs 11000 interest second year. So you get a total of Rs 21000.
Your return of Rs 21000 works out to be an average return of 10.5%. But Bank offers only 10%. So your increased return is because of 'Compounding'.
You must have heard people saying '25 years before, a house in Virugambakkam was available only for Rs 10 lakhs, now people are asking for 2 Crores' This return looks very high. But if you calculate the return, it works out to be only 12 to 13% return only.
During those days when inflation was high, even Govt. of India instruments like Indra Vikas Patra gave 14% return. So the return in the above case was just equivalent to other forms of investment only, not really very high.
Most people approach me by saying 'Sir, I can invest Rs 1 lakh, can you give me some trading strategy to make Rs 10000 per month'
These people expect 10% return per month. Even a commodity broking company advertises in a television channel by saying one can expect to make 10% return per month.
Forget about 10% return per month. Think somebody can make 5% return per month consistently.
Do you know that his Rs 1 Lakh investment will become Rs 10000 Crores in 30 years?
Do you think anybody can make such an amount with such a small investment?
Making Rs 10000 crore in 30 years with Rs 1 lakh investment? Nobody will believe.
But same people will believe that they can make Rs 10000 every month with Rs 1 Lakh investment.
Actually both are same.
Do you know the company 'Symphony' which is the largest wealth creator in the last 10 years. They have grown at the rate of 6% per month. But actually their business did not grow like that. Investors ready to pay huge premium to the company's share price and hence the valuation has become so high.
Most traders come to the stock markets by thinking making 5 to 15% per month is easy in trading, but they do not realise that they will be the richest people in India if they can actually do that. But how many multi billion traders we have seeing around us?
We only see people who have lost heavily in trading.
So be realistic while coming for trading. Every one coming to Cinema field do not become a Rajini or Kamal. Every company you invest will not be like Infosys or Wipro. For every one stock that has done extremely well, there are dozens of stocks that have done very badly.
If you can make 2% to 3% per month in trading, you are a successful trader. But you have to make that consistently.
Time: 4 pm
Compound Annual Growth Rate:
What is Compound Annual Growth Rate?
What we can learn from that?
If you deposit Rs 1 Lakh in a bank which pays 10% interest per annum, you get Rs 1,10,000 at the end of one year. That is Rs 1 Lakh of your investment and Rs 10000 interest which is 10% of Rs 1 lakh.
Here I am assuming, for the sake of simplicity, that the Bank is calculating interest at the end of one year which is called annual compounding. But in realty, Banks do calculate the interest once in 3 months which is called Quarterly compounding.
You get Rs 10000 interest for one year. Does it mean that you will get Rs 20000 as interest for 2 years? No, you will get Rs 21000, which is higher than Rs 20000. Why?
When you deposit Rs 1 Lakh, at the end of one year, you are entitled for Rs 10000 interest. Then at the end of one year, your money is Rs 110000. Then for the second year, you get 10% interest for Rs 110000, not Rs 1 Lakh. So 10% interest on Rs 110000 is Rs 11,000. So you get Rs 10000 interest first year and Rs 11000 interest second year. So you get a total of Rs 21000.
Your return of Rs 21000 works out to be an average return of 10.5%. But Bank offers only 10%. So your increased return is because of 'Compounding'.
You must have heard people saying '25 years before, a house in Virugambakkam was available only for Rs 10 lakhs, now people are asking for 2 Crores' This return looks very high. But if you calculate the return, it works out to be only 12 to 13% return only.
During those days when inflation was high, even Govt. of India instruments like Indra Vikas Patra gave 14% return. So the return in the above case was just equivalent to other forms of investment only, not really very high.
Most people approach me by saying 'Sir, I can invest Rs 1 lakh, can you give me some trading strategy to make Rs 10000 per month'
These people expect 10% return per month. Even a commodity broking company advertises in a television channel by saying one can expect to make 10% return per month.
Forget about 10% return per month. Think somebody can make 5% return per month consistently.
Do you know that his Rs 1 Lakh investment will become Rs 10000 Crores in 30 years?
Do you think anybody can make such an amount with such a small investment?
Making Rs 10000 crore in 30 years with Rs 1 lakh investment? Nobody will believe.
But same people will believe that they can make Rs 10000 every month with Rs 1 Lakh investment.
Actually both are same.
Do you know the company 'Symphony' which is the largest wealth creator in the last 10 years. They have grown at the rate of 6% per month. But actually their business did not grow like that. Investors ready to pay huge premium to the company's share price and hence the valuation has become so high.
Most traders come to the stock markets by thinking making 5 to 15% per month is easy in trading, but they do not realise that they will be the richest people in India if they can actually do that. But how many multi billion traders we have seeing around us?
We only see people who have lost heavily in trading.
So be realistic while coming for trading. Every one coming to Cinema field do not become a Rajini or Kamal. Every company you invest will not be like Infosys or Wipro. For every one stock that has done extremely well, there are dozens of stocks that have done very badly.
If you can make 2% to 3% per month in trading, you are a successful trader. But you have to make that consistently.
Comments
Thanks sir, if bank do calculate the interest once in 3 months which is called quarterly compounding. Will cash market do calculate the interest like bank? If it so, How it is calculated??... asking this purely for long term
ReplyDeleteWhat do you mean by 'cash market'?. Shares offer only dividends and capital appreciation (or depreciation), there is no interest. Dividend amount and capital appreciation amount is compared with interest to determine the rate of return.
DeleteSir From you scenario, When you deposit Rs 1 Lakh, at the end of one year, you are entitled for Rs 10000 interest. Then at the end of one year, your money is Rs 110000. Then for the second year, you get 10% interest for Rs 110000, not Rs 1 Lakh. So 10% interest on Rs 110000 is Rs 11,000. So you get Rs 10000 interest first year and Rs 11000 interest second year. So you get a total of Rs 21000.
DeleteFor second year we are getting interest for Rs 11000...because of annual compounding....but in cash market if we calculate capital appreciation at last..how compounding methodology works here....
For long term investment how could i make wealth creation if calculating capital appreciation at last
This comment has been removed by the author.
DeleteWhen you are investing in shares, you do not 'create wealth' you just accept whatever wealth created by the company. So you invest 'X' amount and it becomes 'Y' amount after 'T' years, then you can calculate the CAGR using the required formula.
DeleteIn reality people can not actually create huge wealth in long term. This is a general rule, there may be some extra ordinary lucky people who have huge money.
Otherwise, in general, your return in long term investment is more or less equivalent to Bank FD rates only.
For example, if you have bought all the shares of Nifty in 1995, by this time you would have made a return (CAGR) of less than 11%. During this period, PPF and other fixed instruments have given better returns.
People may say if you have invested in Infosys you would have made huge money. Then how at that time you know Infosys will do so well. There are number of shares which were trading at Rs 3000 has come down to Rs 3. What will be your position if you have invested in those shares.
If you think you have the skill to identify which share will create huge wealth in the next 10 years, you can go ahead.
Otherwise, on an average, you are not going to get more than 10 to 15% per annum.
Thanks sir
DeleteSir can u suggest any best books for Derivative market
DeleteThis comment has been removed by the author.
DeleteVisit
Deletehttp://zerodha.com/varsity/
Huge domestic inflows this year in market declines clearly shows the Euphoria amongst the market participants.
ReplyDeleteIs our market cheap ?
Sunpharma trading at P/E of 100 at CMP but it has fallen 40% from its all-time high, now people thinks they are brilliant and start bottom fishing only to see Sunpharma losing another 50% from 800 and being range bound for several years.
Even Tatamotors has fallen 50% from peak but its still more than 50 PE
Never see the price, only see value and future (growth) before investing for long-term.
I'm a big fan of small, micro and mid cap stocks than Large-cap junks ..
Sun Pharma made losses in the last few quarters due to Ranbaxy takeover and Tata Motors declared losses due to 6000 of JLR vehicles destroyed in a fire accident in China.
DeleteUsually Pharma and FMCG command high PE ratio.
Oil India was trading at a very low PE ratio but keeps going down.
So markets are really irrational, sometime the stocks that are moving higher will continue to move higher and stocks that move lower will continue to move lower.
All PSU Banks are trading much below book value and at very low PE ration.
There are a number of stocks that trade at a very low PE ration will continue to trade at very low PE ration for many years.
So PE ratio alone is not to be considered while making investment.
Coming to micro and small caps, they tend to perform very well in bull market and perform very badly in a bear ,market. Means your profit will be very high as well as the loss.
Another important thing is that you can not hedge your stocks using options if you invest in micro caps.
If you invest in large caps, you can actually pledge to a broker and get some limit and you can play in option markets to make some extra money which is not possible in micro caps.
However you can take a loan against the shares but you have to pay about 18% interest.
So there are many plus and minus points in investing in small cap or large cap. So it is your personal preference.
When I invest in Large Cap
(1) I can be reasonably sure that the company will exists after 10 years which I am not sure about micro cap companies.
(2) I can Hedge my positions using options.
(3) I can trade by pledging the shares and I can get about 90% limit while pledging.
Though Large cap may not give a better return compared to micro cap in a bull market, my overall return will be much better but my risk is much lower compared to investing in microcap.
One can get 30% to 40% return easily by playing in options following my strategy.
Large cap stocks only for those who doesn't spend enough time and do their own research. All billionaires are the one who bought small and mid-cap stocks .. How many large-cap stock does Rakesh jhunjhunwala has in its portfolio ?
DeleteSir,
ReplyDeleteFYKI,
ExideInd, Amaraja, Havells etc was once upon a time small to micro-cap company ...
PSU stocks or banks command low premium due to inefficient Indian Govt .. All Govt waiver loans for various reasons.
Markets are designed in such a way not to give much money to majority of retailers.
Look at Bharti Airtel, which had huge P/E ratio and has been moving sideways due to high premium paid in mid 2000 .. The reason is either time or price correction happens, when retail gets frustrated and exit ..its when market moves.
Its sensible to buy large cap @ 6-9 P/E for cyclical and 18-22 P/E for non-cyclical like Fmcg, IT, Auto and Pharma (subject to company's growth) ... % terms growth will be low for large caps compared to small and mid-caps ..
Mid-cap like Ashokleyland 13 to 90 , TVS motor has moved from 30 to 300 (8-10x returns compared to large cap stocks like Tatamotors, Maruti or anyother).
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