How to make a sustainable investment portfolio!

What is investment according to you, the subjective reader? It is quite literally an investment of money for most people. Surprisingly, actual investment is an investment of time horizon and money again is the by-product here.

What we really want to understand is: How to make a sustainable investment portfolio over the next 3 decades or more, that also keeps paying me equitable returns, as and when I need it? This is a fundamental question for most people and its answers are not linear for obvious reasons.

The answer lies in first carefully understand the investor's time horizon. How much an investor is willing to wait and endure the age-old theory of "time value of money".

The 'Rule of 72' taught in almost all good business schools is a basic fundamental principle that should be used more often:

So, if you annual return on a proposed investment scheme is 8%, then by using "Rule of 72" your investment will double in 9 years (i.e. 72/8).

Hence, I feel we have to ultimately figure out how quickly our money can double with the lowest possible risk and/or volatility.

Option 1) FD A plain vanilla fixed deposit: Returns of 6-8% depending on type, structure, bank or fund house, etc.

Option 2) Real - Estate A real estate investment in India, looked promising all these years, however, currently looks like a depreciating asset (as an investment). But if a real estate investment is for the end-user, i.e. for the person supposed to stay in it, then it still looks decent. But this is subject to areas, growth prospects, liquidity, builder name, builder reputation, etc. and many more scores of considerations to be taken into account.

Option 3) Gold or Silver: Bullion (especially Gold) seems to a safe bet but only as a hedge against inflation or uncertainty, not exactly as a plain investment option. Gold prices have been in cold storage for the past decade, (it is now in 2020 that Gold is seeing a revival as a hedge). i.e. In times of global uncertainty in equity/forex and other markets, most of the investors flock to Gold. Somewhat different for silver which has an industrial consumption pattern and is not an easy bet to make money on.

Option 4) Equity (Stocks/Mutual Funds) Direct investments in Equity have been picking up in India since the past decade. Needless to say, the Indian equity investment is largely dominated by FIIs (Foreign Institutional Investors) and DIIs (Domestic Institutional Investors) including mutual fund houses, etc. The quintessential 'retail investor' is still picking up his/her socks and putting his hard-earned money in equity at a snail's pace. However, long-term equity investments have always outperformed other investment classes. Over a period of 20, 30 years, equity is arguably the only asset class that can give CAGR of 20% or much more!

As per Saurabh Mukherjea of Marcellus Investment Managers, in his two brilliantly written books, 'The Unusual Billionaires' and 'Coffee Can Investing' (highly recommended reads for all investors) certain observations clearly stand out while picking Equity stocks:

• Look for companies with clean accounting and stable 'believable' numbers. Debt - free companies that have a clear agenda to grow the business. This depends on the integrity of management and the promoters.
• Look for an Return on Equity (RoE) of over and above 10-15% consistently for the last decade or two decades.
• Check for a Return on Capital Employed (RoCE) of above 15% consistently for the last decade or two decades. i.e. Essentially look for companies with incremental 'free cash flow' flowing back into the business and not spent on liabilities.
• The company should have products or services that are 'essential' for regular consumption, i.e. Soaps, biscuits, paints, adhesives, banks, etc.
• The company should have very strong barriers to entry (an unbreakable M.O.A.T) that prevents any other competitor from coming even close to their market dominance.

SAK's bottom line: So all in all, just as we need a balanced diet to keep fit, we need an equally balanced portfolio to keep our money working for us, rather than we slogging for it!