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Archives for August 2013

Poke the Box: Wish Warren Buffett, and Embrace Your Failures

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

  • Warren Buffett completes 83 years on this planet today. A good way to wish the legend is to get inspired by a few amazing words of wisdom he has said over these years. Here are 10 Buffett quotes – Part 1 and Part 2 – to inspire you.
  • As markets continue their fall, here are five stocks I’m watching. (Statutory Warning: Acting on any of these stocks without doing your homework may be injurious to your wealth and health).
  • I mentally sold off all my stocks, and loved the entire process of doing it. Try selling your own stocks mentally. Believe me, it’ll be an enlightening experience.
  • Closed admissions to the first batch of The Safal Niveshak Mastermind after an over-whelming response. Thank you tribesmen! In case you missed out joining, you can now pre-register for the second batch that will open in a few months.
Mental Model of the Week: Cumulative Error

Do you remember playing the “telephone game” in your childhood where a secret message was whispered from child to child until it was announced out loud by the final recipient?

To the delight of all, the message was typically transformed into something new and bizarre, no matter the sincerity and care given to each retelling.

You see, when information travels through multiple channels – like in the telephone game – it’s easy for some elements of the message to get distorted — by biases, or simple human error.

The effect of the spread of misinformation is called “cumulative error”, like you see in this stock market cartoon…


Living in an age where information can travel across the world in nanoseconds, this concept has never been more real or dangerous.

So, when a company’s management says something, the lead analyst hears something else, his report to the fund manager says something else, the fund manager understands something else, his broker understands something else, the broker’s analyst assumes something else, he blurts out something else to the TV anchor, the anchor – thinking how smart she is – shouts out something else, and you – enamoured with the anchor – understand something else.

If I were to condense the history of stock investing mistakes in a few words, those will be what you just read!

Somehow, we expect information to be faithful to its origin, no matter what history might have corrupted it. And that’s why it is so important to cut yourself from the noise – that create cumulative errors – and concentrate on independent thinking.

This is especially true while investing your hard-earned money, where you don’t just need to minimize mistakes, but minimize cumulative mistakes – those that add up to wreak havoc on your savings.

A joke isn’t funny anymore if it’s repeated too much. The same goes with information. The more you hear the same things, the more they get dangerous.

So please be careful!

Book Worm
I was re-reading Warren Buffett’s 1962 letter to shareholders and came across these words…

A lot of value can be obtained for the price paid. This substantial excess of value creates a comfortable margin of safety in each transaction. This individual margin of safety, coupled with a diversity of commitments creates a most attractive package of safety and appreciation potential.

Here is something from his 1992 letter that must be the cornerstone of every value investor’s philosophy…

We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we’re not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success.

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

Poke of the Week – Failure Liberates Success

“Failure is not something to be avoided but something to be cultivated. … It is a sign of weakness and often a stigma that prohibits second chances. … Yet the rise in the West is in many respects due to the rise in tolerating failure. Indeed, many immigrants trained in a failure-intolerant culture may blossom out of stagnancy once moved into a failure-tolerant culture. Failure liberates success.” ~ Kevin Kelly, author of What Technology Wants.

I have learned a lot of life lessons just seeing my daughter grow up. Like when she was just a year old and was trying to take her first steps and repeatedly fell down, she tried again…and again…and again.

Sometimes she laughed. Sometimes she cried. Sometimes she laughed and cried at the same time.

But she kept trying and trying…laughing and crying. She did not labelled her experience as a “failure”. She just enjoyed it.

Unlike us adults, our babies don’t know the possibility of a failure, so they happily keep falling down until one day they take a few steps, and then a few more. Before long, they’re jumping and running. All their trying pays off.

They fall but never fail.

As grown-ups, what if we also simply choose not to fail?

What if we treat our mistakes and failures as not things to be avoided but things to be cultivated?

Like Warren Buffett said…

“You’re going to make mistakes. You can’t play in the game without making any mistakes. I don’t think about it, I just move on. Most business mistakes are irreversible setbacks, but you get another chance. There are two things in life that you don’t get another chance at – marrying the wrong person and what you do with your children. Business, you just go on. It’s a mistake to dwell on mistakes, it’s unproductive. It’s like Mark Twain’s story about the cat that sat on a hot stove – he never sat on a hot stove again, but he never sat on a cold one again either.”

Life teaches us each day that stuff happens (and sometimes shit happens!), but we don’t need to give each of our experiences a label.

Good, bad, hard, easy, success, failure etc. do not exist but as labels in our minds.

All we need to do to hold our head high is to break through these labels.

Well, if you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Friday mornings.

Keep poking.

Embrace your failures.

Be nice to your family.

Be kind to your heart.

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box

Should You Subscribe to Safal Niveshak Mastermind? Here’s a 5-Point Checklist

You may avoid reading this post if you have made up your mind that you don’t want to join my one-year course in Value Investing, The Safal Niveshak Mastermind…or if you have already subscribed to the Course.

But if you are confused whether to go for Mastermind or not, I would try to help you make the decision before I close the course to new admissions 2 days from now, i.e., on 25th August 2013.

So, to answer your question – “Should I subscribe to Mastermind?” – let me first invert and tell you five reasons you must NOT subscribe to Mastermind…and then five reasons you must subscribe.

5 Reasons to NOT Subscribe to Mastermind

  1. If you believe you have already learned all that I am going to cover in the Course (see Page 2 of Course Brochure), and that you need no further guidance, you should not subscribe to Mastermind.
  2. If you have always done better studying yourself from books than doing specialized courses (and I have already suggested you a lot of books to learn how to become a better investor), you should not subscribe to Mastermind.
  3. If you have been a well-behaved investor in the past, and need no understanding on how to get over the biases that impact you in your investment decision making, you should not subscribe to Mastermind.
  4. If you see this Course as a “magic pill” to automatically help you become a more sensible, level-headed and successful investor, please don’t subscribe. The lessons I am going to share over the next one year won’t magically jump out and start implementing themselves. You need to put the work in.
  5. If you think you can continue to invest in stocks without learning how to pick the right businesses, and that all these teachings will be in vain, you should not subscribe to Mastermind.

5 Reasons to Subscribe to Mastermind

  1. If you want to learn all that I have mentioned in the Course contents as mentioned in the Brochure, you must subscribe to Mastermind.
  2. If you want to learn a systematic process to minimize investment mistakes by conducting the right behaviour and picking up the right stocks, you must subscribe to Mastermind.
  3. If you want to test your investment learning at each stage by participating in exercises, quizzes and discussions with fellow investors, you must subscribe to Mastermind.
  4. If you want to receive the learnings from hundreds of amazing books written by or on the investing styles of Warren Buffett, Howard Marks, and Charlie Munger’s mental models but don’t have the time to do it on your own, you must subscribe to Mastermind.
  5. If you have misbehaved as an investor in the past and now need a systematic way to remove as many biases as possible while making your investment decisions, and also to “think clearly”, you must subscribe to Mastermind.

Now, if this clears your mind and you wish to subscribe to The Safal Niveshak Mastermind

Click Here to Subscribe Now!
(New admissions close in 2 days…on 25th August 2013)

What is Mastermind all about?
Someone asked Buffett, “If you were to teach an investment course, besides works by Ben Graham and Phil Fisher and your letters, what would be on the syllabus?” He answered…

An education in investing requires only two courses – How to Value a Business, and How to Think About Markets.

You don’t have to know how to value all businesses. Start with a small circle of competence, things you can understand. Look for things that are selling for less than they’re worth. Forget about things you can’t understand.

You need to understand accounting, which has enormous limitations. You need to understand when a competitive advantage is durable or fleeting. Learn that the market is there to serve you, not instruct you.

In the investing business, if you have an IQ of 150, sell 30 points to someone else. You do not need to be a genius.

You need to have emotional stability, inner peace and be able to think for yourself, since you’re subjected to all sorts of stimuli.

It’s not a complicated game; you don’t need to understand math. It’s simple, but not easy.

Based on what Buffett suggests and based on my understating of how investing really works, the lessons you will receive through the Mastermind Course will revolve around answering these 15 questions …

  1. How to think about markets
  2. How to think clearly as an investor
  3. How to create the right behavioural framework
  4. How to create a latticework of mental models
  5. How to create and expand circle of competence
  6. How to read financial statements
  7. How to identify financial shenanigans
  8. How to assess a company’s management
  9. How to identify durable moats
  10. How to value a business
  11. How to create an investing checklist
  12. How to create a portfolio of quality businesses
  13. How to deal with risk and uncertainty
  14. How to create a solid investment philosophy
  15. How to avoid the big investing mistakes

I will cover all these lessons in a jargon-free, non-geeky way so that you find it simple to understand and implement them in your investing life.

Want to Subscribe to Mastermind?
Now, if you desire to subscribe to The Safal Niveshak Mastermind

Click Here to Subscribe Now!
(New admissions close in 2 days…on 25th August 2013)

Here is something Napoleon Hill wrote in his amazing book “Think and Grow Rich” – “Desire is the starting point of all achievement, not a hope, not a wish, but a keen pulsating desire which transcends everything.”

I wish you that pulsating desire to change your investing life through The Safal Niveshak Mastermind, and even after that.

I Sold Off All My Stocks!

Yes, I did that recently!

I sold off all my stocks without even looking at their prices.

I realized that I had started liking stocks in my portfolio. In fact, my likeness for them had gone to such an extent that whenever I heard negatives about them, I rationalized my decision to hold on to them.

So whenever I learned that, from among my stock holdings, a business was not going to do well in terms of growing its sales in the future, all I did was assume a higher profit growth so that my overall decision – of it being a growth business – remained intact!

[Read more…]

Safal Niveshak’s Investor Psychology Survey: You Failed!

“A human being is a dark and veiled thing; and whereas the hare has seven skins, the human being can shed seven times seventy skins and still not be able to say: This is really you, this is no longer outer shell.”

This is what the noted German philosopher and poet Nietzsche said, and this is what the Austrian neurologist Sigmund Freud agreed – we are ignorant of ourselves!

And the biggest problem with such ignorance is that it is just so expensive.

Now, even Darwin struggled to explain why we would evolve a response that lets others know that we have cheated or lied. Darwin would be trembling in his grave knowing how easily we have learned to cheat ourselves.

[Read more…]

Poke the Box: Face Your Problem…Like that of Being a Bad Investor

Let’s Start with Safal Niveshak
Just in case you missed any of this on Safal Niveshak over the last few days…

  • Launched The Safal Niveshak Mastermind – one-year course to help your reinvent how your invest, work, and live – and have received a great response so far. So that you don’t miss out on this Course, subscribe before it closes on 25th August. Know more and subscribe here.
  • Recently started a survey on investor psychology, and the results have surprised me! Before I share the results and my analysis on coming Monday, please participate in it by visiting this page.
  • There was a massacre on Dalal Street this week. If you are worried about falling stock prices, first delete you online portfolio tracker :-), and then read this.
  • I have 40 reasons you are a bad investor!
Mental Model of the Week: Contrast Effect

Robert Cialdini, in his book Influence, shares a story of two brothers, Sid and Harry, who owned a men’s tailor shop…

Whenever the salesman, Sid, had a new customer trying on suits in front of the shop’s three-sided mirror, he would admit to a hearing problem, and, as they talked, he would repeatedly request that the man speak more loudly to him. Once the customer had found a suit he liked and had asked for the price, Sid would call to his brother, the head tailor, at the back of the room, “Harry, how much for this suit?”

Looking up from his work — and greatly exaggerating the suit’s true price — Harry would call back, “For that beautiful all-wool suit, forty-two dollars.” Pretending not to have heard and cupping his hand to his ear, Sid would ask again. Once more Harry would reply, “Forty-two dollars.” At this point, Sid would turn to the customer and report, “He says twenty-two dollars.”

Many a man would hurry to buy the suit and scramble out of the shop with his “expensive = good” bargain before Poor Sid discovered the “mistake”.

Well, Sid and Harry made their moolah even as the customer thought he got a ‘great’ deal! 🙂

Now look at this image below. The black dots you see are fleeting, and any individual dot will turn white as soon as you focus on it. Clearly, all the dots are actually white, yet at a glance we still perceive some of them as being black.


This is due to a principle in human perception, called the “contrast effect”, which affects the way we see the difference between two things that are presented one after another.

The contrast affect also works when we are studying physical appearances of people. Research investigating attractiveness reflects the importance of physical appearance.

Despite common phrases such as ‘beauty is only skin deep,’ there is no longer any doubt that being attractive has its benefits.

Attractive individuals are consistently treated significantly better than their unattractive counterparts. Additionally, attractive adults are judged more positively in work-related competence than unattractive counterparts, and are perceived as higher in social appeal and interpersonal abilities.

These results hold true even when familiarity is taken into account. Not only are opinions influenced by attractiveness, but behavior towards attractive children and adults echo the importance of being physically attractive.


So if you are talking to a beautiful woman at a party and are then joined by an unattractive one, the second woman will strike you as less attractive than she actually is.

Just look at how big accounting scams are created.

Here is what Ramalinga Raju’s aides at Satyam must have told him before the scam came to light – “If we slowly and gradually over time manipulate the numbers, the auditors won’t notice it.”

Incidentally, in this case, even the auditors were involved! But the Satyam scam did not come to light till Raju confessed of riding a tiger.

You see, contrasts may blind us to change until it’s too late. For example, we often don’t notice the bad behavior of others (like we ignore “small” accounting manipulations at companies) if it goes sour gradually over time. Often we see reality as constant, although it gradually changes.

It is, after all, the small, gradual, invisible changes that harm us the most.

Book Worm
I recently bought Rolf Dobelli’s The Art of Thinking Clearly on the suggestion of Prof. Sanjay Bakshi. And I haven’t put it down ever since.

Here is what Dobelli has written about the Contrast Effect…

When we encounter contrasts, we react like birds to a gunshot: we jump up and get moving. Our weak spot: we don’t notice small, gradual changes. A magician can make your watch vanish because, when he presses on one part of your body, you don’t notice the lighter touch on your wrist as he relieves you of your Rolex.

Similarly, we fail to notice how our money disappears. It constantly loses its value, but we do not notice because inflation happens over time. If it were imposed on us in the form of a brutal tax (and basically that’s what it is), we would be outraged.

The contrast effect can ruin your whole life: a charming woman marries a fairly average man. But because her parents were awful people, the ordinary man appears to be a prince.

Stimulate Your Mind
Here’s some amazing content I read during the week gone by…

  • Sad to see this all around me, but from park swings to medical seats, competition to outsmart others and squeeze through the system starts early for the Indian child.
  • India’s capitalistic companies continue to believe in deal-making with the ‘babus’ than following the rules of the game ethically. Maybe, deal-making is what they consider a rule!
  • Leo Babauta of Zen Habits on why you must simplify your life and let go of your crutches.
  • Jana Vembunarayanan, a Safal Niveshak tribesman, writes on the five elements of effective thinking on his amazing blog.
Poke of the Week – Appreciate Your Problem

“That which opposes produces a benefit.” ~ Heraclitus

There was a time when I was slightly overweight and combined with the rigorous daily travel, suffered from a very bad backache. I didn’t feel in control of my health, because I couldn’t give enough time to improve it.

Or maybe the lack of time was just an excuse to not consider my health a priority. Thinking about my deteriorating health made me feel horrible, so I didn’t want to even think about it!

It was a downward spiral, and really hard to stop.

Most of us don’t like the problems, conflicts, and challenges we face in our lives, because these seem like roadblocks in the path of what we are trying to do.

But Heraclitus, as he writes in the above comment, invites us to consider how these problems — the headwinds we face or things that are moving against us — can benefit us.

If you are an investor in the stock market, your current portfolio of stocks may seem like a big problem to you achieving your financial goals, especially given that stocks across the board are falling like ninepins (and those talked about on Safal Niveshak are falling even faster :-))

So, as a result, one of the following might happen:

  1. You eliminate the problem by selling duds from your portfolio even while suffering the losses but avoiding permanent loss of capital;
  2. You find a few other stocks that are much better businesses and are available cheap after the crash;
  3. You question whether you really want to stress out speculating in stocks and would rather learn the rules of sensible investing that will earn you lower short-term return than speculation, but much higher return per unit of stress.

In short, the problem you think you are facing currently can lead you to stop and re-think what you were doing all this while, and thus lead you to something good.

Think about it: the history of discovery and invention is filled with people whose routines were interrupted and who were forced to come up with alternative solutions.

Even America was discovered as a by-product of the Europeans’s search for pepper!

So, think of the biggest problem you are facing currently and positive things you can discover in seeking the solution?

Like, ask yourself this question now – “What would I have been doing if money was not a problem?”

Then, just do it!

Idea Source: Creative Whack Pack

Well, if you haven’t done it already, sign up here to receive Poke the Box in your email…and get ready for stimulating Saturday mornings.

Keep poking.

Appreciate your problem.

Subscribe to Mastermind. 🙂

And please watch Bhaag Milkha Bhaag!

Till next weekend…

Vishal Khandelwal
Chief Poker – Poke the Box

The Safal Niveshak Mastermind is Here!

“Your time is limited, so don’t waste it living someone else’s life,” said Steve Jobs.

I’m sure you relate to Jobs’ statement very well, for if you are like me, you want to reclaim the reins of your life in your hands.

To do that, it’s very important that you take complete control of your financial future, rather than let someone else decide where you will be 10 or 20 years down the line.

Now you may ask – “But how do I take control of my financial future when I am so busy taking care of my present survival?”

It’s a very valid question, my dear friend. I have been through this very phase just a few years back, when I was worried not only about my financial future, but also about how to do it while being busy taking care of my present then.

But after making numerous mistakes along the way, and in the process learning the right ideas and forming good money habits, I have achieved my financial freedom (well, almost!).

Thanks to the willingness to take control of my financial life, now I don’t work for money for more than a couple of hours a day. Instead, I spend a large part of my time travelling, reading, writing, thinking, and playing…not with my stocks but with my kids. 🙂

You see, I did not have anyone to guide me when I was searching for my personal financial freedom. But you have help at hand!

Now if you are willing, here’s something I propose.

If financial freedom means to you…

  • Freedom from having to work, yet still being able to enjoy life without concern over money
  • Having your life’s basic costs covered, where you’re not worried about car or house payments anymore
  • Having enough money to meet your life’s most important goals
  • Having more time to do the things you really want to do

…I have a plan for you!

After last few months of endless work and last few days of sleeplessness :-), I feel happy to announce at your service…

The Safal Niveshak Mastermind
The Safal Niveshak Mastermind is a one-year course to help you reinvent how you invest, do work that matters, and in the process, get started on creating your financial freedom.

My idea of launching The Safal Niveshak Mastermind is two-pronged. This course will help you with…

  1. Deep and accelerated learning in value investing and personal finance to help you manage your money better; and
  2. Step-by-step guidance on turning your passion into a money-generating small business so that you can live your life the way you want.

I’ve sifted through a mountain of amazing books, documents, lectures, websites, and the last ten years of my personal experience as an investor and two as an entrepreneur to ensure that I bring the best ideas and lessons for you in value investing, personal finance, and living life on your own terms.

The goal of The Safal Niveshak Mastermind course is simple – To help you get richer every single day.

What You’ll Get By Joining The Safal Niveshak Mastermind
I’ve lined up a lot of things that you will receive when you become a part of The Safal Niveshak Mastermind

1. Premium Course in Value Investing
This course will include…

  • 50+ lessons and several hours of video and audio classes apart from a few real-life case studies that will help you learn the nuances of Value Investing and how you can apply it to create long-term wealth through stock investing.
  • Lessons on identifying moats and analyzing specific sectors to help you build your circle of competence.
  • Lessons on building a latticework of mental models – the Charlie Munger way – to make better investment decisions.
  • Everything I teach through my “Art of Investing” Workshops, and much more.
  • Exclusive Forum to participate in learning exercises and discuss practical examples so that you can gain experience in doing your own independent analysis.

2. The Safal Niveshak True Wealth Letter
This will be a series of articles that will include…

  • Habit-Building Ideas on Investing & Personal Finance: You will receive practical and tested ideas in investing and personal finance that will help you bring about a sea change in the way you manage your money.
  • Book Reviews: If you have an excuse for not reading the amazing books on investing out there, don’t worry for I will present you the big ideas from some of the best investing books that I have read so far and will be reading over the next few months.

3. Course: Turn Your Passion into Paycheque
This is a course that a lot of tribesmen have requested me for. Here, you will learn the step-by-step method of turning your passion into a regular stream of money – or an alternative source of income – so that you can do what you love to do, and not be worried anymore about someone else deciding your financial life and future.

Through this course, I will share my experiences in changing my own life by reinventing the way I work, and guide you on how you can do it for yourself.

4. Special E-Books, Workbooks, Videos and Podcasts
From time to time, I will also send you special e-books, workbooks, videos and podcasts…all with the view of enhancing your learning in investing, personal finance, and turning your passion into lifelong earning.

How to Subscribe?
The Safal Niveshak Mastermind, with all its invaluable benefits as mentioned above, is priced at Rs 10,000/- (plus taxes) for an year’s subscription.

Please note that this is a “special, introductory price” for the Course and will be available till 25th August 2013 only.

It’s also the best I can offer you, given the immense value I believe The Safal Niveshak Mastermind will add to your life.

What is more, 20% of the fee I collect for The Safal Niveshak Mastermind, after meeting the costs of running the Course, would go towards sponsoring children through organizations like Akshay Patra, World Vision India, Against Malaria Foundation, and other such efforts.

So at the same time as you are transforming your relationship and results with your money, you will be helping to transform the lives of the underprivileged from poverty to self-reliance. I hope you appreciate that!

Now, if you are interested to reinvent how you invest, do work that matters, and create your own financial freedom, click below to subscribe to The Safal Niveshak Mastermind.

Click Here to Subscribe Now!

The Safal Niveshak Mastermind is your chance to break the shackles, reinvent the way you invest, do what you love, and create a new future.

The knowledge you’ll get here will be your great asset. It wouldn’t be stolen or confiscated. It would set your mind free. And that’s what true independence that you deserve is all about.

With respect,
Vishal Khandelwal
Chief Tribesman, Safal Niveshak



P.S. After you make the payment, I will create your Login and send you the details (Used ID and Password) within the next 5 days. Your Mastermind subscription will start only after that.

P.P.S. In case you face any issues making the payment, please write to me at vishal@safalniveshak.com or call me at +91-80970 73918.

P.P.P.S. Please read the “Frequently Asked Questions” to avoid future confusions/conflicts.

Safal Niveshak StockTalk: Gruh Finance

Statutory Warning: This report may cause a reaction, and acting on it can be injurious to your wealth.

Note: This StockTalk analysis has been written by Asif Nadaf.

1. About Gruh Finance
Gruh Finance (formerly Gujarat Rural Housing Corporation Limited) was set up in 1986 by HDFC with the objective of providing institutional structure to rural housing finance. HDFC owns around 60% stake in the company and provides it equity support. Gruh’s major focus is to provide home loans to individuals and families for purchase, construction and extension. It also provides loan for repair and renovation of houses. The company has a distinct target market segment, which complements HDFC’s market.

Association with HDFC
HDFC helps GRUH in many ways which include enabling funding at competitive rates, operational support, management support, operating policy, lending policy, loan sanctioning norms and loan schemes. GRUH benefits immensely by using well-established stringent credit appraisal and monitoring systems and processes, strong risk management systems and efficient recovery mechanisms of HDFC.

Although both GRUH and HDFC operate in the same industry, GRUH focuses primarily in the rural and semi-urban markets. This segment is distinct from HDFC’s target segment. GRUH also cross sells HDFC products.

Nature of Industry
There are three types of industries:

  1. There are industries where only one or two players take away most of the profit eg. Google, Yahoo or NSE and BSE
  2. There are others where nobody makes profits e.g. Airline industry.
  3. Finally, there are industries where every player makes money. Housing finance (HFC) is one of them.

The success of an HFC is very much dependent on two things, as aptly described in the book “The Richest Man in Babylon” – Safety of principal and safety of interest.

Safety of principal is dependent on nature of collateral and value of collateral. Safety of interest is dependent on nature and ability of borrower to make timely payments.

Any HFC faces three broad risks:

1. Market risk is the risk of losses in positions arising from movements in market prices. HFCs face two broad type of market risks. There is adverse movement in price of collateral and high loan to book value (LTV).

After a loan is given, the value of collateral diminishes. For example, a bank gives a home loan of Rs 30 lac and after some time, the value of home declined to Rs 20 lac. In India, given that property prices have continued to rise in the past, HFCs have not faced risk on this account..

LTV is the ratio of loan given against the value of the collateral. The lower the ratio, the lower the market risk. In simple words, the market risk for an HFC reduces when the gap between the market value of collateral and loan taken is large. For example, if for a property worth Rs 50 lac a loan of Rs 20 lac is given, the market risk is low. On the other hand, if for a property worth Rs 50 lac, a loan of Rs 48 lac is given, the market risk is high for the HFC.


In case of Gruh Finance, the LTV is less than 80% for approximately 78% of the properties financed so far and LTV greater than 85% exists only in case of 4% of the properties financed. Therefore, the overall market risk remains low for the company.

2. Credit risk refers to the risk that a borrower will default on any type of debt by failing to make payments which it is obligated to do. The risk is primarily that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs.

Credit risk could be mitigated by stringent credit appraisal of the borrower by HFCs. Credit appraisal looks for ability and willingness of borrower to make timely payment.


Non-performing asset (NPA) is a measure of strength of credit risk policies and processes.

An NPA is defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. In India, an asset is considered an NPA when the HFCs do not receive interest and/or principal for a continuous period of 90 days. If a borrower stops payment of EMI for 3 months, the bank considers the loan (asset) as non-performing.

For Gruh Finance, asset quality remains above industry average due to low gross non-performing assets (Gross NPA) and low Net non-performing assets (Net NPA).

3. Operations risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Examples of operational risk include fraud by employees, theft of information, hacking damage, third party theft and forgery, account churning, damage to assets due to disasters, system failure, accounting errors, and negligence. Correct operational risk policies and processes increase asset quality and decreases non-performing assets as seen above.

The profit and NPAs of two HFCs are quite depended on processes and policies defined for each of the above risks. HDFC is the best amongst housing companies for managing each of the three risks. Gruh, being a subsidiary of HDFC, has simply copied the processes and policies for managing the above three risks from its parent.

2. Checklist
I’ve analyzed GRUH by answering a few important questions that span its:

  1. Business performance,
  2. Financial performance,
  3. Management quality, and
  4. Competition.

Before we move ahead, here are the symbols that I’ve placed against each checklist point and that will tell you at a glance whether I have a positive or negative view on that particular point.

   Indicates my positive view

   Indicates my negative view

Let’s get started.

A. Business
1. Can I, in simple words, explain what the company does?
Yes. Gruh is a housing finance company where HDFC owns a 59.7% stake. Its major focus is to provide home loans to individuals and families for purchase, construction and extension in rural and semi-urban India. It also provides loans for repair and renovation of houses. The success of HFCs is highly dependent on managing market risk, credit risk and operational risk. The policies and processes covering these three risks determine both safety of principle and adequate returns.

2. Does the business have high uncertainty?
The inherent nature of Gruh’s business is not uncertain. Once a loan is given, it keeps receiving EMIs for the duration of loan which is usually between 10 to 20 years.

3. Has the business got an enormous moat?
Gruh has a weak moat. However, an HFC’s business comes under the service sector and there is scope for number of players to operate with decent profit. One moat here is switching cost. One incentive to switch to other HFC/bank would be lower interest rate. However, the interest rate of HFCs/banks do not differ significantly to offer this incentive. Also, a borrower who wants to transfer loan to other HFC/bank has to put in lot of efforts in doing the paper work. The pain of going through this paperwork during the switch does not compensate with the gain to be received by extra savings to be made by lower interest rate.

The second advantage for an HFC like Gruh is that the policies and processes designed to manage market, credit and operational risks differ from HFCs to HFCs. Gruh has stringent policies and processes for lending, copied from its parent HDFC, which are best in the industry.

4. Does the business generate strong free cash flow?
Yes. Since Gruh does not have to invest in any plant and machinery and also does not have to hold any receivables or inventory, whatever cash it generates from operations is almost free cash. Most of its assets are free cash and book value closely resembles liquid assets.

As can be seen for the year 2013, the fixed asset of approximately Rs 12 crore is very low compared total asset of Rs 5,600 crore. It means whatever profit after tax is generated (Rs 42 Cr in 2008 to Rs 146 Cr in 2013) is almost free cash.


5. What is the bargaining power of suppliers and buyers?
Gruh borrows from various entities – National Housing Banks, commercial banks, debentures, etc. – to meet its short-term and long-term borrowing requirements. Since the rate of interest charged by all HFCs/banks are not significantly different, the rural and semi-urban borrowers do not have bargaining power.

B. Financial Performance
6. Does the business have a consistent sales and profit growth history and is there room for future growth?
Gruh has an excellent track record of financial performance…

  • Both gross and net NPAs have been one of the best (lowest) in the industry.
  • Net interest margin is high compared to peers
  • Loan assets have been increasing steadily over the years.
  • Average annual growth in Profit after tax has been 28% for the past 6 years, which is quite robust


As far as the future is concerned, given the continuous demand for new residential housing in semi-urban and rural India, I do not see mush problem on the growth front for Gruh, though growth may not be as high as in the past owing to the higher base.

7. Does the company have a good dividend history?
Good enough. In terms of dividend payout (amount of dividend paid as percentage of net profit), Gruh has averaged around 60% over the past 10 years, which is a good payout.

8. Has it got a high and consistent return on equity?
Yes. A company’s return on equity is akin to you earning a certain amount every year on your investments (no paper profits but actual dividend and interest income plus any profit on sale of investments). Looking that way, Gruh’s average return on equity of 27% is a good number. This is reflective of the good yield its investments have earned for it over the years, which has largely been a result of an overall good performance by the stock market.


C. Management Quality
9. Is the management known for its capital allocation skill and integrity?
Being a HDFC group company, there is no doubt that Gruh has a management that considers integrity as a core business value. As far as capital allocation skill is concerned, that is reflected in the good 27% average return on equity the company has earned over the years.

As can be seen, the retained earnings is approximately 60% and balance is distributed as dividend.


10. Has there been any substantial equity dilution in the past?
No. Gruh had seen a 30% increase in its outstanding equity shares in the year 2006-2007. This was on account of rights issue in the ratio of 3:10

11. Are management’s salaries too high?
During the latest year, the Managing Director was paid gross remuneration of Rs 1.7 cr. This is around 1.19% of the company’s net profit and thus not a big figure.

12. What has the management done with the cash in the past?
Gruh has, over the last ten years, distributed around 40% of earnings as dividend and balance was reinvested in the business. The average return on equity has been around 27% and it has increased over the year. It means the, management does not hesitate to return the money to shareholders in the form of dividend, instead of employing them in business when returns are not going to be good.

D. Competition
13. Does the business face high competition?
As of now, not much, as there are not many big players catering to the rural and semi urban market. However, when these markets grow in future, many big players would enter them to gain market share.

14. Has the management focused on market share or profitability in the past?
Looking at good capital allocation decisions, decent return on equity, high asset quality and low NPAs, the management as focused exclusively on profitability.

3. Future Prospects
Gruh operates in seven states – Gujarat, Maharashtra Karnataka, Rajasthan, Madhya Pradesh, Chhattisgarh and Tamil Nadu. The bulk of revenue comes from Gujarat and Maharashtra. These two states accounts for 76% of its loan portfolio. Gruh has a total of 134 retail offices and employees strength of 517 in these seven states.

There is enough room for growth for the company in the future. Gruh has the financial strength and support of its parent HDFC to expand and establish branches in remaining 21 states. Looking at India’s growth story, the future growth in housing finance would come from rural and semi–urban market and Gruh is well establish to take advantage of this opportunity in future.

4. Risk Statement
Gruh’s business, when purchased at a good buying price can provide a great amount of stability to an investor’s portfolio. The one risk that remains very high is the price paid to acquire stocks.

I am not sure after the retirement of Mr. Deepak Parekh, how the new head of HDFC and Gruh would be able to carry the legacy forward. Remember what happened to Infosys after Mr. Narayan Murthy retired; he had to be called back to lead the company after the gap of seven years. Essentially, the company is too much dependent on the vision and management skills of its founder.

5. Financial Snapshot


Disclaimer: I, Asif Nadaf, have no position in the company or in any company related to the promoter group. Readers are advised to do their own independent assessment before taking any decision. You can expect some errors or forward looking statements, so do your own research as well.

You’re A Bad Investor!

Dalbar, a leading financial services market research firm in the US, recently conducted a study to determine how small investors have fared over the years compared to the stock market as a whole.

In fact, it has conducted a similar research for the past 12 years, and with conclusion that has said the same story each time, which is…

Small Investors are Bad Investors!
“Small investors are losers,” says the Dalbar report, “…and have consistently underperformed the broader market on a multi-year time frame.”

Here is a chart that shows the most recent decade’s rolling 20-year returns for the average mutual fund investor in the US compared to the S&P 500 index…



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“But these numbers are for the American small investor,” you may say.

My dear friend, I’m sure the numbers for Indian investors won’t be any different!

Now, why do I say this? For two reasons:

  1. First, like their US counterparts, a majority of Indian equity mutual funds, after fees and expenses, have underperformed the benchmark indices over long time periods.
  2. Two, you know for sure how you – and other small investors around you – have moved in and out of the stock market and thus these mutual funds, thereby compounding your costs and cutting short your returns.

Over the years, thanks to your sudden excitement or sudden panic, you have hurt yourself as far as your stock market return is concerned.

Thus, I feel unfortunate to tell you this, but there are great chances that you have been a bad investor all these years!

If you have any doubt about it, I encourage you to compare your performance against that of the BSE-200 index (or any other broader index of your choice) over the past 5-10 years. You may be due for some humbling.

But if it makes you feel any better, know that you’re not alone. Most other small investors may have performed equally bad.

Another proof I have is the list of confessions drawn from my recent post where I had asked readers to list down their worst individual stock performances.

More than the actual performances, what was more enlightening was the list of mistakes readers shared associated with their losses, which follows below.

I suggest you take a print of the following text, paste it in front of you, and read it every time you are about to make an investment decision. It may save you a lot of grief in the future.

Small Investor’s Wall of Shame
Here is a list of 40 investing mistakes most investors make, which I have collated from the confessions I received in the recent post. I am sure you will associate with a lot of these…

  1. I, the small investor, buy stocks even when I don’t understand the underlying businesses.
  2. I get carried away seeing just glimpses of greatness – like low valuation and good corporate governance – and don’t look at the overall business. I act like the man with a hammer for whom everything in the world looks like a nail.
  3. I invest in businesses that are growing fast, but ignore that they are also burning capital consistently to achieve that growth.
  4. Ensuring management integrity sounds difficult, so I often avoid it. I forgot what Buffett said about energy, intelligence, and integrity (that if you don’t have the last, the first two would kill you).
  5. I spend a lot of time reading newspapers and watching business channels, and thus I easily get carried away by stories – especially when too many people are repeating them.
  6. I don’t believe brokers but I believe independent research houses that serve me readymade stock recommendations week after week. So that solves my problems of doing any independent study.
  7. Okay, I sometimes put blind trust on tips from broker, especially when they are for multi-bagger stocks.
  8. I hold on to a stock – whether it’s in profit or loss – even after I realize that buying it was a mistake. Hope has always been my great friend.
  9. I love the ups and downs of cyclical industries (cement, steel, etc.) despite not being an insider and despite not having deep knowledge in the same. So what if I was crushed by such cycles in the past. The future will surely be different.
  10. I love to throw good money after bad because I want to be consistent with my original decision. I work hard to find companies and then invest a lot of money in then. Every fall just gives me an opportunity to average down my costs. If I can average when a stock falls from 100 to 25, I will always average when it falls to 10 or even 5.
  11. I have read that high debt can kill a company, but I have also seen a few companies recover from their debt burden in the past…and so I don’t avoid companies with high debt to equity. I don’t understand the base rate of success of companies that have high debt.
  12. When I love a company’s product or service, I don’t think twice before buying its stock. I believe if a company’s product or service is good, so will be its financial performance.
  13. Warren Buffett is too humble to have a “too hard” basket for businesses that are complex to understand. I don’t find anything too hard for me!
  14. I believe a good company will always turn into a good investment. So I don’t mind paying any price if the business is good.
  15. I hold on to stocks that are down 80-90%. How worse can it get?
  16. I find it difficult to convince myself that I have made an investment mistake. After all, I rarely make mistakes!
  17. I often don’t remember why I bought a stock.
  18. I often buy a stock because a smarter investor bought it. How could he be wrong?
  19. IPOs? Oh I love them, and especially for their listing gains. Again, I don’t bother about the base rate of success as an IPO investor (which, in reality, sucks!).
  20. I only show patience when it comes to holding on to my losers…rarely otherwise.
  21. I love cheap stocks. Even if the business goes bankrupt, I will still get some money back.
  22. I believe in high conviction and high concentration. So sometimes, my best idea would form 70-80% of my portfolio.
  23. I have great faith that businesses that are going downhill can turn around. I know Peter Lynch said that “turnarounds rarely turn around”, but I am always hopeful.
  24. When I make some money in the stock market, I feel like a great stock picker. I see this as a great way to keep myself motivated.
  25. Some stocks that are down 80-90% are lying in my portfolio for the last 10 years. You see, I am a long term investor.
  26. I know that businesses that have been “reliable” for years will be reliable in the future as well, and so I can always “rely” on them.
  27. I have a great memory and don’t believe in having a written process. I am after all a human and will continue to make many mistakes. But I will learn from them, and that’s important.
  28. The beautiful anchors on business channels often lead me to buy bad stocks. But that’s a cost you must pay to watch them throughout the day.
  29. I often buy stocks due to peer pressure. How can people I know make quick money while I am left out?
  30. If a company’s promoter is doing fine today, I avoid looking into his past. People change, after all.
  31. I understand P&L accounts but find balance sheets confusing. By the way, who has the time to read balance sheets these days?
  32. So what if the stock has risen 50% from the time I sold it? I will buy it again! I don’t want to miss out on the gains like others have made in recent times.
  33. If a company is earning good profits, it must be earning good cash. After all, doesn’t profit equal cash?
  34. I am often attracted to shiny stuff that has great future potential – things like green energy, new drug, and latest technology.
  35. I am young and thus have too many years to cover my mistakes. So what if I lose some money now. I have enough time on my side to try out many stocks before finding the best ones.
  36. I am sure putting out my mistakes in the open will help me avoid making them in the future, so I felt great after confessing on Safal Niveshak.
  37. I read Safal Niveshak like it is a holy grail that will make me a smarter investor. I am sure of Vishal’s capabilities and thus sure that I will find my multi-baggers some day.
  38. I stopped doing my homework ever since I left school.
  39. I don’t believe in miracles, except when it is about my stock portfolio.
  40. I know that a fool and his money are soon parted, but I am not that fool.

Hate the Sin, Not the Sinner
You see, there’s no point splitting your hairs on what has happened in the past. But surely there’s an urgent need to throw floodlights on what you are doing as an investor, as of NOW.

It’s a time to do a reality check – whether you really want to take up stock market investing on your own, or delegate the responsibility to a fund manager and then keep your fingers crossed for the next 10 years.

Of course, there’s no point quitting the stock market at all taking this to be a casino or a place where just the big investor wins.

If you have time in your hand – and that’s your biggest edge as a small investor – there’s no better place than the stock market to create your retirement nest egg.

But there’s no point being overconfident – and that’s a big sin – on your capabilities as a stock market investor…thinking that you are much better at it than you actually are.

Please don’t treat stocks as coins in a coin-flipping contest. “If not this one, then that one!” is a dangerous mentality in the stock market.

Your odds of success will only grow if you can take time out to understand businesses, then buy only those that are good and are available at discounted prices, and behave sensibly all through this process.

Online trading has given you great powers to instantly invest whenever and wherever you want. But before you choose to use this power the next time, always remember what Spiderman said – “With great power comes great responsibility.”

You have been a bad investor. Now I hope you will become a responsible one.

All the best!