Diamonds aren't your best friends, stocks are: Damani

Everyone who has ever lived in a place like Mumbai knows the kind of demands that it can make on you. If you are a single girl living in a big city, it’s never been easy. In an effort to help women stay on top of their investments, CNBC-TV18’s team along with Ramesh Damani, Member BSE provide tips to single women to maximize wealth and investments.

Encouraging women investors to enter the stock markets, Damani said,“The best argument I can give you is that believe it or not, diamonds aren’t your best friends, stocks are. You need to invest if you want to be financially free over the next 10-15-20 years. If you want to do it in the next two months, go bet on the races, do whatever makes you happy, but if you want to be financially free, equities have consistently, over any long-term period, given you superior rates of return than diamonds, real estate, bonds. So stocks is where the action is, and over time, if you want to be financially free, stocks is a great place to be in.” Below is the edited transcript of the interview... Q: I have never really invested in shares and I know the share market is not doing so well and I want to be prudent, yet I want to take baby steps. So what’s the best way to go about it? A: It’s a perverse logic that works in the stock market, the worse it is, the better values you get. As an investor who wants to invest not for the next six months, but for the next 5-10 years, you want to buy things cheap. Think of it as buying it on a sale. When you get a bargain, you rush out and buy it. So stocks have a bargain. When stocks have a bargain, they represent good value. Just because it’s unpopular right now or because no one is looking at the stock market doesn’t mean that you are not getting good buys out there. So I would encourage you to start looking from that perspective. Secondly, you are very young still. You have next 20-30 years of growing power, income power, spending power ahead of you. Unless you invest in stocks, which over time, have been consistently able to beat inflation, you are not going to get wealthy. It’s like running on a treadmill. You will go nowhere if you invest in FDs or you invest in recurring deposits. You need your money to grow at a rate faster than the economy is growing. Stocks, historically at least, will do better than even inflation rate. But if we go back 20-40-50 years, stocks have grown and compounded a rate of about 11-12% in India, maybe 7-8% in global markets. So it keeps you ahead of the inflation rates plus gives you dividends. Also, in India, the most important thing is it’s a great time to be an equity investor. Why? Dividends are tax free. For example, if you put money in fixed deposit of Bank of India, you will be paying 33% tax on whatever you make. So if you make 10%, 30% gets taken off the top every year by the income tax authorities. However, if you buy a great blue chip company in the stock market, they pay you a dividend. It’s tax free. You get to keep 100%. If you manage to hold stocks for one year, it’s tax free in India. So here is a fabulous way to create wealth. That’s why you should be in stocks. Q: I have a retirement goal over the next 15 years. What would be the safest areas for a healthy portfolio to invest in? As of now, my portfolio is Mutual Fund (MF) heavy, almost 10% of my portfolio is in MFs. Is that prudent? What would you suggest? A: There are two thoughts on mutual funds that I will bring to your attention. Generally for someone like you, for example, I would suggest you put it in an index fund, which will track the index over a period of time. So there is no decision. Whatever the constituents of the index are, the fund manager buys those shares in that percentage of the index. So if you expect the Sensex to double in five years time, your money will double in five years time. It takes the guesswork out of the stock selection that you might be doing. For picking individual stocks, you need a hot fund manager, someone who has good track record. The trouble is fund managers leave after a period of time. So you may start with a person who has given fabulous returns, he might jump ship and open another mutual fund. So it becomes a bit iffy. So I would suggest you move at least portion of your savings into an index fund. They are very low cost, very efficient and as long as you have an intellectual hypothesis that yes, I am bullish on India and I want to remain in equities, index investing is perhaps a very good way to look at it. Q: If I get about an interest rate of 10% when it comes to fixed deposits, why should I invest in equities? A: Fixed deposits are giving very high rates of return right now, so a lot of money instead of coming to the stock market, is going to the banks. In fact, Indian retail public is not investing in Indian equities. It’s a huge mistake. Suppose fixed deposit gives you 9-10%. Inflation is 10% and the rupee is depreciating, so where are you making money? If you look at purchasing power, what you can buy with Rs 1,000 today to what will you can buy from the same amount of money three years from now, you are losing. Remember, you are paying 30% tax rate on that, so the effective take home amount after inflation is that you are losing purchasing power. Every year you invest in fixed deposit, you are losing purchasing power. On the other hand, if you invest in a stock that is appreciating at 10-11% per year at least you are breaking even with inflation, the dividend is what’s making you money. So, the stock is yielding 2-3% dividend and great companies pay dividend tax free to you every year like clockwork. There are companies like Hindustan Lever, Castrol etc that pay you dividend every year, in good or bad times. At least you are getting dividends that is tax free for you. While it is an illusion that you are getting a higher return on fixed deposits, if you really think about it, the problem is that stocks are inherently volatile. With fixed deposits, it is guaranteed that at the end of the year if you invest Rs 1,000 you will get Rs 1,100 back. In the stock market Rs 1,000 might become Rs 800 or become Rs 1,200. Most people cannot deal with that. But to be in the stock market, you must remember that returns are not linear. They don’t come in easy chunks every year, but they come in spurts. So over a 3-5 year period, stocks have repeatedly shown in any study to beat almost all of the asset classes like fixed deposits, real estate, gold, diamonds etc. So my thesis is to think as a long-term investor. Be bullish over the prospects of the company and you will probably end up doing fine in stocks as opposed to fixed deposits. _PAGEBREAK_ Q: What kind of diversified investment products would you recommend for women, a) for homemakers and b) for women who are working? Does it have to be a little bit different? Secondly, does one need to change the portfolio or the investment over a period of time? As you grow older, do you need to change the allocation of funds or does it have to be same? A: When you are young, you must take risks in life. The philosophy is as follows. If you agree with the philosophy then you have to follow a particular path. The philosophy is that by the time you are 50, you want to be financially free. The point is that you need to be more aggressive in your investment. In my opinion, fixed deposit is not an aggressive investment. It’s a passive investment, which actually costs you money. It’s a fairly loony idea that people with fixed deposit is safe. It is not safe. You are losing money every year, you put into a fixed deposit. Yes, notionally you will feel better. If you invest it over the last year, and this year your fixed deposit went from Rs 1,000 to Rs 1,100, but your equity went from Rs 1,000 to Rs 850. But over a period of time, it’s a brainless game. You are going to lose. At least equities give you that opportunity to be rich of turning Rs 1 lakh into Rs 10 lakh. In fixed deposit, the chances of that happening are zero. Secondly, does the mix change? Yes, as you get older, you perhaps want to put it in fixed deposit because you are now in the drawing age, you are not in the earning age. But once you are in the earning age, you need to be risky with your assets. In India, of course, everyone puts into real estate and for the last 10 years, that’s been actually a great place to put it in. Just look around you - can you buy a property in Bombay? With the kind of savings we have, you cannot buy a property. It’s so stratospherically expensive, it is extremely illiquid. The only problem is that, historically, Indians have not trusted paper money, so they put all the money into gold, real estate or fixed deposits. But it must change over a period of time. Global equity holding percentages for retail are much higher. So if you are young, please start looking, put some money into it. Q: From the point of view of a single woman who wants to turn into an entrepreneur, it’s a risk that you take to let go off a steady job and then take up entrepreneurship. So you break a lot of funds or you sell a house and then you get into investment. When you are investing in the new business you really are at a stage where you don’t know you are taking the risk, it might work or not. What percentage should you invest into business or should you put aside for investment in one of the shareholdings or infrastructure bonds? A: The best investment is in yourself and in your business. I am a great votary of that. If you believe in your business, the first focus should be the business. If you always are the best hairdresser in town, or the best lawyer in town, no matter what the economic conditions are, there will always be a demand for your product. So please first invest in your own business. Once that business does well and you have savings, start investing in the stock market or property or wherever choose to do so. The first investment is always the best investment and that is in yourself. If you can build a business, the amount of satisfaction it will give you, no amount of stock appreciation will give you. So first invest in yourself. Once you get into that investment stage, where you have extra surplus which your business does not require then evaluate the market at that time. The trick in the stock market is always to buy cheap, to buy low, sell high. So what is cheap, what is valuable at that time we will buy that. Q: I can’t stop thinking about the whole fact that FMCGs are doing so well. It’s probably because I work on a lot of FMCG brands being in advertising. How do I start really putting money into that investing in FMCG companies? What’s the first step I should be taking? A: It brings us to the nuts and bolts of investing. How do we invest? Just figure it out from this intellectual hypothesis. India has a billion people. 500 million are women, 500 million are men on a rough basis. What is the product category that’s growing the fastest? Is it liquid soap or feminine hygiene? Is it food products or noodles? Once you have figured that out, see if the stocks that make those products are mispriced. That requires a bit of accounting, a bit of knowledge of a balance sheet. It’s not that complicated. It doesn’t require an IQ of 130 or you to be a rocket scientist. Once you understand and grasp the basics, how to read a balance sheet, how to value a company and whether it is cheap according to your metrics of how you value a company, then you can start making investing decisions. So it’s a great place to look at. There are a billion consumers in India and we are going to consume. Our GDP per capita is about USD 1,500 per person, which is very low. Once we get to USD 3,000 and we know that say from China or from Singapore or from any other country that have crossed that USD 3,000 per capita GDP, there is an explosion of demand. There have been explosion in education, entertainment, travel. Look at what happened to cell phones in India. When I was growing up, telephones were a luxury. The penetration of telephones was 2 per 100 population, now it’s 70 per 100. So maybe you could have seen the explosion of Bharti, if you were working on Bharti’s account a few years back. So there are a lot of opportunities in FMCG. It’s a great sector to look at because India is a consumption story. There are a billion of us who have been denied basic products. We are all going to get into the consuming class. So it is a great place to start, do some homework and suddenly, the market will speak to you. Q: What are the basic trends that you noticed in the kind of portfolio allocation that you had done? A: The overwhelming conclusion is that everyone is scared of equities. I think they are all reluctant, so equities is still a poor cousin to investing. I hope it changes; there are some great growth stories in India and I think it needs all of us to pay some attention because it will do well. A couple of ladies suggested gold, which is a classic hedge in India because we print money and it leads to inflation. It’s a good investment and I have been bullish on gold myself but it is no longer cheap as it used to be. Gold has had five times move over the last five-seven years so it is not as cheap at this time. The problem with gold is that it’s not a productive investment. You have to store it, it doesn’t pay you dividends or high transaction cost. Remember, stocks give you dividends also, it is a very productive investment. Gold is just something you keep in vault, it’s not a productive investment. From what I have seen in my life or in academic studies is that equities is the way to go because at all times, it returns are superior to almost every other investment. Also, if you want a superior return, you need to put superior amount of money into equities.