Some insights

Magic of compounding’ – sounds so boring.

Why?

Everyone in the finance industry repeats it – repeatedly.

To make things even more repetitive, in our age of social media, it gets repeated that much
more often.

It almost goes from being boring to annoying.

Peter Lynch is famous for saying, “everyone has the brainpower to follow the stock market.
If you made it through fifth-grade math, you can do it”.

He is also famous for advocating that investors invest only in companies that they
understand.

Besides this, Peter is famous for authoring books that many investors treat like religious
books.

‘One Up on Wall Street’ and ‘Beating the Street’ are two of his most famous books.

But all of this is a product of his main work: he was the fund manager of the Fidelity
Magellan Fund.

Fidelity launched a new mutual fund in 1963 – Fidelity Magellan Fund.

From 1963 to 1977 (14 years), it had a total of around $20 million of investors’ money in it.
By most measures, this is a small amount for a mutual fund.

Between 1977 and 1990 (13 years), this amount grew from $20 million to around $15

billion. Why? Peter Lynch.

In 1977, Peter Lynch became the fund manager of this fund.

Peter Lynch is considered one of the top 10 fund managers in history. Between 1977 and

1990, Fidelity Magellan Fund gave returns in excess of 29% per annum. It was the best

performing mutual fund of its era.

In 1990, Peter Lynch quit his job at only 46 years old to spend more time with his

family. 29% for 13 years.

Source: groww digest

Anyone who has been an investor – in mutual funds, stocks, derivatives, anything – will tell
you how impossibly great those returns are.

If you invested Rs 1 lakh into this fund in 1977, you would have almost Rs 28 lakh 13 years
later.

To give you some context, you will struggle to find an Indian mutual fund with over 29%
returns over a 10 year period, let alone 13 years.

The mutual fund returns in the US are even lower.

The Fidelity Magellan Fund had grown so famous for its performance, everybody wanted to
invest in it.

The amount of money invested in it shadowed the money managed by its competitors. In

his 13 years as the fund manager, Peter Lynch would have made his investors very rich.

But he did not.

There are numerous reports from back then and even in recent years that say the same
thing: the mutual fund made great returns. But its average investors did not.

How is this possible?

This isn’t Peter Lynch’s fault. It isn’t even Fidelity’s fault – the numbers are all correct.

It is the investors’ fault.

29% per annum over 13 years doesn’t mean the mutual fund gave exactly 29% returns
every single year.

It means the average returns over that 13 year period was 29% per annum.

In some years, the returns were higher than 29%, and in some years, below 29%. And
sometimes, they were even in the negative.

Too many investors got scared of such times. They would take out their money in such
moments.

And then when the returns would have climbed high, they would start investing

again. The cycle repeated many times over the 13 years.

The result of this was that investors never really remained invested for long periods of time.

The same can be observed in India also – investors tend to not get the returns that mutual
funds show because they withdraw and reinvest too often.

Among many lines, Peter Lynch is famous for this line too: ‘the real key to making money in
stocks is to not get scared out of them.’
Source: groww digest
Compounding stops working the moment you take out money from the investment.

This is true for all good long-term investments: mutual funds, stocks, FD, gold – anything
really.

The key here is of course ‘good’. If you remain invested for long-term in a bad investment,
it’s not going to help in any way.

Finance experts and influencers keep talking of the ‘magic of

compounding’. That sounds boring. It is – compounding is boring.

But does it work?

Yes, it does – only when investors let it work.

Source: groww digest
Luxury Stocks
Bernard Arnault is one of the top 3 richest people in the world.

He had finished technical education. Now, he was ready to enter his family business:
industrial construction.

In only three years, he convinced his father to change the business to focus on real

estate. From 1978 to 1984, Arnault was the president of this real estate company.

Born in 1949, he belonged to a well-to-do family. His mother was a pianist – so he learned
to play the piano well. She was also fascinated by a luxury brand called Christian Dior.
In 1984, the French government announced they were looking for someone to take over a
company called Boussac – a textile and retail conglomerate.

Boussac was financially troubled and employed many people.

Bernard, the real estate company president saw his moment.

He put forward some of his own money and borrowed some more. He took over Boussac.

Among many companies under Boussac, there was one brand that particularly appealed to
Bernard (and his mother) – Christian Dior.

This marked Bernard Arnault’s entry into the luxury world.

After this takeover, he ruthlessly sold off assets of the company, cut jobs, and trimmed
everything that cost money but didn’t bring in money.

Back then, this move was not well accepted.

In 1987, he performed what was one of his most talked-about moves ever.

From Boussac, he reinvested a huge portion of money into two luxury companies: Louis
Vuitton and Moet Hennessy.

He ousted the CEOs of these two companies and merged them to make

LVMH. And he became the CEO of LVMH – a title he holds even today.

LVMH is now the world’s most powerful luxury group.

Since the formation of LVMH, the group continued to acquire luxury brands one after
another.

Today, it has over 70 of the biggest luxury brands under its umbrella. Tag Heuer, Givenchy,
Bulgari, Sephora, you name it.

If you hear of a luxury brand, more of than not, it’ll be an LVMH brand.
Source: groww digest
And that means, Bernard Arnault is one of the 3 richest people in the world (as of

now). Richer than Warren Buffett, richer than Jeff Bezos, Bill Gates, and so on. What

about luxury?

What was it about luxury companies that tempted Bernard?

Timeless. Modern. Fast growing. Profitable.

This is what is said to be his formula.

Luxury products are about quality and craftsmanship.

Maybe more than that, they are about what others think about you.

This one quirk – what others think about you – allows luxury companies to do something
other companies can’t.

Keep prices high without having to explain the high price.

For most other things, a product may be priced high. But someone else can make that
same product for a cheaper price. And everyone will flock to the cheaper product.

But with luxury products, people want the more expensive product. They want to tell the
world (directly or indirectly) that they paid big money.

It isn’t about the product as much as it is what the product says about the

owner. The four formulas of LVMH seem to leverage this.

Timeless – when you buy an expensive item, it shouldn’t seem outdated too fast. It should
be appealing year after year.

Modern – to some, this may seem opposite to the first point. To LVMH, it probably doesn’t.
A product can be modern and continue to seem modern for a long time.

Fast growing – this one’s obvious. You want to sell something more people want.
Otherwise, you won’t make a lot of money.

Profitable – this may seem easy with high-margin expensive luxury products. But there are
enough brands that make products that are not profitable or don’t have big margins. They
pass it off as marketing cost.

Bernard Arnault came from a construction background and within 3 decades, became the
most powerful person in fashion.

Luxury: advantages that others don’t have

Luxury companies have advantages that other companies just cannot have.

Source: groww digest

The biggest advantage is, of course, profits.

Luxury products are bought for their price. So companies can keep prices high – and have
high margins.

Who doesn’t like fat margins?

Luxury companies are also less affected by short-term trends. They tend to be more
constant and resilient that way.
This allows for the same products to last much longer in the markets.

And one of the best outcomes of all of this: luxury products are often bought by rich people.
These rich people tend to be so rich, they’re unaffected by market ups and downs.

So a market crash or recession usually affects luxury companies to a lesser

extent. Invest in luxury brands?

Well, yes.

Sounds really good.

And that – as you’d have guessed – is never that easy.

Like every other investment, luxury stocks need a certain kind of skill

too. Yes, there are advantages.

Each of the advantages that luxury company stocks are associated with can fail too.

Profit margins can shrink because of threats like counterfeit products, competition from
other luxury brands, poor brand perception, and multiple reasons.

These companies aren’t charging money for their products. It’s more about

perception. If something happens to the perception, it can be very tough to recover.

In fact, many luxury brands actually don’t have all the advantages associated with luxury
company stocks.

Is Apple a luxury brand?

Yes, it has profit margins, modern perception, and great design, It certainly isn’t timeless.

Nike?

It has a lot going for it. But again, timeless, it is not.

In India, is Titan a luxury brand? Maybe.

Source: groww digest

IHCL – yes, seems like it. But they offer services, not products. And competition is very
high.

Bottom line

The bottom line is, luxury company stocks have a set of unique
advantages. But they’re far from “safe”.

They’re different – yes. They’re not safe. In that safe, they’re just like most other stocks.

Like any other company’s stock, if you invest in it, you still have to research and understand
the business.

You need to understand what the company’s strengths are, its weaknesses, its competitors,
the threats it faces, and all that.

Is it your cup of tea?

Source: groww digest

Are Buybacks good or bad
In March 2020, airlines in the US desperately asked for help.

The pandemic had just started. Every country was shutting borders. A large number of
planes were just parked without being used.
Pilots, air hostesses, flight engineers, and ground staff’s timetables were mostly

empty. In the US, air travel is the main form of transport for many.

The industry is huge. It, directly and indirectly, gives a job to over 10 million

people. With barely any income, airlines would have to fire a majority of their

employees.

10 million or 1 crore people without jobs is a massive hit. The US economy was already
suffering because of the pandemic.

To that, 10 million people without any income would only make the economy worse.

So the airlines got together and asked for a bailout. They wanted over $50 billion from the
government.

This amount would let them keep their employees for some time – a time in which they
hoped people would start flying again.

Voices against them erupted in the media.

“Why should there be a bailout?” “Let those companies fail.”

The US government obviously didn’t want the companies to die.

Airlines are vital. Without them, transportation would be a nightmare in the modern

era. But why so much anger against the airlines? What had they done to attract the

hate? The answer: they had done share buybacks.

What is a buyback?

In a buyback, a company spends extra money it has to buy its own shares from the share
markets.

Then, these shares are destroyed.

Why?

When the shares are destroyed, remember, nothing has actually changed.

Source: groww digest

The company’s earnings are the same. The management is the same. Everything is the
same.
The only thing that has changed is the total number of shares: it has reduced. Because of

this destruction of shares, the percentage holding of each shareholder goes up. There are

20 apples. You own 2 apples. So you own 10% of all apples.

Suddenly, 10 apples are destroyed. 10 are left. You still own 2 apples. So now, the
percentage has gone up. You own 20% of all apples.

Same thing.

A share’s price is linked to its earnings.

So if the earnings remain the same but the number of shares reduces, the earnings per
share has gone up.

So the share’s price goes up.

This can be a bit confusing. Please read it again if not clear.

Companies often do buybacks as a means of giving investors money – they either give
dividends or do buybacks.

Do remember, it isn’t just shareholders who have shares. Companies’ top executives (CEO,
VP, etc) are also paid in shares along with cash.

So they benefit when the share price goes up – just like shareholders.

This is mainly why some people look down upon buybacks: there are executives who have
done buybacks so their compensation would go up.

Back to the airlines

Why was the public so angry with them?

The airlines were asking for a $50 billion bailout.

Over a 10-year period before March 2020, the airlines had spent a total of around $50
billion in share buybacks.

Around the same amount, they were asking in a bailout.

People were angry that they spent money they had on buybacks instead of saving it for a
future rainy day.

Airlines argued that nobody could have predicted an event as devastating as the pandemic.

Source: groww digest

Others argued that the airlines’ executives had simply been greedy and failed to store
enough emergency money.

The heated debate continued – and still continues.

Eventually, owing to how crucial airlines are in the modern era, the US government bailed
them out. They also put clauses that prevented them from doing share buybacks for a
period of time.

This is why buybacks are controversial in some industries.

People accuse high-placed executives of only doing buybacks to increase their own income
without worrying about the future of the company.

Irresponsible behavior.

On the other hand, many argue that buybacks are one of the best ways to reward
shareholders – and rewarding shareholders is anyway the ultimate goal of a
company.

Dividend vs buyback

Shareholders are owners of the company.

They are entitled to the profits of the company – as long as the company has put aside
enough for its operations, future growth, and for dealing with emergencies.

Whatever extra cash is left after spending on operations, growth, etc, can be returned to
shareholders – profit sharing.

This is when companies pay a dividend.

Share buybacks are an alternative to that.

Instead of giving a dividend, companies can do a share buyback.

Many investors feel share buybacks are better than dividends.

Why?

Because when dividends are paid to investors, they have to pay a tax that year itself.

When buybacks are done, only the share price rises. Tax is not needed to be paid till the
investor decides to sell the shares.

More control in the hands of investors.

In light of the above, whatever reason is a valid argument for not doing a buyback also
holds true against paying dividends.
Buybacks without controversy

Source: groww digest

By the way, airlines aren’t the only companies performing share

buybacks. Major tech companies have been doing them too.

And because they have lots of earnings and lots of cash stashed away for a rainy day,
nobody seems to mind their share buybacks.

In fact, theirs is the highest – nobody is spending more money on buybacks than tech
companies.

In the last 10 years, Apple spent more than $500 billion dollars on share buybacks.

To give you some context, there are only 9 companies in the world right now whose entire
market cap is greater than $500 billion.

Imagine that.

They spent the equivalent of the value of the 9th biggest company in the world – buying
their own shares.

Google (Alphabet) will spend $70 billion on buybacks this year. They’ve spent billions in the
past too.

Amazon has done it. Microsoft too. Facebook (Meta).

So many of them.

And no controversies.
Source: groww digest