2016 Learnings/Reflections

It's that time of the year when some retrospection is in order. Let me first talk about the things that went well:

1. ULIP Investment - I am happy about making a long term investment commitment which I expect to reap good dividends 20-25 years from now, when I expect fatherly responsibilities to call for significant financial outlays. The last 2 quarters have not been great for Indian equities, but I am highly confident about the prospects over the next two decades. Assuming that I am in India at that time, my withdrawal will be totally tax free, which will be a nice bonus.
2. Employee Stock Purchase Plan - I finally began participating in my company's ESPP. This has  been my best profit earner this year. While I regret not having participated in the past four years, I guess its better to be late than never.
3. Options Trading - I did quite well with my Options trading in 2016. I made approx 20% profit on my options trades alone. With novice level knowledge and trading restrictions (due to the size of my account), this was pretty good.

What didn't go as well as I expected:

1. Stock Picking - The year began in a fantastic way. My portfolio was up 25% at the end of April. I remember reading a headline in CNBC in May which recollected an old market adage "Sell in May and go away", alluding to long term trends about how stock markets tend to underperform in the May-Dec period. I should've taken that advice. In the coming months, my portfolio had a pretty volatile ride - thanks to Brexit, Trump and Fitbit. I have lost all my gains from Q1 and look set to end the year with close to no gain/loss.
2. Two bad trades - All my gains were wiped out by two trades: Oil and Fitbit. In retrospect, I don't think the Oil loss could've been avoided. The market reaction to the collapse in OPEC talks was weird and hardly anticipated, so I don't blame myself for that. Fitbit gave a shocker of a forecast for Q4 and the stock tanked by 30% in one day. There is not much one could do in that situation. But in hindsight, I should've exited my options position much earlier, considering the higher risk/beta associated with the stock.

Lessons for 2017:

1. Focus on a few: Track no more than 20 stocks and hold no more than 7-8 at any time.
2. Improve on Options: Despite my limited knowledge in Options, I made money on most of my options trades. My objective in 2017 is to learn more and execute more consistent, lower risk trades.
3. Learn about the instrument before investing. I put money in some ETFs without fully understanding them and lost some money. Will not repeat the mistake in 2017.

High Conviction Bets - GOOGL

I am starting a series of posts on stocks or securities where I have a high conviction that they will succeed. The first post also represents my biggest bet. Alphabet (GOOGL) is the parent company of Google. As of the date this article is being written, the following are the key metrics of this stock:

Market Cap: $553 B

·        Stock Price: $821.54

·        Forward P/E: 20.17

·        Revenue (TTM): $81B

·        Quarterly Revenue Growth: 21%

·        Quarterly Earnings Growth: 24%

Google is at the forefront of the digital economy. It is a major provider of information and analytics to companies and individuals around the world. In the larger context of things, I believe we are just scratching the surface of data and analytics usage. There is a lot of room for growth as the economy (as well as personal activities) shifts to the digital realm. The growth potential is several times higher in emerging economies like India. Google being the dominant player in most of these markets is extremely well positioned to reap benefits.

Considering this immense growth potential, I believe that a forward P/E of 20 is too cheap. The S&P 500, which would fairly represent a broad view of the overall US corporate world, trades at a forward P/E of 18. This implies that Google trades at a premium of 11% to the broader US corporate economy. If you take Nasdaq, which more closely represents the Information/Technology economy, the premium is reduced to just 5%. This doesn’t make sense to me. Considering the stability, market dominance and growth potential, GOOGL should be trading at least 20-25% premium to the broader market.

So far, I’ve discussed the core business of Alphabet, which deals with Google products that collect and monetize data. There are a lot of newer technologies that the company is betting on. This includes self-driving cars, AI and other more exciting ideas from the Google X Labs. Even if a fraction of these ideas succeed, they will provide a significant leg up to the company’s growth further into the digital era. I can see the company easily grow revenue and earnings by 20+% well into the next decade. That would imply a stock price appreciation of 10-15% or more YoY over the next 5-10 years.

Alphabet cannot deliver on these expectations unless it succeeds on 2-3 areas outside of its traditional advertising business. It could be Cloud or Cars or something else. But they will definitely need to make it big on at least a couple of these “other bets”.

A couple of risks/downsides:

·        Mobile – Though android dominates the OS market share, the premium segment continues to be dominated by Apple. This is leading to increased traffic acquisition costs to Alphabet. More importantly, as Apple controls this affluent base of consumers, it is that much more difficult for Alphabet to reach and monetize those consumers.

·        China – Google is not present in China due to government censorship. As a result, they are losing out on the most populous and soon to be the biggest middle class market in the world.

Considering the market dominance, growth potential and excellent management team, the risks seem manageable. To me, GOOGL is a growth stock with plenty of steam left to keep it runnig deep into the next decade and maybe the one after.

Why ULIPs are a great investment choice for NRIs

Back in 2007-08, I used to be a strong critic of ULIPs (Unit Linked Insurance Plans).  I would advise friends against investing in them. What pissed me off about these products was the high upfront commissions cost that ate into the premium so much that it would take years to show profits to the investor. On top of it, agents would use ridiculous market returns assumptions in illustrations shown to customers. It was normal to see illustrations assuming 15-20% annual returns that show astronomical returns to investors. Most investors would be bitterly disappointed with the returns seen in the first 2-3 years and either discontinue or withdraw prematurely, thus never realizing a net gain. Click here to see my post back in 2007 when I junked the MoneyPlus ULIP plan by LIC.

Fast forward to 2016, I am now a proponent of ULIPs. When I went to India on vacation this summer, I met my banker and as usual he started explaining this latest investment product. I thought, 'here we go again...'. But as I listened more and later researched the finer details on the website, I was pleasantly surprised to find that the new, refreshed ULIP product is more protected and advantageous to the investor. I ended to taking up a significant financial commitment, which I am confident will reap me good profits in the long run.

Thanks to IRDA and SEBI, the new rules and regulations put in place have greatly enhanced the value of these products in investors' portfolio. I now strongly believe that ULIPs are a great product to be included in the portfolio of any investor, and especially for a NRI. Following are my reasons:

• Low cost - Premium allocation charges have come down from around 20% to the 3-4% range
• More low cost - Longer term investors will enjoy very low fund mgmt charges of 1-1.5%, even for equity funds. These charges are even less than that of mutual funds. So, if you stay invested for 15-20 years or more, you will do better with the ULIP than with a comparable MF.
• Insurance - A 5 lakh per year investment will get you a minimum insurance cover of 50-60 lakhs. And you can add on to it. So, no need to shell out additional premium or do additional paperwork for another policy. And in case you were wondering, you will be covered regardless of where in the world you live.
• Tax - The most important feature I like about this product is that any capital gains and the entire withdrawal will be completely tax free in India. Of course, if you live in the US at the time of withdrawal, US tax rules will apply. However, if you entertain thoughts of returning to the motherland at some point, this is an attractive proposition. Think about it. You invest 25 lakhs over a 5 year period and stay invested for another 20 years. You return to India by then and withdraw a corpus of 1-1.5 crore rupees, totally tax free.
• Flexibility - This has always been the strength of ULIPs. Depending on your life stage and financial goals, you can reallocate your money between different fund classes - equity, debt, money market, etc.

Now, why do I say ULIPs are a great choice for NRIs? Well, ULIPs are great for any investor. But for US based investors, it is especially useful since taking exposure to Indian equities through the MF route is now much harder due to the FATCA regulations.

Finally, this is a great time for US NRIs to invest in India. The US equity markets are at a point where I see very little upside in the next 3-5 years. The same goes for Europe. Fixed return investments will return below inflation for the next 5-7 years. The only growth opportunity in the medium term lies in emerging markets. Within the EM bracket, India looks really good because of the significantly improved investment climate, encouraging start up ecosystem and a strong central government that has pushed through significant reforms like GST and FDI in key sectors like Defence and eCommerce.

Why REITs are a great investment option

REITs are a great way to get steady returns from your investments. Traditionally REITs have been favored by conservative investors who have a low risk/low return perspective. However, in today’s world of ultra-low yields, REITs look attractive for a wider audience. A good spread of REITs in your portfolio can easily yield returns of 5-7% or more, with low risk on your capital.

For those that don’t know, REITs are Real Estate Investment Trusts. These are US companies that own real estate properties in the commercial and residential space and earn lease/rental income from those properties. A portion of the rental income is distributed to the shareholders of the REITs. In fact, US laws require REITs to distribute at least 90% of their taxable income as dividend to shareholders. Since the shares are traded on the stock market, there is easy liquidity if you want to exit the investment.

Following a few examples of REIT stock yields that I have explored:

·         WSR (Whitestone Realty) – This company holds commercial real estate properties in Texas, Arizona and Illinois. The company has paid monthly dividend of 9.5 cents every month for the last 6 years. At a share price of $14.54 (as of Aug 26, 2016), this gives a yield of 7.8%.

·         Liberty Property Trust (LPT) – This company invests in industrial and commercial properties and is based in Pennsylvania. The stock has produced an average dividend yield of 5.4% over the last five years.

·         Washington Real Estate (WRE) – This company operates in the DC metro area and manages a variety of properties in office, industrial and retail space. The stock has produced an average dividend of 5% over the last five years.

·         WP Carey (WPC) – This is a NYC based company. The stock has produced an average dividend yield of 5.3% over the last five years.          

Traditionally REITs have been recommended for older investors who look for a steady income in their post retirement years. However, in the current investment climate, I would recommend all investors to park some of their money in this asset class. This component can not only reduce the volatility of your portfolio, but may very well give better returns than the S&P 500 over the next 3-5 years.

A guide to investing for Indian workers in US

I came to the US in 2011, when my company sent me for an onsite assignment. I had the typical mindset of a desi guy on a work visa. To me, home was (still is) India and my stay in the US is temporary. As with any temporary events, we don’t do long term planning. I was happy with the salary I was getting, especially when I mentally multiplied it with the Indian currency exchange rate. For over two years, I paid the highest individual income tax rate and had zero protection against inflation for my US income. It took me a long time to realize the income and savings that I was missing out due to a lack of financial planning. Unlike in India, here you don’t have family or elders to guide you on these matters. I have now spent five years in the US and have gained some knowledge in financial planning that I would like to pass on to my fellow Indian workers in the US.


Depending on your length of stay and long term plan, consider the following ways to save or invest money:

         1)      401(K) – I did not join a 401(k) plan for over 2 years and missed out a lot. This is the most important and easiest money that you can make from day 1 in the US. 401(k) is a retirement savings plan that is offered by almost all companies in the US. This is similar to the Employee Provident Fund in India. A percentage of your monthly income can be allocated to your 401(k) account. Most employers make matching contribution to their employee’s 401(k) up to a certain limit. In my case, my company adds 50% more to my contribution, when I allocate up to 6% of my income. For example, if my monthly salary is $5,000, my individual contribution is 6% of $5000, which is $300. On top of this, my company will add 50% of $300, which is $150. So, my monthly 401(k) total contribution is $300 + $150 = $450. This money can be invested in a variety of Equity or Debt based mutual funds. Key benefits of a 401(k):

a.       The employer contribution (in the above example, it is $150 per month) is “free” additional income which you would otherwise miss out if you didn’t open a 401(k)

b.      Allocating a certain percentage of your monthly income to 401(k) before it reaches your hands, results in compulsory savings. This will really help you in a rainy day (read “old age”).

c.       By allocating your savings to mutual funds, you give it a chance to grow and counter inflation over the years. Otherwise, money sitting in the bank earns no interest in the US, in the current environment.

d.      The money you contribute to your 401(k) is tax free. You are taxed only when the money is withdrawn.

e.      Withdrawal Penalty worries: A lot of Indians worry about what will happen to their 401(k) money if they need to return to India. Don’t worry. It is very rare to lose money with a 401(k).  An early withdrawal (before you reach the age of 59.5) attracts a penalty of 10% of the value of your 401(k) in addition to your normal tax rate. If you are already gaining by an employer match (which is at 50% in the illustrative example I explained above), you will still come out with a gain. Also, if you need to return to India, there is no need to terminate your 401(k) unless you really need the money. You can easily keep the money invested in the 401k and let it grow over the years in the US. This part of your life savings can be in dollar denomination and be a great way to diversify your savings. The US has very little restrictions on fund flows. You should be able to withdraw and transfer the money to India (or any other country) at any time you need it.

       2)      IRA/Roth IRA – Some employers don’t offer 401(k) plans, especially small consulting firms. If you are in such a situation, you can open an IRA or a Roth IRA account. These are individual retirement plans with similar benefits as a 401(k). Several leading financial services companies, including Vanguard, Fidelity, etc offer this. Just google “IRA” or “Roth IRA” and explore the various plans offered.

     3)   Employee Stock Purchase Plans/Options – A lot of companies offer plans for employees to purchase their shares at a discount. Please be aware and subscribe to these plans. Once again, this is easy money that you shouldn’t miss out. However, as with any equity asset, you should put the effort to understand and monitor the asset. Know what you’re doing or consult a financial advisor.

      4)      College Savings Plan – Folks with a long term plan to settle in the US, should plan to save for their kids’ college education as early as possible. College Savings or 529 plans are offered by most financial services companies. This is a great way to save tax while saving up for your kids’ education.

      5)    Health Savings Account (HSA) – Most families have to spend out of the pocket for some medical expenses over the course of a year. By opening a HSA and contributing money to it at the beginning of the year, you can gain a tax advantage. The money you contribute to the HSA is non taxable. You are allowed to use the HSA money only for medical expenses. In case you fail to fully spend the HSA money in a given year, you can roll over the balance to the next year.

Once you have exhausted the limits of the above savings options, you should generally be in a healthy financial position. If you have a surplus after this, you may choose to invest in a variety of asset classes in the US or in India. I will write more on these various asset classes in future articles. One piece of advice to young (below 40 yrs) folks is: don’t be over cautious with your savings. If you want your savings to keep up with inflation, you have to take on some risk. That means moving away from fixed income to growth assets like equities. If you don’t, you will be at the mercy of the greatest risk to long term savings – Inflation.