Gaining Financial Independence through Investing…

Contributed by: Ashutosh Dabake

The Pune Chapter of the IAIP organized a speaker event on the topic of ‘Gaining Financial Independence through Investing – One of the ways of living up to the expectations of your CFA Charter’ on 29th March 2014. The speaker at the event was Umesh V. Kudalkar, CFA, Masters in Financial Management and Mechanical Engineer. He has more than 25 years of experience in Corporate Finance, Venture Capital, Private Equity and Public Equity. The purpose of the session was to inspire the audience to walk the path of financial independence through demonstration of a set of cohesive concepts, application of investing techniques and tools followed by examples.  Financial Independence gives the freedom to live and work on one’s own terms. Financial Independence is likely to bolster one’s commitment to always do the right thing for all clients, stakeholders, family and society at large.

The discussion started with the definition of ‘Financial Independence’ and its importance. The advantage of investing significant percentage of income early on in one’s career to enjoy the benefits of compounding returns and the need to achieve post-tax returns spread over inflation rate were underlined. A well-defined standard of living expressed in numerical terms is a necessary pre-requisite in planning for financial independence. Further, Umesh shared his insights into various challenges faced by individual investor and different investment options available to investor. During the discussion on investment options, features of each individual investment category and opportunity cost of it were shared with the audience. Some of the aspects on which evaluation of investments was done were Transparency, Transaction Size, Liquidity, ease of performance assessment, and selection of the particular investment from a class, return spread over inflation and taxation applicability.

Umesh brought to the attention of the audience that of all the investment classes discussed, equity investments is one of the important asset allocation options that can help one achieve the goal of ‘Financial Independence’ due to potentially higher risk adjusted returns. Additionally, it would be unwise not to take advantage of Long Term Capital Gains Tax i.e. @ ZERO Percent on Stocks held for more than one year. Tax efficient returns provided by stocks help to achieve higher post-tax returns spread over inflation rate. He shared his approach towards asset allocation and stock selection strategies. Overall asset allocation needs to be dynamic based on market valuation (e.g. Market P/E). He proposed infrequent strategic balancing say 3-5 times in a decade and suggested classifications viz. Neutral, Bull Case & Bear Case depending on Market PE ratio. Out of the assets that could be allocated towards equity asset class; major investment needs to be in stocks which are ‘Economic Moats’ and a minor portion can be allocated towards high risk high growth stocks that do not have enough history. It is necessary to keep in mind that obsession with BSE Sensex Level is unwarranted as many Economic Moat category stocks have outperformed in the past. One needs to set upper limit on the percentage of money invested in individual stocks and achieve diversification benefits. He quoted Warren Buffett who coined the term ‘Economic Moat’ and explained the term through several examples, its relevance and how to formulate investment strategy by using this qualitative approach.

Then, Umesh shared another approach to stock selection process called ‘Quantitative Template Based Approach’. He enlightened audience on various criteria to be integrated in formulating template.  He showed examples of templates designed by him for Indian stocks and how a bad stock can be filtered out based on criteria in the template. One needs to use a fine combination of quantitative and qualitative criteria in stock selection to achieve good returns. In concluding remarks, he mentioned quotes by Warren Buffett on ‘Patience’, Albert Einstein on wonders of ‘Compounding’ and on a more philosophical note he quoted Khushwant Singh on ‘Richness’. 

– A D