Investment Guide for Conservative Investors

This post is intended for the audience who have little to no knowledge regarding stock markets and investment but want to enter into with circumspection without much time and energy effort.

Stock market's performance depends on 3 factors:

1. real growth (the rise of the company's earnings and dividends)
2. inflationary growth ( the general rise of prices throughout the economy)
3. speculative growth or decline (any increase/decrease in the investing public's appetite for stocks)

For instance, if yearly growth in a corporate earnings per share have averaged 2%, inflation is 2.4%, and the dividend yield on stocks is 1.9%, then the expected return will be roughly 6.3% and 3.9% before and after inflation respectively. Any temporary growth in the long term will be adjusted around it.

Portfolio

An investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds. Generally, it should be approx 50-50. This policy is also known as tactical asset allocation. The sound reason to go above 50% in stocks is during "bargain price" levels in a bearish market and reduce holding in the same when the market is speculatively high. For investment, aways follow a systematic investment policy (dollar-cost averaging).

Rebalance your portfolio to the ratio you have set for stocks and bonds as the value of your assets or bonds change. Try to rebalance every six months on easy-to-remember dates like New Year and Independence Day.

The Bond component

• Taxable vs Tax-free: Choose based on their returns and your tax slab in which your gain would be taxed. Sometimes at higher tax slabs, tax-free bonds can yield more return, and conversely, taxable bonds could do better for low earning individuals. So, unless you are in the lowest tax bracket go for tax-free bonds.
• Long-term vs Short-term: Long-term bonds provide high coupon rates than short-term bonds but are subject to the interest-rate risk. Due to inflation, the value of bond payment decreases and it also results in the fall of bond prices in the secondary market. The best choice is the intermediate-term bonds maturing in 5 to 10 years. You can also minimize your risk by diversifying among different maturity periods.
  
• Callable vs Non-callable: Callable bonds pay a high coupon rate but they can be redeemed any time by the issuer. It generally happens during low-interest rates in the market and corporates exercise it as debt refinancing. While non-callable bonds have a somewhat low coupon rate but can't be redeemed before maturity. For more details visit this link.
• Convertible vs Non-convertible: In case of convertible debentures, the debenture holders get the right to convert his or her debentures into equity stock of the company while non-convertible debentures, as the name suggests, are those which cannot be converted into equity stock of the company. For more details visit this link.

Some good options for the bonds are:

• Indian Treasury Bills
• Savings Bonds
• Mortgage Securities (CMOs)

Note: There seems to be a relation between the bond coupon rate and its risk level. If a company is paying a high rate of interest in order to borrow money, it is a fundamental signal that it is risky.

The Stock component

• Common vs Preferred: Preferred stock doesn't give voting rights, unlike the common stocks. However, dividends are fixed for preferred stocks, and the company pays preferred shareholders before common shareholders. Preferred stocks should be bought on a bargain basis or not at all. There is also a tax advantage for corporations not individual investors in case of preferred stocks. However, with all these elusive benefits of preferred stocks company can call them anytime and they're issued when the company's debt bonds are glutted which implies it might not be a good investment option for a conservative (passive) investor.

4 Rules for the common stock component

1. There should be adequate though not excessive diversification. It means a minimum of 10 different issues and a maximum of about 30.
2. Each company selected should be large, prominent, and conservatively financed. (Here conservatively financed means that at least 40% of its market capitalization should be financed by bank debt)
3. Each company should have a long record of continuous dividend payments.
4. The investor should impose some limit on the price that he will pay for an issue in relation to its average earnings over, say, the past 7 years. The limit should be around 25 times such average earnings and 20 times those of the last year.

Common-stock offerings (IPOs)

A conservative investor should not buy the stocks of newly traded companies without very strict analysis. The reasons are the special salesmanship behind them which makes them more attractive and they are carefully traded during the bull market which makes their price rise easier.

Portfolio on Autopilot mode

If you don't want any hassle in the portfolio diversification, rebalancing your stock and bond ratio, and completely wants to autopilot your investment then go for systematic investment in Index Funds that charges minimal fees. After this, you can answer any investment question with "I don't know and I don't care". The only flaw in owning an Index Fund is that it is boring but in the long-term (say 10-20 years) they will beat the majority of returns delivered by professionals.

Foreign Market

Though this is a bit risky affair but the investment diversification across the global markets is not mandatory but definitely advisable. If you live in India, work in India and get paid in Indian Rupees, you are already making a multi-layered bet on the Indian Economy. So, put some of your investment portfolio abroad. Generally, putting to a third of your stock money in foreign mutual funds helps insure against the risk that your own backyard may not always be the best place to invest. [https://groww.in/blog/best-international-mutual-funds-in-india/]

Market Fluctuations

Since common stocks are subject to recurrent and wide fluctuations in their prices, one can make money in 2 ways:

1. Way of pricing: It means to buy stocks when they are quoted below their fair value and sell them when they rise above such value.
2. Way of timing: It means to buy stocks when the price seems to move upward in the future and sell them when the price seems to move downwards.

If you invest in the 2^nd way then you'll become a speculator and ends up with a speculator's financial results (which is not pleasant for most of the people but ironically practiced by most of the people).

There is a paradox that the more successful the company, the greater are likely to be the fluctuations in the price of its shares. This means that the better the quality of common stock, the more speculative it is likely to be. For e.g, IBM and Xerox (in 1962-63). However, the prices of these stocks (which were irrationally higher) would eventually come down in the long-term. So, the best bet for an investor is to concentrate on issues selling at a reasonably close approximation to their tangible-asset value - say, at not more than one-third above that figure.

Security Analysis

A typical conservative investor should not focus much on Security Analysis as it never gives desired results consistently. So, the readers may skip this section.

Bond Analysis

The chief criterion used for corporate bonds is the number of times that total interest charges have been covered by available earnings for some years in the past. In the case of preferred stocks, it is the number of times that bond interest and preferred dividends combined have been covered. For bonds calculate minimum Ratio of earnings to Total Fixed Charges of past 7 years while for preferred stocks calculate minimum Ratio of earnings to the sum of fixed charges plus twice preferred dividends of past 7 years. This ratio should be around 7 to make the bond investment-friendly.

    However, instead of earnings, we can use the percent earned on the principal amount of the debt i.,e percent earned on debt to Total Fixed Charges. This ratio should be around 4.5.

Other Factors includes:

1. Size of Enterprise (should be large enough to withstand any future obstacle) and 2. Equity Ratio (should be high depicting large part of the company is financed by equity and interest can be easily paid to the debtors before the common shareholders).

Stock Analysis

The best way of analysis is to predict the future share price. It is calculated by estimating the average earnings in the future and multiplying it by an appropriate "capitalization factor". Factors affecting the capitalization factor includes:

• General Long-Term prospects
• The company shouldn't be a "serial acquirer".
• It should generate enough cash from its own business rather than from OPM (Other People's Money).
• It shouldn't have only a handful of customers.
• They should have a strong brand identity (like Harley Davidson), monopoly or near-monopoly, a unique intangible asset (like CocaCola recipe), or resistance to substitution (like Railways, Electricity Utilities).
• Management
• Financial Strength and Capital Structure
• Dividend Record
• Dividend Payout Ratio

Apart from the Stock and Bond Analysis, the analyst should also do the Industry Analysis for the future prospect of the company.

How do I manage Competitive Programming(CP) and GATE together?

This is a question that has been asked a lot to me by many GATE aspirants. For reference, I do CP quite on a regular basis. I am rated as Candidate Master(2026 Rating) on Codeforces and 5🌟(2060 Rating) on Codechef. I am AIR 3 in GATE CSE 2019.

So, let me start with the timeline of my four years in BTech. In the first year, I only focused on my college subjects and did very little programming on the platforms. I started my Competitive Programming Journey from the third semester. I consistently did practice questions on various platforms like Codeforces, Codechef, Hackerrank, and HackerEarth. There are times when you might spend multiple days on a single question but that's ok because it's important to improve your CP skills. I took part in many Intra and inter-college competitions. One must understand that you should do CP only if it's your passion otherwise you can easily get fed up by the dedication it requires. After my fifth semester, I got qualified for ACM-ICPC Kolkata-Kanpur Regionals and went there which was an amazing experience. However, during all this I never compromised my studies of my BTech subjects. I regularly attend all the classes and maintains a good CGPA(9.6/10). This is the only reason why I am able to prepare easily for the GATE.

I started my GATE preparation in the sixth semester. Though my concepts were clear, I needed proper guidance and a timeline for the preparation. Therefore, I took an online course in BrainStorm Achiever, New Delhi. My reasons for the online course were flexibility in watching videos, the option to skip the videos, or fast forward them according to my comfort level and avoiding the commutation time for the coaching. During the preparation period, I went for an internship at HackerRank, Bangalore.

Finally, for those who want to manage both CP and GATE together I would suggest learning your BTech subjects well because your GATE syllabus comprises of these subjects only and keep practicing CP questions as consistently as possible.

P.S: I intend to keep this post short for an easy read. Comment your queries(if any) in the comment box below.