Category Archives: Personal Finance

Thursday Trivia ~ Trust the Process

Last week, I came across a fabulous resignation letter of Sam Hinkie who served as the general manager of the National Basketball Association’s (NBA) Philadelphia 76ers from 2013 to 2016. He has also consulted for several National Football League teams. A resignation letter that I would love to re-read from time to time.

I’m sure your first thought would be that writer has gone nuts! How can a resignation letter be wonderful? The words Resignation and Wonderful simply don’t match each other. 

The reason is his cross-pollination of ideas from the world of investment. Hinkie goes on to quote Howard Marks, Seth Klarman, Charlie Munger, Warren Buffet to name a few. He has somehow taken the best out of them and applied in running a basketball team. A sports person taking ideas from investment world has been an unheard event to me. If you have come across anyone who cross pollinates ideas then please write about them in the comment section below, we would love to hear more about them.

“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.” — Charlie Munger

A brief history of Sam Hinkie and Philadephia 76ers


The 76ers hired Sam Hinkie in May 2013. The team’s owners, led by private equity investors, chose him for his analytics acumen. They figured Hinkie, a Stanford MBA, could Moneyball the 76ers to greatness. When Hinkie interviewed for the job, he made it clear to the owners that he thought they were “a long way away” from winning big. The cupboard was bare of talent, and if they wanted to win a championship in the long term, their best way forward would involve a lot of losing in the short term.

Here’s his thinking: Historically, in the National Basketball Association (NBA), the teams that win championships rely on star players such as Michael Jordan and Lebron James. Hinkie believed the surest way for the 76ers to get a star of that caliber was to have a high pick in the amateur draft (the annual process through which newly eligible players are selected by the NBA’s 32 teams). The highest draft picks are awarded to the worst teams, and if the 76ers were bad enough for long enough, he argued, they would eventually get a great player. It would take patience though.

Hinkie warned his bosses, the team, and its fans that the short term would be painful, and it most certainly was. Almost immediately upon Hinkie’s hiring, the team began “tanking”—the sports term for losing on purpose. Hinkie traded the team’s best players and made no attempts to acquire players that would make it better.

Over the next three years, the 76ers were horrible. They lost more games than any other team, and broke the NBA’s record for consecutive games lost. It all culminated in the third season when the team won only 10 of 82 games, making it the second worst NBA team of all time. One prominent sports writer called the team an “abomination,” and another an “atrocity“. Observers called for the NBA to intervene and have Hinkie replaced with a manager who wouldn’t tank. The team’s attendance and tv ratings were among the lowest in the league.

But even at the worst depths of history-making failure, many of the team’s hardcore fans were steadfast in their support of Hinkie. Unlike his predecessors, Hinkie offered a concrete plan based on quantitative analysis. The team was an embarrassment on the court, but they were getting talented young players with high draft picks who might some day become stars.

“[Before Hinkie, the 76ers] just had mediocre teams playing mediocre basketball, being incredible boring… and having no plan,” said Michael Levin, a lifelong 76ers fan and host of the popular 76ers podcast The Rights to Ricky Sanchez. Levin was immediately enamored of Hinkie, he told Quartz. He was happy that the team was finally ”thinking long-term at expense of any short-terms gains.”

In April 2016, Hinkie stepped down. “Given all the changes to our organization, I no longer have the confidence that I can make good decisions on behalf of investors in the Sixers….” Hinkie wrote in his 13-page resignation letter to the 76ers board. The resignation letter served as a defense of his decision-making, as well as a kind of philosophical treatise that includes references to Elon Musk, cognitive science, the physicist James Clerk Maxwell, and Jeff Bezos’s 10,000 year clock. The letter cemented Hinkie’s reputation as a mad genius or a fool—all depending on your point of view.

By January 2017, it finally became clear that Hinkie was right all along. The 76ers have won more than half of their games over the last month. The team’s talented young players are blossoming, and it is in a strong position to acquire more excellent players going forward.

Most emblematic of Hinkie’s success is the emerging stardom of the 76ers’ agile giant Joel Embiid. Hinkie drafted the 7-foot Cameroonian in 2014 even though he had a broken bone in his foot that would not allow him to play for six months. Embiid was a player of immense talent, and because the 76ers were not worried about winning in the short term, the injury did not deter Hinkie from drafting him. 

Correlation to our Investment Process

As many of our readers are aware that we follow a strict quant driven approach for our investing our client’s money in mutual funds. We call it Dynamic P/E Asset Allocation Strategy. It’s purely process oriented that takes away any emotional input for buying or selling any mutual funds.

The key objective of our strategy is to provide risk adjusted returns compared to Nifty. This attribute can be seen in the lower standard deviation and better sharpe ratio in our portfolio. Standard deviation can be construed as a measure of risk in the portfolio and sharpe ratio is return generated by per unit risk taken.

Having a standard deviation of 7.74 which is significantly lesser than Nifty’s standard deviation of 13.45 has resulted in lower volatility in the portfolio. That has created a peaceful investment journey!


Just like the process of Sam Hinkie when he intentionally tanked the team down for creating a winning team, our quant model too asks us to invest in equity when market is sliding down. We have to see red in our equity portfolio for a little while as the market bottoms out. This is the whole purpose of our quant model to take rational investment decisions by looking at numbers and not falling for emotions such as fear and greed.

We are not an expert at catching the bottom of the market. Our process is not for timing the stock market accurately either. Nobody can do that all the time. 

Even the greatest investor – Warren Buffet cannot. Even Isaac Newton once famously quoted “I can calculate the motion of heavenly bodies, but not the madness of people” while talking about his inability to time the market correctly.

There many quant models out there who successfully outperform their respective benchmarks. We are comfortable with our current quant model that has enabled us to manage risk in the portfolio as well as outperform Nifty. 

That’s why we echo the words of Sam Hinkie – Trust The Process!

– Jinay Savla

Disclaimer: The intention of this blog is not to advertise about our portfolio allocation strategy or ourselves as superior financial advisors. The intention here is to create a faith in Process or System that every Investor must follow in every market condition. Just by falling into emotions and taking wrong decisions will do more bad for an investor than good. Once again, Trust The Process!

Thursday Trivia ~ My Notes from Lecture of Superstar Investor Prof. Sanjay Bakshi!

Prof. Bakshi is one of most revered names in the investment industry. He doesn’t speak about investment returns nor does he engage with business media. On the contrary, a student of stock market attending his lecture often is enlightened with learnings from Warren Buffet, Charlie Munger, Ben Graham, Philip Fisher and other great investors around the World. It’s the uncanny ability to apply those learnings and making them super easy for audience to understand those learnings that leaves a lasting impression.

The lecture was titled – The Evolution of a Value Investor that took place on Sunday, February 23, 2020. Prof. Bakshi spoke about his 25 years and constant evolving value investment framework. The focus was on 2 names that redefined his investment ideology whose ideas most of us are following in some way or other.

  1. Ben Graham
  2. Philip Fisher

Prof. Bakshi started his session by speaking about Ben Graham where he highlighted his learnings from Special Situations and Bargain Securities. 

In the 3rd edition of Securities Analysis, Ben Graham has written an essay about Special Situations which entails as betting on happening or non-happening of a corporate event such as merger/demerger, bonus, rights issue, etc.

Features of Investment in Special Situations

  • Great Returns 

There is a possibility of getting a 40 to 50% return in less than 1 year by investing in such news based activities.

  • Uncorrelated Returns

In a normal investment framework, one is worried about market risk. Whereas in Special Situations framework, event risk is far more important than market risk.

  • No need for predicting future fundamental performance
  • Lots of fun

It’s definitely a lot of fun when there is a chance of making a quick buck in a limited time frame. Kind of gives a dopamine effect to the brain.

Since these situations seem like a low hanging fruit on a tree for most investors. It’s very easy to copy and replicate an almost similar performance. Hence, over the years a lot of things happened.

  • Competition Caught Up

The arrival of arbitrage funds in the mutual fund category was a game changer in the industry. These funds were created for exactly the same purpose. With more money pouring in, prices shot up quickly and the returns on these special situations came down.

Another reason was that there were no entry barriers to invest in such kind of events. Not as if one needed an intellect or patience of Warren Buffet. These were just low hanging fruits which everyone could see how to make money from.

  • Patsy in the Game

Patsy is made in reference to a dumb guy who doesn’t know what’s happening. As Warren Buffet says, in the game of bridge – if you can’t figure out who is the patsy in the game then it’s probably you. 

Special Situations are all about information asymmetry, where one person has a little more information about the company than the other. Since, this little edge can give huge rewards but being on the wrong end, might also make you a patsy in the game.

  • High IRRs, Low Wealth Creation

To create sustainable wealth, money should remain invested in the business for long periods of time. Investing in such situations may result in high internal rate of returns (IRRs) but since cash remains idle for most part of the year, it results in low wealth creation for investors.

  • Trying to predict the behavior of other investors

In the subject of Behavioral Finance, we learn that it’s impossible to predict the behavior of masses or crowds.  Most investors have lost a lot of money doing the same. However, the paradox of investing in special situations is that constantly we are trying to predict the behavior of other people.

Rumors spread around quickly which affects our conviction. Other than investors, sometimes even regulators or governments play some spoil sport. This drives down our profits. It’s a struggle to accurately predict the behavior of others accurately, all the time.

  • Errors of Omission

There are a lot of moving parts in the deal. Such as some court cases going on a particular project, some corporate governance issue which has not come to light as yet but can come into news anytime, etc. These sort of issues are very hard to focus on from a 6 month to 1-year perspective and hence it removes our focus on compounding our capital for long periods of time.

What Ideas should be discarded from Special Situations

  1. Short Term Thinking
  2. Dependence of Returns on the Behavior of Other People.

Ideas to be implemented

  1. The Idea of Upside Potential v/s Downside Risk

In certain special situations, there is a tremendous upside potential with limited downside risk. This happens when a company demerges or spins off a non-profitable unit or sells it to someone which unlocks hidden value of the company.

  • Taking Advantage of Market Over-reaction to Adverse Events

Demonetization is an adverse event where markets over-reacted to a lot of things. When money comes back into banks as deposits, it makes a bank healthy which is good for the economy in the long term. But in the short term, markets tanked giving pockets of opportunities.

  • Importance of Reinvestment Risk

In special situations, cash is lying idle to wait for the next big idea to jump in. There is little chance for that reinvestment to work in exactly the same way or even better. There can be times where money is lost which brings down the overall return on investment for the year.

Prof. Bakshi then went on to speak about Bargain Securities, something that Ben Graham is famous for and which even Warren Buffet used to practice in his early days.

Features of Bargain Securities of Ben Graham 

  • Low Price as your friend

Earning power yield which is the opposite of price to earnings multiple should be more than prevailing bond rate. Using this multiple, Graham would figure out whether the price is low or expensive.

  • Low price in relation to average past earnings power

There can be situations where current earnings are low but the average past earnings are higher. The reason for low current earnings could be some short term bad situations. In such a scenario, usually price is down due to disappearance of earnings. Bet here is that the earnings will one day go up.

  • High Dividend Yield
  • Low Price in Relation to Asset Value
  • Low Priced Common Stock
  • High Cost Producers & Leverage

A way to think about this is a stretch rubber band that comes back to normal shape once it’s released. When commodity prices go up, Graham advocates investing in high cost producing companies. 

For example, when steel prices go up buy a high cost producer of steel. When the cycle turns, there is a disproportionate impact on profits. Because revenue numbers go up, while input costs remain same. So there are good operating profits generated which help in paying out interest costs on debt. This pushes the Net profits upwards and so does Earnings per Share (EPS) hence the rubber band was stretched with low EPS which is now coming back to normal.

  • Relatively Unpopular Large Companies

Problems in Bargain Investing

  • Value Traps

Investors should always keep in mind the golden rule – stocks are sometimes cheap for very good reasons. Such as bad management quality, shady promoter activity, bad balance sheet quality, etc.

  • Errors of Omission

Since, the focus is too much on bargains, an investor tends to miss out on compounders. Sometimes they just don’t pay up for quality businesses looking for bargains. Charlie Munger changed this behavior of Warren Buffet in the late 1980s after which Berkshire bought a good stake in Coca Cola.

  • Selling a good business too early

As there is no effort to work on quality of the business. An investor tends to exit the stock once the bargain is over. This is a lot more painful when the stock continues to climb upwards even though there is no perceivable bargain in the framework.

  • Need for constant monitoring

80 to 100 stocks are difficult to monitor. Especially with so many moving parts. The constant buying and selling often disrupts the long term wealth creation aspect.

Common Factor in Graham’s Stock Philosophy 

Mean Reversion (Apna Time Aayega)

Bad periods will be followed by good periods.

Other Aspects of Graham’s Philosophy

  • Relatively Small Holding Periods
  • High Degree of Diversification

Looking for statistical good bargains. Hence, the portfolio is diversified upto 80 to 100 stocks in such situations.

  • Earnings Power Growth as a Speculative factor
  • Protection v/s. Prediction

Pain won’t last forever. Hence, protection from volatility is countered by wide diversification.

After an extensive discussion on Graham’s philosophy, Prof. Bakshi spoke about the second most influence in his life as a value investor – Philip Fisher. As he had spent a lot of time focusing on Graham’s philosophy, he went through a few things about Fisher very quickly. Fisher is completely opposite to Graham. He loves good companies that keep on compounding at decent rates for long periods of time. The idea of concentrated portfolio emerges from Fisher’s philosophy which our readers will discover further.

Key Features of Fisher’s Investment Philosophy

  • Growth

Contrary to bargain companies whose prices are low for a specific period of time, Fisher speaks about investing growth companies that will compound its earnings over long periods of time.

  • Innovation

Companies that innovate in various production processes that are usually hidden from its competitors are companies that possess strong growth over long periods.

  • Low Dividends

Companies that use money in good IRR projects rather than distributing them as dividends.

  • High Profitability
  • Self-Funding Growth

EPS of the company that keeps on growing.

  • Entry Barriers
  • Management Quality
  • Paying up for Quality 

Price in relation to future expected earning power of the company. Graham pays for price in relation to current earnings of the company. Another opposite feature.

  • Low Diversification

Less than 10 stocks which is completely opposite to 80 to 100 stocks of Graham.

  • Very Long Holding Periods

Common Factor in Fisher’s Investment Philosophy

Fundamental Momentum (Abhi toh party shuru hui hai!)

Things are good, they are going to get better.

Benefits of following Fisher’s Philosophy

  1. Slowing down by making fewer decisions
  2. Appreciation of qualitative factors
  3. Freeing up time

Downside of following Fisher’s Philosophy

  1. Overconfidence was costly.
  2. You could go wrong as management quality may change after purchase of stock or you can go wrong about the future earnings power
  3. No return for 10 years
  4. Business maybe very good when purchased but then story changes.

Ideas from Fisher to accepted in the portfolio

  1. Fundamental Momentum
  2. Paying up for quality with a caveat

Discarding ideas from Fisher

  1. Very long holding periods: As business cycles are getting shorter due to tech disruptions
  2. Extremely concentrated portfolios

Adding more ingredients by Prof. Bakshi on his portfolio

  • Different perspective on diversification

Having a focused portfolio of 15 stocks at max. in the portfolio.

  • Anti-fragility (Desirable)

Pain of others is a blessing for you. Because they did some dumb things which you didn’t.

  • Earnings power v/s Reported Earnings and Owner Earnings v/s Reported Earnings

Graham v/s. Fisher

Both ideologies are right but the tools are different. People get into trouble when they mix up both these ideologies. Example, Graphite story was of Mean Reversion and people confused it for Fundamental Momentum.

Synthesis between Graham and Fisher

  • Mean Reversion: In the long term, it’s a very powerful force.
  • AAA Bond Yield as a key mental construct

Suppose if the AAA bond purchased for Rs. 100 yields 10% interest, then an investor makes Rs. 10 (pre-tax) each year. This should be seen as an indicator of business’s earnings growth that should happen more than AAA Bond Yield so that the investor is better off purchasing equities of a business.

  • Earning Power Growth as a speculative component

The approach here is for an earnings power growth of a stock is when the market thinks it will shrink and all it has to do is not shrink. And then when it grows, it makes a lot of money for investors. Return on investment will come from growth.

Benefits of treating Earnings Power Growth

  1. No longer required to make elaborate projections about quantum and timing of growth.
  2. As multiple re-ratings are not in our control.
  3. If a large part of an excellent return has come from P/E multiple expansion as opposed to earnings power growth, then at some point stock will get vulnerable.
  4. Because you are reasonably diversified, hopefully you won’t get it wrong in every security in the portfolio.
  5. Protection v/s Prediction
  6. Focus on Portfolio’s Earnings Power Growth and not individual stocks.
  7. Buy high growth, high P/E stocks with moderation of risk.

The closer you are at the portfolio level to a AA Bond Yield Earnings, the more protected your portfolio will be from value impairment.

Discarding Ideas

  1. Low price can compensate for poor quality
  2. Too much diversification

End of Presentation

Then came the Question and Answer session where Prof. Bakshi was very open about his views on NBFCs and PSUs. He sees pockets of opportunities there. To a peculiar question of a largest private bank, Prof. Bakshi candidly mentioned that there are several ways of making money but very few ways blowing it up. An investor should study of how businesses blow up as there are hidden markers everywhere before such an event unfolds.

We thoroughly enjoy such knowledge sessions from veteran investors. Investment industry pays its deepest respect to investors such as Prof. Bakshi who come out and pour gold to others by sharing their knowledge, wisdom and practical application without having any second thoughts. It’s our constant endeavor to spread such pearls of wisdom with our readers, this Thursday Trivia is dedicated to Prof. Bakshi.

– Jinay Savla

Thursday Trivia ~ Mimetic Theory and How it impacts your Financial Future!

Rene Girard was a French historian and literary critic. He’s famous for Mimetic Theory, which forms the worldview of many of greatest entrepreneur’s and investors of our generation. One of whom is Peter Thiel, co-founder of Pay Pal and one of the early investor in Facebook. Thiel studied under Girard as an undergraduate at Stanford in the late 1980s. Their relationship stretched beyond the walls of Palo Alto classrooms and became a lifelong friendship. 

Mimetic Theory rests on the assumption that all our cultural behaviours, beginning with the acquisition of language by children are imitative. He sees the world as a theatre of envy, where, like mimes, we imitate other people’s desires. 

Mimetic conflict emerges when two people desire the same, scarce resource. Like lions in a cage, we mirror our enemies, fight because of our sameness, and ascend status hierarchies instead of providing value for society. Only by observing others do we learn how and what to desire. When it goes right, imitation is a shortcut to learning. But when it spirals out of control, Mimetic imitation leads to envy, violence, and bitter, ever-escalating violence. 

Mimesis is the Greek word for imitation. Imitation is not the childish, low-level form of behavior that many people think it is. Since humanity would not exist without it, humans aren’t as independent as they think they are. Early psychologists like Sigmund Freud didn’t take imitation seriously enough. In one essay, Thiel described human brains as “gigantic imitation machines.” 

How the Mimetic Theory impacts your financial future?

It’s no secret that the generation of 50s and 60s were absolute savers. They were raised differently; India’s economy wasn’t opened up to provide for a lot of opportunities. The way a millennials go about their lives, it wouldn’t even be in their imagination. Equity Markets weren’t as transparent as they are today, hence Banks fulfilled most of their needs. Information which is now freely available was once upon a time a scarce resource. Data analytics as a profession is something nobody would have thought of in 70s that one person sitting in front of a laptop or computer has the ability to access tons of data around the world. 

However, one thing doesn’t change between both the generation is the tendency to imitate their peers when it comes to life decisions especially financial ones. That’s why we tend to see mutual funds becoming an important conversation during 2016-2017 when equity markets gave good returns and by 2018-2019, these conversations now turned to having a fixed deposit being the better option. Yet the World’s Biggest Investor – Warren Buffet advises investors to do the opposite which is Be greedy when everyone is fearful and be fearful when everyone is greedy. Yet, almost always it never happens.

The reason is our capacity for imitation is unconscious. We tend to look at our peers such as family, friends, co-workers or relatives making certain financial decisions of their lives which in our rat race are unconsciously imbibed by us.

Our Mimetic nature is simultaneously our biggest strength and biggest weakness.

We tend to get inspired to do great work when we hear about someone who has accomplished so much. Sachin Tendulkar is the greatest influence on the game of cricket. Sehwag first and now Prithvi Shaw have their batting style which identical to the great man. In the world of badminton, PV Sindhu and Saina Nehwal have made a whole bunch of youngsters go out to play a serious badminton game. The world of Investments pays its respect to the dynamic duo of Warren Buffet and Charlie Munger. For starting great businesses, a whole generation is inspired by Steve Jobs and Elon Musk, so much so that they take pride in dropping out of college. 

The motivation to do great work often results in huge monetary gains as well. Higher aspirations right from the childhood combined with almost identical education amongst a circle of friends can result in an impactful career choice. For instance, students pursuing commerce are often interested in CA, CFA, CS or LLB, while students in science tend to pursue engineering. MBA these days has become a cult as a post-graduation degree, regardless of where a student has pursued graduation. 

However, there is another side to this as well. Our Mimetic nature often interferes with our peace when the tendency to match up our lifestyle with others takes the centre stage.

Take for example, the newly purchased or furnished home of your relative or a fancy new car or bike your co-worker brought to office. Looks great isn’t it? They must have made the right financial decision to afford it and we are being too conservative with our finances. For some there could a plethora of thoughts such as they could have also bought a similar house or bike, if only their investments would have grown at a faster rate. The tendency to take investment risk rises in such situations . And it’s this tendency where people tend to fall for tips from star fund managers or investors coming on television or reading about their recommendations over the internet to make quick money. The primary feeling behind this sort of behaviour is to not feel left out especially when the stock moves up.

Competition distracts us from things that are more important, meaningful, or valuable. We buy things we don’t need with money we don’t have to impress people we don’t like. 

These days we tend to see a new dimension to children’s birthday parties. Spending a good amount on parties by giving them in good restaurants are seen as a very important expense by parents just so that their children gain peer acceptance in school. Otherwise, there is a fear of a child becoming lonely or being seen in a poor way. The days of house parties with one large cake, wafers, samosa or vada pav followed with pav bhaji and soft drink are a thing of past now. 

Hence, in many ways spending has seen a rise. So has the need to start budgeting. Yet, it’s often ignored in the hunt for instant gratification. Any new mouth-watering deal that offers 50% discount but not really a necessity is often purchased resulting in over spending for things that we don’t really need.

With the rise in spending, especially discretionary expenses the ability of a family to save is decreasing. Since, imitating our peers make us short sighted, we tend to ignore our future goals of life such as retirement. Will we have enough financial resources to support our life when we are no longer working? Okay, that’s too much into the future. What about having some money aside if in-case there is a lay off and no job is available for the next 1 year? Do we have some money set aside to support us in those times?

We aren’t trying to be pessimistic here, just being cautious. When driving on a highway, it’s better to use a seatbelt which doesn’t mean that there is a chance of an accident.

Due to our Mimetic nature, cons often outweigh the pros. This tendency to imitate often takes away our originality. 

Hence, first and foremost we should ask ourselves whether are we really falling prey to this Mimetic Theory of imitating others? If yes, then specifically which areas of life? Is it to do with having a big house because some relative has it or a fancy car or generating best investment returns even while putting our money at greater risk?

And if you are actively countering your mimetic behaviour then please do share with us your success story. We eagerly await your reply.

– Jinay Savla

Thursday Trivia ~ XIRR v/s CAGR

CAGR and XIRR are the most commonly used investment terminologies in the financial services industry while describing the investment returns to an investor. At times, an investor tends to get confused whether the two are same or carry some stark difference.

Let’s start by looking at the definitions.

Compounded Annual Growth Rate (CAGR) 


Compound annual growth rate (CAGR) is the rate of return that would be required for an investment to grow from its balance in the beginning to its balance at the end of the tenure, assuming the profits were reinvested at the end of each year of the investment’s lifespan.

CAGR is nothing but the geometric mean of returns for all the years you stayed invested. So for to find out a CAGR for an investment over 10 years, one needs to find out annual returns of 10 years. Each annual return is then added by 1 and then multiplied to find out the Compounded Annual Growth Rate.

Extended Internal Rate of Return (XIRR)

XIRR or extended internal rate of return is a measure of return which is used when multiple investments have been made at different points of time in a financial instrument like mutual funds. It is a single rate of return when applied to all transactions (investments and redemptions) would give the current rate of return.

Surprisingly, the definition of XIRR is not given on Investopedia.

CAGR and XIRR will be the same in the case of a lump sum investment.

Scenario 1: Rs. 1 lakh invested at the beginning grows at 5% in the first 5 years and 10% in the next 5 years.


Scenario 2: Rs. 1 lakh invested at the beginning grows at 10% in the first 5 years and 5% in the next 5 years.



A reader would notice that in these 2 scenarios, Mr. X’s investment of Rs. 1 lakh will generate the same amount of corpus after 10 years. Compounding at different rates for different time periods don’t have any impact since there are no cash flows.

CAGR and XIRR are same in both the cases.

Only difference is that in Scenario 2, the investment will compound at the faster rate in the first 5 years and in Scenario 1, investments will compound at a faster rate in the remaining 5 years.

CAGR and XIRR will be different when there are multiple cash flows due to which annual returns for each cash flow is variable.

A brief background

Extending on the context of above two scenarios, suppose Mr. X, an investor decides to invest Rs. 10,000 every year for a period of 10 years. In the first scenario, the investments grow at 5% in the first 5 years, then 10% in the next 5 years. In the second scenario, the investments grow at 10% in the first 5 years and then at 5% in the remaining 5 years. Here, we are trying to figure out whether the CAGR and XIRR will be similar or different in both the scenarios. 

As part of the exercise, we recommend you to do a quick calculation in your mind as well.

Scenario 1: Investments grow at 5% in the first 5 years and then at 10% in the next 5 years.

Scenario 2: Investments grow at 10% in the first 5 years and then at 5% in the next 5 years


In the first scenario, Mr. X makes a decent Rs. 1,60,596 at the end of 10 years with an investment of Rs. 1 lakh. Whereas, in the second scenario, Mr. X makes Rs. 1,43,729 at the end of 10 years. A reader would observe here that the magic of compounding can lead to a better experience when the investments are compounded at higher rates towards the end of the tenure. 

Whereas the interesting part here is that CAGR in both scenarios remain the same, in fact a reader would notice that CAGR has remained the same in all 4 scenarios, the reason for this is that CAGR is a geometric mean of returns and has nothing to do with cash flows during the period. Hence, a reader might feel that Mr. X will end with the same corpus because the CAGR is the same. That is clearly not the case.

Yet, there is a difference in XIRR. Sequence of returns matters, in case of recurring investments (or multiple investments).

How does an investor with a layman approach to finance looks at returns?

‘Returns’ is the most important part of conversation for any investor. The objective is simple; money should make more money. Let’s say for example, a person born in 1960s or 70s has a very different way to think about investment return. The conversation with such a person is pretty straight forward, he or she bought a house in 1990s worth Rs. 10 lakhs which today can be sold at Rs. 1 crore. In their conversation, Rs. 90 lakh is their investment return. No second thoughts. But if you ask a person who understands finance, he would take out his calculator, run some numbers and say it’s just 8% Compounded Annual Growth Rate (CAGR) in a period of 30 years.

Since, a lot of investors tend to use CAGR for a house since they look at point to point investment returns as there is no cash flow in between.

In case of investments in mutual funds for instance, an investor tends to have multiple cash flows in the form of Systematic Investment Plans (SIPs) or partial redemptions for different periods of time. At such a time, an investor can calculate CAGR for each SIP which will be for a different duration at a different rate than other SIPs or XIRR can be simply used to ascertain the investment returns for the same.

In a nutshell, an investor should look at XIRR when there are multiple cash flows and returns generated. But in case of point to point investment, CAGR can also be looked at since the XIRR too will remain the same.

– Saurabh Mittal and Jinay Savla

Thursday Trivia ~ The Rise of Quick Service Restaurants, Burger King IPO and Cafe Coffee Day wind up!

When the malls first arrived in Mumbai, I distinctly remember sitting with my uncle and discussing the way small shop owners are going to be impacted due to it. He was too casual around the subject and mentioned that it’s just a matter of 5 years, Indians are price conscious and they won’t buy expensive things. On the contrary, he would go on to tell me how costly it is to build a mall and that too a profitable one. Well, fast forward 2 decades and you see a very different story. My uncle was partly right, say around 20% that malls aren’t really a profitable business for everyone. But the fact that he got wrong was about change in tastes and preferences of Indians, which is 80% of the story.

Taking cue from another industry that has impacted our life in the most significant way is the mobile phone industry. In 2001, the most expensive phone that I had seen was Nokia Communicator which used to cost some Rs. 45 thousand. The phone was highly advanced and ahead of its time. Buying a Nokia 3310 or Samsung R220 which used to cost less than Rs. 5,000 was a costly affair. Why? Because the phone calls were chargeable. Internet was practically a luxury only a few could afford. Reliance Communications changed the game for incoming calls by making them free and Jio recently has changed the way the entire telecom industry operates. Now, buying a phone worth Rs. 45,000 isn’t a luxury anymore. The game has changed completely. Nokia was late to understand that just like my uncle and due to their own short-sighted approach, both are out of their respective businesses.

Coming back to the mall culture, several years back when Crossroads, the first shopping mall came to Mumbai, it had McDonalds at the ground floor. For some of us it was a weekly ritual to go there, do some window shopping and have some French fries with coke. If at that time, had anyone said – that food service business in the form of quick service restaurants will be the next big thing then people would have simply laughed and never given it a single thought.

Back then, Sunday dinners meant going to a few fixed places where right from waiter to restaurant manager knew you really well. But this has changed. So has the spending habits. It’s the millennials that have given these quick service restaurants its due. Places such as McDonalds, CCD, Barista, Burger King, etc. are more than about food now. Millennials want to hang out, have long romantic conversations, share a business idea, business meetings of startups when an office isn’t feasible.

Crossroads mall in Haji Ali changed the way Indians perceived malls. The second blow to small shops was delivered by Big Bazaar which was opened in Phoenix Mills, Lower Parel. It was a gigantic success. Weekend rush was a terrible affair to deal with. This is one thing my uncle missed out on contemplating that people usually get tired after shopping for long hours. So they simply enter a quick service restaurant (QSR) like McDonalds, Dominos, Pizza Hut, etc. for their dinner. After a few times, it’s the McDonalds that become the center point due to a distinct taste in food and priced at a reasonable rate. Hence, it sort of becomes a combo offer! Add to it movie theatres such as PVR and Inox, combine them with Café Coffee Day and Starbucks. A perfect Sunday hang out plan is prepared!

Millennials don’t spend their weekends like baby boomers (predecessors). They spend more on experiences which result in instant gratification. With easy access to bank loans and credit, they are able to fulfil their goals much faster than baby boomers. They won’t wait for 10 years to buy a SUV or sedan. When the loan is a go, they will book it immediately. Now whether this is the right approach and what are its repercussions, is an entirely different subject which we will discuss some other time. 

This spending culture has definitely given a rise to the food services business in India. Let’s have a closer look at the numbers. 

The Indian food services market is classified into two segments – organized and unorganized. Total market has grown by 9% CAGR over the last 5 years. Organized market has grown fastest. Standalone organized outlets have grown at 13% and chain restaurants have grown at 18% The unorganized market constitutes 62% of the total market. However, this is on a declining trend. Right from 69% in Financial Year 2014 versus currently 62% in Financial Year 2019. 

Out of the organized market, quick service restaurants which we were talking about earlier holds 46% of the market which has grown fastest by 18% over the last 5 years. It’s close cousin casual dining restaurants, hold 34% of the market and has grown by 15%.

Let’s talk about Burger King! A company that has given Mumbai a VIDESHI Vada Pav!

Burger King was founded in 1954 in the United States and is owned by the Burger King Corporation, a subsidiary of restaurant brands international inc. Burger King has a global network of over 18,000 restaurants in more than 100 countries.

Burger King India has a master franchise and development agreement with Burger King Asia Pacific, which is an affiliate of Restaurant Brands International Inc. The master franchise agreement is valid until December 31,2039. The company operates in the QSR segment and was a late entrant in the Indian markets. It opened its first restaurant in November,2014. And now the company has 216 company owned and 8 sub franchised Burger King restaurants spread across 16 states and UTs and 47 cities across India.

You will be surprised to know that 60% of Indians eating out are millennials. Add to it increased internet and smartphone penetration, or we can say it’s the Jio effect. Plus, the menu of burger king is not heavy on the wallet too. For instance, the company has a lot of products which are under Rs 100 and runs promotions like 2 crispy veg burgers for Rs 69. The incremental pricing between products is also kept low – 10-20 Rs, this enables the customer to upgrade easily. 

The combination of tech and food is going well for Burger King right now. As it files for an IPO. This simply indicates the confidence of private investors in the food service business of India. It’s for the millennials, by the millennials and of the millennials.

Although all is not well in the food services business. Few months ago, we witnessed the tragic death of VG Siddhartha, the founder and CEO of Café Coffee Day. Apart from the fact that the company never made a profit and was buried in debt, people actually came out and refreshed their memories about the first time they had a coffee in a CCD outlet either with a friend or someone special. CCD certainly changed the way Indians consumed coffee.

CCD was the place which showed millennials the experience of drinking a coffee. Starbucks too is riding a similar wave. Different versions of coffee and its pricing is something baby boomers wouldn’t have thought about in 1990s or early 2000s. Spending Rs. 500 on a coffee is now an experience. Consider the most popular Starbucks at Fort which was the first store in India for the company, it has spent a fortune on its interiors. When you compare it blatantly with some South Indian restaurants that have filter coffee, you would look at me and say, come on – there is no comparison. The coffee is completely different, right from its brewing technique to the flavors, it’s a different world. But for baby boomers who were born in 1960s, a cup of filter coffee equals a latte or a mocha. That’s the gap!

Quick service restaurants are here to stay. There is no going back. Technology has changed the way we approach our food completely. Swiggy and Zomato are simply giving the QSRs the much required push that they are about. Millennials will spend their money. Weekends will be about fun with friends and not about staying at home and cooking dinner for family plus relatives. The World is much closer now due to internet where QSRs can market themselves and millennials can reach out to experience something new, something different. Money is not about saving anymore, it’s about YOLO – you only live once!

Please note: We don’t recommend any investment in Burger King and neither do we hold any position in Café Coffee Day or have recommended to anyone in the past. This blog is for information purpose only and not an investment advice. We only talk about the trends of these industries and what sort of impact it has on our lifestyle and personal finances.

– Jinay Savla