- Suramya Khanal

“The stock market is designed to transfer money from the active to the patient” – Warren Buffet

It is no secret that Warren Buffet, the self-made billionaire investor, has always valued investing over the long-term. His slow and steady approach has proved to be successful in building wealth—making him one of the richest people in the world with net worth of almost $85 billion (Rs 88 kharba). One of the most popular mantras of Buffet is about giving more importance to long-term investment on growing companies, rather than focusing on trading and short-term investments. So what can we learn from the man whose personal net worth is 6 times more than NEPSE’s entire market capitalization of Rs 14.30 kharba?

On several occasions, Warren Buffet has said that if one does not have the patience to hold stocks for 10 years, they shouldn’t hold it for even 10 minutes. Keeping this in mind, ShareSansar analyzed what would have happened if we had invested just Rs 1 lakh in some of the 15 popular stocks from different sectors and let it grow for 5 years. We analyzed 14 different companies (plus 1 mutual fund scheme) for this analysis, and projected the returns. Siddhartha Investment Growth Scheme-1, a mutual fund that matured in December 2017, was also analyzed to see if mutual funds could also provide good returns in Nepali share market.

The below graphic shows what Rs 1 lakh invested in these 15 scrips five fiscal years ago would have grown (or shrunk) to in today’s value. For simplification, we made a few assumptions. We assumed that any cash dividends received in the five-year period (FY 2069/70 to FY 2073/74) were not reinvested, and capital gains tax was also not calculated. Since 7.50% capital gains on profit will not matter much in the long-term (due to adjustment of average base prices), this will also not offset the final worth by a big value. Amount invested for right share was also adjusted in the overall value, and any cash flow in these five years were totaled for the whole 5 years. Also, Rs 10 was taken as the per unit cost of SIGS1 since its initial offering (IPO) came in Mangsir, 2069. Finally, we have assumed the prices of 5 fiscal years ago i.e. on Asadh 31, 2069 to fully compound the dividends of all the 5 years.

Companies Analyzed

S.N. Company Symbol Sector 1 Nabil Bank Limited NABIL Commercial Bank 2 Nepal Investment Bank Limited NIB Commercial Bank 3 Everest Bank Limited EBL Commercial Bank 4 Standard Chartered Bank Limited SCB Commercial Bank 5 Muktinath Bikas Bank Limited MNBBL Development Bank 6 ICFC Finance Limited ICFC Finance 7 Nepal Life Insurance Company Limited NLIC Life Insurance 8 Shikhar Insurance Company Limited SICL Non-life Insurance 9 Soaltee Hotels Limited SHL Hotels 10 Oriental Hotels Limited OHL Hotels 11 Chilime Hydropower Company Limited CHCL Hydropower 12 First Microfinance Laghubitta Bittiya Sanstha Limited FMDBL Microfinance 13 Chhimek Laghubitta Bittiya Sanstha Limited CBBL Microfinance 14 Nepal Doorsanchar Company Limited NTC Others 15 Siddhartha Investment Growth Scheme – 1 SIGS1 Mutual Fund

These 15 scrips have always been hot stocks for their sectors, including the 4 commercial banks that are considered blue-chips: Everest Bank, Nabil Bank, Standard Chartered Bank and Nepal Investment Bank.

Results: Annualized Returns:

Scrip Initial Value (Rs.) Today's Value (Rs.) CAGR (%) FMDBL 100,000.00 2,161,680.31 84.91% SICL 100,000.00 1,835,367.91 78.96% CBBL 100,000.00 1,695,398.88 76.14% MNBBL 100,000.00 1,556,553.28 73.15% OHL 100,000.00 1,130,287.59 62.42% NLIC 100,000.00 867,483.08 54.05% SHL 100,000.00 364,240.20 29.50% ICFC 100,000.00 342,284.80 27.90% SIGS1 100,000.00 342,200.00 27.90% NIB 100,000.00 322,376.11 26.38% EBL 100,000.00 271,437.43 22.11% NABIL 100,000.00 249,300.96 20.05% SCB 100,000.00 200,716.76 14.95% NTC 100,000.00 189,463.22 13.63% CHCL 100,000.00 188,248.46 13.49% TOTAL 1,500,000.00 11,717,038.99 50.85%

It might be surprising to see that the 4 commercial banks (NIB, NABIL, SCB and EBL) were nowhere to be found at the top, although the annualized returns they provided was not bad (14.95% to 26.38%). However, among these scrips, First Microfinance was the clear winner with almost 85% Compounded Annual Growth Rate. In the 5 fiscal years, FMDBL has provided 15% cash dividend for 2 years, 15% bonus share for 3 years, 100% right share once and 50% right share for 2 consecutive years. If one had invested Rs 1 lakh in First Microfinance 5 years ago, it would have grown to Rs 21 lakh as of today. Oriental Hotels (the operator of Radisson Hotel Chain in Nepal), as a hotel company, had also posted a remarkable growth in this period and distributed dividends for the last 4 years, along with hotcakes such as Muktinath Bikas Bank (MNBBL) and Shikhar Insurance (SICL). Chilime Hydropower (CHCL) and Nepal Doorsanchar (NTC) stood at the bottom of the 15 reviewed scrips, with annualized returns at 13.49% and 13.63% only. Rs 1 lakh invested in Shikhar Insurance five years ago would have yielded Rs 18 lakh today (including all the money reinvested as right share). And if Rs 15 lakh was invested in these 15 companies five years ago, it would have become Rs 1crore and 17lakhs today.

Takeaways:

1. Choose mutual funds over fixed deposits If one does not have time or knowledge for making personal investment decisions, they can always opt for buying mutual funds. Mutual funds invest in many companies from different sectors, are regulated, and are managed by expert fund managers and analysts. SIGS1 provided regular cash dividends during its time, with compounded annual growth of 27.90%. No fixed deposit scheme will ever come close to providing this return.

2. There's almost no correlation between company’s operations and stock performance over the short-term, but 100% correlation in long-term. Often, there does not seem to be much correlation between how the company is performing and its market performance. When the market is bearish, the prices of every companies start to fall. Using this dip to buy stocks of companies with growth potential will help reach investments goals over broader term. It pays to be patient and to own successful companies.

3. Ride the bear into the bull Ever since making a high of 1,881 points almost two years ago, market has been in a consolidation phase. Those who had invested at the peak of the bull market in Shrawan 2073 may be at a loss today, however, holding on to the stocks of growing companies will surely lead to a good return. For the last 2 years, NEPSE has been on a downward trend, leading to many moments of panic selling. This has sharply decreased the price of the companies. For example, First Microfinance (FMDBL) had reached over Rs 1600 per kitta last year (2017 April), whereas its price is Rs 500 at the moment. Shikhar Insurance (SICL) can be bought at Rs 950 today, but it had reached Rs 4,300.

What we have to learn is that even when the companies have been devalued by such an extent, the number of shares one possesses has been steadily growing for the past few years. Eventually, this will outweigh all the risks of short-term trading and short-term swings. When the next bull market comes, we can offload the shares bought in bear market and get maximum returns on our investments. So, don’t feel afraid to buy undervalued companies in the bear market. The market may crash, but your share on the good company will only increase. Eventually when the bull arrives (and it will surely arrive), we can ride it. By focusing on long-term value instead of short-term emotions, by being patient when everyone is running to sell their shares, and by choosing companies with good future growth prospects, good returns can be anticipated in the next few years.

This article was first published in ShareSansar on April 3, 2018.