Being a Chartered Accountant by profession I often get questions like how to make a profitable investment on shares. How WARREN BUFFET- became one of the richest persons in the world? People might wonder about the approach he applied while investing in the share market. I have been asked a couple of times which share would you recommend buying in the Nepalese Stock market right now? This article may help answer that very question. The approach Warren followed is that of investing over the long term. A slow & steady approach has been proved to be successful in wealth building & making him one of the richest people in the world with a net worth of almost $72 billion (Rs.86 kharba). The main formula of Warren is about giving more importance to long term investment in growing companies rather than focusing on trading and short term investments. The main reason to buy and hold stocks over the long term is that long term investments almost always outperform the market.
While talking about the Nepalese market, since the NEPSE index making a high of 1,888 points almost four years ago, the market has been in a consolidation phase. Those who had invested at the peak of the bull market in Shrawan 2073 might 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 an inconsistent trend, leading to 1620 in Falgun 2076 from 1110 in Manghsir 2076 and again down to 1175 in Baishakh 2077. This has sharply decreased the price of the companies. For example, First Microfinance (FMDBL) had reached over Rs.1600 per unit in 2017 April, whereas its price is Rs.500 at the moment. Shikhar Insurance (SICL) can be bought at Rs.1500 today, but it had reached Rs.4300 once.
Irrespective of the market trends, I have analyzed what would have happened had we invested Rs.1 lakh each in some of the 10 popular stocks from different sectors. I have analyzed 10 different companies for this analysis and projected the returns. Few assumptions were considered-
- It has been assumed that the received cash dividends were not further invested.
- The tax effect on capital gain has been ignored.
- The shareholder subscribed to all the offered right shares issued during the 5-year period.
- The cost of the right share applied has been deducted from the final value.
- Bonus & Dividend for the year 2076-77 has been calculated by the average of earlier last 3 years, i.e. 2075-76/2074-75/2073-74.
The top return in the last 5 years (from 2072 to 2077), with a CAGR of 64 percent, you would end up getting Rs.11,81,307 by investing Rs.1,00,000 5 years back in First Microfinance Laghubitta Bittiya Sanstha Limited, a micro-finance sector company that clicks the fastest growth in the period. The same investment for the same period would earn you Rs.10, 67,877 if invested in Sana Kishan Bikash Bank ltd, another micro-finance sector company, which generated 61 percent CAGR in the period. Compared to the returns provided by the above shares, if Rs.1 lakh invested in a bank fixed deposit (FD) with an average interest rate of around 8.5 percent would have generated Rs.1, 70, 2275 in 5 years.
Conclusion:
The above analysis clearly shows that those companies with tremendous growth potential are much more attractive and will provide better returns. This study should also be a motivation for beginners to enter in Nepali stock market. If someone is looking for stable returns then the given list of stocks is a good buy even at current levels. Don’t wait for the bulls to arrive, and start investing in companies that have growth potentials. However, equity investors need to choose the companies, in which they want to invest, as a wrong choice may lead to capital loss. By focusing on long-term value instead of short-term, 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 long run.
CA Bhusal- Actively engaged in Nepali Share Market for the last five years.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion and analysis of Merolagani.com.
