Credo Capital

Tim Feriss after interviewing about 100 of the most succesful people ranging from a 5 Star general to billionaires (have to tell here that he is one of them himself ) has written that the common thread in all of them can be found in a passage written in a novel in 1922 about a monk in ancient India ! In the novel the monk named as Siddhartha is asked by a merchant how can Siddhartha  give anything if he owns nothing, Siddhartha replies that he can give what he has which is  his learning which is summed up as

I can think, I can wait and I can fast – these three things says Tim Feriss is what sets apart successful people. Let us how this can help us as investors.

1.  I can think – As investors we need to think for ourselves

While Spending : Every expense is just a click away and the temptation to waste money instead of saving it is very high. Advertisements used to be in ear panels in front pages, now advertisements are the front pages !, If you search online for a watch, every web page that you visit shows ad for the watch !. The attempts to lure us with zero down payments, buy-one-get-one, etc is high. So thinking for ourselves ensures we buy what we want and only what we want is important.

While investing : Many of us who take few days looking at Trip advisors ratings for a 2 day vacation stay  blindly sign cheques for lakhs, only to find later that it is not a good investment and what is more can not be even sold for next 5 or 10 years !

Both the mistakes one of over spending with out saving and other of investing without knowing says that we don’t think for ourselves, if we did so our financial life could be at least more peaceful and a source of happiness.

2. I can wait – patience which literally pays in investing !

if the first is tough, the second is even more so, patience is not seen as a virtue in today’s world but in investing patience literally pays ( around 18% pa !! if we go by last 20 odd years of returns of equity MFs).  Patience will be tested with every scary headline and the problems that the world faces. Markets as the proverb goes, climb a wall of worry. Patient investors invest and keep on investing, and are not distracted by the headlines of the day, week or month. They think in terms of years and even decades. Another mistake is waiting to invest, i have friends who seem to track markets regularly and ask such smart sounding questions like ‘ Is Trump victory good for our markets’ but have not till date invested much, so they wait for the ‘right’ time that never comes. So it is better to invest and then wait patiently than to wait patiently to invest !

3. I can fast – delaying gratification

I can fast – this is the toughest one, I do fast at times and it is not easy, going without food for 36 hours is tough but it is a system cleaner as we all know. Financially it can mean giving up something today for something better tomorrow. Delayed gratification as this is known is what separates the men from the boys.  Just a Rs 2000 outing a week can set you back by Rs 104,000 a year or a cool Rs 520,000 in just 5 years, let us say we want to spend on outings but cut it by half, once every fortnight instead of weekly, and save 52000 a year, and invest the money saved in a equity fund which gave us 12%, after 15 years, this humble Rs. 52000 per year or Rs 142 per day saved would be worth a cool Rs 19,38,000 ! The humble 2000 bucks saved every fortnight is now grown big, thanks to delayed gratification. What is more the rest of time we spend the money will be looked forward to and can be spent guilt-free. Much like the feasting that comes after the fasting !

As the year draws close,  these three things – I can think, I can wait and I can fast, could make better investors and better humans of us all. Happy Holidays.

PS : The link to the article mentioning the passage from Herman Hesse’s Siddhartha : http://www.businessinsider.in/After-interviewing-over-100-successful-people-Tim-Ferriss-says-a-passage-from-a-1922-novel-captures-the-approach-every-high-performer-takes/articleshow/55930832.cms

http://economictimes.indiatimes.com/wealth/invest/search-for-higher-rates-ends-at-post-offices-goi-bond/articleshow/55595085.cms

Halfway through their term, the NDA government has unleashed a tsunami by withdrawing 500 & 1000 Rs notes( De-monetization or De-mo in short !).

The opinion on the outcome of this move is sharply divided, while no doubt it has caused hardship to people, most have accepted it as the cost to clean the system of black money accumulated over ages.  This is the big bang reform that no one thought would be even remotely possible to do in such a large,diverse and to a large extent un-banked country as ours.  Let us actually forget this for the moment (difficult as this is the hottest topic in the country!) and see what has been done in last 2.5 years before this move to see where we are heading.

While our GDP has averaged at 7% since 2010, our population growth has been slowing down making the per capita GDP grow at 5.8% approx, this growth if it continues makes us one of the fastest growing economies in the world.

1. GST – likely to become reality early next year, this by itself is a monumental reform
2. Fuel prices deregulation – done for diesel
3. Direct benefit transfer – partially done,
4. Repeal unwanted laws – many redundant laws have been done away with
5. Bankruptcy code
6. transparency in auction of resources like spectrum, gas etc – done
7. Jan Dhan accounts – 22 cr new accounts opened in 2 years, to put this in perspective we had 40 cr accounts opened from 1947-2014 !!

Apart from this infrastructure developments like Road, Railways and reforming Agriculture are in ‘mission mode’ to borrow the phrase from railway budget.

So this is the report for how things have moved before de-mo, and de-mo is something that will pan out over a longer time frame. The half year report card reads well and if this pace is maintained we may truly enter a period of good growth with a much cleaner economy. That is what any one would want for himself as an investor but as a citizen too as these changes can pull many people out of poverty and into productivity.

A disclaimer : All the data has been culled from publicly available sources and believed to be reliable. The idea for this note came from a investment managers perspective.

Though we all know the proverb never judge a book by it’s cover, we seldom follow it, the attractiveness of the packaging is a selling point.

Over the last 15 odd years spent in advising people on how to manage their money, i have learned the sad fact that packaging sells more than the product.

The best performing investment over the last 20 years has been equity and along with it equity mutual funds but many are still reluctant to buy equities but dont seem to mind buying Insurance policies that can at best give 5-6% returns after 10,15 years but are sold well as the packaging is good ( never talk about lock in, costs and actual returns but make great advertising about childrens education and retirement etc!)

I have lost count of the number of investors who have been taken for a ride by their banker, agent or relative who pushed a insurance policy that gives low return but packaged well as money back or some other name ( your own money coming back after 5 years that too partially is somehow a great idea !!), etc., While most investors are afraid of the volatility in equity they seem fine taking the same risk with a ULIP which will give a lower return !

Packaging is fine but what is inside is whats going to give you the returns, Buying a soap or shampoo as the ad or packing was good is fine, as one can stop buying it from next time. when it comes to investing where the results are after many years away, it is better to focus on what is inside than how it is packed !

Have a great weekend !

Pareto principle or the 80/20 rule is fairly well known simply put it says  20% of inputs is responsible for  80% of results and vice-versa, which goes to show that most results are due to a small number of factors. This seems to hold good in investing too but with a twist.

IDFC mutual fund recently came with an intriguing ad IDFC Ad – want to loose money ( click for the ad)

The ad makes an interesting observation,

1. When markets are cheap ( ie they are down badly and it is a good time to buy) hardly 1% investors put money and this 1% investors make amazing returns over next few years (29% p.a is the return over next 3 years)
2. When markets are fairly valued ( they are not down but are not expensive either) around 19% investors put money to work and they get good returns ( ~ 19% p.a is the returns over next 3 years )
3. And when markets are over-valued ( they are up and expensive ) a whopping 80% investors put their money in and they see pathetic returns (hardly 3% p.a over next three years)

If you add the investors in 1 & 2 above it is 20% investors who make good money and 80% investors do not make money.

Why does this happen? Answer lies in our memory which is oriented to look out for only short term,

In stage 1 above when equities are undervalued, the news flow would be negative ( Ex : some crisis in Italy /high interest rates in India/ Recession in US or something like that) at this point in time the past return from equities too would be poor, so no one would be interested in investing except for the 1% and they are buying at the cheapest rate available for the next few years !!

In stage 2 some positive news is emerging  and past returns would be o.k but nothing great, at this point in some more investors come in thinking it is still fairly valued.

In stage 3: This is lift off stage, there is no dearth of positive news ( India GDP at all time high / ABC Group buys largest steel company in US / GLobal markets are up,etc), Last 3 years returns are a great 25% pa and business channels are saying this is a ” New era ” !! This is when even your uncle and his neighbour are heavily investing ( the 80% investors move in quickly seeing the past returns ) and both stage 1 & 2 investors become nervous &  don’t invest more. Anyone investing at this point historically is likely not to make money but that does not stop us from trying as we believe that the great returns of the past will keep happening, what happens instead is poor returns at best or loss of capital at worst. In 2-3 years after stage 3, Things will be likely back in stage 1 & history repeats itself.

The best choice for investors is invest via lumpsum in stage 1 & 2, even though it would be tough to do so when no one else is investing and stay put for 5 or 1o years, and avoid  buying near stage 3.

In this new financial year, here’s wishing that you are in the 20% who make good returns.

We want to save for tomorrow and spend it today – Meir Statman

Prof. Meir Statman’s is the author of the book ” What investors really want “, while many may think it is simple enough as investors want returns, it is not that simple. Let us take a quick look :

Prof. Statman says when taking decisions involving money we look for one or more of three benefits as follows

Let us take buying an expensive watch for example :

IWC Grande ~ 18 Lacs

1. Utilitarian benefit – What does it do for me  :  Shows me time and date
2. Expressive benefit – What does it say about me : I’m successful with good taste
3. Emotional benefit –  How does it make me feel : Accomplished as I  flaunt it.

While buying a phone or watch based on above benefits is a decision that depends on what we want out of our purchases, We make the mistake of following the same pattern in investing or even in taking a decision not to plan or invest.

1. Investments offer utilitarian benefit of either preserving or growing our capital, we can be misled into buying what is not good for us because of what it says about us or how it makes us feel.
2. We should be aware of buying investments that make us feel ‘exclusive’:  Invitation only real estate project launches,  low risk and high return products that need to bought today before the ‘opportunity’ closes etc.
3. Emotional benefit of having an investment portfolio that can see us through retirement and not the emotion of play today and pay tomorrow.

Avoiding these emotional mistakes while pursuing our goals can make us better investors and in turn better decision makers in general.

You can see the full presentation here : http://www.cfasociety.org/poland/Documents/Meir_Statman_presentation.pdf

Tomorrows ‘cheerful’ headlines are being written today : “Mayhem in the markets” &  “Blood bath in the street ” are all time favourites. This will make investors bit nervous, but what is the data saying :

Sensex is currently 23000, it was 30000 at some point last year, and from that level is down more than 20%, this sounds scary, but is it so actually?  Let us see what scary things happened to investors who bought in at various points over last few years :

2 year returns :

In Feb 2014 , index was at 20400, if you bought back then and held the return would be around 6% p.a, not great but definitely not ‘blood bath’ or some such nonsense. this is for index, most of us invest in equity funds in a mix of large and multi-cap funds , let us see the returns there :

3 Years  : Min 7.5% p.a & max 22% p.a

5 Years : Min ~7.5% p.a and max 18% p.a think the average returns would be around 10-11% p.a

10 Years : Min 10% for index fund ( which i don’t suggest for investors) whereas active funds is around 12% and max 16%, think the average would be 13% p.a

These are the returns one would have got as of yesterday by investing 3,5,10 years before. All the screaming headlines of blood bath and mayhem gave this kind of returns to patient investors,

SIP returns for the above period too have been same or higher than the above returns ( ~10% pa for large-cap funds and 15% for multi-cap funds over 5 years and 11% to 18% over 10 years)

So move away from the headlines, stay calm, cool and as the Johnny walker ad says Keep walking and keep investing for a healthy and wealthy future !

Data source : Valuresearchonline

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it. – Warren Buffett.

Phrases like “market panic”, “mayhem” and “meltdown” are being seen in headlines over what is happening in China, which has been dragging the worlds equity markets down for some time now.

As investors hearing news like these, we have two choices

1, Does it matter?

It does matter if your investment time frame is a week, month or may be even a couple of years. But if we are clear on our asset allocation ( how much we invest in equity and debt ) and are investing for what matters most to us like our children’s education and our own retirement, what is the headline on markets today, this week or next month does not really matter.

2. Can we control it ?

Obviously not, what happens to China or oil prices and how it affects our markets is something which we have no control over.

Instead if we focus on

A. Saving more : Having a budget, saving at least 30 -40% of our income, not falling for the  ‘great online shopping sale’ that seems to happen every weekend. Having at least  3 months of monthly expense for a rainy day.

B. Investing the savings properly : Having a goal for the investments, investing for real tax efficient return ( ie post tax and post inflation return), Just as we earn monthly, investing the savings monthly helps us to create wealth.

C. While investing it is better to  avoid products that are  too complex. Avoid products which club insurance with investing, Keeping investments simple with bonds, equity via mutual funds is the best way to go.

Once we focus on the intersection between things that matter and things we can control, what happens in China last week or somewhere else next week becomes less of a concern.

The oft repeated but ignored idiom ” Save for a rainy day” really happened for many of us in Chennai.Though the city not only recovered from this punch from nature, it has more or less stood up thanks to thousands of volunteers, armed forces and workers.  Now comes the damage assessment and its financial impact, which is not going to be easy. Some pointers for the future & how you can have a financial emergency box :

1. Keep at least 6 months expenses in an investment that can be sold easily like a short term FD or a short term debt fund.
2. Digitize all documents from education records, passports, voter id etc.,  Make a pdf copy of all these and send a mail to yourself so that you can download them again when needed, you can also have a copy in file sharing apps like dropbox.
3. Make a simple spreadsheet of all your documents details such as passport no, bank acct no, debit/credit card no etc and save them too. Use a password vault like keepass or Norton vault for storing passwords, if you are worried about the same being hacked you can memorize first part of password and save the second to make it safer.
4. Consider householders insurance that covers the contents of the houses but ensure that the cover is against all types of calamities, no point in having fire insurance only but not floods since there was never flood in your area.

Saving 6 months expense may sound tough job but work on it, tracking all the data and digitizing it will be tough but do it still. Be prepared as the scouts,say.