Credo Capital

“We buy things we don’t need, with money we don’t have to impress people we don’t like.” – Dave Ramsay

I love to talk about investing and have addressed groups as diverse as college students and senior bankers. After my talk,  I am often asked ” We would love to invest, but we don’t have enough money.”

Do you really think so? I think not! You have money right in your pocket. Confused, are you?  Okay, to begin with , have a look at your mobile phone.  Some of us own a mobile that costs as much as one’s monthly salary (you ‘smartly’ exchange it for the ‘new’ version every year or so in turn spending one month’s income every year). On top of that we spend a cool thousand rupees or more every month for recharging it. So, think again!.There is money right in your pocket, but you are busy spending it.

Wanna find more money to invest? We all go to malls as a ritual. I do agree that it is indeed fun to see a movie and dine out. But, if you can restrict your outings  to twice a month instead of every weekend (after all, as someone rightly said “If you see one mall, you have seen them all”) you will be able to save money, which might roughly translate to Rs. 2000 Rs every month ( Movie tickets+ dinner + parking not to mention the popcorn at Rs. 100 ‘only’). Alternatively , you can go to the beach or a park, play with your children. By doing so you will get to burn some calories instead of money. And, not to forget the “ever-happening and never ending sale” on swipeyourcardtoglory.com !

Assume that you are able to invest around Rs. 3000 every month in an equity mutual fund. This could turn into  Rs. 45 Lacs ( at 15% returns which is less than the past returns of around 18-20%p.a in equity mutual funds ) over a 20 year period. Now, there is no reason to  invest the same amount every year. You can always increase your monthly investment as your salary increases.

Don’t get me wrong! I’m not suggesting that you have be a miser to have a better future.  But I am trying to tell you that for a brighter future , you got to spend wisely and invest the rest.By all means, do enjoy your outings and gadgets. But, try to minimize them to essentials and invest money saved. You would get better returns that way!

The problem with most of us is that we have been brainwashed into thinking that spending money will make us happy. It indeed does, but such pleasure lasts till their bills arrive! So, as I said earlier, we have money to invest provided we are a bit prudent about our expenses and save small amounts every month.

Fellow Certified Financial Planner and speaker Carl Richards put it nicely in his cartoon. I believe that it is not “tough choices” that we have but “sensible choices” we need to make while investing.

Image copyright : Behaviour Gap

“Stock market is a mechanism for moving money from the impatient to the patient” Warren Buffett.

The most frequently asked question to me as an investment adviser is:

“Is it a good time to invest”?

My answer depends on

1. How much ‘time’ will you give for the investment to grow?
2. Are you investing to get rich ‘quick’ ? or do you want to create wealth over a long period of time?

Getting Rich Quick

Buying a fund or stock at Rs 10 and selling it at Rs 15 after a good year or two is getting rich quick. We can call ourselves smart for getting 50% returns in a short time. The flip side is that the timing can be wrong and you could end up losing money too as no one can predict short term movements.

Creating wealth slowly

Creating wealth slowly but surely on other hand involves investing monthly bit by bit and holding on to to your investments for at least a decade or two.  Here is an example.  Rs. 5000 per month invested in an equity fund like Franklin India Bluechip for last 20 years has resulted in a wealth of around 1 cr. And what was the total amount invested? Just Rs. 12 Lacs over a 20 year period grew at 20% per year (on an average, some years were up 40% and some down 20% or more)

This is an excellent example of get rich slowly but surely.  Will the past return of  20% p.a be repeated in future ? Im not sure, but 15% p.a is quite possible. Would investing Rs. 5000 p.m been a big commitment back in 1995?   I was studying in college then so could not have afforded it. I know people who could have, but did not.

The brighter side is you can invest higher sums even today as salaries have risen compared to 1995, if, you invest Rs. 25000 monthly now for 15% return your wealth can grow to Rs. 3.78 Crs after 20 years. As an investor I’m sure you would be happy with this kind of wealth any day.

A slow and steady disciplined approach to wealth creation far is better than jumping in and out of markets assuming that one can get rich quick. It is always better to be the steadfast tortoise than the fast running hare.

Star Tortoise – Vandalur Zoo picture courtesy : Srividya

“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” – Warren Buffett

Though we learnt it in the 6th standard or so, understanding this is not easy, small shop keepers have understood it to make millions while many with degrees in finance struggle to understand it.

And how long would it take to get to 1 crore ??

It was somewhere in 2011 that i got a call from Economic Times journalist Prashanth asking for my views about how people should deal with sudden fortune coming their way. The context was that a Kaun Banega Crorepati participant Sushil Kumar had won for the first time 5 Crs in the contest. Prashanth wanted me to tell how should people go about investing that kind of one time fortune, my view was that this kind of luck was unlikely to be repeated hence one should be extremely cautious as windfall gains would be followed by spending spree leading people back to square one.

You can read the 2011 report in ET below :

http://articles.economictimes.indiatimes.com/2011-12-01/news/30463210_1_reality-show-fortune-goa

Today just over three years later Hindustan Times reports that Sushil Kumar is indeed, more or less, back to square one.  http://www.hindustantimes.com/india-news/fickle-fame-the-jobless-kbc-winner-with-little-cash/article1-1313778.aspx

My view was that people do not respect large sums of money that they get unexpectedly as they :

1. Did not earn it (whether the money came via rich uncle who left an inheritance, stock options, lottery or KBC) so they start doing things that they would not have done otherwise like building a bungalow where a small house will do. Precisely what the above winner did.

2. instead of investing the money in FD’s, tax free bonds, some equity and a small house which can preserve and grow wealth people start ‘playing ‘ with the money in business ventures where they have no experience, loans to relative and friends etc. There is a mention of an FD interest that seems to be sustaining Sushil Kumar these days, that and the four cows that give him milk everyday seems to be the only return that he is getting.

No wonder his wife is upset 🙂

The reason for this is a fancy term called mental accounting, as we feel the money is free. It is not free,This thinking is mainly responsible for many who get large sums unexpectedly to lose it real fast and come back to square one. money is money and it does not care whether you got it via stock options or won the KBC or worked hard for saving it. So it is up to the individual to respect the money by investing it wisely whichever legitimate way it reached your bank.

As we wrote yesterday even a genius like Mozart could not sustain overspending

One way we can all not fall for this is to plan well for it, save and invest wisely so that wealth that came unexpectedly stays with us and does not go away as unexpectedly as it came leaving us much more miserable had it not been received in the first place.

http://en.wikipedia.org/wiki/Wolfgang_Amadeus_Mozart#mediaviewer/File:Croce-Mozart-Detail.jpg

There once was a man who became the most famous composer in the world but was utterly miserable most of the time, and one of the reasons was because he always overspent his income. That was Mozart. If Mozart can’t get by with this kind of asinine conduct, I don’t think you should try.” – Charlie Munger

Indians have always been good savers but poor investors, but even that saving is coming down as we become more global and it is not tough to find youngsters buying mobile phone worth a month’s pay but do not have even one months savings in bank for an emergency. Worse they have liabilities that needs to be paid like credit card EMIs etc.

Mozart as the quote above says was nothing short of genius as we listen to his music even now but he was miserable as he had a tendency to overspend. Profligate spending leads to trouble whether one is Mozart or Mike Tyson as we saw earlier. Before starting to invest, ensure first that you have around 3 months of expense saved in a bank, and then start investing for long term growth, remember if a genius like Mozart had to suffer we better be prepared as the scouts say.

I fear not the man who has practiced 10,000 kicks once but one kick 10,000 times – Bruce Lee.

Best selling author Malcolm Gladwell wrote that it takes around 10,000 hours of practice for anyone to be an expert. Bruce Lee seems to have found that out much before with the above quote!

As investors most of us are try different things to increase our wealth, which is not wrong but we also need to practice that one kick ( consistent investments over the years ) to make a meaningful difference. the one kick that i can think of in investing world is SIP, ( systematic investment plan which is fancy way of saying monthly investment!) that one kick once a month patiently done over last 20 years has made people ‘ Crorepatis’ without winning KBC !!

Let us see how one can do this. Franklin Prima Plus, an equity fund was started in 1994, completed 20 years last year. A monthly investment of 5000 Rs since Jan 1995, is worth 2.2 Crs today. All one needed was the patience to keep investing that 5000 Rs and not stop it for any reason. Even 2000 Rs, for 20 years ( 2000* 12 months * 20) precisely what i could have afforded from my salary of 5000 RS then, would be 88 Lacs today as against invested value of 4.8 lac’s. All this by investing amounts that one can afford and leaving it be for long term.

I’m telling this because young investors should not repeat the same mistake, salaries are much higher today, and people spend 2000 Rs on their phone bill every month, not to mention 1000 Rs for going to the movie in a multiplex.

So if you would like to practice one kick 10000 times and become rich slowly but easily, start investing today and keep investing for next 20 years or more, If you can increase your investment as your salary increases may be you can make 10 Crs or more with the same 18-20% returns, though i would be extremely happy with any return over 12-15%. As the return is not in our hands but investing monthly is ( one kick, repeated every month !)

Remember even Bruce Lee feared the man who learnt one kick 10000 times !!

PS :The 20% return mentioned above has come with years of low or negative returns (of even 50% once! ) and years of high positive returns (ranging from 30%+ to even 233% in one year! ) but those who stayed the course reaped the benefits. Future will also hold such negative surprises as well as +ve surprises, and the investor will be tested and tempted to quit, and as in past rewards are likely to be for people who hold on.

Wish you a happy and forgetful new year 2015 !!

Let me explain 🙂

Fidelity Investments did a study of their investors to find out who made the best returns, one would like to think that those who made the best returns were either most educated, or people who carefully analysed their investments and went to investments conferences to get new ideas etc or even people who were emotionally strong investors who did not sell during a panic or buy at the top. The answer to who makes the best investor is surprisingly simple that people who had forgotten that they had investments made the best investors.

Why is this so? Investments compound wealth over long periods, so when some one says 15% annual growth our minds immediately calculate 100 Rs becomes 115 at end of year 1 and stops there (not exciting,right), but does not move on to think it will be 132 Rs at end of 3rd year, things get very interesting from there on. At the end of 9th year the total return is 50 Rs approx which is half of the initial investment of 100 Rs, at the end of 15 years the annual return exceeds the initial value of 100 Rs and by 20th year it is almost twice the initial investment every year. So if you spend Rs 50k today instead of investing it, you are potentially losing around 8 Lacs in twenty years, and around 1 lac per year after 20 years. 1.5 lacs per year in returns after 22 years etc.

So the really large returns ( not % returns but amount wise returns) happen after longer period of times, While someone who invested Rs 50000 and took out Rs 1 lac + change at end of year 5 did make 15%, he never made 50k per annum that the investor who stayed till 15 years made or 1.2 Lacs per annum that investor who stayed till 22 years made.

I can hear some of you say where do i get 15% fixed return, I agree we can’t get 15% but the volatile markets where one could lose money in some years and make more in some others have delivered an astronomical 18%+ over 20 years, so anyone who stayed the course for 2 decades has made 20 lacs out of 50000 Rs. In fact mutual funds like franklin bluechip have delivered 20% over last 20 years.

The reason why the fidelity investor made large returns was because they had forgotten that they had invested and the money was compounding for them quietly all the time, if they had known that there was such an investment, chances are they would have taken the money out and donated the money to poor companies like Apple or Google for buying gadgets that will be outdated in about 2 weeks 🙂

So, in 2015 please ensure that you invest in a good diversified mutual fund via monthly installments or SIP and forget that you invest till you retire, the results are likely to be an happy surprise for you !!

Disclaimer : Mutual Fund investments like just about everything else in life carry risks, please understand them before investing.

We all know Mike Tyson, but who is Theodore Johnson? Here is a David vs Goliath story.

Mike Tyson, former heavy weight champ and the man who made more money than any other boxer, was at one point in time worth half a billion dollars, that would be around 3000 Crores today, making him both rich and famous by any standards. However Mike Tyson declared bankruptcy in 2003 and admitted on TV in 2010 that he was living pay check to pay check. It is difficult to think of this great boxer who made it big in life being broke.

Let us now move to Theodore Johnson, who, had he lived in India would have been called the ‘aam admi’. He joined United Parcel Service in 1924, as a trainee, drawing not more than 14000$ per annum salary, retired as Vice President of HRD, he set aside 20% salary and any bonus received to buy his company shares. At 90, He lived to see his wealth grow to 70 million dollars and could donate more than 36 million dollars to charity. This took time, obviously but here was a true life David, he was not famous, neither a great industrialist, yet he could amass close to 420 crores in todays dollars and could donate 200 crores to charity.

This is the power of compounding, an ordinary executive could become a millionaire by diligently saving and investing over long periods of time, whereas some one with 100’s of millions of dollars ended up bankrupt.

It does not matter how much you earn, but how much you retain and invest and for how long you can stay invested. It does not matter if you are one of the richest men on the planet, it is possible to spend it all and end up with nothing. Think about and decide whether you would want to be Ted Johnson or Mike Tyson??

(Source : In the book Money Master the game by Tony Robbins, he explains how simple folks become rich, and some rich folk become poor as they don’t understand the power of compounding and think some how the income will keep up with their spending. The story of Ted Johnson and Mike Tyson appears in the book )

Wishing you all a peaceful and prosperous new year 2015.

The attached pic via @awealthofcs while meant to show power of compounding also shows that frequent churning of investments leads to wealth destruction and not creation. Keep in mind that returns are same for both options and the only difference is the taxes paid once every year vs once after 20 years. If we assume that due to frequent selling and buying we lose more on transaction costs, opportunity costs etc the returns would be even lower.

Charlie Munger, told that one of best traits is to determine  progress apart from activity, Everyone wants to be active but only few progress.

So, to become rich keep investing and stay invested, you will be progress and be richer.

Inspired by the Make in India campaign of the Prime Minister.

India has one of the largest stock markets in the world, extremely well regulated and has given spectacular returns over long term which is tax free to boot. yet most Indians prefer real estate or gold. While in the past this may have had some validity ( As gold was like cash and can be borrowed / sold fast during emergency, Real Estate provides security etc) it is not the be all in today’s world. Your bank ATM ensures that you can get hard cash 24*7 and what is more pays you some interest (even  6% in some cases!!)  unlike gold which you pay to safeguard ( even if some one steals from ATM your money is safe whereas if your gold is stolen it as good as gone). Agreed that a home of ones own is every ones dream, and all should work towards it but it is sad to see many people buy real estate for investments and struggle to pay EMI’s for the next 20 years.

Sadly, while majority of us focused on past short term returns to buy Real Estate and Gold, we missed the long term story unfolding in Indian equity markets which has given around 16% returns over last 10 years and around 18% per annum returns over 20 years. To put that in perspective at 18% your investment doubles every four years. Mutual funds that have been around for 20 years have given around 22% or 53 times in 20 years !!

Indians shun equities because they think it is ________( fill your pick here : gambling / risky / volatile etc) this is again an old tale, Indian markets have delivered amazing returns to those who invested and were patient, I’m not for a minute suggest that one should invest only in equities but that one should at the the least ‘also’ invest in equities.

What is more, investing in equities can be done in small chunks monthly by almost anyone ( from 1000 Rs / month)  so that it is easy on your budget and can help you create wealth ( Rs 1000 invested every month in Franklin India Bluechip for last 20 years has grown to Rs 28 Lacs, no doubt it was not a smooth ride of 22% every year but lumpy as some years saw great returns and some negative)  but overall the performance was excellent. In fact if one had started at 1000 Rs and increased the investment as their incomes grew, the resulting wealth would be in crores !!

So, Invest in India. If you believe that this country can do well, its stock markets would do much better !!!

Note : Past returns may or may not be sustained in the future / Mutual Funds are subject to market risks. Come to think of it that is true for Gold and Real Estate,too !!