22 June 2016

Sensible Measures without getting Too Ambitious

Sensible Investing

Sensible measures without getting too ambitious - these 6 words from an old RBI press release caught my attention.

RBI governor Raghuram Rajan's recent announcement to not take up the second term, triggered a desire in me to read up whatever I could find about him. So I landed up on a press release (link), which had some key points in a speech made by him.

Talking of this announcement, the media is full of debates around the so-called Rexit (Raghuram Rajan's Exit). I read up a lot and still have no answers to questions related to Rexit's implications for the Indian economy.

But I am quite impressed with the PSU Bank cleanup that he initiated. There are few more initiatives that I think were in the right direction. To cut a long story short, I am of the opinion that having him around as the RBI chief would have been better for the economy than not having him.

But in life, we can have anything but not everything. So I guess, we will just have to do with a good Prime Minister for the time being. :-)

Now getting back to the 6 words that caught my attention…

Sensible measures without getting too ambitious.

I feel these words can act as Level-1 Guidance for people looking to put their personal finances in order.

These words are neither as comprehensive nor as spectacular like these. But are still worth pondering over for few minutes (atleast in my opinion).

When we invest, its very natural to be influenced by the recent performance of the asset we are investing in. So when for example, stocks have given 15% plus annual returns in last 5 years, it becomes the new normal. People start believing that same (or higher) returns can be achieved 'easily' in future too. This is also known as the recency bias. People tend to believe that stocks will behave like bonds with guaranteed returns! Now is that sensible? Hell no!

We cannot take high-returns for granted. No matter how much we want something, we should be sensible about what we believe in.

Similarly, using a low inflation in your personal finance calculations can reduce the required monthly investments today.

But when the day of reckoning comes and if actual inflation is higher than your assumption, you will be short of the required funds for some very important goals of your life.

Ofcourse you can borrow and bridge the shortfall.

But why borrow when you can plan better today? Why not assume a higher inflation in your calculations and invest more from today itself? So that there are no rude shocks later on?

I am not advocating completely sacrificing the present in preparation for the future. But turning a blind eye to realities is something that is not acceptable.

Remember that returns given by any asset won't necessarily match your expectations or those calculated returns that you need to achieve your goals. Markets and assets have no regard for your wishes. They take their own bloody path.

So lower your expectations. Don't be too ambitious. If it means investing more today, so be it. Be sensible enough to do that.

As for RBI, it will be interesting to see who gets into Mr. Rajan’s shoes and continues the reforms he had initiated.




15 June 2016

Stable Investor Mid-Monthly

Mid Monthly June 2016

Its extremely hot here in North India and I don’t know when the rain gods will send their blessings. I envy those who have permanently settled in mountains – and I gave it a serious thought myself when I visited Bhutan few months back. By the way, it’s a lovely country and if you are a traveller at heart and one who seeks peace, then it can be a great place to visit sometime.

Nevertheless, like my monthly State of Market posts, I have decided that once every month, I will do a roundup kind of a post where I share links to:
  1. Good financial and non-financial posts I have read in last 30 days. I read a lot, but will share only few that I think would be worth your time.
  2. Useful posts written here on Stable Investor in last month - for those who somehow missed reading them.
  3. Some stuff that is lost in archives here.
  4. Random thoughts which I might not want to write a full post on or tweet about.

I know you would be cursing me as I did start something similar last year too - when I did a series of posts titled Boring Tuesdays. :-)

Unfortunately, I stopped it after few months - Not because of lack of stuff to share but because I really did not have the time to do a weekly roundup-kind of a post alongwith my regular writings.

So I am trying again. This time though, it will be a monthly commitment to start with.

Lets see how it works out (…and keeping my fingers crossed).

So here it is…


Great Stuff Elsewhere

When is a 7% return Not a 7% Return? Yes. That’s not a typo. (Must) Read it to believe it.

How the quartet of cash flow, liquidity, profitability and net worth can help you sleep well (focus on the second half of the article).

Useful rules to organize and declutter everything (something I feel is very important) by Leo Babauta of Zen Habits. Of all things mentioned in the article, I don’t follow most of them myself. But I am trying a few and it actually works! The article is a good starting point if you are thinking on the lines of decluttering your life.

My guess is that 37.8% of readers of Stable Investor have had Maggi in last one month. :-) Now that was just a guess. But Maggi and more importantly, Nestle is trying to comeback from the fiasco. May be it was just the right wakeup call which the company needed. This article details how Nestle (after the Maggi screw-up) is getting back on its feet.

This is pretty old but I still like to revisit it at times - Ten things Google guys believe to be true. It’s a sort of owner’s manual in line with what Warren Buffett’s Berkshire Hathaway has. Now don’t tell me you haven’t read the Berkshire’s Manual. If you haven’t, leave everything and head straight to this page.


In Last 30 days on Stable Investor

This has become one of my personal favorites. These crystal clear financial principles (very easy to read and understand) by Jason Zweig (a noted writer) can open your eyes and mind to how best to manage your money, without being fooled by others.

First we didn’t bother about buying health insurance policies sighting various reasons. Now most smart people do buy it but still end up not paying attention to one very big risk, i.e. Health Care Inflation.

I interviewed John Huber of Saber Capital about investing, money and other stuff. Once you read the interview (Part 1 and Part 2) and do spend some time on his awesome blog, you will become his fan, just like me.

Some people are so fond of bad luck that they run halfway to meet it. They take unnecessary risks and to make the money they don't have and they don't need, they risk what they do have and do need. That is plain foolish and the real reason why some people always lose money.


From the Archives

I start with something personal. Here are the 17 Odd Things that you might not know about me.


What would happen if teachers, doctors, gardeners, weathermen, etc. i.e. the normal people started behaving like those in Stock Markets.


A Random Thought

I did try this on a friend recently – to scare and sadden her financially. :-) I asked her to add up all the monthly salaries (or annual incomes), which she had received in her working life.

Then I asked her to compare it with what she had saved up or invested anywhere.

And she was shocked.

This small exercise easily proved that she did not manage her money well. So lets say that she earned a total of Rs 50 lacs in last 7 years. Out of which, she was only able to save Rs 4 lacs. So there definitely is a problem somewhere. Isn't it?

Try this exercise yourself.
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10 June 2016

Unnecessary Risks and Why Some People Always Lose Money

Why Some People Always Lose Money

Do you like taking unnecessary risks? With money? I am not sure about your answer but mine is that I don’t.

Ofcourse we cannot eliminate the risks in stock market investing. But lower the risks are, better I feel. In previous post about why being smart is not necessary to be rich, I explained why having a super IQ + intelligence might not protect your investments.

We need to understand that we can afford not to be a great investor. But we cannot afford to be a bad one.

The downside of being bad are pretty, bad. There is no need to take unnecessary risks if you don’t know what exactly is being offered in a deal. You can always choose to walk out of a deal you don’t understand fully. Instead, take the 2nd best strategy if that works for you more than the best one. 

I know many cases where people have lost all money in stock markets. Then there are those who are waiting to recover money lost in stocks, even after years (and in rare cases, decade). Even the financial companies at times (rather most of the times) try to fool you. Read this for a real-life incident.

And who can forget the IPOs? Designed specifically to not-benefit only one category of people – new investors. :-)

The promoters know more about their companies than the small investors. They only come out with IPOs when they know that they will be able to sell at prices, which are higher than actual intrinsic value. Now when the prices correct in line with actual value, the small investors get hurt. Then promoters come back with buybacks, open offers and delisting proposals. So all in all, its quite unfair. But people still take the IPO route when they see any recent trend of IPOs doing well.

In secondary markets, most investors participate with the wrong mentality. With share prices going up and down on a daily basis, there is an urge to act and benefit from volatility. But most investors lack the capability to make the right decisions under such levels of uncertainty. They let emotions take control of their portfolio and end up ruining it.

Another reason why some people always end up losing money is that they bet something important to get something unimportant.

Lets take an example.

Suppose you have to send your child to college in 5 years. You know that you will need Rs 15 lacs for that after 5 years. You have already saved up Rs 10 lac and are also regularly saving Rs 7000 a month. This will easily let you achieve the target of Rs 15 lacs in 5 years, even if you don’t earn anything on Rs 10 lac that you have already saved .

But your high-flying, high IQ financial advisor tells you that a particular sector is expected to do well in coming years. And you can benefit from this once-in-a-lifetime-opportunity by investing in some sectoral fund. You think about it and invest the already accumulated Rs 10 lacs in the sector fund.

Unfortunately, the sector doesn’t turn out to be a once-in-a-lifetime-opportunity and your investment goes down to Rs 7 lacs after 5 years.

Result is that you have screwed up the goal of achieving Rs 15 lacs in 5 years because you took an unnecessary risk.

You gambled because of your greed, ignorance or whatever. You risked something important for something that was not.

Buffett once used the example of Long Term Capital Management (LTCM) to explain about taking unnecessary risks. This is what he had to say (emphasis mine):

______

“…If you take the 16 of them (LTCM's people), they probably have the highest average IQ of any 16 people working together in one business in the country, including Microsoft or whoever you want to name – so incredible is the amount of intellect in that room.

Now if you combine that with the fact that those 16 have had extensive experience in the field in which they operate. I mean, this is not a bunch of guys who made their money selling men’s clothing and all of the sudden went to the security business or anything. They had, in aggregate, probably 350 or 400 years of experience doing exactly what they were doing.

And then you throw in the third factor: that most of them had virtually all of their very substantial net worth in the business.

They have their own money tied up, hundreds of hundred of millions of dollars of their own money tied up, a super high intellect, they were working in a field they knew, and they went broke.

And that to me is absolutely fascinating.

If I write a book, it’s going to be called “Why do smart people do dumb things?

To make the money they didn’t have and they didn’t need, they risked what they did have and did need – that’s foolish, that’s just plain foolish.

If you risk something that is important to you for something that is unimportant to you, it just does not make any sense.

I don’t care whether the odds are 100 to 1 that you succeed, or 1000 to 1 that you succeed.

If you hand me a gun with a thousand chambers or a million chambers, and there is a bullet in one chamber and you said ‘put it to your temple and pull it’, I’m not going to pull it. You can name any sum you want.

It doesn’t do anything for me on the upside, and I think the downsize is fairly clear.

I’m not interested in that kind of a game, and yet people do it financially without thinking about it very much.

It’s like Henry Kauffman said the other day - the people going broke in these situations are just two types: the ones who know nothing, and the ones who know everything.”

______

Coming back to the example of funding your child’s education, you can easily blame bad luck for getting screwed up.

But is it really bad luck? I don’t think so.

Its rather a case of what this quote by DW Jerrold says:

Some people are so fond of bad luck that they run halfway to meet it. :-)


So what is it that takes to save your money from yourself?

There is no set formula to not lose money. Also being smart is a good thing. But don’t be oversmart when it comes to money matters. Don’t do stupid things because you are greedy or impatient.

There are things you don’t know and more importantly, there are things that you don’t know that you don’t know! That is where the biggest risks lie. Make buffers for such unknown-unknowns. Also make buffers for known-unknowns like death.

Be aware of the potential downsides of your decisions. The potential upside is totally irrelevant if the downside is bankruptcy or death (as in case of Buffett’s gun example).

And as David Houke of Alpha Architect says, there are certain bets, regardless of how asymmetric they may appear, that should be beyond consideration by a reasonable and prudent actor. The second thing that can protect you is an awareness of what the potential monetary upside actually means to you, in practical terms.

The second point is really important.

What is that you are after? Does taking the additional risk actually help you in any other way apart from adding some extra money to your wallet? What is the true effect of additional returns on you and your life circumstances? It’s a question worth asking.

So if till now, you have managed to lose money in most of your investments, may be its time to think critically about your thought process, your assumptions, your risk-taking habits and what your financial priorities are.

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8 June 2016

You + Are Smart = Will Be Rich?

You Smart Will Be Rich


The equation (You + Smartness = Rich) appeals to the common sense. Its natural to believe that smart people know things that helps them get rich. Isn't it? Even I believe that on an average, smart people will be far wealthier than no-so-smart ones.

But still, when it comes to investing in stocks or managing money in general, there doesn’t seem to be much correlation between being extremely smart and being extremely rich.

Why is it so?

Jason Zweig has something to tell us about this (source):

It’s remarkable how much you need to learn in order to discover how little you ever needed to know. Smarts are overrated; the world is awash with smart people. What’s in short supply is wise people.

Apply the basic principles of the wisdom you’ve acquired from your experience elsewhere to investing, and you will probably fare better than many “smarter” investors.

Be skeptical, think for yourself, ask for evidence and probe it for weakness, control your emotions, distrust the fashionable, remember to assess not just how much you will make if you are right but how much you will lose if you are wrong — steps like these are basic good judgment and simple wisdom.

Often, people who know a lot about investing become so taken with their own knowledge that they forget the power of a few obvious questions.


Talking about what is required to actually succeed in investing, he says:


To master investing, you don’t need more than a basic understanding of economics. What you need to understand is psychology and history, because human nature doesn’t change and financial history is an endlessly repeating chronicle of all the mistakes other people have made.

The single greatest asset any investor can have is self-control — not a higher IQ, not better computers, not the earliest glimpse at information, but self-control.

The journalist Carol Loomis tells the story of a dinner party at which a woman finds herself seated next to Charlie Munger and asks:

“Tell me, Mr. Munger, what’s your investing secret?”

“I’m rational,” growls Munger, and goes back to eating his salad. :-)

But there’s more to it than that, I think. It isn’t that great investors are unemotional; they’re inversely emotional. They have an ability to sense when other people’s emotions are getting out of hand, and then they take the other side of that trade.


Like his principles that I published few days ago, even these words by Zweig make a lot of sense. More so when I think about all the smart people (I know personally) and who make tons of dumb investing mistakes.

Investors often sabotage their results when they try to get fancy. And rest assured, I have done my MBA from a good college and I can vouch for the fact that you don’t need an MBA to manage your money well or to reach your financial goals.

People think that MBAs (from good colleges) are smart and can do anything. That’s bullshit. :-)

Investing successfully and achieving your financial goals is not about being smart or having the highest IQ or being popular. Rather, common sense and becoming incrementally wise (on a daily-basis) will get you there.

Some people are too smart to be rich. They give a lot of importance to what they know. But unfortunately and due to their personality (or maybe arrogance), they chose to ignore what they don’t know.

And that is exactly what does them in. And as Charlie Munger says:

"If you think your IQ is 160 but it's 150, you're a disaster. It's much better to have a 130 IQ and think it's 120."

We all know that we are simply supposed to buy low and sell high. But that doesn’t happen. Majority have trouble following that sequence and instead end up buying high and selling low. And then there are those who become wise and find the right questions to ask themselves - but only when its (almost) very late.

Why? Not because they have less IQ or are not intelligent. But because they let their emotions and biases take over. A wise one will listen to his emotions but will act as the rational section of the brain advises.

When I was writing this post, I got a call from my childhood friend. On being asked, I told him about what I was writing. Now this friend of mine (based in US) is a successful entrepreneur himself. Being a Y-Combinator alumni, he told me about something which Paul Graham (founder of Y-Combinator) wrote in 2009. Though it was in context of successful startups, some of it made sense in this discussion of (You + Smartness = Rich)'s context as well. This is what Paul wrote:

We learned quickly that the most important predictor of success is determination. At first we thought it might be intelligence. Everyone likes to believe that's what makes startups succeed. It makes a better story that a company won because its founders were so smart. The PR people and reporters who spread such stories probably believe them themselves. But while it certainly helps to be smart, it's not the deciding factor. There are plenty of people as smart as Bill Gates who achieve nothing.

But that’s about investing (and startups) in particular.

What about money (and getting rich) in general? I came across an interesting Q&A on Quora where a responder said:

Getting rich requires dealing with other people. Smart people spent a lot of time beefing up their IQ and not their EQ.

In most cases of highly intelligent people who are not rich, they have applied their brains to analytic reasoning. That's a skill that might help calculate the odds of winning, but will not tell you what the other person is thinking.

IQ won't give you the social EQ to turn a competitive situation into a cooperative one.

Don't play chess at a poker game.

I think the last line nails it. ;-)

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