14 September 2014

What I told a Frustrated Guy in Job. At 37, He Retired few Months Back - Part 3

This post was long due after I did Part 1 and 2 in April this year. Though the story of this guy was covered in first two parts, I wanted to do a follow up post highlighting some of the important points raised in comments of the post.

Readers like Krish, Bharat and many others made some noteworthy points, which I feel need to be shared with a larger audience and hence this post.

You can either read the complete story in detail in Parts 1 and 2; Or just go through the broad outlines below:

This person had a big home loan, was earning decently, but just sufficient to make ends meet (after paying his monthly loan EMIs), had very little savings and investments and more importantly, was frustrated with his job and financial situation.

Luckily, he inherited a plot of land which till a few months back, he did not know what to do with. 

What he does afterwards, is what changes his life:

Step 1: Sold off the land plot for Rs 9 Crores (post tax).

Step 2: Closed his home loan of Rs 70 Lacs.

Step 3: Created an Emergency Fund of Rs 30 Lacs (which covered his family’s expenses for next 2 years).

Step 4: Put Rs 4 Crores in Fixed Deposits, which provide approximately Rs 1.75 Lacs every month in interests (post tax).

Step 5: Bought 7 flats for Rs 3 Crores

Step 6: Bought a small warehouse (godown) for Rs 1.1 Crore

Step 7: Put 5 (now 6) of these flats on rent for a total of Rs 1 Lac a month.

Step 8: Put Godown on rent of Rs 60 a month.

Step 9: Quit his day job

Note – Actually he quit his job before the godown went on rent.

To summarize, he used proceeds of selling his inheritance to create a monthly income stream of more than Rs 3 Lacs. His average monthly expenses are between Rs 50K to 60K.



Now this is the current situation. And we do not know what might happen in future.

But few readers raised concerns about this approach and shared some different approaches. I share their concerns and ideas below:

Point 1: Cashflow is great in terms of interests, rents etc., but over the years expenses also rise. Not only because of inflation, but also because of altogether new expenses like kid’s education, medical bills, renovations, etc.

Point 2: If investment in properties (flats) is made for capital appreciation, then one should understand that it is not that easy to sell off properties. Banks are generally skeptical about lending to buyers for older properties.

Point 3: Once again if investment in property is made for capital appreciation, it makes sense to buy in relatively undeveloped areas. Then wait for 3-5 years and sell them off. In this way, one can cash out on overall upgradation (read: development) of that area, and the increase in desirability quotient of that area. If one waits for more than 5-7 years, there'll always be a problem of "Old Flat" perception.

Point 4: In rental properties, each time a tenant vacates, it requires big expenses in form of painting, cleaning, plumbing, unsolicited breakdown of utilities, etc to get the flat ready for next occupant. This eventually reduces the actual rental income coming from the property.

Point 5: Dependency on rental income often proves to be fickle and it does not even beat inflation. Since chances of real estate markets being in bubble currently are high, expectations of very high capital appreciation would be wrong.

Point 6: There is an increase in people seeking help / donations / loans when they realize that you are flush with funds and living off without working for anybody else.

Point 7: With so much money coming in every month, life style changes and expenses on luxuries like foreign trips, electronic gadgets tend to increase. These eventually reduce the surplus every month.

Point 8: Could have chosen not to close the home loan and continue getting tax benefits. The money could have been used to earn hefty interest.

Point 9: Plan of taking another loan (>2 Crores) and use the monthly surplus to pay EMIs can be a big risk as it greatly reduces the free cash available every month.

Point 10: Plan of starting a money lending business is a big no-no if one gives any weightage to peace of mind.

Point 11: All the proceeds from sale of property could have been put in debt funds (50% Growth, 50% Quarterly payout). After decent quarterly payout accumulation, the money could have been invested in Equity Mutual Funds and Residential plots in small towns as in long term, only MFs, Direct stocks and Land are game changing wealth creators.

Point 12: This person should not have quit his day job until his planned business had kick started. Any business started after inheritance is more of a time-pass and chances of it succeeding are pretty low.

These are few of the major points which came out of the discussion which took place in comments of the post. I personally do not subscribe to quite a few like not paying off loan (I love being debt free). But I also think that few of points like expenses related to properties are quite valid.

Overall, I think the approach taken has been quite prudent, driven by common sense and most importantly focused on generating cashflows. But finally, only time will tell whether its correct or not.

31 August 2014

Dissecting The 98 Most Powerful Words That Can Make You Really Very Rich

At 98 words, previous post on Stable Investor was the shortest one ever. But probably one of the most important ones, if I was to consider its potential impact on a genuine long term investor’s life.

Read these 98 words by Charlie Munger again...

"Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past."

I got a mail from a reader yesterday suggesting that I should have added something else to my previous post apart from just quoting Charlie’s words.

Honestly speaking, I thought that these words were so complete, useful and impactful, that there was no need to add anything else. And whatever I would have added would have been born out of my personal, biased and little experience which I have. So it would not have served any purpose.

But then I thought that may be its a good idea to do it as it will help me document my thoughts about these 98 powerful words. And hence I decided to write this follow up post.


I for the second time, quote these words in this post.

Emphasis below (in red) are mine:

"Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past."

Now let’s see what we can make out of these highlighted words.


Being Prepared

These 2 words are not only applicable to markets, but life in general. Being prepared means to have thought through and be ready to take advantage of any situation, good or bad. In markets, there are times when stocks are undervalued compared to the real value which actual business behind the stock offers (Read: What we missed if we didn’t buy at Lows of 2009).

And during such times, it makes sense to put in money and buy those undervalued businesses. But for that, you need to be prepared. Prepared with the knowledge (based on study) that stocks are underpriced; Prepared with free money to buy such stocks; And a strong, disciplined mindset to be ready to hold onto these stocks till they become overvalued.


Simple & Logical Things

We are average investors. We don’t have access to inner circles of companies and hence have no clue about what these companies are planning to do in future. So the logical thing to do here is to not to make big guesses about future. And to stick with companies which have a track record of ‘not-fooling’ investors, have the ability to survive bad times and have potential for making money from their business for themselves as well as for their shareholders.

It’s plain and simple.

No need to rush for IPOs or companies selling future-changing technologies etc. The companies of latter type have mortality rates in excess 90%. And we are not capable enough to identify the remaining 10% of the companies.


Few Major Opportunities

If you have been in markets for last few years, you would know what happened in 2009. The markets were so undervalued that if you blindly bought stocks of any well known company, chances are that you would have doubled you money in next 2-3 years.

Now, lows of 2009 (in terms of valuations) are very rare. And during those times, it looked like a crisis situation from which markets could never recover. But markets move on. Yes. No matter how bad or how good the situations are, the markets move on. And those who realised this fact and took actions accordingly, were the ones who made truckloads of money in next few years.


Willingness To Bet Heavily

Now this one is not easy. It is possible that you are well prepared for the crisis. You also knew what you wanted to buy in case markets crashed. You had the money to buy. And once the markets tanked, you were getting the chosen stocks at prices well below your imagination.

But still you did not buy.

What was the problem?

You did not have the guts to go out their and make a big bet.

Its understandable that for average investors, its tough to make big bets which can alter their financial life dramatically. But its also a proven fact that unless and until you are ready to put substantial amounts of money in shares of good companies when markets and economy is down, you will not get life changing results.

You need all the 3 ‘C’s to become ridiculously rich,

Cash...Crisis and ofcourse...Courage.


Resources Available

This is very simple. You may be great at identifying opportunities, and also have the guts to go out there and bet big money. But unless and until you have the cash to invest, you cannot make use of this opportunity.

Once again, you need all the 3 ‘C’s to become ridiculously rich.

Crisis...Courage and ofcourse...Cash.


Patience In Past

You cannot easily become rich in stock markets. Though it is as simple as the 98 words being discussed, it is not easy at all. We can boast about how we can time the markets and know how to buy low and sell high.

But becoming rich in market, and staying rich (which is much tougher) takes time.

It takes years.

And unless and until you are patient enough, you will take some rash action which will hamper your chances of getting / remaining rich (read: Don’t disturb the magic of compounding)


It might be years before you get an opportunity of the type which can change one’s life. And during all these years, you would need to stay connected with developments of businesses which you have already shortlisted as ones worth buying. You would need to continuously accumulate resources (read: cash) to be ready when the opportunity comes. And you would need to continuously develop the mindset that you will need to buy heavily when the opportunity comes, i.e. you need to build your guts.

29 August 2014

98 Words That Can Make You Very Rich

"Experience tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing some simple and logical thing, will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind that loves diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past."

- Charlie Munger


PS - I strongly suggest that you read this statement multiple times to understand its real importance. And please do share your thoughts too.
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