Silly Things People Say about Money # 5

Image by Gerd Altmann from Pixabay

Income and expenditure are opposite in not just their very nature but also in the behavior they result in. While it’s considerably hard to generate income, it’s as much easy to spend. So, most of us wonder why our incomes are so low but the expenses keep going up. The difference between income and expenditure is savings. If either of their determinants goes out of whack, savings suffer. So does investing.

If your expenses rise by the same amount as your income, you are actually no richer. Worse, if your expenses rise at a faster rate than your income, you could be poorer. To boost your savings and investing, you should work on both income and expenditure. Try to increase your income and at the same time control your expenses. A stupid theory to which many youngsters have subscribed to is let your expenses rise and that will motivate you to earn higher. That’s equivalent to saying that you start suffering from poor health because that will motivate you to become healthier.

The nature of expenses is such that they are not perceptible at the time of their occurrence. However, they add up to a large amount by the end of the month. Even harmless, small-time expenses can take away a major chunk of your income over time. In order to avoid that, delay your expenses as much as you can. Make them when you have to, not before that. If you follow this simple rule, you will realize that over time, some of your expenses simply disappear. In the normal course, you would have spent money on them because they looked too small or because you had money in hand. But as you tighten the noose around them, they get relegated to the point of extinction.

Another trick is to make your discretionary, feel-good expenses around the month-end, not at the start of it. This will help you better prioritize your expenses. We often end up making the negotiable expenditures before the critical ones. This results in diminished savings and a feeling of anxiety and desperation in the middle of the month. The need is to be disciplined from the start of the month.

And of course, the greatest rule is to save before you spend. Your expenses should be a remnant of your income after savings. Your savings shouldn’t be a remnant of your income after expenses.

Beware of the Eccentric Entrepreneur

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One of the major attributes of entrepreneurship is innovation. Entrepreneurs frequently disrupt the older ways of working and introduce the new, perhaps revolutionary, way of doing things. Obviously, this requires the entrepreneur to be unconventional with his outlook. He should be able to spot opportunities or trends that may not be readily visible, keep faith in his idea and be rigorous to implement it. If he is successful, unimaginable riches may be in the offing.

Selectivity bias causes us to overestimate entrepreneurs. We are naturally drawn to those who are successful and don’t even have an idea of the countless that fail. This makes us see the successful ones as demigods. Even if they are entirely reckless, we don’t see that as a problem but as a part and parcel of entrepreneurship. This is a mistake. Today, quite a few eccentric entrepreneurs have captured the limelight. The CEO of an American electric-car maker doesn’t spare an opportunity to stir controversy and sensation. For some reason, investors have bought into his vision, not minding the company’s financials, his behavior, exposure to multiple cash-guzzling businesses and so on. It’s only a matter of time before the moment of reckoning arrives.

A major factor that has increased the acceptability of the eccentric entrepreneur is easy money flowing into startups. Startups defy business sense. With scant regard to profits, they want to grow large first. This encourages risky business practices and unfortunately crowds out smaller sensible businesses. This is a shame. A Japanese billionaire runs a huge fund that invests in such startups. It has yet to be profitable and has attracted flak due to its recent goof-ups. Covid-19 has muzzled the supply of this easy money, thus resulting in a crisis at startups run on easy money. If the situation continues, many will perish. 

Business is a serious business. It’s not about risky, stupid or senseless actions. While entrepreneurs do take risks, they are also conservative and don’t want to lose money. They understand that many people’s lives depend on their businesses. They feel the weight of this responsibility and quiver at reckless business practices. Warren Buffett is a staid businessman and investor. If you read his annual letters, you will realize how conservative he has been, yet that has not stopped him from being immensely successful. 

Unconventionalism may be an attribute of entrepreneurship but sensibility lies at the heart of it. Real entrepreneurs never lose sight of this fact.

Why the Stock Market Is Overrated

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Many are baffled about the recovery in the stock market over the last one month, even when the economy is suffering and has bleak prospects. Experts are trying to make sense of this disjunction. Some are saying that the market has run up ahead of the fundamentals. Others are anticipating a sharp recovery with the lifting of the lockdown.

The stock market has been made out to be what it is not. To see the stock market as some robust mechanism that predicts what will happen in the real world or that reveals a picture otherwise hidden is a mistake. The market has been erroneously given more respect than it deserves, when it is a random mechanism at best, at least in the short run. 

Investors and analysts tend to make sense of a company’s performance or a policy decision from how the stock market reacts to it. Some call it a “discounting mechanism.” Others consider it as a crystal ball that helps them look into the future. The US president boasted of the new highs in the stock market as a signal of his successful management. The abrupt fall in the market shakes governments, which start wondering if what they did was indeed right.

By bludgeoning a stock, the market gets control of the fate of a live company. Because the stock has been beaten up, there must be something wrong with the company, investors wonder. This turns into a self-fulfilling prophecy. A free-falling stock price can be lethal for finance companies and those that have taken up debt or have high promoter pledging. Not surprisingly, the top management rushes to soothe the market’s nerves before much damage has been done. It also uses the share-price performance as a gauge of its competence.

All this is a mistake. The stock market is not an efficient mechanism. You can’t always trust its ups and downs to have any real-world implications. In the short run, traders determine its course. Stocks move up and down because there are vested short-term interests. With the onset of algo trading and other automated ways, the frenzy in the market will only increase. That won’t mean things are changing dramatically. Reading too much into market moves can only dilute your focus and returns. 

At best, the stock market is a buy–sell mechanism. Its main job is to provide liquidity. If you entrust it with any more responsibilities, that’s a recipe for a life of anxiety and pessimism.

Covid-19: The Great Differentiator

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Warren Buffett once said, “Only when the tide goes out do you discover who's been swimming naked.” In good times, everything seems to be gung-ho. It’s difficult times that differentiate among the good, the bad and the ugly. Covid-19 is a great differentiator. It has already started to show its impact. Many companies are complaining of an acute cash crunch as their operations have come to a halt. Some have cut their staff’s salaries. Others have plans to lay off workers. 

Covid-19 isn’t the real problem; it’s just made out to be so. It’s been two-three months of its onset and some companies are already teetering. In reality, these companies were never doing well. Only that they were able to hide their incapacities behind the veil of economic growth. If a crisis persists, everyone suffers, that’s understandable. But if in a month or two, your very survival is at stake, then that requires some close examination.

Many of these companies never built emergency reserves. They worked on hot money that optimistic investors kept injecting. The so-called “start-ups” are a case in point. Without any profits and in absence of fresh funding, they will find it hard to sustain themselves. Some will showcase greed and opportunistic behavior by their promoters and owners. It’s easy to lay off workers, so they will do so.  

Obsolete business models will start surfacing. Primitive ways of working that should’ve been dead but which survived on the ventilator will be exposed. Take for instance the auto sector. It’s production has come to a halt. Or aviation—there are no flights. If work can go on without travelling and flying, that itself raises the question how these industries flourished to date. Much of their demand was artificial.

Investors have a great opportunity to observe how companies respond to the pandemic. That will show their character and strength. Solid companies won’t complain about the situation; they would be busy adapting to the new normal. They won’t beg for government support. When things get back to normal, many of these not-so-good ones will also get back on their feet but the good ones will have actually thrived. It’s by investing in those good ones that you will build wealth.

Home Is the New Office

In just one month or so, the coronavirus pandemic has affected our daily lives in myriad ways. Many realizations and revelations have occurred that may not have happened in the normal course. One such useful discovery is that many employees can handle their jobs remotely. This means going to the office daily could be redundant.

Companies are fast realizing how productive their workforce can be if it is allowed to work from home. With many communication tools available today, coordinating isn’t a problem. Some other unproductive and energy-sapping activities have come to an end. My alarm clock no longer dictates when I should wake up. I don’t have to tolerate the whims of cab drivers. We are not being stuck in traffic. There is no rush, yet things are happening.

Most importantly, the work is getting integrated in our lives. There is no need to see it separate from our other regular activities. There is no need to wait for the weekend for some time off. Not surprisingly, many of us are working more than usual, without realizing so. 

Surely, there are others who are missing their office life and may be finding it difficult to concentrate at home. However, the pandemic has forced them to switch to the alternate life for good. Of course, not all work can be done from home; a lot of professions entail travelling. Factory workers have to go to factories. Those who are into public dealing or sales or marketing have to move. But there are a lot many who really don’t have to move so much.

The message is clear. While office life can’t be written off, work from home is there to stay. It should be taken more seriously than before. Perhaps some combination of both should be used wherever possible. Even those who are on the move can be asked to spend some quality time thinking and planning. That won’t just increase productivity but will also enhance the quality of human life.

The Corona Reset

Never has news been so predictable. Before I read the newspaper or begin watching news on TV, I know for sure what its contents are going to be. It appears that everything else which mattered just a few days ago no longer matters. What about the US–China trade war? Or Brexit problems? Or the Venezuelan crisis? Or the problems of migrants in Europe? Nobody is talking about anything but Covid-19. 

And that’s understandable as the corona crisis is indeed one of the most severe threats humankind has faced. You must do all that’s needed to protect yourself and your family. That includes staying indoors, washing your hands often and maintaining social distance. This is not the time to bring out the daredevil in you. Just follow the health advisories.

The stock markets world over have fallen dramatically. Needless to say that there are many opportunities out there, so get into buying mode. But more than that, use these times to reset your lifestyle. As we have been cut off from our daily lives, there is once-in-a-lifetime opportunity to reorganise ourselves. That includes developing useful habits and getting rid of the unproductive ones. 

For instance, currently, you would be forced to cut on your expenditure as there are no avenues to spend. Amazon isn’t delivering. Shops are closed. Hotels are out of service. You can’t travel. So, you can reset your spending behaviour. You can take a look at your investments. If you have been ignoring them, this is the time to reset that behaviour too. What about reading your book that has been lying there somewhere in your cupboard? How about watching some classics? Exercising? Meditating? There are many reset opportunities available today.

Sooner or later the old life will resume—deadlines, traffic, pollution, junk food, smoking, drinking, etc. I have come across videos showing how desperate some people have become because of the lockdown. Others are complaining of boredom. This too shall pass. But till that time, let’s put this time to the best use.  

The Burden of Rationality

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It’s well known  that human beings are driven by emotions. Even the most skillful, trained and experienced individuals can’t deny this. Emotions intervene in our day-to-day lives but we don’t feel their influence. 

Quite a few books have been written on psychological biases and how to boost your logical reasoning. These books are worth reading and it’s worthwhile to strengthen your logical side. But at times the burden of rationality becomes too difficult to carry. You will feel a struggle between your rational and emotional sides on such occasions. Curiously, you will find a “logical” reason to do what your “emotional” brain says. Indeed, if you can’t be rational, you can always rationalize.

The need is then to balance your rational and emotional sides. It’s okay to act irrationally if it’s a trivial matter and there are no major consequences of it. In fact, it’s desirable to do so. Those who try to be fully rational (which is impossible of course) have to spend a lot of time fighting their own emotions. It’s better to surrender to them for small things, save energy and focus on the bigger things. Also, by being irrational occasionally, you can make amazing discoveries, feel more lively and be thrilled. 

In stock research and investing, the rational mind is actually at a disadvantage. The stock market is no perfect mechanism; there are no clear rules that drive it. Those who are trained in logical thinking, especially fundamental analysts, struggle to digest irrationality. It’s okay to analyze companies across traditional metrics, through the balance sheet, income statement and cash flows, but it also pays to be perceptive. 

Peter Lynch had called stock investing more of an art than science. As you spend more time investing, you naturally develop insights. It pays to trust those insights rather than cling to the numbers. Putting aside the burden of rationality can open new doorways, both in real life and the stock market.     

If It’s Free, It Can Cost You

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It’s natural to be attracted to freebies. Why not? You don’t have to pay anything for them and you get the benefit. But free stuff can actually be more expensive than its real worth. Take WhatsApp for example. I am not a user of WhatsApp, so I frequently get surprising looks from those whose lives now revolve around this messaging tool. WhatsApp is free, so everyone is on it. It does provide ease of communication and file/photo sharing but in return, it compromises your privacy. Around the world, internet giants like Facebook and Google are being investigated on privacy concerns. Apart from privacy, WhatsApp clutters your phone. With its barrage of forwarded messages (nobody is sure where they originate) and videos, it makes your life hell. You just can’t declutter your phone, so you end up buying ones with larger memory. To store what? Junk! When emails were introduced, they were intentionally kept free, so that more and more people should opt for them. Thanks to a lot of spam and unwanted mails, today most inboxes are congested. It’s a nightmare thinking of cleaning them up. If you do undertake the task, you are actually incurring cost in terms of the time spent to do this unproductive task. Not to forget the irritation such a task will cause. Today many businesses are being configured around this idea of giving something free and then extracting a much bigger cost later. Gaming is another example. Once children start playing a game, they are lured into buying stuff within the game. In banking and finance, toxic products are sold for free, for instance, credit cards. The banking rep will tell you that the credit card has no fee. If you are caught in his trap, the bank will extract a lot more in terms of interest and penalties. The broker will waive off brokerage for the first year, only to pester you into making investment mistakes, which will cost you dearly. In a recent election, a political party won riding on giving electricity, water, bus travel and internet for free. Gullible voters were tricked into believing that the free stuff is permanent. The real cost will be visible with time. Free stuff also often lacks quality and is not sustainable. Avoid it like plague. If something is good, it’s also worth paying for. If something is given away for free, investigate where the actual cost lies. It will often be much greater than the actual worth of the freebie. Indeed, there’s no such thing as a free lunch.

Banking & Finance: The Necessary Evil

Indian banks have been in the news for all the wrong reasons, which range from non-performing assets to managerial incompetence to corporate governance. But that’s all “high-level” talk that only the “educated” can understand. For the common man, the problems are different.

The ghost of the PMC scam is still fresh in our minds, where innocent depositors had to suffer. But one doesn’t have to wait for such a scam to suffer grave inconvenience. Most of us tolerate it in our day-to-day dealings with Indian banks. 

I had my first account opened many years ago with a government-backed bank. At that time, the facility of internet banking wasn’t much developed, so I had to visit the bank’s branch. The bank staff used to be arrogant and dealt with customers as if they are doing them a favor. You would frequently find them complaining that the printer was not working or the server was down, so you couldn’t get your work done. 

Times changed. Private banks started occupying the space once dominated by public-sector banks. But their advent has not been free from problems. They are mostly deficient on the service front and ultra aggressive about sales. If you call a private bank, you will probably have to wait for a long time before you get connected. However, we all receive numerous sales calls for credit cards. 

The transaction infrastructure is also a problem. While both private and public banks advertise their “robust” digital backbone, you get to experience the robustness when you actually transact. Dropped online transactions lock in your money for several days. I have personally written to the disputes-resolution department of a private bank to claim my amounts from such dropped transactions. I can tell you from experience that the process is a pain.

The other day someone told me how the bank deducted Rs 25,000 from his bank account as loan-processing charges. The person had no clue about them. Perhaps the bank salesperson had concealed them. Most banking products have such hidden clauses dumped somewhere in the contract. You get to know about them when they hit you.

In the digital era, it’s unthinkable to deal in cash or to store cash. So, you will have to deal with the banking system. Hence, be utmost cautious. You can conveniently assume that banks and finance companies are never honest and there is always hidden stuff. Caveat emptor.       

Knowing More Will Hurt You in the Stock Market

Stock research could be enervating. The classic analyst tracks and studies several indicators before picking a stock, yet the work never seems to end. That should not be surprising. Listed companies have businesses and operations so widespread and multifaceted that no time is sufficient to make up your mind. That’s what gives rise to “analysis paralysis”—you become so entangled in analysis that you can’t make a decision. 

In spite of this, broking firms spew out stock recommendations, thanks to the pressure to deliver. But that’s a different problem; let’s leave discussing it for another day. Let’s come back to analysis paralysis. The core of the problem of analysis paralysis is trying to know too much. And that’s a vicious process. The more you know, the more you want to know and the more confused you are. That’s natural as well. No company is free from problems. All have their strengths and weaknesses. Once you start focusing on the weaknesses, you will find more and then even more. Eventually, you decide to shun your stock and move on. But you wonder when that same stock becomes a multibagger.

Financial parameters aren’t flawless either. Each has its drawbacks and frequently they fail to capture the reality. Sometimes they are even manipulated. So, tracking multiple financial parameters also doesn’t help as eventually they will throw conflicting signals.

In the stock market, you never have full information. The decisions have to be made amid healthy uncertainty. Of course, you have the past financials, forecasts, management outlook, peer views and so on, but the more you focus on them, the more you distance yourself from making a timely call. Little surprise, one of the secrets of successful stock-picking is “picking” the stock.

To do so, you have to deliberately cut your information intake. Yes, don’t look for more data. Rather, cut the existing sources. Knowing more is counterproductive to stock-picking; it’s not the other way round. What’s important is that you make a timely judgment. The next important thing is to stand by your stock. Don’t let the ever-present barrage of information affect you. Learn how to ignore.

Remember that wealth is made in the stock market by picking winning stocks and standing by them, not through endless research.