The Art of Spending Money

For those who have been fed up reading about the importance of saving money, the heading of this article would have come across as a whiff of fresh air. After all, spending money is fun; earning it is not. People have to learn how to earn their living; nobody needs to teach them how to spend. They are intuitively good at it.

Sure, we are all different and hence our priorities can vary. But there are good and bad expenditures. For instance, an expenditure that makes your life more comfortable, reduces the risk, or cuts some pain is generally a good expenditure. On the other hand, an expenditure that solely satisfies your desire may be a bad one. 

Let’s try to understand it with an example. Most of us have to commute to work on a daily basis. This commute can be enervating. Not many of us would say that they like to commute to work. Now if you can make your daily commute comfortable by spending some extra money, it can go a long way in improving the quality of living, yet many of us try to save money there so that it can be spent elsewhere.  

Similarly, if I have to travel a long distance, I prefer a flight rather than a train, even if the differential in the fares is substantial. To me (and I am sure, for many others), sitting in a train for a long time can be absolutely tiring. By paying some money, you can avoid that trouble.

Many of us are in the bad habit of saving money at just the wrong place. But when it comes to other negotiable and even potentially harmful expenses (smoking and drinking for example), we don’t mind. That’s stupid. The real value of money is unlocked when it is used to improve the quality of living, not when you buy the latest smartphone available in the market.

Amassing money for its own sake is foolish as well. While you do need to save for the future, hoarding more money than needed because that’s what pleases you also leads to misery. Strike a good balance between saving for the future and enjoying the present. Similarly, strike a sensible balance between good and bad expenditures. That’s the art of spending money.

Silly Things People Say about Money # 3

Carpe diem seems to be the order of the day, especially for the youth. Our disillusioned youngster, who has gone crazy about music and considers an undisciplined life style a badge of honor, takes immense pleasure in saying that saving isn’t worthwhile. He (or, of course, she) wonders that since the future is uncertain, what anyone would want to save all that money for. Getting into a philosophical realm, he argues that all we have is the present, so why not enjoy it to the fullest?

Overindulgence in the present is a shortcut to financial misery in the future. To the bewilderment of many, the future will indeed arrive. If the hunter-gatherer talked of carpe diem, it would have made sense, given his highly uncertain life. But when a 21st century person talks of an uncertain life, he is doing nothing more than fooling himself. Some will say that compromising on the present makes one’s life small and hence it shouldn’t be done. But again that’s immature thinking at best.

In most aspects of life, including saving and investing, what matters is balance. One must look for balance in all aspects and avoid the extremes. If that sounds like some sermon, be it. An intelligent person is he who balances the present and the future. He enjoys the present but also saves enough for the future. 

Marketers are doing their best to make consuming look cool so that you spend profusely. They create needs where they don’t exist (for instance, smart watches, smart ACs, smart TVs and what not; just use the word “smart” and you have something which is not needed per se but someone is trying hard to push it into your life). No marketer talks about saving money (unless that means handing your money to them; for instance, wealth-management firms). It’s your responsibility to act prudently. 

Media also promotes a culture of consumption. Consuming is made to look “cool.” The human need to feel appreciated and accepted makes you do stupid things with your money. Moreover, people look at those who make just the wrong role models (movie stars, fashion models, sportspeople). Such role models have a flashy lifestyle that is highly deceptory.

What to do then? Seek wisdom. It’s not readily available. You will have to look for it. Read books from successful people. Almost always, they have endured hardship to reach where they are. In investing, it’s discipline and simplicity that make you rich. Stop paying attention to marketers and media. 

Finally, you always have the luxury to decide what you are going to do with all that money. That’s not a problem. The real problem is not having the money to be able to ask that question.

Read the earlier stories in this series:

Silly Things People Say about Money # 1
Silly Things People Say about Money # 2

Do Elections Matter for the Stock Market?

With the Lok Sabha elections just around the corner, one set of data is doing the rounds. Some data crunchers have compiled market returns during various governments. The outcome is that elections don’t matter for the stock market. As the data suggests, the market has given healthy returns even during coalition governments and majority governments don’t directly imply good stock-market returns. 

In an interview in a business newspaper, Kumar Mangalam Birla, Chairman of Aditya Birla Group, said, “A coalition will have its own pulls and pressures and can never be the same as the situation today. I think the government has a role to play in taking that 7% (growth) to 9.5-10%. Therefore, the shape and composition of the government is important. We haven't reached a point where politics and economics have been totally divorced from each other.”

Now that’s a view coming from a businessman rather than analysts and data crunchers. Data is a manipulative object. You can find any data to suit your beliefs. It is not the belief that flows out of data, but the analyst finds the suitable data to match his beliefs. Hence, you can’t really trust data. That’s counterintuitive because data is generally considered to be unbiased and non-partial. It’s the opinion that’s colored. But data can have many underlying determinants and conditions which are generally not visible. That’s what makes relying completely on data dangerous. Data does nothing more than give a false sense of certainty and control. 

So, what to do? Combine data with common sense. Data devoid of common sense is worthless. It can only deceive you. To me, common sense suggests that governments are absolutely crucial for businesses and hence the stock market. Imagine a cabinet that rolls out one anti-business, populist decision after another, without worrying about the economics. Imagine a government that is engaged in corrupt practices. What will happen to the stock market?

Sometimes the effects can be so distanced from the primary cause that the data doesn’t capture them as one entity. For instance, if a policy decision produces its effects in two years, you won’t find the impact on this year’s stock-market returns. A case in point is the state of government-run banks. Before the ongoing clean-up, they were virtually zombie banks. But the stock-market-return data didn’t capture it. During the clean-up, their stocks fell, so the data would show negative market returns. Now once clean-up has been done, their stocks will likely soar. But when this happens, the government will have changed. If it’s a coalition once again, the data will show the market racing, thus implying that the market can race during coalition governments as well. That’s farcical.

In the stock market, as also in elections and most other matters, common sense is your best friend. Don’t ever trade it with data. Data should just be a tool, not your master.

Why Investors Should Beware of the Media

Analysts and investors pride themselves in being genuine about their thinking and research. But that’s not always the case. At a subconscious level, they are not just influenced but driven by the media. Many of them will shake their heads on reading this, but as I said, it happens at the subconscious level, so you don’t know that you are being controlled.

The media feeds on our fears, anxieties and the tendency to pay attention to what’s abnormal. That’s why it seldom reports what’s normal. If it’s normal, nobody wants to hear it. That’s why, there is so much importance given to “breaking news” or being the first to break a story. The recent Union Budget again saw the media trying to outguess the budget provisions. When a couple of them proved to be right, the media patted itself on the back. With the general election scheduled in a month, the media is again try to predict the future.    

What’s the need for all this? Why can’t we wait for the event to conclude and wait for the outcome? The media then can do the reporting. But then there will be no thrill, perhaps. 

The latest news flow in a couple of stocks is another example of how the media controls the narrative. A leading housing-finance company is the latest prey of media monsters. Nothing that has been said against the company has been proved yet, but the effect is visible in the company’s stock price. Analysts are falling over themselves to find problems with the company. The same analysts were earlier recommending the stock on TV.

The real problem is not the unfettered criticism by the media. To some extent, it’s essential to ensure transparency and check corruption. The problem is that this rebuke can cascade into reality. The same housing-finance company has seen its bonds downgraded and its stock dumped by institutions. After all, who wants to take the risk? This itself can cause substantial damage to the business and shareholders.

What’s the solution then? Take the media to task. It shouldn’t be allowed to escape after making false allegations that result in loss of money or reputation. The media company should be made to pay the damages if its report turns out to be wrong. This will also make the media more accountable. 

It doesn’t take much to malign a company or an entrepreneur; any idiot can do that. But it does take a lot of effort and years of toil to build a company, on which many people depend for their livelihood.

Mistakes Investors Make in the Stock Market #1: Being Penny Wise and Pound Foolish

No one wants to lose money. Yet many investors make losses in the market. While it’s not abnormal to make losses per se, many investors increase their losses due to their own behaviour. They do so by hinging themselves to their buying prices. If a company has started to perform poorly, investors still want to somehow get back their buying price, which may or may not come. 

Even if the stock hovers about their buying price, they don’t want to sell the stock so that they don’t make any loss at all. Often they find that after coming close to their buying price, the stock moves several percentage points down. You can imagine the frustration. Eventually, they decide to sell at a much larger loss. That’s being penny wise and pound foolish.

The stock price is a dynamic element. It changes every second. You can’t rely on it to act in your favour. The solution to the problem is to be comfortable with small losses. Consider them as insurance against a sudden fall in the stock. If you must exit a stock and Mr Market offers you a price a few points lower than your buying price, don’t hesitate to accept it. Mr Market may not offer you the same price tomorrow.

Another useful tactic is to sell in tranches. For instance, if you are down 20 percent, sell half of your holdings. If the stock appreciates and you are down just 10 per cent, sell the rest. Your overall loss will be less as compared to if you had sold out entirely when you were down 20 per cent.

Losses in the market are perfectly okay. You can’t expect to make money on all your stocks. Some will indeed go sour. In such cases, formulate a loss-containment strategy and don’t be too finicky about getting back your buying price.

The Industry of Tomorrow #1

Personally, as an investor, I don’t like taking subjective calls on the fate of industries. In my view, such calls frequently go wrong and do nothing more than giving a false sense of control to the analyst. Yet here I am going to discuss some trends that can have a significant impact on how business is done in future. These trends may not have an investment implication, so don’t start looking for investment opportunities. But they do carry an entrepreneurial insight and are also useful for the consumer. If not anything, consider them as my musings.

The privacy industry is going to get prominence in the future. Businesses that develop the reputation of guarding your data with their lives will have an edge over others. Those that develop a reputation of being careless with your data are going to lose trust to the extent that their survival will be in jeopardy. If you are thinking about Apple and Facebook as the examples for the two kinds of businesses, you are on the right track. Apple is seen as a champion of data privacy and every day Facebook is in news for some sort of data leak.

An interesting aspect of the need for privacy will be that businesses can start charging extra for enhanced data protection. Many of us will be willing to pay. Yet another interesting angle would be people paying money to search engines to “forget them.” Or could it be a subscription plan? For forgetting you for one year, you have to pay $100!

What about the consumer? The average consumer has been beguiled by tech giants to compromise his/her privacy. They are making money off your private information in ways you can’t imagine. Surely, there are no free lunches. When Facebook or WhatsApp lets you create a “free” account, it isn’t free. You pay a high cost. Your personal information (including pictures, videos and what not) are out there for everyone to see. And most of us rejoice in calling this “social” media.

The smart consumer will be he who will not let the privacy mongers raid his personal life. That means part or full abstinence from social media and judicious use of the internet—Of course, coupled with that annual subscription plan by Google to forget you!

What to Do in NBFC Stocks Now

The recent IL&FS crisis has seen many NBFC stocks fall, with DHFL losing more than half its value. As always, investors are confused about what they should do. Should they hold onto their NBFC stocks? Should they buy them or buy them more? 

Analysts and brokers are turning “cautious” of the NBFC segment, which is natural for them, given their work profile. If they turn bullish on NBFC stocks and they fall more, they lose face. If they rise from here, they can always say that they were cautious, not bearish. All in all, there are no easy answers for our average investor.

Crazy things happen in the market and the crash in NBFCs is one of them. But at the same time, you should avoid the temptation of rejecting whatever is happening as complete bullshit. You must acknowledge the fact that you are dealing with uncertainty and things can certainly go against your judgement. 

So what to do? 

Do you own NBFCs? If yes, no need to sell them. 

Should you buy more of an NBFC in your portfolio? Check your investment strategy. Does it allow you to buy more? If you have already reached your maximum allocation to a NBFC stock in your portfolio, you shouldn’t buy more, no matter how attractive it looks.

Should you load up on NBFCs, given their attractive valuations? Use your good judgment. Don’t make any one sector a large part of your portfolio.

Should you make an entry into the NBFC space if you don’t have any stock of that sector? Absolutely. The current mispricing is an opportunity to add this sector to your portfolio.

Finally, as a general rule, don’t allow the market to tell you when to buy or sell. Do so when your strategy permits so. What if you don’t have a strategy? Well then… that’s the real crisis.