Enough has been said about the demographic potential of India. With over 130 crore people, the Indian market is any marketer’s dream project, yet the ongoing “slowdown” has deflated investor spirits and cast doubt on India’s potential. Rating agencies have lowered their outlook. All this is a temporary phenomenon, which warrants little attention.
Quite a few things are working in favor of our country today. A large young population; a huge market, where penetration is not yet deep; development that is far from reaching saturation, etc., make India a promising opportunity for both investors and entrepreneurs. In India, if your product or service is not working, that’s not likely a problem of demand but of a faulty business model or management.
Anything and everything has a market in India. All these markets are far from maturity. This evolving nature of the Indian market can accommodate just any kind of entrepreneur, at any level. If someone fails as an entrepreneur here, it’s likely not the idea but the execution. Similarly, as an investor, you can do well in this country if you simply avoid the pitfalls. As an investor in India, your job is not to look for great companies but simply avoid bad ones. The upside will take care of itself. The upside is built into the investment – such is the case of the Indian market.
This is very different from the case in developed markets where you have to try hard to find growing businesses, both as an investor or an entrepreneur. The so-called great global companies have stagnant revenues and profits in developed markets. Entrepreneurship has reached all echelons of society, with mom-and-pop stores being commonplace. That’s why foreign investors are so keen to invest in India.
So, if you are an entrepreneur, start now. Don’t worry about how good your idea is. Focus on execution. As an investor, pick stable companies with clean managements and just sit back. With time your wealth will naturally grow.
Savvy investors actively track management commentary, CEO’s message, and other such forward-looking stuff. They think that by tracking these, they can get valuable insight into the future performance of the business. I have even seen analysts “reading” and “decoding” the management’s body language and confidence level. In my view all this is dispensable. Even if someone must pay attention to this sort of things, he should use it in conjunction with other data or sources. However, what the management does is always useful information. That’s because actions speak louder than words.
The case of an Indian airline is exemplary. This is the largest airline in the country and has about half the market share. In an industry where it’s difficult to turn profits, it has been consistently profitable. Its IPO also saw a surge in its share price. Everything seemed to be fine with the company until the tussle between its founders broke. The founders traded barbs, acted like recalcitrant children and sought mediation at multiple forums. One founder actually questioned the business practices of the airline.
The ego war between the founders of this airline tells us a lot about the airline’s management. Companies have a tendency to sugarcoat things. Even when they are “honest” about a gloomy scenario in the future, they still tend to hold back information or juxtapose bad news with many “howevers.” That could make the analyst believe that after all the situation isn’t so bad and probably the company would recover soon.
Broadly, what people do tells you more than what they say. When it comes to speech, we put our best foot forward. But actions are what reveal the truth. Hence, paying attention to what people are saying is of limited use. Instead, look at what they have done. That can provide you more information. Similarly, while analyzing a company, discount what the management or the CEO is saying. Instead, see what the company has done in the past. That’s more insightful.
In the stock market, you can make money in two ways: by buying a stock that appreciates in value and by avoiding one that’s going to fall. This is a simplistic statement and surely there are many conditions that apply to this rule. However, most investors worry about the first way only; they actively look for stocks that will appreciate. How do you make money off the second way?
One sector that most investors can conveniently leave is banking and finance. The reason for this is that this sector is most prone to frauds, scams and corporate-governance issues. The business of finance and banking is such that it allows manipulation at a great scale, which most investors can’t sense until something goes wrong. Let alone investors, most experts can’t sense that. History is full of examples when problems arose in banking and finance and took the whole economy down. The 2008 recession happened because of reckless lending. The ongoing banking mess in the country is another example.
Of course, there are good companies in banking and finance as well. But let “smart” investors spot them. For most investors, simply avoiding this sector can preclude a lot of pain, astonishment and loss. Sure, you will have to give many companies a pass, but then you will still have many more remaining. The Indian market is dominated by banking and finance companies and it could be very difficult for any investor to overlook all of them. Yet do it. If you must take an exposure toward this sector, keep it low and only to stocks generally perceived as high quality.
Is there any sector that’s just the opposite? In my view, the FMCG sector is one, especially the big names in this sector. The FMCG sector is a faithful sector that doesn’t give its investors tears in the process of generating returns. Of course, there could be exceptions to this general rule as well, yet sticking to the big names should do the job for most of us.
Remember that in the Indian context if you can spot and avoid wealth-destroying stocks successfully, the upside in your portfolio will take care of itself.
Passive investing means investing in an exchange-traded fund (ETF) or an index fund. By doing so, you can track an index and get returns like those of an index. For instance, by investing in a Nifty 50 index fund or ETF, you can get returns like those of Nifty 50.
Passive investing is an uncool way of making money over the long term. There is no thrill involved in it—just a very long wait. The returns aren’t going to be dazzling either. In India, you would probably get 8–12 per cent per annum, yet passive investing can’t be overlooked.
Passive investing is perhaps the most foolproof way of investing. When you pick individual stocks, you may err, which can hurt your returns. If you invest in an actively managed mutual fund, your fund manager’s bets can go awry. But when you invest in the market or an index, you are sure to get index-like returns. The costs of most index funds/ETFs are also low. This further adds to your return. You don’t have to track an index fund, as you track a stock or an actively managed fund. Finally, you don’t have to suffer the extreme emotions that active investing subjects you to. If you add up all these advantages, passive investing has a strong case.
Of course, you shouldn’t allocate 100% of your portfolio to index funds. In my view, 20% is fine. This part of your portfolio is a no-stress portfolio. You absolutely have to do nothing about it. Over time, if the rest of the determinants remain fine, returns will naturally flow. No sweat. Let the rest 80% part of your portfolio take care of market-beating returns.
Which index funds/ETFs to pick? In India, passive investing is still a new concept. Most ETFs, leaving a few, have low trading volumes. Hence, go for index funds, where the fund house concerned will ensure liquidity. Also, opt for the basic indices, not their derivatives or not the ones which have some engineering done to them. Index funds/ETFs tracking the market, mid-cap and small-cap indices are just fine.
The problem many investors face with passive investing is that they have been injected with the idea of beating the market. For some reason, getting market-like returns has a negative connotation; that shouldn’t be so. Plus they can’t miss all the action that active stock-picking requires. Passive investing is all about patience and inaction; many adrenalin junkies can’t bear it. But this quote from Paul Samuelson, an American economist, sums it up well: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
How do you determine if something is expensive? Is a book available at Rs 5,000 expensive? Is a pair of shoes available at Rs 3,000 expensive? Is a music system selling at Rs 2 lakh expensive? Or is the latest iPhone 11, which will probably be around Rs 1 lakh, expensive?
At the outset, it’s easy to say that most of these things are “expensive.” The metric of expensiveness that most of us unconsciously use here is what the average product in the category costs. A book is available at Rs 200. Why buy one at Rs 5,000? A phone comes under Rs 10,000, why buy an iPhone that’s over Rs 1 lakh? Another metric that’s consciously applied is they money you have at disposal. If your bank account has just Rs 5,000, a Rs 3,000 pair of shoes is a big ask.
Both the metrics mentioned above are not the true gauge of expensiveness. Expensiveness should be judged against features, quality, excellence and so on. For instance, a Rs 5,000 book that captures the best information and presents it to you in a highly appealing form isn’t expensive. It’s actually cheap. By reading it, you will get useful information that will help you in the future in directly and indirectly making money. If not anything, it will help fulfill your intellectual appetite and will be a joy to read.
The iPhone is elusive to many, given its high price, yet it may not be expensive. With the superior safety that Apple products provide you, combined with the cutting-edge technology and the pride that comes with owning an Apple product (I don’t know many proud Android or Samsung or Xiaomi users), it’s actually a bargain. If you don’t have the required amount to spend, that’s a different story. But that doesn’t make the iPhone expensive.
When you invest in stocks, you don’t look at the stock price alone. You read it in conjunction with other fundamental factors such as earnings. Similarly, don’t see things from the price perspective alone. Compare the price with the excellence the product offers. You will be surprised to find many bargains around you that you once felt were eye-watering.
In an increasingly complex world, those who can simplify stuff can have a premium position. Call it the simplification industry. Things are generally simple by nature but over time complexity is added due to scientific and entrepreneurial zeal. Then starts the competition to provide more and more features at the same price point or in order to raise it. That’s when things get out of control.
Look at your TV remote and all the unusual functions it has apart from the basic ones. In order to add more “comfort” for the viewer, marketeers kept adding features to the remote. Now viewers are actually terrified of all the things that a remote can do. By mistake if you press a button, you may create enough trouble for yourself to keep you engaged for a few minutes to undo it. In many cases, you will require “expert” help. In some cases, even the experts can’t help you.
Or consider the panel of a basic landline phone. Earlier there used to be the numbers plus one or two more keys. A landline phone kept in front of me has the following apart from the numbers: *, #, Redial, Flash, M1, M2, M3, M4, Menu, Dial, Prog, and a few more keys that have some pictures on them. I haven’t used any of them in my life and have no need for them either. Of course, such objects come with an instruction manual, but when was the last time you read an instruction manual?
All this is true not just about things but also content, software, education and so on. There has been an increasing bent towards complicating stuff. Perhaps there are people who feel great about doing so. Warren Buffett said, “There seems to be some perverse human characteristic that likes to make easy things difficult.” But complicated things have made consumers’ life hell. The need is to simplify things to their most basic level. Companies that can do so can command the loyalty of their customers. They can actually command a premium despite their simplified offerings. The Google phones that come with pure Android operating system, which don’t have any manufacturer-installed “features,” actually charge a premium. Likewise, those who can explain things to people in a simple manner can expect to have a larger following than those who talk of abstruse stuff, no matter how intelligent they are.
So, as an entrepreneur, you should pay attention to simplifying your offerings as much as you can. Intelligence applied towards doing so is intelligence well utilised.
Read the other article in this series at:
The Industry of Tomorrow # 1: The Privacy Industry
If you had to name one muddled science, stock investing would qualify for it instantly. There are as many theories and methods of investing as there are analysts, investors, traders and experts. Interestingly, the search for the holy grail of stock investing is still on. Investors, analysts and experts are still looking for that one foolproof way which can help them make money in all seasons. Sometimes they look at Buffett (or any other star investor); sometimes they look at data; sometimes they introspect; but the quest for one perfect method doesn’t seem to be getting over.
This quest has given birth to several formulas and rules that have become so entrenched in investing that they almost look sacrosanct. For instance, consider the division of stocks by their size: large, mid and small caps. Somebody sometime divided stocks by size. This thought then penetrated so deeply in investing that you have separate strategies to deal with these stock types. Many investors like to divide their portfolios across them. The thought itself has become the foundation stone of new theories and methods.
Now the moment you decide to have some sort of allocation, you commit yourself to investing in only that type of stock, no matter if there are better, more sound opportunities available elsewhere. In your "small-cap portfolio," you can’t buy a large cap or a mid cap, even if you have an opportunity available there. The same is true for "style-specific" portfolios. If you have a "value" portfolio, you would probably overlook "growth" or "dividend" or other opportunities.
In stock investing, and for that matter in other areas of life as well, we often tie ourselves up with rules, formulas, methods and ideologies. They look convenient at the time of formation, provide clarity and familiarity, and make the complex world simpler, but at the same time they take away freedom of thought. Once you have adhered to a method for years, it starts to look like an eternal truth that you can’t refute.
So, should you have no methods? We all need them to make sense of the world and progress with our daily lives, including investing. But we should not be a slave to them. We should be willing to evaluate them from time to time. If something else sounds better, we should give it a try. We should also try to hone our existing methods and beliefs to make them fit the times we are in. All this is an interesting process if we show openness to it.
As far as stock investing is concerned, try to make your method as open as possible so that you aren’t tied to some belief. All you need to do to succeed in stock investing is to find good companies and stay invested in them. Rest everything is optional.
