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

Image by Gerd Altmann from Pixabay

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

Image by Pete Linforth from Pixabay 

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.

Silly Things People Say about Money # 4 

One problem with the Indian way of thinking (or perhaps that’s observed worldwide) is to focus on income. The size of your pay cheque tends to determine your financial well-being—the more you earn, the more well-to-do you are believed to be. There’s indeed a direct correlation between your income and your financial health, but your income is not the only determinant of your financial health. There are at least two more: your assets and expenses. 

The other day I was talking to someone who has a fat paycheck. The person was lamenting that it still isn’t enough. He just manages to get by. That was surprising. I asked him if he tracked his expenses. He said he didn’t and honestly he had no idea about where his money was getting spent. 

This is a classic case of expenses ruining your future. This person has allowed his expenses to grow to such a level that he no longer has an idea of them. Clearly, in his case, income is not the problem, though he would want to believe otherwise. 

The simplest thing you can do to check your expenses is to track them. Don’t let them go unnoticed, for if they do, they soon get out of control. Tracking them brings them to your attention and you can control them in time. 

It’s natural for your expenses to rise with your income. The second way you can check them is by diverting your income to assets—the second determinant of your financial health. When you direct part of your income to asset-building, you naturally restrain your expenses. The assets created further strengthen your financial position. An asset that generates cash flows can also supplement your income and in turn help build more assets.

Next time if you want to spot a financially successful person, don’t see his income alone. Rather, focus on his balance sheet and expenses. They are much more reliable indicators.

Read the other articles in this series:

Silly Things People Say about Money # 1

Silly Things People Say about Money # 2

Silly Things People Say about Money # 3

The Best Stock-Selection Strategy

There is no dearth of stock-picking strategies. From value investing to growth investing to tactical investing to dividend investing and so on, investors have a lot to choose from. Many investors do like to use a cocktail of various classical strategies. And of course, you can devise your own strategy. Others who have gained experience in the market develop their own insights.

Once you are successful with a strategy, you may also want to experiment with others, or even formulate many more of your own. This experimentation aspect of the stock market is what keeps the average investor “interested” in the market. If there were just one method of investing, many investors would have left investing out of sheer boredom.

There’s nothing wrong with experimenting. However, over time, you should be willing to reject strategies than try new ones. It’s true that different strategies may work in different market phases, yet by following too many strategies or even a couple of them can unnecessarily increase your work without contributing meaningfully to your returns. Worse, when you allocate a part of your portfolio to a particular strategy, you must find opportunities to fit that strategy. If such opportunities are not easily available or if the companies which you eventually select are of doubtful nature, you may actually do yourself harm than good.

In the stock market, trying to do many things isn’t a sign of maturity. On the contrary, it shows a lack of confidence or too much indulgence in the market or overexcitement or overactivity or anything. Over time, you should be able to come down just one or two ways of investing and stick to them. You will not just save a lot of effort, time, energy and money but you will also likely generate better returns.