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.

India: A Foolproof Investment Destination

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. 

Why Listening to the Management Is of Limited Use

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.