Sunday, 22 December 2019

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:

Saturday, 7 December 2019

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.

Saturday, 23 November 2019

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. 

Sunday, 10 November 2019

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. 

Friday, 18 October 2019

One Sector that Most Investors Can Avoid… and One that Most Can Buy

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.

Friday, 27 September 2019

Why You Should Get Active about Passive Investing

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.”     

Sunday, 15 September 2019

The Art of Valuation

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. 

Sunday, 25 August 2019

The Industry of Tomorrow # 2: The Simplification Industry

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

Saturday, 10 August 2019

How to Really Simplify Stock Investing

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.

Saturday, 27 July 2019

The Real Cost of Stock Investing

If you buy a stock, what do you have to pay? The most obvious answer is the stock price plus the brokerage and taxes. That’s true but that’s not the total cost. The total cost of investing in a stock or the stock market is its quantifiable element and the unquantifiable element. When most investors talk about costs, they are talking about just the quantifiable element, not the latter one.

What is this unquantifiable element? It is the peace of mind. By investing in the stock market, you unknowingly commit to parting with your peace of mind. Now there are many things apart from stocks that can deprive you of the peace of mind and we are not going to talk about those lest we would enter into a philosophical realm from which it is difficult to escape. But like those things, stocks also can also claim a fair share of the peace of your mind. Ironically, most investors invest in stocks for wealth creation that could give them peace of mind eventually, but that’s what they keep losing every day.    

How does this happen? No matter if you are an experienced investor or a rookie, movement in stock prices causes you to experience a range of emotions over a short period of time—from ecstasy to despondence to anxiety to fear to doubt to irritation and so on. These emotions and their rapid fluctuations and recurrence are as if you were on an emotional roller coaster for the full day. You can imagine the impact it has on you. Little surprise, people in the financial industry age faster (my own observation; I don’t have any study backing it).

Emotional instability is the biggest cost you pay for investing in stocks. And because this cost can’t be stated in a currency, investors keep paying it without knowing that they are. This cost is much more than the gains you will ever make. Over their investing lives, most investors will be in net loss. That’s sad. 

What to do? Should you stop investing in stocks? No, of course. In order to reduce the emotional cost of stock investing, cut yourself from the financial world as much as you can. Don’t check your portfolio too often; once a week or fortnight is just fine. Consume less of financial news and analysis; most of it is useless in the medium to long term. Follow your stock strategy, not market movements. Find other useful pursuits than worrying about stock prices, the economy and the market.

It’s only when you have cut the emotional cost of stock investing that you can proudly say that you have made money in the stock market.

Saturday, 13 July 2019

Silly Stuff Serious Marketers Must Avoid

Marketing is a dynamic field. But there are still some old tricks that one can still find around. They have stopped creating an impact and actually become irritable, yet the textbook marketer doesn’t want to let go of them.

Take for instance discounting. Discounting for a short time is fine but if it stays forever, it stops creating the desired impact. Over time people realize that the discounted price is the actual price and there is no discount whatsoever. Worse, some think they have been tricked by making them believe that they are getting a bargain.

Now consider freebies. Marketers try to attract investors with free gifts. If you go for them, you are asked to share your contact details. Some people leave the deal that very moment. Others give fake information. I have created a “junk” email account. If I must part with my contact information, I provide that junk email address. I never worry about the emails in that account.

Many payment applications offer cashbacks these days to entice users. It’s only after you have earned them do you realize that they come with many riders. You can’t use more than a certain percentage of the cashback on one transaction. A highly irritable term is “up to.” The number written after up to is an attractive one. The moment you apply the deal, your payback turns out to be miniscule. 

From quoting 9s at the end of the price (299, 399, 999…) to duping you on no-cost EMIs that do entail a charge, to using tricky language, marketers often try to deceive customers. Erroneously, many marketers still think that marketing is about selling a product by using clever means. They spend a lot of time devising ways in which they can trick customers. They think that once the transaction is done, their job is over. That’s a mistake.

Marketing is about providing solutions. It’s about assisting the customer solve his problem. It’s about a life-long relationship. It’s not about fooling people. You might fool your customer once but he won’t ever come to you next time. What’s more, he will spread negativity about your business. The cost of this is enormous in the long term.

What should the marketer do? He should put himself in the customer’s shoes. Would he like it if a freebie required him to share his contact information? Would he like it if having been offered an “up to” 100% cashback, he ended up with just 5%, which can only be used in tranches? If you are giving something away, have no strings attached. If the customer likes your free product, he will come back and pay up for the other things you are selling. 

As a marketer, your  primary challenge is how to create more and more value for your customer. Invest your energies there.

Saturday, 29 June 2019

How to Deal with Companies in Trouble

Lately, many Indian companies have run into trouble. From those belonging to the NBFC sector to the ones hit due to poor corporate governance, the list is long. Unfortunately, many investors (including myself) have had to bear the brunt. Can an investor preclude investing in such companies?

After a scam has been unravelled, business newspapers and magazines are filled with postmortem analysis and how you could have avoided the impacted companies. But that’s all with the benefit of hindsight. Even if someone reliably predicts a troublesome company, how do you distinguish his analysis with the countless other analyses and propaganda against companies doing the rounds. In my view, you can’t always avoid investing in a stock that will turn a nightmare later on. This makes your post-crisis strategy important.

The first leg of your post-crisis strategy actually happens when you make the investment. Invest as per your pre-decided allocation strategy. Don’t go overboard with investing in just one company, no matter how promising it appears and how attractive it has become. Secondly, avoid buying more when the stock price has started to crash. Thirdly, avoid the temptation to sell away (unless you are in profit or making a small loss) just because some news has broken out.

Now the core of your strategy. You are invested in a company that’s caught in some trouble and your stock is already down significantly, say above 25% or, worse, 50%. What should you do? Avoid acting on media reports and wait for more clarity. Media tries to sensationalise things and hence its reporting will likely be nothing short of a doom prediction. Also, media is hungry for developments like these so that they can fill pages. If you sense that there’s indeed some trouble, try to measure its impact and timeline. If some problem is going to be over in the next six months, you might like to hold the stock.

What if you still don’t have clarity but the stock keeps falling? In all such cases, it’s better to start exiting in lots. If  it’s a big holding, it can be sold over a year. Smaller holdings can be sold between three to six months. By selling in tranches, you still stand the chance of benefiting from a recovery, which looks elusive when the crisis happens. The impact of the loss also gets distributed. Above all, you save the remaining capital from getting destroyed.     

In India, especially in recent times, stocks that faced some trouble have been thrashed to such an extent that a recovery looks impossible. It’s natural for the investor to lose hope. Just formulate a post-crisis strategy and stick to it. Over the long term, if your overall stock selection is good, such losses are neatly absorbed by the gains.

Sunday, 9 June 2019

How Anyone Can Pick Great Stocks

For most of us, good investing is about picking great investments. And that’s understandable. With a plethora of investment options available—many of which are substandard—it’s only natural that we should actively look for “great” investments among them. In fact, many fund managers, private-equity professionals and advisors spend much of their time in finding great investments. Of course, they charge you hefty fees for this service. What if you could identify such investments yourself? You won’t have to pay the fund manager and you will have greater control over your portfolio. 

Finding great stocks is easier than you thought. But you will have to open up your eyes. If you track businesses, good businesses are right there in front of you. You deal with them; you consume their products. Such businesses have stood the test of time. In the Indian market, some of such companies are HDFC Bank, Kotak Mahindra Bank, Hindustan Unilever, Dabur, TCS, Maruti Suzuki, Britannia, ITC and so on. Why shouldn’t you invest in them?

Investors face a few problems while investing in this “simplistic way.” Because these companies are clearly visible, they don’t arouse much interest or perhaps thrill. What arouses interest is what’s not widely known—that stock which you discovered after weeks of analysis and that nobody knows about but you. Secondly, the “already discovered” companies are expensive in valuations. Classic investment science says valuations are crucial, so investors give such discovered names a miss. Yet another category of investors feels that large companies can’t give smashing returns as mid and small caps do. Further, some investors feel cheated if you tell them the names of such stocks because they already know them. They want to know something new.  

The world of investing has been made complicated for no reason. While most experienced investors and analysts stress the need to be simple, they do just the opposite. This results in countless theories and models that try to pick the “winning” stocks and “beat” the market and the peers. It appears that investing were a game where only one person or a handful of people can win. If you “score” less than your neighbour, you have failed. 

Investing in already-discovered stocks should be the core of your investing strategy. Don’t worry about valuations much. Such stocks seldom come cheap, given their quality and robustness. They move slowly but then they also won’t likely fall the way mid and small caps do. Over the long term, the returns from the popular stocks add up to become significant. Invest in them for the long term; don’t get obsessed with short-term ebb and flow in them or their financial performance. Such companies have a history of weathering the storm. In short, they are boring but effective. 

Once you have made a core portfolio of such stocks, you can go about hunting for the next stars. This will make your overall portfolio prepared both for the next bull or bear market.  

Sunday, 26 May 2019

The Beauty of the Bear

When it comes to bear markets, there are two types of reactions. The first is that of outright dislike (I belong to this camp). No one wants to see their wealth erode, so this reaction is quite understandable. The second reaction is that of excitement, which is not natural but induced. Why be excited? Because now you can buy good stocks cheap.

I doubt the people in the second camp. All they are doing is denying the reality so that it doesn’t hit too hard. If Warren Buffett gets excited about buying stocks cheap, that’s still understandable. But when the guy next door assumes an expression of nonchalance at the latest market fall, I sense fakery. We have been indoctrinated to “not” feel the pain of the bear market and express excitement. That forces us to dismiss the pain of losing money. Worse, we think it’s something to be ashamed about. 

Recently, I have started looking at bear markets in a different way. They do cause pain but there is wisdom in that pain. While a bull market makes any rookie believe that he is a star investor, it’s the bear market that unravels your stock-selection strategy. In a bear market, you inevitably have to reevaluate why you did what you did. Most likely, you will find some fault with it. You can’t find these errors in a bull market. Once you fix them, your returns can be even better.

Hence, while bear markets are indeed painful, if you sustain through them, you become a better investor.

If you deny the pain of the bear market, you will have no reason to act on your investment methodology. On the contrary, you will begin buying more of what you own, thus compounding your mistake. 

When Buffett gets excited about bear markets, that’s because he has endured multiple bear markets and understands their nature. For most of us, it will make sense to first start appreciating the beauty of the bear.

Friday, 10 May 2019

The Power of the Stock Price

If you ask a fundamental investor about the importance of the stock price, you will probably get a look of disdain. He will tell you that valuation matters, not the price. Price alone conveys little. Plus he would advise you not to pay attention to the price; just worry about the fundamentals.

The fundamental investor is right. But the problem is that his wisdom is seldom followed. Interestingly, he himself also fails to follow it. You like it or not, stock price is the uncrowned champion of the stock market. 

It is the price that creates the narrative. Recently, a company announced its results. Analysts felt that they were mediocre. The stock price should have fallen. The next day, it didn’t. On the contrary, it climbed a fraction. The narrative quickly reversed. After all, the results weren’t bad either. 

The problem comes when the stock price becomes the foundation of making a judgement. Because the stock price of a leading bank has fallen, analysts have eagerly engaged in a fault-finding exercise. Similarly, because the stock price of a leading consumer-durables company has been on an up-move, analysts are ignoring its valuations; everything’s hunky dory with the company.

Apart from creating greed/fear in investors, stock price also drives their confidence. It’s not their own analysis or the company’s numbers; it’s the stock price. A falling stock price makes them doubtful; a rising stock price makes them cocky. 

What’s the solution then? That’s not easy. Given your biological wiring, the stock price will always influence you. Better don’t see it. Once you have a strategy in place, follow it in letter and spirit. Check your portfolio once a week or fortnight. No matter how good an analyst or investor you are, at a subconscious level, the stock price will influence you if you see it by the hour. That’s the power of the stock price.

Saturday, 27 April 2019

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.

Sunday, 14 April 2019

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

Saturday, 30 March 2019

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.

Saturday, 16 March 2019

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.

Friday, 1 March 2019

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.

Sunday, 17 February 2019

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!