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.