Silly Things People Say about Money # 5

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Income and expenditure are opposite in not just their very nature but also in the behavior they result in. While it’s considerably hard to generate income, it’s as much easy to spend. So, most of us wonder why our incomes are so low but the expenses keep going up. The difference between income and expenditure is savings. If either of their determinants goes out of whack, savings suffer. So does investing.

If your expenses rise by the same amount as your income, you are actually no richer. Worse, if your expenses rise at a faster rate than your income, you could be poorer. To boost your savings and investing, you should work on both income and expenditure. Try to increase your income and at the same time control your expenses. A stupid theory to which many youngsters have subscribed to is let your expenses rise and that will motivate you to earn higher. That’s equivalent to saying that you start suffering from poor health because that will motivate you to become healthier.

The nature of expenses is such that they are not perceptible at the time of their occurrence. However, they add up to a large amount by the end of the month. Even harmless, small-time expenses can take away a major chunk of your income over time. In order to avoid that, delay your expenses as much as you can. Make them when you have to, not before that. If you follow this simple rule, you will realize that over time, some of your expenses simply disappear. In the normal course, you would have spent money on them because they looked too small or because you had money in hand. But as you tighten the noose around them, they get relegated to the point of extinction.

Another trick is to make your discretionary, feel-good expenses around the month-end, not at the start of it. This will help you better prioritize your expenses. We often end up making the negotiable expenditures before the critical ones. This results in diminished savings and a feeling of anxiety and desperation in the middle of the month. The need is to be disciplined from the start of the month.

And of course, the greatest rule is to save before you spend. Your expenses should be a remnant of your income after savings. Your savings shouldn’t be a remnant of your income after expenses.

Beware of the Eccentric Entrepreneur

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One of the major attributes of entrepreneurship is innovation. Entrepreneurs frequently disrupt the older ways of working and introduce the new, perhaps revolutionary, way of doing things. Obviously, this requires the entrepreneur to be unconventional with his outlook. He should be able to spot opportunities or trends that may not be readily visible, keep faith in his idea and be rigorous to implement it. If he is successful, unimaginable riches may be in the offing.

Selectivity bias causes us to overestimate entrepreneurs. We are naturally drawn to those who are successful and don’t even have an idea of the countless that fail. This makes us see the successful ones as demigods. Even if they are entirely reckless, we don’t see that as a problem but as a part and parcel of entrepreneurship. This is a mistake. Today, quite a few eccentric entrepreneurs have captured the limelight. The CEO of an American electric-car maker doesn’t spare an opportunity to stir controversy and sensation. For some reason, investors have bought into his vision, not minding the company’s financials, his behavior, exposure to multiple cash-guzzling businesses and so on. It’s only a matter of time before the moment of reckoning arrives.

A major factor that has increased the acceptability of the eccentric entrepreneur is easy money flowing into startups. Startups defy business sense. With scant regard to profits, they want to grow large first. This encourages risky business practices and unfortunately crowds out smaller sensible businesses. This is a shame. A Japanese billionaire runs a huge fund that invests in such startups. It has yet to be profitable and has attracted flak due to its recent goof-ups. Covid-19 has muzzled the supply of this easy money, thus resulting in a crisis at startups run on easy money. If the situation continues, many will perish. 

Business is a serious business. It’s not about risky, stupid or senseless actions. While entrepreneurs do take risks, they are also conservative and don’t want to lose money. They understand that many people’s lives depend on their businesses. They feel the weight of this responsibility and quiver at reckless business practices. Warren Buffett is a staid businessman and investor. If you read his annual letters, you will realize how conservative he has been, yet that has not stopped him from being immensely successful. 

Unconventionalism may be an attribute of entrepreneurship but sensibility lies at the heart of it. Real entrepreneurs never lose sight of this fact.

Why the Stock Market Is Overrated

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Many are baffled about the recovery in the stock market over the last one month, even when the economy is suffering and has bleak prospects. Experts are trying to make sense of this disjunction. Some are saying that the market has run up ahead of the fundamentals. Others are anticipating a sharp recovery with the lifting of the lockdown.

The stock market has been made out to be what it is not. To see the stock market as some robust mechanism that predicts what will happen in the real world or that reveals a picture otherwise hidden is a mistake. The market has been erroneously given more respect than it deserves, when it is a random mechanism at best, at least in the short run. 

Investors and analysts tend to make sense of a company’s performance or a policy decision from how the stock market reacts to it. Some call it a “discounting mechanism.” Others consider it as a crystal ball that helps them look into the future. The US president boasted of the new highs in the stock market as a signal of his successful management. The abrupt fall in the market shakes governments, which start wondering if what they did was indeed right.

By bludgeoning a stock, the market gets control of the fate of a live company. Because the stock has been beaten up, there must be something wrong with the company, investors wonder. This turns into a self-fulfilling prophecy. A free-falling stock price can be lethal for finance companies and those that have taken up debt or have high promoter pledging. Not surprisingly, the top management rushes to soothe the market’s nerves before much damage has been done. It also uses the share-price performance as a gauge of its competence.

All this is a mistake. The stock market is not an efficient mechanism. You can’t always trust its ups and downs to have any real-world implications. In the short run, traders determine its course. Stocks move up and down because there are vested short-term interests. With the onset of algo trading and other automated ways, the frenzy in the market will only increase. That won’t mean things are changing dramatically. Reading too much into market moves can only dilute your focus and returns. 

At best, the stock market is a buy–sell mechanism. Its main job is to provide liquidity. If you entrust it with any more responsibilities, that’s a recipe for a life of anxiety and pessimism.

Covid-19: The Great Differentiator

Image by Gerd Altmann from Pixabay 

Warren Buffett once said, “Only when the tide goes out do you discover who's been swimming naked.” In good times, everything seems to be gung-ho. It’s difficult times that differentiate among the good, the bad and the ugly. Covid-19 is a great differentiator. It has already started to show its impact. Many companies are complaining of an acute cash crunch as their operations have come to a halt. Some have cut their staff’s salaries. Others have plans to lay off workers. 

Covid-19 isn’t the real problem; it’s just made out to be so. It’s been two-three months of its onset and some companies are already teetering. In reality, these companies were never doing well. Only that they were able to hide their incapacities behind the veil of economic growth. If a crisis persists, everyone suffers, that’s understandable. But if in a month or two, your very survival is at stake, then that requires some close examination.

Many of these companies never built emergency reserves. They worked on hot money that optimistic investors kept injecting. The so-called “start-ups” are a case in point. Without any profits and in absence of fresh funding, they will find it hard to sustain themselves. Some will showcase greed and opportunistic behavior by their promoters and owners. It’s easy to lay off workers, so they will do so.  

Obsolete business models will start surfacing. Primitive ways of working that should’ve been dead but which survived on the ventilator will be exposed. Take for instance the auto sector. It’s production has come to a halt. Or aviation—there are no flights. If work can go on without travelling and flying, that itself raises the question how these industries flourished to date. Much of their demand was artificial.

Investors have a great opportunity to observe how companies respond to the pandemic. That will show their character and strength. Solid companies won’t complain about the situation; they would be busy adapting to the new normal. They won’t beg for government support. When things get back to normal, many of these not-so-good ones will also get back on their feet but the good ones will have actually thrived. It’s by investing in those good ones that you will build wealth.

Home Is the New Office

In just one month or so, the coronavirus pandemic has affected our daily lives in myriad ways. Many realizations and revelations have occurred that may not have happened in the normal course. One such useful discovery is that many employees can handle their jobs remotely. This means going to the office daily could be redundant.

Companies are fast realizing how productive their workforce can be if it is allowed to work from home. With many communication tools available today, coordinating isn’t a problem. Some other unproductive and energy-sapping activities have come to an end. My alarm clock no longer dictates when I should wake up. I don’t have to tolerate the whims of cab drivers. We are not being stuck in traffic. There is no rush, yet things are happening.

Most importantly, the work is getting integrated in our lives. There is no need to see it separate from our other regular activities. There is no need to wait for the weekend for some time off. Not surprisingly, many of us are working more than usual, without realizing so. 

Surely, there are others who are missing their office life and may be finding it difficult to concentrate at home. However, the pandemic has forced them to switch to the alternate life for good. Of course, not all work can be done from home; a lot of professions entail travelling. Factory workers have to go to factories. Those who are into public dealing or sales or marketing have to move. But there are a lot many who really don’t have to move so much.

The message is clear. While office life can’t be written off, work from home is there to stay. It should be taken more seriously than before. Perhaps some combination of both should be used wherever possible. Even those who are on the move can be asked to spend some quality time thinking and planning. That won’t just increase productivity but will also enhance the quality of human life.

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

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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

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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. 

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.

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.”     

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. 

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

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.

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.