Monday, 19 November, 2012

Wealth by Stealth

Wealth by Stealth

I've often been told: "I know that I get a big fat salary, but I don't know what happens to it - by the end of the month, it is all gone".

The disciplined saver has a simple enough solution: "Make savings your first expense. First put away a pre-determined sum of money in your favourite liquid fund or equity mutual fund or Savings Bank account for onward deployment in accordance with your overall asset allocation. Then start incurring all your other expenses like buying groceries, paying your EMIs, paying rent, paying your phone bills, etc."

Unfortunately, the guy who finds "his money disappearing" is certainly not exactly a "disciplined saver".

Is there a simple solution for such an individual?

Fortunately, yes indeed. Such a person just needs to go back to the late 60's, 70's and perhaps the ealry 80's to find a good enough solution - Try and adopt (with necessary modifications) the techniques that used to be followed by middle-class housewives, bank employees, junior management staff of private sector companies, etc. in those days:

Wealth by Stealth

Your money does have a "knack" to disappear. To make it stay with you, here are a few simple "tricks". The key is not to simply read these tricks, but to put them into practice:

  • Identify 2-3 spots (perhaps one each at your home and your work spot) where you will keep a "Savings Hundi" - It could even be a simple small box / purse / pouch where you will park your temporary savings
  • Identify a "very small" sum of money which you consider as "throw away money" which you'll not even notice if it disappears on any given day. First thing in the morning, every day, without fail, before you brush your teeth, take this quantum of money and put it off in this "savings Hundi". People have told me that 0.5% to 0.75% of your monthly take-home income would be an appropriate sum of money for this purpose. (Congrats, you've just made a beginning.)
  • If you are not a typical "disciplined saver", you will typically be spending money often on a lot of "small-ticket" items of expenditure, often on a whim. For instance, you'll be waiting for someone on the streets, and just to pass the time, you'll buy either a magazine or a cup of coffee or a bottle of coke. Each time you do this, you would have offered the same bottle of coke to any friend of yours who would have been around at that time. Assume that such a friend was there with you, and put the same quantum of money in this "savings Hundi" of yours. This may sound odd, but is a pretty simple tool to ensure "forced savings".
  • Impulse buying is a bane for a person like you. Each time when you are "tempted" to buy something, ask yourself whether you actually need it. If so, (for the moment), go ahead and buy it. If not, pick up that money that you would have "blown up" otherwise and put it in that "savings Hundi". An example: When you are walking down and aisle at a shopping mall, you find an offer: "Buy a box of sweets and get another box free". And you get tempted. If you don't buy it, that's money saved - put it off in that "savings Hundi".

I'm consciously not giving any more ideas - I'd like you to execute the above before proceeding further.

At the end of each month, pick up all the amount collected in the Hundi and deposit the money in a dedicated savings bank account during the last weekend of the month.

As soon as the amount in this dedicated savings bank account crosses a threshold, deploy the sum of money in a suitable investment keeping in mind your overall asset allocation plan.

Review the investment value of these "minor savings" after a year. You'll be surprised. 

Follow this process for a while, and the "Wealth by Stealth"  would convert you very quickly into not only a "disciplined saver", but also a "savvy investor".

Good luck!



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Thursday, 15 November, 2012

Fool & his/her money quickly part ways

Fool & his/her money quickly part ways

I've been watching with interest the news item about the "cheating couple".

Apparently, they have "looted" over Rs. 500 crores. This figure may be disputed, but indications are that the amount involved is huge.

What did they promise?

Here's a summary based on what I saw on TV News Channels:

The "Promise"
Hey folks, please deposit a sum of Rs. xxx with us.
You'll be paid an interest of
  • 20% per month for Six months
  • And your principal of Rs. xxx will be returned in the Seventh month
This essentially implies that you will more than double your money in much less than a year!
Hey friends, come, come quickly and put in all the money that you can right away with us! 

This promise reminds of the story about the "old, unfit tiger" which used the garb of "having renounced the world" to attract naive innocent victims only to kill them and eat them up.

When someone promises to double your money in 6-7 months, obviously there must be a catch in it. Especially when the bank deposits give you a return of less than 10% per annum. Especially when one of the greatest investors of all time, Warren Buffett generates a return of less than 30% per annum.

If you still get tempted and put in your hard-earned money with the couple who promised you to double your money in less than a year,
I'll certainly not have any sympathy for you - I'll not even admit that the couple has cheated you.

A fool and his/her money
Deserve to part ways
No regrets!



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Wednesday, 14 November, 2012

Super-bull-market ahead in India (with certain caveats)

Super-bull-market ahead in India
(with certain caveats)

I was reading some stuff from the Economic Survey, and found a vital "interesting" point. Then I looked for a shorter version of the same point so that the readers of this blog can quickly read, and found it in the Times of India:

Key excerpts from the above link:

Labour growth has slowed down in both public and private organized sectors, the Economic Survey has revealed. Just 15% of the total labour force has regular salaried jobs. While employment in the public sector grew at just 0.4% between 2010 and 2009 as compared to 0.7% between 2009-2008 , private sector employment grew at 4.5% as compared to 5.1%.
Job creation remains a massive problem. The government aims to create 5.8 crore jobs between 2007 and 2012, but in the five-year period between 2004-5 and 2009-10 , only 1.8 crore jobs were created. Moreover, the labour force expanded by just 1.2 crore in that period, possibly because more young people stayed on in education, the Survey estimates.
Source: Times of India, March 16, 2012

The fact that just 15% of the labour force has regular salaried jobs is most interesting.

It reminds me of the story of the two Bata shoe salesmen who went to Sub-saharan Africa to explore the market for shoes. The pessimist came back, saying that "Nobody wears shoes - there's no market here". The optimist sent a fax: "Send me a million pairs of shoes - Nobody wears shoes here. The market potential is unlimited".

In a similar vein, a significant group of those who are faced with a constraint of looking at the next quarter or two would belong to the camp of pessimists. And will say: Growth is slowing down. There's very little employment. Both investment and consumption is slowing down. There's too little to hope. And, to top it off, the global trends are not supportive.

However, I'm an optimist and also have a much longer time horizon when it comes to handling my own personal investments. The fact that only 15% of the labour force have salaried jobs represents a humongous opportunity to my mind.

Look at it this way:
  • Schemes like the NREGA are already putting a lot of money in the hands of people at the bottom of the pyramid. Consumption-led demand is far more to blame for the high inflation. While the inflation monster must be tamed, the fact that purchasing power is going up can't be all that bad.
  • Guaranteed education is going to make an ever-increasing group of people "employable" in the years ahead vis-a-vis the number of "employable" people among "new adults" in the past several decades.
  • There is a significant focus on "Skill Development" - don't recall the exact scheme off the cuff, but I'm conscious that there is a lot of concerted (and government supported) effort to actually develop skills.

The above points will ensure that the number of people who enter the "salaried class" will only keep increasing in an exponential manner in the years ahead.

The figure of 15% of the labour force belonging to the salaried class is so very low that the "base effect" will work to our advantage in the years ahead. When the percentage of people belonging to the salaried class goes up from, say, 50 to 55%, that works out to just a 10% increase in percentage terms. However, if the current 15% figure goes up to 20%, that translates to a huge 33% increase.

Statistics has shown that when the per capita income of a country crosses a threshold of $ 1000/=, the momentum of the economy picks up in a significant manner thereafter. We've crossed the figure recently.

And when the inevitable march of an ever increasing population enters the "salaried class", there will be an unprecedented economic boom due to an increase in consumption in virtually every sector that you can imagine. The disposable income would be going up enormously. The ability to spend AND the ability to save will only increase. And we'll enter a virtuous cycle of:
  • Increase in disposable incomes
  • Increase in savings (which enter the economy through either the banking system or through the equity route to promote investments)
  • Increase in consumption expenditure.
  • Increase in demand
  • Improvement in the pricing power of companies
  • Greater volume growth and increased margins for companies
  • Higher tax collection for the government
  • Increased infrastructure spending
  • Much higher GDP growth rates
  • Huge inflow of global capital due to the attractiveness of the country
  • Reducing interest rates
  • Increased earnings of corporates
  • Greater wealth creation for investors
  • Improvement of the physical infrastructure of the country
  • Increase in the number of retail investors entering the equity market directly or through mutual funds
  • Improved feel good factor
  • A repetition of virtually most of the above points due to the rest of the points coming true

The natural result???

A huge bull market that will last for an unimaginably long period of time lasting at least a couple of decades, if not more.

The obvious caveats would be:
  • Local: The government does something stupid and derails one or more of the steps in the virtuous cycle as described above
  • Global: Some major unexpected fiasco occurs resulting in a global recession

My hunch is that the first caveat, while probable, is unlikely: Too many smart people across all major political parties will ensure that the right things get done. I do believe that corruption is likely to reduce in the years ahead. Even corrupt practices continue to prevail, the very same corrupt politician / babu / industrialist nexus will be able to make much more "corrupt money" in a high growth economy than in a recessionary economy. This, by itself, will ensure that all key stakeholders will, in due course, strive to achieve high growth.

The second caveat - that of a global recession - is far more likely in comparison. However, while it will definitely set us back by a couple of years, the advantage that India has vis-a-vis many other developing countries is the domestic consumption story. This key differentiator will ensure that the inward FDI flows resumes in due course.

Folks, the coming bull market is going to be huge. You may question the "when", but you can't question the "whether".

Keep reading my blog regularly for inputs on how to maximise your benefit from the coming bull market.



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Sunday, 11 November, 2012

The Individual Investor's Edge

The Individual Investor's Edge

Just came across excerpts from a nice book "Money Makers" by Jonathan Davis. In this book, he comes up with an interesting point: The individual investor has an edge over a professional fund manager. And elaborates with a few reasons.

The more I think about it, the more it sounds appealing. I thought further about the subject. The greatest advantage is simply that the ordinary investor has no need to abide by the rules of the professional game.
Here are a few very valid reasons (some provided by the aforementioned Jonathan Davis, and some based on my own understanding of how the market works):

  • For a start, no private investor has to try and outperform the market: your livelihood does not depend on relative success. Your main concern is the absolute level of return you make on your money, and the risk you have to take to achieve it.

  • As a corollary to the above, it is possible for an individual investor to put all his equity allocation to an index fund and forget it for a long while. A fund manager often can't do so.

  • Private investors are one of the few classes of investors who can often afford to take a genuinely long-term view of their investments. While many professional investors say publicly that they adopt a long perspective, in practice most are still bound by to do if they are genuinely investing for the longer term. Fund managers often have quarterly targets. They need to get their increments, they have their bonus worries, they want their promotions. Individual investors have no such worries. As an example, when Ranbaxy witnessed a change in management, the share prices tumbled to sub-200 levels. A fund manager would have easily found it difficult to buy at 200-250 levels and hold on to those shares. An individual investor could easily have done so, if he had the risk appetite to see even lower sub-200 levels for a short span of time. Today, you all know the prices of Ranbaxy. A similar situation could possibly hold water for stocks like Tata Steel and BHEL which are wildly out of favour. When the tide turns, however, the returns could be great.

  • Individual investors are not burdened with the sheer size of portfolios with which most professional fund managers have to grapple. The bigger the fund, the harder it becomes to sustain an edge in performance. An individual, on the other hand, can easily achieve adequate diversification with a portfolio of anywhere between 7 to 20 companies.

  • A professional investor is constrained by the "nature of fund", "fund house guidelines", etc. For instance, for an equity fund, as per present rules, a fund manager is forced to hold at least 65% in equity shares. An individual investor has no such worries. If he was prepared to do so, nothing prevented him from holding 10% equity and 90% cash when the index hit 21000 in 2008. After all, he knew (as well as the fund managers did) that a whole lot of shares had gone up to crazy heights. Even if a fund manager knew that he was personally uncomfortable holding on to those shares at such high levels, the fund manager could not have "sold out". The individual investor has no such restrictions.

  • When a fund manager buys a share (or sells a share), he has the obligation to "justify" the decision to his internal bosses. On the one hand, this delays the process. On the other, it results in "Group Think", where all members of a team try to be agreeable, rather than to express what's right. The individual investor does not face such restrictions. He can jolly well go by his own analysis.

In terms of inputs (whether data or knowledge), with the explosion of the internet and the plethora of disclosure norms, the individual investor does not face any significant disadvantage vis-a-vis the fund manager.

Still, many individual investors, including the "theoretically knowledgeable" investors do not make enough money in the equity markets.

Besides the problems that are associated with stock-selection, I feel that there are a few key behavioural finance issues that prevents the individual investor from becoming truly wealthy:

  • Information overload - The individual investor tends to believe that "the other guy" knows more - Just because someone writes in a magazine or publishes a blog post or appears on TV, one need not presume that such an individual knows "more than" oneself. After all, NOBODY knows exactly what's going to happen in the market in the near future.

  • Bias for action - This one is linked to the information overload. The individual investor, hearing all the "noise" from various sources, ends up with a strong bias for action. In the markets, "being still", being patient, waiting with your stocks - these are the traits that make you solid money. I distinctly recall buying Titan industries several years ago at a pre-bonus, pre-split price of sub-50. In hindsight, I also know that I had bought it at around the same time as Rakesh Jhunjhunwala made his initial investment in Titan. I got tempted by my "ability to make quick money" and sold out when the share prices doubled. Rakesh is still holding on to Titan. I remain a "retail investor", while Rakesh has become "The Big Bull". Obviously.

  • Greed for more - We're keen to get the last penny from our shares. Hence, despite knowing that a share is overvalued and can only go down, we wait till the music stops. All of us will be familiar with the 2008 story of how the indices fell from 21000 to sub 10000 levels in no time. I just happened to listen to a fund manager a few days back mentioning about how he failed to sell Pentafour Products at over 2000 - He was constantly hoping for more, and today he's left with those shares quoting below Rs. 5/=.

  • Fear factor - This is the converse of Greed - When we know that a high quality company is quoting at ridiculous levels due to temporary problems (either in the company or due to market sentiments), we're way too scared to pick up the shares. A good example would be Tata Motors and Tata Steel. After they picked up Jaguar Land Rover and Corus respectively, the share prices tumbled. Went down to levels so crazy as to become meaningless. And we all knew fully well that the house of Tatas are adequately reliable. We knew about their ethical standards, their management bandwidth, their longevity. Still, many of us failed to pick up those shares at such low levels and hold on to them.

If we can manage to overcome these behavioural "problems", any prudent individual investor who bothers to analyse well before investing can surely become truly wealthy over a period of time. So what if he "underperforms" the index or a couple of fund managers for a couple of quarters or even a couple of years? What matters to the individual investor is whether or not his investments yield the desired wealth over a period of several years.

Happy Diwali!



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