Auditing my 2015 Resolutions & making 5 New Ones for 2016

Making new year resolutions is not tough. It is only tough to keep them.
Like every year, I also made few resolutions last year. And to ensure that I don’t end up being as bad as I have been in keeping them, I decided to publish them in a post last year.

New Year Resolution 2016

So with year now drawing to a close, I thought it would be a good idea to have a status check of the resolutions I made for 2015:
Resolution 1
I will increase my MF SIP contributions by 10%.

Accomplished for personal portfolio.
Infact, I even managed to convince my wife to invest more in equity MFs. She increased the SIP contributions by 20%! But that was after she managed to force me to buy some gold. 🙂

Resolution 2
I will once again try to surrender an endowment (insurance) policy, which an uncle of somebody sold me and I couldn’t surrender it, because of my family’s connection with that somebody’s uncle.
Failed. I tried to convince ‘the uncle’ about superiority of term plans but unfortunately, uncle is an agent and I could not push hard enough due to our family relations.
There are ways by which I can still get some of my money back. But that will come at the cost of annoying ‘the uncle’. So for sake of family relations, I have taken this hit and written it off. 🙂
I have also increased my insurance coverage by buying more coverage of plain term insurance plans.

Resolution 3

I will increase my Emergency Fund to cover 6 months worth of my family’s expenses. (In 2014, it was at a risky 4 months).
Accomplished. I managed to increase my Emergency fund to cover 15 months worth of family’s expenses. I have also ensured that my wife’s own emergency fund is big enough to cover 6 more months of our expenses. The amount is parked in less-used savings accounts and fixed deposits.
I know you will accuse me of sacrificing returns by parking money in savings account. But this setup is in line with my idea of giving more weightage to peace of mind than to earning more returns on my emergency fund.

Resolution 4

I will save atleast 5% of my income in Travel-Fund. I will push my wife to do it too. 🙂 We love travelling and that requires planning and money.

Accomplished. Both my wife and me save atleast 5% of our monthly incomes to fund future travels. Infact, the cash which we get from family members in social gatherings / festivals, also finds its way into our travel fund most of the times. 🙂

Resolution 5

I will read 3 books which I should have read long time back:  Letters from StoicTitan – The Life of John D Rockefeller and Make Your Mark

Failed Miserably. Read none of the three. Infact, read very few new books this year. Very disappointed with myself.

Resolution 6

Accomplished. Read all three.
For those who haven’t read the Art of Thinking Clearly, I can only say that you are missing out on something really important. The book is highly recommended. And if you plan to read just one book in 2016, then pick this one up. It is worth making your constant companion. It has a permanent place on my study.

Resolution 7

I will use my Market Crash Fund (with courage)… if markets go down by 15%-20% this year.
Partially Accomplished. Markets did not go down so much this year. But I did buy few stocks when they fell significantly. I was happy to see large-caps being ignored at cost of mid-cap stocks. Many people seem to be suffering from overconfidence of the bull run in mid-cap stocks. My best wishes to them.
That was about my 2015 resolutions.
Earlier, I was quite skeptical about making New Year resolutions. But since this approach of publicly declaring resolutions has had reasonable success in 2015, I don’t think there is any harm in trying it out for another year.
So here it is…

My Resolutions for 2016 

1) I will increase my MF SIP contributions again by 10% this year
I must confess that I already know it will be tough to achieve. There are few expenses that will surely loosen my wallet in 2016. Though I have already made provisions, things can always go out of hand. But I will still try to achieve this resolution.
2) I will save atleast 5% of my income in Travel-Fund
Tough again. But can’t compromise with travelling aspect of my life. 🙂
3) Re-read Poor Charlie’s Almanack, some of Warren Buffett’s Annual Lettersto Shareholders and all Memos by Howard Marks.
4) I need to put in place a more stringent fitness regime
Turned 30 in 2015. I believe that it’s the right time to get serious about my health. I have been walking and cycling on a daily basis for last few months. Now I need to use this momentum to put a more formal routine in place and ensure that I do atleast one exercise everyday in 2016. Fingers crossed.
5) I need to arm-twist atleast 5 people to buy life and health insurance to help them protect themselves.
Might sound odd but some people just don’t understand. I have recognized 5 such people (& families) who are close to me and don’t know the risk they are taking by not insuring themselves adequately. I will do my best to help them get insured. Even if it means helping them pay first few premiums. (Note – I am not an agent or distributor and won’t get any commissions if they do so.) 

That’s all.

I would have loved to see broader markets correct more this year. But I am still happy to have found some opportunities at individual stock levels. Reason is obvious. I plan to remain a net buyer of stocks for next several years. Hence market falls give me opportunities to buy shares of good companies at cheap prices.
With this, I wish you all a very happy and prosperous New Year.

May you give the right importance to yourself, your family and your money in 2016 and beyond.

How to Make Money in Stock Markets?

The idea of making money overnight is what brings most people to stock markets. However, its easier said than done. Making money in markets is not easy. No matter what anybody (me included) tells you, it is not easy. But it is also not impossible if you have the common sense to understand one simple concept.
I know the title of this post sounds spam-like. But its not, I swear. 🙂

Make Money in Stocks

Now stock market is a volatile place. If you have been in markets for last few years, then you will agree with me on this. And if you are new in market, then you will agree with me pretty soon. 🙂
Many people believe that just because they can easily calculate CAGRs using excel calculators, markets will respect their efforts and only move up or down in straight lines. But I am sorry to disappoint. This notion is as wrong as the idea of Sun rising in West. Markets never go up or down in straight lines. Never.
So then why are stock markets volatile?
Why is it that many times, markets suddenly fall by 5% or maybe 10%?
Think of it like this…
All companies exist to make money for their owners (investors). So a company needs to make money to exist. But nobody actually knows how much money a company can make in future. And all those who claim to know are only referring to their opinions and projections about it. Now everyday, on basis of these opinions and projections, lacs of people buy and sell stocks of these companies. Those buying feel that they have got a good deal and those selling feel that they have got a good deal. But in real world, both cannot be right simultaneously. 🙂
This constant buying and selling is what makes the market do up and down… When either of two (buying/selling) increases many times of other, markets either crash or go through the roof. This is what makes markets volatile.
This volatility is exactly what makes market, an ideal place to make truckloads of money. But only if you have the patience to wait and the courage to invest when things are worth investing.
You may ask…
When are markets worth investing?
The answer, atleast for long term investors is that when markets are cheap.
You might feel that it is quite easy then. After all, there are many indicators that tell when markets are overvalued or undervalued. Isn’t it?
True. But as Buffett famously said, Investing is simple, but not easy.

So the right question to ask here is…
When are markets reallyworth investing?
Ofcourse, you won’t get such opportunities regularly. May be you will get such chances only 3 or 4 times in your life. But that is what real successful investing is all about.
Talking of volatility reminds me of an interview held in India, where Warren Buffett said:
If you look at the typical stock on the New York Stock Exchange, its high perhaps, for the last 12 months will be 150% of its low. So they’re bobbing all over the place. All you have to do is sit there and wait until something is really attractive that you understand.
Now this quote made me curious.
I know that individual stocks do ‘bob around’ a lot and can be quite volatile. But even if we were to consider broader markets, it can be quite volatile within short periods like 1 year.
This short-term volatility offers tremendous opportunities to investors to build long-term positions, even at broader market levels.
Now I tried to evaluate Indian markets from the lens of Buffett’s High/Low wisdom. Also, instead of choosing individual stocks and complicating this analysis, I picked our bellwether index Sensex, whose data was easily available here.
And this is what I found…

India Stock Market Volatility
Buffett is right. Even for Indian markets. As you can see, even indices are volatile in line with his statement. Though high/low volatility seems to have decreased since 2010, stock markets are still volatile enough for us to contemplate about it with all seriousness.
Volatility is not just important for long term investors. Even short-term traders understand its importance and make a career (and at times, fortune) out of it!
Have a look at the High/Low gaps in table above. Its clear that markets give numerous opportunities, even on an annual basis. You just need to have the patience to wait for the right opportunity. You can use market’s volatility as your friend.
John Huber of Saber Capital Management (Base Hit Investing) says,

There is no logical way to explain why large, mature businesses can fluctuate in value by 50% on average in any given year. It makes no sense that the intrinsic values of large mature businesses can change by tens of billions of dollars in a matter of months—and this dramatic price fluctuation occurs on a regular basis—in fact, every year.
Lets take an example of the year 2014. The high and low for Sensex in that year were 28,822 and 19,963 respectively. So that means that yearly-high of Sensex was 44% higher than its yearly-low.
This begs the question:
Are the 30 largest Indian businesses really 44% more valuable than they were just few months earlier?
Though in hindsight, its obvious that due to the euphoria around installation of new government at centre, government’s underestimation of economic problems and people’s overestimation of new government’s ability to solve those problems, market behaved in such an irresponsible (!) manner.
But this is how markets function – they first overestimate and then underestimate.
Pick data for any year and trend remains same. And so does our question:
Are the 30 largest Indian businesses really XX% more valuable than they were just few months earlier/later?
Answer this time too, remains same – Unlikely.
And mind you, we are talking about (averages of) 30 largest Indian companies and not even small companies having comparatively unpredictable businesses. If we were to choose smaller companies, my guess is that their values will fluctuate even more.
Again quoting John Huber here, greater volatility brings greater opportunity for investors as the more a stock fluctuates around its true value, the larger the potential gaps are between price and intrinsic value.
Obviously this list [above] tells us nothing about the intrinsic value —only that the prices fluctuate widely. But it should be fairly obvious that prices are fluctuating much more than intrinsic values—which provides us with opportunity.
So be sure of this – markets are volatile and will remain so. This is the nature of market. It will not change. And understanding the nature of market is the key to have the confidence that you are not doing anything stupid. This confidence will allow you to invest large amounts when markets are down and others are selling out. This is when you will make some real money.
Talking of building confidence, I leave you with words of a financial blogger Pete (of MMM) that exactly voices my thoughts about stock markets:
It’s worth gaining this confidence, because investing knowledgeably in stocks has always been the single best thing to do with your money in terms of getting lifetime income with absolutely no effort on your part.

Where else can you hire people to work for you and you own their companies.


So embrace volatility and make money in stock markets.

Investing in Large-Cap Stocks. Don’t Ignore It.

For a moment, let’s keep aside the discussion of investing in large-cap stocks and dedicate next few sentences to the over-glamorized concept of ‘Thinking outside the box’. As per generally agreed definition, thinking outside the box is a metaphor that means to think differently, unconventionally, or from a new perspective. This phrase often refers to novel or creative thinking.

Now you will agree with me that even referring to this phrase makes one sound smart. Even though it’s not at all easy and infact, a grossly misunderstood concept.
Now lets come back to what this website is about – Investing + Common Sense.

Investing India Large Caps

It is a commonly held notion that one needs to do something out of the ordinary, to find multibagger stocks. For example being able to correctly predict a sector’s rise in future, correctly predicting a company’s turn around, correctly predicting Fed rate cuts and how it impacts investors, etc.
To an extent, it’s true. When investing, it does auger well for an investor if he can look outside the box and correctly identify change in trends, businesses, demands, etc.
But when markets continue to do well, market participants (lets ignore whether they are investors or traders) need to increase their efforts to find their next investment thesis. Why is an increase in efforts required? It is because due to rise in markets, good investment opportunities become hard to find.
Now by definition, good investment ideas are rare. So one essentially needs to look in unexplored pockets of stock markets to find good investment worthy stocks. This works well for really good analysts and investors.
But when this trend of finding multibaggers catches the fancy of common investors (who might get attracted to terms like value investing, moat investing, special situations investing, etc.), I feel that the possibility of stocks of well established, large-cap companies getting ignored and falling off the radar, increases.
What I am saying is that when everyone is looking outside the box, it might be a good idea to turn around and look into the box again. Its because there is a good chance that there might be a few good, investment worthy stocks, lying there in plain sight.
To be more specific, it’s possible that when you are looking for the next multibagger among small-caps and other exotic stocks (outside the box), some seriously undervalued stocks might be available in the large-cap space (inside the box).
I was reading an article by John Huber of Saber Capital Management (Base Hit Investing), where he talks about why stocks get mispriced in general. Here is what he had to say, especially about large-caps:
Large caps stocks that get mispriced are almost always due to disgust. These stocks are large companies that are widely followed by investors and analysts. There is very little information that is not widely known by all market participants. However, sometimes these large companies run into a temporary problem and investors sell the stock because the outlook for the next quarter or the next year is poor. Investors can take advantage of this situation by a) accurately analyzing the situation and determining that the nature of the problem is in fact temporary and fixable, and b) be willing to hold the stock for 2 or 3 years—a timeframe that most individual and institutional investors are not willing to participate in.
Some investors refer to this concept as “time arbitrage”. It just means that you’re willing to look out further than most investors and willing to deal with near term volatility and negative (but temporary) short-term business results.
In addition to a company specific “disgust”, these large caps can also get beaten down when the general market environment is pessimistic. In bear markets, companies with no problems at all often see their stock prices get beaten down because of macroeconomic worries or general market pessimism.
So although many value investors look at small caps because they feel this is where they can gain an informational advantage, I think taking advantage of this “disgust” factor is just as effective and is an important arrow to have in the quiver.

These are some really wise words for common investors, looking to build their own direct stock portfolio, in addition to mutual funds portfolio (highly recommended thing to do).
What John is trying to say is that as a common investor, it’s really tough to find the next set of multibaggers (especially in small-cap universe). Common investors by definition do not have the time or the skill to correctly analyse real businesses behind stocks. And honestly speaking, the best they end up doing is to get a tip from here and there, and invest their money, hoping to be right.
Sometimes, it works. But most of the times, it doesn’t.
It can work beautifully in Bull markets as a rising tide lifts all boats. But it can cause big losses when Bulls give way to Bears.
Think about it. When almost everyone is ignoring large cap stocks and looking in the mid-cap and small-cap universe, isn’t it possible that some good, solid and established businesses might be available at throwaway prices? I think, its possible.

A common investor’s best bet when dealing with stock markets, is to use their Common Sense.

So read the paragraphs by John (italicized above) again. Don’t ignore large-cap stocks just because everyone else is saying that they don’t move much. Apart from focusing on upsides, its also very important to protect the downsides when investing. And large caps can help you do that. They generally* don’t fall as sharply as most small-caps.
* There is no guarantee that large-caps won’t fall a lot. It did happen in 2009-2009. It’s just that it doesn’t happen with large-caps as frequently as it happens with small- and mid-caps.

Fed Rate Hike and what Indian Investors can do about it

A lot of noise is being generated these days about the much-awaited US Federal Reserve’s Rate Hike. In fact, I had been adding to that noise indirectly as I was working on a client’s research project, where I had to analyse the impact of possible rate hike on emerging markets among few other things. So now as I am through with my report, I am sure it will be used further to create more noise. 😉

While doing my report, I decided that I will also share my thoughts here, about how a common (long-term) investor needs to think through this development.

As of today, many in India are trying to predict the following:

  • Will Fed actually increase rates?
  • How much will it increase?
  • What will happen to Indian markets after that?

For common investors, there is not much they can do about the above 3 questions, unless they can somehow influence Fed’s decision. But that I assume will pull them out from the crowd of so-called common investors and put them among US policy influencers. 🙂

Fed Rate Hike Indian Impact

Caution: Basing your buy/sell decisions on macroeconomic scenarios alone is not right. But ignoring them altogether is not a wise thing either. So if there are chances that a stock, which you are ready to buy at Rs 200 today, will be available for Rs 180 (with no change in fundamentals, atleast broadly speaking) – then I think that you should give a serious thought to staggering your purchases to get a lower buy price. Isn’t it?

I know it sounds like trying to time the market, which is not advisable. But please do hear me out. I am trying to put in place a framework to think through such developments.

Now frankly speaking I cannot analyse the coming Fed rate hike. I am no rockstar economist like our beloved Mr. Rajan. Also, I have absolutely no way of knowing whether Fed guys will even hike rates or not. Its possible that just at the last hour, they might decide not to do it for another quarter or so (in view of say, any last-minute developments).

There are known-unknowns and then, there are unknown-unknowns. So we can never be sure.

But general consensus is that rates will be hiked. And chances of this hike coming through by mid-December are high. As far as impact of this is concerned, there is a perception that is clearly evident from headlines like these in business newspapers:

‘D-Street fears a volatility spike on uncertainty over Fed Hike.’

‘Markets too fall more post Fed rate Hike.’

Now what actually happens when Fed hikes rates?

This simply means that money which was easily available in US and flowed into emerging markets like India, will not be available that easily. According to an article I read recently,

the US Federal Reserve has resorted to various measures to pump in liquidity in the economy [after the credit crisis]. Three rounds of so-called Quantitative Easing (QE) failed to bring in the required impact on the economy. Though the Fed has withdrawn the QEs, they kept the ‘easy money’ tap open by keeping interest rates near zero. Money was available for free to conduct businesses in the USA. But most of the money was channelized into equity markets and that too in riskier assets [like emerging market equities]. So if interest rates are increased, access to this easy money will become costly. Chances are that inflow of funds will reverse if interest rates are increased…

Now a rise in interest rates in US is expected to further strengthen the dollar. A stronger dollar is expected to attract money back from other markets. Among all recipients of this easy money, riskiest are the ones in emerging markets like India. Hence the first markets from where allocations will be withdrawn will in general, be emerging markets. The recent pullback by FIIs from Indian markets indicate this. Infact, selling by FIIs in last few months have been highest since 2008 crisis (source).

But here is a counter logic. The recent outflow can also mean that a larger part of the so-called ‘hot money’ has already moved out of India in anticipation of rate hike.

Quite possible…

Hence when Fed does increase the rates, then one very important thing which will be removed is the uncertainty – about whether rates will rise or not.

This removal of uncertainty is quite important.

Think of it in personal terms as well. When you don’t have a doubt, your decision making changes. For example: When you pay toll for using a good expressway, you are sure that the roads will be in good condition and free from potholes. Its very easy for you to then take a decision to drive fast (even exceeding 150 kmph).

But if you have this nagging doubt that roads might be bad, you will stay cautious and drive accordingly.

So when uncertainty about rate hike is gone, chances are that investors might take a fresh look at emerging markets, especially India. Interestingly, emerging Asian markets, witnessed one of the best bull runs ever (2004-2007) and it was aided by FII inflows amid rate increases by guess who, the Fed. 🙂

I personally think that India is well placed here. Though we have been wrong in underestimating India’s structural problems and overestimating new government’s ability to solve them*, its quite clear that India’s growth story is still intact. Atleast I believe in it (or else, why will I continue investing in Indian stocks). Think of it in another way. No matter how much the Fed raises rates, India’s growth story will still make it a compelling option as an asset class. So if you are a FII, then even after rate hikes, you will still think about putting money in investments which have a bright future and growth potential. Isn’t it? So sooner or later, India will come back to your investment radar, when dust and noise due to Fed rates settles down.

* It is another matter that due to its very nature, markets ran ahead of the fundamentals and performed quite well till July 2015. But when the realization that things at economic front are not as rosy as expected occurred, markets decided to come down. Result is that we are down almost 15% in last 6 months. It seems funny now that stock prices are correcting as earnings are not meeting expectations. But when it all started after election results, it seemed so obvious to everybody that thing will turn for the better in matter of months. People forgot that we are a $2 trillion economy where 1.2 billion people live. We are huge on all parameters. Things don’t happen quickly here. Only opinions are formed quickly here. 🙂 And don’t forget that when earnings fail to meet expectations, many will look for external factors like Chinese slowdown, rate hikes, etc. to put a blame on. As investors, its our responsibility to see through all this. Its tough. But it needs to be done.

I also feel that things like Fed rate hikes, Chinese slowdown, etc. get much more weightage than they deserve. The bigger risk is the risk of reforms not coming through. Things like power sector reforms (and ofcourse their linkages to bank NPA problems), GST rollout, etc. are bigger concerns here.

Then, there is another less discussed scenario. Most people are focusing on impact of hot FII money invested in equities leaving India. But if dollar further strengthens against rupee post the rate hike, then chances of money invested in debt market leaving India also rise. With RBI reducing rates and Fed expected to increase it, the differential between the two will reduce eventually and might kick in more outflows from India. I am not so sure about its actual impact. Its like a known-unknown for me. 🙂

But having said all this and as clear from above few paragraphs, we cannot be sure of anything.

Seriously. Anything can happen.

But we need to be aware of broader happenings around us and how various economic factors interact with each other to effect us.

So will Fed rate hike lead to market correction? The answer is that its possible and seems logical. But I am not very sure as to how much more money will exit India – I am no FII ;-). Having said that, I also have this nagging feeling that fears here are overdone. There is bound to be some volatility (hopefully on lower side so I get to buy more shares at lower prices). But I think that our country is well placed to deal with any short-term market volatility.

I may be wrong in my lines-of-thought above and infact, might look like an idiot if things don’t pan out as they should, according to theoretical thought processes (used above). But when it comes to financial markets, is there anything which happens as per our expectations? You know the answer very well. 😉

In this discussion of predicting and analysing future events, I remember Buffett’s remark in his letter to shareholder in 1992:

We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.

So as per Buffett, I am a 30-year grown up, behaving like a child here. 🙂

What should you do?

I love the word ‘Nothing’ when it comes to the general questions like what to do in markets. But I will not use it here. I suggest you think it through.

Thinking is quite underrated. But as Aristotle famously said:

It is the mark of an educated mind to be able to entertain a thought without accepting it.

So if you have been thinking about Fed rate hikes, then whether you agree to what I write here or not, its in your benefit to think it through more deeply.

You need to think for yourself. What will you do if this happens? What will you do if it doesn’t happen?

Here is how you can go about thinking:

You cannot control what Fed does. (Uncontrollable)

You cannot control what Indian markets do after Fed does something. (Uncontrollable)

You can control what you do after above two things take place. (Controllable)

So lets focus on YOU and what you can do.

As a long-term investor, you only invest the money that you don’t need for next few years. Right?

Great. But you can only invest when you have the money to invest. Not talking about borrowing and investing here (though you still can do it).

So you can be in either of the two situations below:

  • You have cash to invest, or
  • You don’t have cash to invest.

That’s it. Plain and simple.

As for the markets, it can either go up or go down. Lets ignore the does-nothing for simplicity here.

So we only have 4 possible outcomes:

  • You have cash. Markets go Down: I get to buy shares at reduced prices. (You win)
  • You have cash. Markets go Up: You get small returns on holding cash, and lose out on possible capital gains had you invested earlier. (You don’t win)
  • You don’t have cash. Markets go Down: Nothing to worry. Life goes on (but You don’t win)
  • You don’t have cash. Markets go Up: You make paper profits. But you don’t get to buy more shares cheaply. (Not sure whether you win or you don’t lose – depends on individual)
Fed hike impact Indian Markets

But if you would have observed carefully, there is a mistake (of omission) in grid above. It ignores the probability of markets moving unexpectedly. So as discussed in counter logic few paragraphs ago, its possible that markets might start rising inspite of a rate hike by the Fed – which will be against expectations in general.

Then the grid will need to be modified and might look something like this:

Fed hike Indian Markets
You can further think on those lines and do a deeper analysis. But at end of the day, it will depend a lot on whether you have the cash to invest or not, or to simply put on your personal financial situation.

It will be safe to say that you would not be investing even when markets have gone down lower because of fed rate cuts, if you have a strangulating loan EMI to service.

So its more about You than its about Fed.

No. Stock Markets Never go Up Straight.

Stocks Markets Never go Up Straight
If you think you are a long-term investor, then here is the truth – Its not easy.

Just calling yourself a long-term investor is easy. But being one, year after year, for a decade or two, is not easy. Period.
The problem with markets is that it does not know that you are investing your hard earned money in it. It does what it does best. And that is – be volatile.
Just look at the following graphs:
Period 1: A fall of 20%-25% in about 6 months
Indian Markets 2003 2004
Period 2: A fall of more than 20% in less than 2 months
Indian Markets 2006 Fall
Period 3: A fall of more than 50% in less than 15 months

Indian Markets 2008 Crash

Period 4: This is recent one. A fall of about 15% in less than 6 months.

Indian Markets 2015 Fall

This is how the markets operate. There can be some really volatile moves that can throw everyone off balance.

At times, falls are small – 10%, 15% – types.

But at times, these falls can be as much as 30% or even 50%!
Just think about it. How would you have felt when your portfolio was worth Rs 50 lac at the end of 2007 and fell to almost Rs 25 lacs by early 2009?
Horrible might be an understatement. Seeing your hard earned money evaporating in front of your eyes is not easy. It’s painful.
Your faith in equities would have been shaken.
It’s even possible that your family might have turned against investing after such a fall in your portfolio.
This is real long term investing my friend.
It comes with its share of unbearable pains and temporary losses in short term. It will test your patience. It wants to test your mettle. It wants to see if you have the heart* to follow through when the going gets tough.
* I would have used the word ‘need’ here. But thats an obvious thing. There is ofcourse a need to invest for almost everybody.
But in long term, the general trend remains up.
Combine all the above graphs and this is what you get:
Indian Stock Markets Long Term
Looks like a decent upmove in last 15 years. Isn’t it?
But it’s easy to look at above graph and say that markets ‘will definitely’ move up in long term. It’s a different ball game altogether to remain invested during severe falls and be brave enough to buy more.
So if you feel that Dev is saying that 12% CAGR for next 15 years will make you a Crorepati, then you need to be cautioned a little.

This 12% is the AVERAGE. It does not mean that you money will grow exactly by 12% every year. That is how averages work.
In fact, a very successful long-term investor Howard Marks once quoted:
Never forget the 6-foot tall man who drowned crossing the river that was 5 feet deep on average.
Do not forget that the range of depth of the river can be between 2 and 10 feet. 🙂
Same is the case with markets.

A 12% average expected returns means that there might be a sequence of returns like one below:
+20% : -15% : +7% : -35% : + 20% : +40% : + 15% …..and so on.
The average of such a sequence might mathematically result in a CAGR of 12%.
Markets will never do something like this:
+12% : +12% : +12% : +12% : +12% : +12% : +12%…..
So just because markets have been doing great in recent past, don’t start thinking that it will go up in a straight line in future too. It will fall and it will rise.
The markets overestimate and then underestimate. This leads to over-reactions and then to reversion back to means.
It is very important to understand that markets don’t just go about in straight lines. Neither up nor down. Every calendar year cannot be an UP year. Infact at the start of 2015, I am sure that given a 30% rise in 2014, most experts and common investors would have felt that markets (Sensex) will be at 30,000 or 35,000 at end of 2015. The same doesn’t seem to be happening.

Just because markets did well last year does not mean that this year too will be good. Infact, statistically speaking and using the concept of mean reversion, chances of having a bad year after a good year is quite high. So don’t give too much weightage to short-term fluctuations.

You are a long-term investor and your job is to stay invested. Over the long-term, the markets reward discipline. So keep calm. Don’t start taking action just because you are bored and not getting a 12% return this year. Don’t be fooled into taking unnecessary actions.

How to convince your Spouse to start investing in Mutual Funds and Stocks?

Spouse Money Investing

In the First Personal Financial Concerns Survey, many questions were asked about how to convince one’s spouse to reduce expenses and increase/start investing.

Now the first part: about reducing expenses, is tough.

And frankly speaking, it’s much tougher than most staunch advocates of frugal living might make it sound. Infact, expenses have this bad habit of beating income increases every year. 🙂

But jokes apart, the survey did point towards one clear problem:

Not every couple thinks on same lines when it comes to money. At times, husbands have no clue whatsoever about the benefits of investing and at times, wives cannot stop themselves from spending.

So what I will do in this post is to share my views on the second part, i.e. start investing. Deliberately, I will leave out the first part (about reducing expenses) and play safe with female readers. 🙂

Let me first share few extracts from survey responses:

Respondent 1:

“My wife wants safety in all investments. She is against investing in any mutual funds (especially equity) because of the NAV fluctuations. I know that daily fluctuations are a common phenomenon and there is no need to worry about it. But even then, I am being forced to invest more in FDs, which I don’t like personally….My goal is to invest for my retirement…”

Respondent 2:

“Currently my spouse is working but may leave her job after few years. Though she does not want me to spend her money, she herself is of the free-spending kinds. Tell me something which will nudge her to reduce expenses and start saving for our single-income days in future…”

Respondent 3:

“…I regularly send personal finance articles to my wife to help her understand the concepts of spending less and investing more. But she never reads them. How to convince her about the benefits of investing?”

I am sure these extracts would sound familiar to many of you. 🙂


How can You convince your Spouse to get serious about investing?

But before I try answering that question, I think I should share about my own personal experience here too…

I would say that I am lucky. My wife is an investor in her own right. We both spend… a lot at times 🙂 But spendings are more about buying experiences and less about buying gadgets and other stuff. It might sound boring, but that is how both of us operate. We generally don’t buy things that we won’t value after a few months. We also don’t want to save everything and wait till we are old. It just doesn’t make sense to us. To sum it up, we try to balance our expenditures and investments, to get the best of both the worlds. So spending a lot is not much of a problem for us.

That is about my wife and me.

I am sure many people would be having a tough time explaining the benefits of investing to their spouse.

The following image clearly shows what I am trying to say:

convince spouse investing

Now I am assuming that YOU are fully convinced that for most people, investing (in good mutual funds) is the best option. This is assuming that you understand the risks and have the appetite to digest temporary fluctuations.

But what about your spouse?

The first thing for you to accept is that your spouse might be operating from a very different set of money beliefs than you. So even though you cannot force your beliefs on your spouse, what you can do is try convincing him/her to understand the benefits of your belief.

But before you do so, you need to be sure. Sure that you are right and your spouse is not. Because in reality, it can be the other way around, without you realizing it. 😉

My personal belief is that for common people, the most important thing to understand is the impact of inflation and how it erodes their future purchasing power, despite regular increases in income. Other important concepts like time value of money, compounding, etc. can only be realistically demonstrated when one clearly understands how his or her purchasing power is affected and what one can do to protect it.

So the next important thing, which needs convincing about is the impact of inflation. You need to convince that Rs 100 today is only worth say Rs 95 after a year – because of inflation.

How do you do it?

Its tough but you can choose examples of items, which are of everyday-use for your spouse. So if something that he/she uses daily, cost Rs 50 in 2011 and now costs Rs 80, then that is real-world inflation for them.

You can repeat this exercise with other costlier items too. If your spouse loves travelling, then you can use that as an example.

Now comes the tricky part.

Ask your spouse to imagine a scenario where both of you are not earning, living off a small corpus that you have saved over the years and more importantly, when the costs of all necessary items have risen way beyond your expectations. As for your dream vacations etc., those are beyond your financial capabilities’ then.

And if possible, be a little dramatic about it. 🙂

It helps, I swear.

Now tell them that if they don’t start thinking about investing soon, then you both’s retirement might look similar.

The idea is to push the discussion from a general one to one that touches the borders of fear. It can help reinforce the concept of the need for investing.

Once the realization occurs, it will become clear that keeping money in safe options like FD won’t be of much help (but you need to show that FD paying 5% after tax, cannot negate the effects of a 7% inflation). Your spouse will also understand that prices going up over time, putting money only in safe products or may not cover the same expenses in future.

The whole idea of having such a discussion is to prove that to have enough money for preserving the desired future lifestyle, investing (in better return-giving products), is the only option. Infact, putting money in FDs is akin to being ‘Guaranteed Losers’. Though it is still better than not saving anything at all.

You can also take help of the older generation – maybe your parents or your spouse’s parents.

Elders are real treasures of experience and they can help you convince your spouse about the importance of understanding inflation, saving and investing.

Here is a tip… ask them about price rise in the cost of medicines and healthcare. And make sure your spouse is there to listen to their experiences. I am telling you that not just your spouse, but you yourself will be shocked to hear what they tell.

It is also possible that your spouse might not be interested in touching the so-called risky products like equity mutual funds. This fear may be borne from past experience of him/her or family members losing money by investing in stocks. It is your responsibility then to explain the difference between speculating with shares of a single company as opposed to investing in a diversified group of hundreds of companies (i.e. mutual funds).

Now a very important thing to understand here is that whenever you have this discussion, never speak as an authority on investing or money. The discussion should be more about how you as a couple will be managing your money so that you can maintain or upgrade your lifestyle in future and also, when you are retired and not earning.

You need to show that you are thinking about your combined future, and are not just pushing maths in your spouse’s face.

Return percentages, tenures and other mathematical stuff should be used sparingly in such discussions.

You are also not there to prove your spouse wrong.

Read the above statement again.

You are there to put both your finances in order to better enjoy your life in future. If you’re constantly telling your spouse to spend less, then you also know that it won’t work. You need to convince them about the real-life benefits of investing rather than focusing on reducing expenses.

Once the benefits are clearly understood, expenses will automatically start coming down to free-up funds for investing for better future benefits. And proper investing in line with well thought out asset allocation for your personal capital review at crediful can help you achieve your financial goals.

(Read how to set your real financial goals and use goal-based financial planning to achieve them with higher certainty).

This reminds me of few words by Seth Godin which I also covered in the post 40 Words To Question Your Notions About Long Term:

What are you willing to give up today in exchange for something better tomorrow? Next week? In 10 years?

Your long-term is not (just) the sum of your short terms.

Try using these lines too, if necessary. Might help. 🙂

I had this bad habit of sharing fun facts about investing with my wife – like how investment in one stock went from Rs 10,000 to Rs 400+ crores and how one man lost an opportunity to make Rs 700 crores because he sold his shares too soon. Another one I remember is that its possible to retire much before the age of 60… if one is ready to begin investing just Rs 15,000 per month or Rs 20,000 a month starting from a young age. Read this case study and you will clearly understand why.

But now I don’t need to convince her anymore. Rather it’s the other way round. In fact, when the Sensex fell by more than 1500 points in one day, it was my wife who was asking whether I bought stocks or not and whether I needed more funds to buy stocks.

I literally had tears in my eyes that day. 🙂

Now that’s enough from me. But I leave you with another interesting strategy. Here is it….

A Cheat To Actually Do it

I read about this approach somewhere online and found it worth sharing. No credits to me here…

Take Your Spouse on a Retirement Dream Date

…I have found that when you define your dream retirement, you’re much more motivated to work for it. Abstract dreams are too foggy, too intangible to stick with you, while you wait 30+ years for the payoff.

So how do you go about dreaming the right way? First of all, married couples must dream about retirement together. There’s often a disconnect between couples on this topic because they’ve never talked about it before…

…So set up a date night where you and your spouse will talk about nothing but your retirement dreams. Put everything on the table. In this conversation, you’re not concerned with how much you do or do not have saved for retirement. You’re focused only on building a clear picture of what you want your future to look like…

Sounds interesting and do-able as a first step. Right?

Now once you are done with your retirement dream date, you can do the maths and tell your spouse about how much you both need to invest on a monthly basis to realize your dream retirement together. Also, tell them that it’s possible to retire much before the age of 60. That will get their attention. 🙂

You can also try talking about how compounding works. But I think that should be part of your second retirement date, after you have already convinced them about dreaming of a beautiful retirement and also about how inflation can screw it up.

Stable Investor Completes 4 Years – My Letter to You

4 Years Stable Investor

Yesterday, Stable Investor completed 4 years. Coincidently, 17th November was also the first day of my first corporate job. Though first-day-first-job has its own charm, I must confess that I remember this day more because of Stable Investor and less because of first-day-first-job feeling. 🙂
Now to say that I am happy and satisfied after completing 4 years would be both right and wrong. I am happy – Yes. I am satisfied – No. Why no? Because I want this to continue for many more years to come.
But that is not possible without YOU.
My heartfelt thanks to all of you who read, like, share and write back to me. Had it not been for you all, I would have been like a person on a deserted island, shouting out his thoughts with no one to listen to.
Every week, I get numerous mails from readers. Many are about how something I wrote helped them take a good financial decision. These mails mean a lot to me. And everytime a reader writes to me, it becomes another source of motivation for me to carry on.
Not a day goes when I am not thinking about what I should write here. Infact, it has become such an integral part of my life that at times, my wife questions whether I am married to her or Stable Investor. But even she realizes what this means to me. And result of her realization is that even my personal birthday cake did not have my name on it! 🙂
Since the site is about numbers (more specifically money), here are some numbers that might interest you. Site now has 250+ articles on areas of Investing, Personal Finance and Common Sense. Few months back, site’s traffic crossed million hits. Email and RSS feed subscription have doubled and tripled respectively, in last one year. On social media, Stable Investor has more than 4200 Facebook fans (become one) and 2300+ Twitter followers (join them). These numbers are not huge but still prove one thing very clearly – there is a growing tribe of people who actually believe in benefits of reallong term investing and who also want to put their personal finances in order.
Here are the 8 most read posts on the site that were published in last one year:

Now I am sharing few words by Morgan Housel (source) here. I shared these last year too. But relevance of these words here, force me to share these again:
Investing isn’t easy. It can get emotional. It can make you angry, nervous, scared, excited, and confused. Most of the time you make a decision under the fog of these emotions, you’ll do something regrettable. So talk to someone before making a big money move. A friend. An advisor. A fellow investor. Just discuss what you’re doing with other people. “Everyone you meet has something to teach you,” the saying goes. At worst, they give advice you don’t agree with and can ignore. More often, they’ll provide prospective and help shape your thinking.
So I request you to be my friend, advisor and a fellow investor from here on.

As for me, I promise to be your friend, your advisor and your fellow investor starting right now! 🙂
Thanks once again…
Looking forward to continuing this wonderful journey together and doing much more in 5th year. For starters, I rededicate Stable Investor to helping readers Invest Better, put their Personal Finances in order and achieve their financial goals using Common Sense.

Your Parents are not your Emergency Fund. Your Children are not your Retirement Fund.

Your Parents are not your Emergency Fund. Your Children are not your Retirement Fund. Strong and thought-provoking statements. Isn’t it?
Parents Children Emergency Retirement Fund

I am sure many of you will be having gut-wrenching experience right now after reading the title of this post.

And many of you will also be feeling scared about your financial unpreparedness. But if that is not the case, then you are a lucky person who is doing just fine. You are not dependent on your parents for handling emergencies. And you are also well on your way to create a big-enough retirement corpus, which will not make you dependent on your children for post-retirement expenses.

But if you do depend on your parents for getting out of financial emergencies and you think of your children as your retirement funds, then I have only one advice for you.

You need to do something about it urgently. And you need to do it now.

If you are young or middle aged, and if you still need to ask for money from your parents to get over financial emergencies, then something is wrong somewhere.

Isn’t it?

Now when I say financial emergencies, I am not talking about taking money from parent’s to invest (generally people do so to buy real estate / property). I am talking about instances like regularly running out of money before month-ends, being unable to pay credit card bills, car loan EMIs, etc.

If these things happen once in a while, it is fine. But if such occurrences are regular, then you know that there is a problem. Either your expenses are exceeding income unnecessarily or you are not planning your future expenses properly. The situation can go out of hand very quickly. I have seen it happening with my well-earning friends. They earn well. But they are still broke for all practical purposes.

Creating an Emergency Fund is one of the first things any young person (or anyone who hasn’t done it) should do. A good target for this fund can be to accumulate 6 month’s worth of expenses (including EMIs if possible). It might sound tough to do. And I will not mince any words here – The fact is that it is not easy. And when someone has a habit of spending a lot (even more than his income), it is all the more difficult. But it is the right thing and it has to be done.

Also, even if your parents are financially capable of helping you in your financial emergencies, don’t build that thought into your financial planning assumptions. Stand on your own feet. Your parent’s have already done a lot for you in last few decades. Why treat them as Emergency Funds now?

That was about parents and taking their help for current expenses.

But what about your retirement plans?

Are you doing fine? Are you not sure about it? Or you know that you are not doing fine?

If your idea of retirement is that your sons and daughters will (happily) take care of you in your non-earning days, then frankly speaking, I don’t know what to say.

I just hope your children do as you expect them to do.

And I pray for you. 🙂 Because if they don’t, then it’s will be a very scary situation to be in.

No one wants to end up in an old-age home. I have been there many times as we regularly donate a part of our family income for helping old people. And what I see there is unexplainable. One can only feel the pain of senior people when one visits these homes. My suggestion to readers is that atleast once, everyone should visit an old-age home. You will only realize what I mean when you are there.

But coming back to our main discussion – if you are not preparing well for your retirement, then that is wrong on your part. Plain and simple.

See… I am sure you have full faith on your children. But not doing anything on your own is a clear case of inviting trouble.

Now I may sound wrong here, but if you are spending every rupee you earned on your children’s education and marriage, and are not planning to save much for your retirement, then you got it all wrong.

Helping your children is your responsibility. And so is helping your own older self in future when you are earning ‘0’ active income. There is absolutely no justification for not doing everything in your power to ensure that your retirement is comfortable.

So to cut a long story short, if you think that your children are your retirement fund, then you are neither being fair to yourself, nor to your children.

And you need to do something about it urgently. And you need to do it now.