You + Are Smart = Will Be Rich?

You Smart Will Be Rich

The equation (You + Smartness = Rich) appeals to common sense. Its natural to believe that smart people know things that help them get rich. Isn’t it? Even I believe that on an average, smart people will be far wealthier than no-so-smart ones.
But still, when it comes to investing in stocks or managing money in general, there doesn’t seem to be much correlation between being extremely smart and being extremely rich.
Why is it so?
Jason Zweig has something to tell us about this (source):
It’s remarkable how much you need to learn in order to discover how little you ever needed to know. Smarts are overrated; the world is awash with smart people. What’s in short supply is wise people.
Apply the basic principles of the wisdom you’ve acquired from your experience elsewhere to investing, and you will probably fare better than many “smarter” investors.
Be skeptical, think for yourself, ask for evidence and probe it for weakness, control your emotions, distrust the fashionable, remember to assess not just how much you will make if you are right but how much you will lose if you are wrong — steps like these are basic good judgment and simple wisdom.
Often, people who know a lot about investing become so taken with their own knowledge that they forget the power of a few obvious questions.
Talking about what is required to actually succeed in investing, he says:
To master investing, you don’t need more than a basic understanding of economics. What you need to understand is psychology and history, because human nature doesn’t change and financial history is an endlessly repeating chronicle of all the mistakes other people have made.
The single greatest asset any investor can have is self-control — not a higher IQ, not better computers, not the earliest glimpse at information, but self-control.
The journalist Carol Loomis tells the story of a dinner party at which a woman finds herself seated next to Charlie Munger and asks:

“Tell me, Mr. Munger, what’s your investing secret?”
“I’m rational,” growls Munger, and goes back to eating his salad. 🙂
But there’s more to it than that, I think. It isn’t that great investors are unemotional; they’re inversely emotional. They have an ability to sense when other people’s emotions are getting out of hand, and then they take the other side of that trade.
Like his principles that I published a few days ago, even these words by Zweig make a lot of sense. More so when I think about all the smart people (I know personally) and who make tons of dumb investing mistakes.
Investors often sabotage their results when they try to get fancy. And rest assured, I have done my MBA from a good college and I can vouch for the fact that you don’t need an MBA to manage your money well or to reach your financial goals.
People think that MBAs (from good colleges) are smart and can do anything. That’s bullshit. 🙂
Investing successfully and achieving your financial goals is not about being smart or having the highest IQ or being popular. Rather, common sense and becoming incrementally wise (on a daily-basis) will get you there.
Some people are too smart to be rich. They give a lot of importance to what they know. But unfortunately and due to their personality (or maybe arrogance), they chose to ignore what they don’t know.
And that is exactly what does them in. And as Charlie Munger says:
“If you think your IQ is 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120.”
We all know that we are simply supposed to buy low and sell high. But that doesn’t happen. The majority have trouble following that sequence and instead end up buying high and selling low. And then there are those who become wise and find the right questions to ask themselves – but only when it’s (almost) very late.
Why? Not because they have less IQ or are not intelligent. But because they let their emotions and biases take over. A wise one will listen to his emotions but will act as the rational section of the brain advises.
When I was writing this post, I got a call from my childhood friend. On being asked, I told him about what I was writing. Now this friend of mine (based in US) is a successful entrepreneur himself. Being a Y-Combinator alumni, he told me about something which Paul Graham (founder of Y-Combinator) wrote in 2009. Though it was in the context of successful startups, some of it made sense in this discussion of (You + Smartness = Rich)’s context as well. This is what Paul wrote:
We learned quickly that the most important predictor of success is determination. At first we thought it might be intelligence. Everyone likes to believe that’s what makes startups succeed. It makes a better story that a company won because its founders were so smart. The PR people and reporters who spread such stories probably believe them themselves. But while it certainly helps to be smart, it’s not the deciding factor. There are plenty of people as smart as Bill Gates who achieve nothing.
But that’s about investing (and startups) in particular.
What about money (and getting rich) in general? I came across an interesting Q&A on Quora where a responder said:
Getting rich requires dealing with other people. Smart people spent a lot of time beefing up their IQ and not their EQ.

In most cases of highly intelligent people who are not rich, they have applied their brains to analytic reasoning. That’s a skill that might help calculate the odds of winning, but will not tell you what the other person is thinking.

IQ won’t give you the social EQ to turn a competitive situation into a cooperative one.
Don’t play chess at a poker game.
I think the last line nails it. 😉

Power of Increasing Your SIP by 5% or 10% Every Year

A few days ago, I did a post on How You Could Create a Corpus of Rs 8.4 Crores Starting with Just Rs 10,000 every month. In the post, I analyzed following 3 scenarios over a period of 30 years (with approximate results):
  1. A Fixed SIP of Rs 10,000 every month (= Rs 3.24 Crores)
  2. An Increasing SIP, Starting with Rs 10,000 every month & 10% Annual Increase (= Rs 8.40 Crores)
  3. A Fixed SIP of Rs 26,000 every month (= Rs 8.40 Crores)

In all the above scenarios, the assumption for annual returns was 12%. Now this number, according to me is quite conservative because of the following points:

  • In last (almost) 2 decades, Indian markets have given higher returns (in excess of 15%).
  • Well diversified, actively managed mutual funds have delivered returns of more than 18% for almost a decade.
  • If risk-free instruments like NSC, PPF give close to 9% return, then there is no point going for equities as an investment class if expectations are less than 10%
  • Indian Growth Story is still intact. And till the time India becomes a developed economy, it will continue to grow at a reasonable pace. My guess is that India is still 25-30 years away from becoming a mature and (real) developed economy – in terms of quality of life, industrial might and similar things.

The last point is my personal assumption (speculation). And there were few readers who had the view that 12% average returns in not sustainable for next 30 years. Some of the views were that as the economy grows and matures, inflation would stabilize and reach levels close to 2-3% as in the case of US and other developed economies…so figuring in dividend yield and the equity return risk premium, Indian markets might give 9% to 10% return 30 years down the line… AND….Premium above inflation is bound to reduce as inflation decreases as the economy matures.

Now I am not saying that my assumption of 12% is hundred percent correct. What I am saying is that I am slightly more optimistic about India in next 30 years. I know I will not get 20% returns from market. But I ‘think’ I will be able to make more than 9% average returns over the next 30 years. Because if I am not able to manage that, then I will rather buy risk-free options like PPF, NSC, etc.

MF SIP Investing Cartoon

But more importantly, what I think a lot of people are missing in last post is the fact, that the 3 scenarios discussed show the real power of long term, sensible investing.

Ask anyone who is close to his/her retirement and chances are that they may not have crores in their retirement funds. I have people asking me questions like ‘What should I do if I have Rs 10,000 every month to invest?’ 

The previous post is an answer to that. No matter where you are and what your current financial state…you can start now!

Believe me… Equities have the ability to make you rich. Really rich… All you need to do is to be disciplined and stick to simple investment ideas.

Note that in all the scenarios, we are assuming a 30 year tenure and equity return of 12%. These numbers can change depending on change in tenure and equity return…you can either keep an assumption of 10% for next 30 years OR 12% for first 20 years and 9% for remaining 10 years. But the overall conclusion remains same – Do your SIP diligently, however small it may be. And whether or not, you are able to increase it every year. You will be positively surprised at the money you have accumulated at the end of all those years.

Case Study: How To Accumulate Rs 8.4 Crores? Starting Only with Rs 10K every Month?

Some time back, I made my 7 resolutions for 2015. One of the resolutions which I made was to increase my mutual fund SIP contribution this year by atleast 10%. This initially may seem like a simple thing to do, but believe me…it can have a really big impact on how much wealth you can accumulate eventually.

And this is what I will try to convince you about here…

Let us suppose that I stay in a job for next few decades. I turned 30 few days back. So for all practical purposes, I have another 30 years before I retire.

Let’s also assume that as of now, I do not have any savings or investments.

Now let’s take up 3 different scenarios:

Scenario 1

I start a SIP of Rs 10,000 every month for next 30 years. I am making a conservative assumption that a well diversified mutual fund scheme will be able to deliver 12% every year. There are schemes in India which have done almost double of that for almost a decade. But lets not be over-optimistic, and stick to 12% for this and other scenarios.

So after 30 years of Rs 10K monthly investment, the corpus will finally reach a cool Rs 3.24 Crores!! Details of the calculations can be found in image below. Please click to enlarge it:

Scenario 1: SIP of Rs 10K for 30 years

Scenario 2

I start with a SIP of Rs 10,000 every month. But for next 30 years, I increase my SIP contribution by 10% every year. i.e. I invest Rs 10,000 per month in first year…followed by Rs 11,000 every month in second year….Rs 12,100 in third year..and so on. Here again, the return assumptions are kept at a conservative 12%.

So after 30 years of increasing SIPs (which started at 10K a month, with 10% annual increase), the corpus will finally reach a (way cooler) Rs 8.40 Crores!! Details of the calculations in image below:
Scenario 2: SIP starting with Rs 10K, which increases 10% every year for next 30 years
So you see the difference. A simple 10% increase in your monthly SIP, more than doubles your final corpus. Not bad.

But wait…..

You must be wondering that instead of just increasing this SIP every year, what would happen if you started with higher amounts and kept it constant?

The answer to your question is provided in the third scenario.

Scenario 3

To achieve a corpus which is almost equal to one achieved in second scenario, i.e. Rs 8.40 Crores…you need to start with, and continue paying Rs 26,000 every month. Once again the detailed calculations are given in image below:

Scenario 3: Constant SIP of Rs 26K for next 30 years
As you see in second and third scenarios, you can achieve the same target amount (Rs 8.4 Cr) by choosing two different approaches. So question now is…

Which one to choose?

At first glance, it might seem that increasing SIP is better than Constant SIP as it is more convenient. It also seems to be in line with a simple common-sense based thought that:

Income Rises – Expenses Rise Too – So Should Investments

Why should SIP be kept constant when your income is rising? Your investment (through SIP) should also increase. Think for yourself… If you started a 10K SIP when you were earning 50K some years back, and you are proudly flaunting this 10K SIP even today…when currently you earn more than Rs 1.5 lac a month, then it is something stupid. You wont become rich!

An important point to consider here is that even though both scenarios result in Rs 8.4 Crores at the end of 30 years, the total investments made by you in both cases will differ substantially.

In scenario 3, the SIP is constant at Rs 26,000 for all 30 years. Whereas in increasing SIP model, you start with Rs 10,000 and it continues to increase every year. In 12th year, the SIP amount in increasing SIP scenario crosses Rs 26,000 (equal to constant SIP value).
In year 18, monthly SIP will exceed Rs 50,000. In year 26, it will exceed Rs 1 lac a month.
When you compare these numbers with constant SIP number of Rs 26,000, these might seem like very big numbers. But decades from now, these would be very small numbers considering the increase in annual income and inflation, etc.

But as I said, total investment in both cases will differ substantially. In constant SIP scenario, you will be making a total investment of Rs 93.6 Lacs in 30 years. But in increasing SIP scenario, your total investment would be Rs 1.97 Crores (almost twice!).
So does it mean that its better to start with a bigger amount in constant SIP instead of increasing one?? As in both cases…the end result is same – Rs 8.4 crores.

But before you decide, read further…

When we start investing, its not easy to allocate very big amounts towards Mutual Fund SIPs. Suppose you start earning Rs 40,000 as your first salary. You under normal circumstances, will not be able to shell out Rs 26,000 every month. But can easily manage Rs 10,000. And with rising income, you can keep increasing your SIP amounts (Scenario 2). 

Honestly speaking, there is nothing like starting a large SIP very early in your life.

What do you think? What strategies do you use to boost your SIPs?

Answer to the BIG question – “Why Am I Not Getting Richer?”

Didn’t you always have this question? 

That even after earning so much, why are you are not getting any richer?

I guess you must have felt like this before. In a post I did some time back, a person earning more than Rs 1 lac every month was barely able to make his ends meet; but that is before he took matters in his own hands and retired at a young age of 37.

What does it mean?

This simply means that there is something fundamentally wrong about the way we manage our incomes and more importantly, expenditures. But all is not lost. If you are ready to take care of some really simple but critical factors while managing your finances, then chances of you getting richer are bound to rise.

So here are the 5 less-discussed but really important ways to help you become rich.

Reinvest your profits
I have seen people making the mistake of not reinvesting their profits many times (to be precise, 19 times out of 20). Don’t be tempted to spend your profits. If you reinvest profits from your investments, then you would be helping yourself in the long run as you would be contributing to the magic of compounding. And don’t worry if the profit is small. In the long run, compounding takes care of converting small amounts into very large ones.

Control small expenses
Be obsessive over controlling small but wasteful expenditures. For example, just because one of your colleagues has got himself a new phone, you decide to buy a newer one to satisfy your ego. Agreed that such expenditures can give you pleasure & satisfaction. But these would be short lived. And such useless expenditures also dent the process of long term wealth creation. Exercising vigilance over small expenses can help you divert funds from going towards unnecessary expenditures towards better investment (profit) opportunities.

Limit What You Borrow
It is simple common sense. Living on credit card and loans won’t make you rich. Period. It is only when you are debt-free that you can think of saving and investing to become rich. If you are not debt free, then most of your time would be devoted in servicing the EMIs and Credit Card Bills. Think about it.

Assess The Risk
Just because a family member or a good friend introduced you to something which looks-too-profitable-to-be-true does not mean that you should blindly do what you are being told. Asking ‘and then what’ can help you see all possible consequences and risks involved when making the final decision.

Be Willing To Be Different
Just because it did not work for somebody else does not mean it won’t work for you. But more importantly and similarly…just because it worked for somebody else does not mean that it would also work for you. Remember this and assess the risk provided by every opportunity. It’s always possible that life is offering you something unique to benefit from; and which was never offered to anybody else. So be ready and be capable of recognising such opportunities.
Warren Buffett Richest Man
To be rich (& not poor) is glorious and glamorous | 🙂
Note – Most of these 5 points/ways are based on Warren Buffett’s philosophy. Hence the picture above.


The Wealth Grid – A New Way To Track Your Money

Wealth Grid, as the name suggests is a matrix of your wealth. But before I get into the details, I would first like to tell you about the origin of this concept.

Why Wealth Grid?

In past, I have been fortunate enough to have worked in a highly process oriented industry. (Read more about me and my past in an interview here). And I have a strong belief that no matter who you are OR where you are OR what you do, nothing worthwhile can be achieved without following a structured approach which has proper well defined systems in place.

In financial terms, for some people, something worthwhile might mean becoming rich and being counted in some club of Crorepatis. For me it might mean something far less materialistic. In past too, I have been a proponent of following a structured approach like the Core-Satellite approach to build one’s long term stock portfolio. Now when you think of a grid, the very first image which comes to mind is something like the one given below –
Plain Blank Grid
A grid is a collection of cells, where each and every cell has a proper well-defined place according to some pre-defined logic. And each and every cell has some or the other relation with cells adjacent to it.
How Does Wealth Grid Help?

Now the question comes that how can we use this wealth grid? Now, to be honest here, I am still developing this concept, which may eventually spread out and encompass use of multiple grids for different purposes. But this current grid structure, which I will explain in just a little while from now, simply helps in identification of asset classes. Once identified, it aims to map these asset classes to their respective (correct) time horizons, depending on the end use.
What Exactly is Wealth Grid?

Now on the very first glance, it might not be easy to think of your wealth in a grid like structure as detailed below. But once you clearly understand the concept being tracked on x-axis and y-axis, you will realize that this is quite a helpful structure which allows one to view their wealth on a simple timeline in accordance with the end use of the money.

Wealth Grid Manage Money
A Basic Wealth Grid
As you can see in this very basic Wealth Grid, the columns are used to track the purpose of that asset class, i.e. short term, medium term or long term. The rows are used to track liquidity of these asset classes. This is important because a mismatch here can be disastrous. Suppose you intend to pay for your child’s college fee in next few months, and for that you have bought stocks of some good Indian companies. But unfortunately at time of fee payment, stock markets crash and shares of companies you have bought also go down with them. Now how will you pay the fees? You are in a fix. You might have to borrow some money from your close relatives or take personal / education loan from the bank. I hope you are realizing the gravity of such a situation…

But if the same money was parked in Cash / Fixed Deposits / Recurring Deposits to be used later, then the possibility of any such crisis happening would have been eliminated. Why? Because the correct asset class (non-risky one) was being used to fund a short term expense.

Eventually, it is all about understanding when to save and when to invest (and mind you, there is a difference between the two).

And if you observe closely, I have marked Wealth Grid as [Beta], as I am still working on this concept. It is still not complete. This grid only gives a snapshot of the asset side of your finances. But another important component of our financial lives is debt or loans. Going forward, I would be incorporating the loan and other aspects as well in this Wealth Grid. Rest assured, I will keep you guys updated about the developments.

I will leave you all with a sample (real life) Wealth Grid, which can be used to track one’s wealth. As you can see below, one can get a very comprehensive picture if the Wealth Grid is properly maintained:
Comprehensive Wealth Grid
Sample of Real Life Wealth Grid || Click to enlarge
In the meantime, if you all have any suggestions to improve this grid, please share it with me by means of comments or you can email me directly at stableinve…