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My Interview Stable Investor

My Interview with Stock & Ladder

My Interview Stable Investor

Recently, I got interviewed by Ravichand of Stock & Ladder. The interview was originally published here (at Investing Chat with Dev Ashish).

It covers my background, investment philosophy (and how it has evolved over the years), how I invest and other related aspects. I thought it would be useful to publish it here as well, for the benefit of existing readers of Stable Investor.

This investing chat is a long one at about 6000 words and may require some time. But I hope you find it useful and worthy of your time.

So here it is…

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Ravichand (S&L):  Hi Dev, Firstly a big thank you for sparing some time to share your thoughts with the readers of Stock and Ladder. First up, please tell us something about yourself especially the part about how you got into the world of investing and Personal finance.

Dev: Thanks Ravi, for considering me worth interviewing.

My story isn’t very inspirational or anything like that. I am just a regular person.

Being born in a family of lawyers and doctors, chances were high that I would take a similar path. But I have been the odd-man-out in my family. Maybe it was because of the powers above which had a very different plan for me and so, I began my journey in a completely different direction.

Currently, I am a practicing SEBI-registered Investment Advisor.

But even though I had a noticeable interest in finance since I can remember, I still went ahead and did my engineering. Later, I joined a government sector oil company and got posted in a remote location.

After working there for a few years, I made a conscious decision to gradually align my life and work towards my area of interest – which was investing in particular and finance in general.

This, however, was not going to be easy as for doing that, I would have to quit my safe government job. It was a tough decision but my family and then-friend-now-wife backed me fully for the decision.

So I quit, did my MBA and then joined a private bank. After a few years, I got a very good job offer from a startup. I was no doubt happy with the offer in my hand.

But I spent some time contemplating whether it was actually what I wanted to do. In the end, it didn’t seem like it. I realized that if I had to do something on my own, I had to take a call sooner or later.

So after having several rounds of discussion with wife, parents and a few people I consider to be my mentors, I quit my job and decided not to join the startup.

I decided to take a plunge into what I really wanted to do. I must mention here that I had sufficient savings by then to make this decision.

I took a license from SEBI to start my Investment Advisory practice and that’s what I am currently doing. After having worked in metros and other cities, I returned back to my hometown Lucknow, where I currently stay with my family.

Though my target eventually is to achieve financial independence, I think I can safely say that I will never actually retire, as is the norm in our family of doctors and lawyers.

As for my interest in investing, it got kindled when I was quite young. My father and grandfather had money invested in shares of a few MNCs. So every now and then, we used to get dividend cheques from these investments.

On enquiring, my father explained that these cheques were dividends – which he was being paid to hold pieces of paper (physical shares then).

This attracted me like anything. I just fell in love with the idea of getting a regular flow of passive income without going to work for somebody else! This was as clear a case of money working for you (rather than the other way around) that there could be.

So you can say that there wasn’t any one single moment when it happened for me. The seed was sown very early on and I tried to gradually align my life towards investing and working for my own self.

 

Ravichand (S&L):  That’s wonderful Dev. Not everyone can make their passion the means for their paycheck and many usually end up spending their lifetime helping someone else build their dreams.

Mark Twain’s golden words come to my mind “Twenty years from now you will be more disappointed by the things you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”

Let’s get into investing proper. Tell us something about your investing philosophy and how it has evolved over the years?

Dev: I am 33 but have been investing in markets for about 15 years now. But initial few years are a grey area from investment philosophy perspective. Consciously or unconsciously, I was trying out several things then.

And to be honest, I did not even have a philosophy in those initial years. I simply went after ideas where I felt the probability of making money was reasonably high. Luckily, I have had this inherent bias of being a little conservative when it comes to stock picking. So more often than not, I gravitated towards good companies with proven businesses (this is an approach that I am still loyal to).

I am not exactly sure why I have had this conservative bias. Maybe it was due to my family’s history and me as a child having observed that most of the investments were in mature, dividend-paying safe stocks.

But whatever it was, I still made decent money. Maybe I got lucky in several cases. And I cannot ignore that I was amply helped by the rising tide of our great Indian bull run of 2004-07.

Thankfully, I have had an inquisitive mind that tries to look for answers to how things work. Not just in finance but everywhere. And one of the things that I really wanted to understand (after a good experience during the Bull Run) was what actually made the stock markets work and behave as they do.

So this pushed me into reading about markets and investors. Luckily, I got exposed to Warren Buffett and his philosophy at the start itself. And Mr. Buffett led me to Benjamin Graham.

The more I studied these value investors, the more I felt that value investing was best suited for me. Here I must say that I have nothing against other schools of investing. 3 plus 7 is 10 and so is 5 plus 5. So there are several ways of making money. It was just that value-conscious investing attracted me the most.

So from then on and for many years, most of my investments were based on valuation attractiveness. And I loved investing in dividend plays. Being valuation sensitive, my process was numbers driven.

But slowly I started realizing that just focusing on numbers wasn’t enough. Why? Because I was regularly missing out on other attractive opportunities that were not attractive valuation-wise.

So in due course of time and after having missed many good money making opportunities, I decided to gradually tweak my way of investing.

Valuations still mattered for me. But I was now willing to pay up (more than what I was earlier comfortable with) if I could find businesses that were of high quality, had good conservative (or let’s say non-adventurous) management, predictable growth runway and manageable debts which gave them some ability to suffer for extended periods of time.

So from a pure valuation’s guy, I became a valuation conscious investor who was willing to embrace growth. Not too much but still ready to pay up to an extent.

So instead of focusing on the cheapest stocks available, I was going after comparatively higher quality cos. which were not very cheap.

Along the way, I continued buying good companies when they faced temporary bad events. So in a way, I was and still operate as a virtual bad news investor.

This reminds me of a good analogy about why we should stick to good companies. Tennis balls are costlier than eggs. And both the egg and the tennis ball will fall occasionally. But only the tennis ball will bounce back. As for the egg, you know what fate does to a falling one. So when buying businesses, buy tennis balls. At least they will bounce back when they fall.

As of now, my approach is a little more structured than what it earlier was.

  • I run a core portfolio of about 20-25 stocks. But to ensure that I bet convincingly in my main picks, about 80-85% is allocated towards the top 12-15 stocks.
  • Remaining are ideas that I am either still working on and/or where I am yet to build full conviction about. I generally try to ensure that none of the stocks hold more than 12-15% of the overall portfolio.
  • A majority of the stocks in the core portfolio belong to the top-150 universe. So you can say that I am a conservative investor when it comes to stock picking.
  • Many people think that large caps cannot make money. I don’t agree but I don’t try to convince anyone now. Large caps have worked wonders for me over the years. So I stick with them.
  • I also run a smaller (call it satellite) portfolio where I enter into short-medium term bets. This is more to take advantage of temporary mispricing and other low hanging fruits.
  • Of course, it is easier said than done and chances of being wrong here are immense. But that’s fine. It’s my way to tackling my urge of doing something every now and then and trying to be the next Buffett.
  • And luckily, the results haven’t been bad and provide for more money to be pumped into the core portfolio.
  • I also maintain a watchlist of stocks where I keep an eye on businesses that I wish to buy but which still aren’t in my portfolio for some reason or the other.
  • Over the years I have realized the power and option that cash brings in times of distress. So I ensure that I regularly put aside some money in suitable debt instruments to act as a Market Crash Fund.
  • You never know when the market might throw up some interesting opportunity. So better to be prepared. This way, I will not miss having CASH, when there is a CRISIS and I have accumulated enough COURAGE to venture out in tough times.
  • The above point, as you might have guessed, refers basically to the idea of sitting on cash. And I swear it is extremely difficult to do. More so when I see people around me making easy money.
  • But in the long run, I think restricting the number of bets I make in most convincing ones (in my view) is how a larger part of the wealth will be created. So I try to sit on cash and do nothing if there is nothing to do.
  • Apart from direct stocks, I have a goal-specific investment portfolio that has equity funds, debt funds, PPFs, deposits, gold, etc. One of my major life goals is to become financially independent by 40. So these investments are aligned towards that goal.

There is one thing that I have learned over the years. And maybe this is because I still pay my respect to valuations.

A good investor knows that it is only occasionally that he has to do something. And when the time comes, he has to and should do that ‘something’. And then, there is no need to do anything else. Money will be made in most such cases.

 

Ravichand (S&L):  Dev, that was the most detailed way someone has ever shared their process. That’s a great blueprint on which we can build our own investing framework.

As regarding to the way you have gravitated towards value investing, I remembered what Seth Klarman said “It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic”

From philosophy let’s move on to putting the philosophy into action. Tell us, what are the criteria’s or characteristics you look for in a business for it to be considered investment worthy?

 

Dev: I don’t have a very long checklist.

But broadly, I check stocks around 3 things – quality of the actual business, quality of the management and price in relation to my view on valuation of the stock.

Obviously, there are several things to check within these 3 broad heads.

Quality of business is all about doing the typical number-oriented analysis like examining sales and profit growths, margins, etc. – for the company and the industry peers.

Analyzing how industry and economy-specific environmental variables have impacted company’s trajectory in the past. And that of its competitors. Cost and capital structures and power that suppliers and customers have on the company or vice versa.

Then a good return on equity and return on capital are no doubt important. A less leveraged balance sheet is preferable as it makes business more robust in trying times.

I prefer sticking with businesses that have some barrier to entry that is not evaporating at least in the medium term. These are just some of the factors that I try to assess the company on.

Then there is that grey area of having a view on future growth of the business and more importantly, longevity of this expected growth. There is a big possibility to get this wrong but you need to have an objective and unbiased view on this to make your bets.

I will be honest that the quality of management is a difficult one to judge. And quality not only means their business sense but also their integrity.

So no matter how deep I go with analyzing these factors (from various sources), there will always be a chance of being completely wrong. But that’s fine. Sticking to what information is available and what signs the management is sending via annual reports and other ways is what I stick to. I really cannot get it right every time.

Even after several years in the market, I regularly end up feeling like an amateur when it comes to picking stocks. I am improving but there is a lot to learn.

I do run excel models but none of them are extremely complex or fancy. That’s because I feel that if I need a very complex model to prove a stock as a worthy of investment, then maybe it’s not that good after all.

Also, businesses are run by people and not excel spreadsheets. An Excel model cannot be an alternative to thinking. And that is where our subjectivity and biases come.

I think that good investment ideas are very simple. And to be fair and acknowledging the limitations of my ability to analyze any and everything, I would say that a stock idea has to be so good on just a few parameters that it should just jump out and find me rather than me trying to find it out.

And last but not the least, and extremely important… there is valuation. It is very subjective and what is undervalued to me might look overvalued to someone else and vice versa. But that’s how it is.

The stock should be in a comfortable valuation range for me to buy it. I generally start buying in small lots and accumulate over a course of time. I am not very comfortable buying large quantities in one go.

Here I will say that I generally avoid talking about the stocks I own or am contemplating owning. It puts unnecessary pressure on me as an investor to defend my position every time there is a news (which may or may not be relevant for me as a long-term investor). The ability to ignore and filter out the short-termism is I think necessary to operate well as a long-term investor. And there is no competition. So I try to reduce the stress to the extent possible.

Generating alphas is in itself so difficult, so why take on additional stress to justify your picks to people who may have different investment horizons or risk taking capacity. Isn’t it?

Remaining silent is all the more important as a valuation-aware investment strategy does not work all the time. Markets don’t and won’t always agree with you.

So going through extended periods of under performance is necessary and fine with me. I am more than willing to have return-holidays if I can get better longer-term returns.  As they say that as a real investor, you should be willing to be misunderstood in short-term to be right in the long-term.

Talking of investment criteria’s I think I should also share my views on the somewhat related and important aspect of cycles.

Over the years, I have come to appreciate the importance of mean reversion. Or let’s say how cycles play out. I don’t have any expert advice to offer on this front as this topic tends to tread in the territory of market timing.

But I believe that we can improve our long-term investment returns by adjusting our portfolio in line with cycle requirements.

Talking of cycles, think of it like this – when recent market returns are high, the attitude of the masses towards risk changes. People forget what their real risk tolerance is and get comfortable taking more and more risk in search of better returns.

This is exactly what sows the seed for future declines. And when the time comes and the delicate balance is disturbed by some external event, it pushes the market off the cliff. That is where the cycle turns.  So if one learns from the past data, then there are indicators which highlight when people are getting irrational. The same case can be built around people’s unreasonable fear after the market falls.

It is at such junctures that some level of portfolio adjustment (by re-balancing or taking cash out or bringing it in the portfolio) can improve future returns.

This requires operating against the herd. This is about being contrarian in real sense and not just for the heck of it. Which is easier said than done but with each passing year, it becomes not too difficult.

 

Ravichand (S&L):  Completely agree on the point of simplicity and thinking of simplicity, Peter Lynch’s famous quote comes to my mind “Never invest in an idea you can’t illustrate with a crayon”.

You also brought up the important topic of market cycles which I believe to be a topic that every aspiring investor should be familiar with. Howard Marks book Mastering the Market Cycle: Getting the Odds on Your Side is an excellent read on market cycles.

From checklist let’s talk rules. If there were to be “Dev’s 5 rules for successful investing” then what would that be?

Dev: I feel there are no perfect rules out there for successful investing. Any day it is possible that the bets we make due to all our successful investing framework (that we are proud of) and where we have the maximum conviction, turns out to be super bad.

But if I had to list down few important realizations that I have had, then here are my rules:

  • Stick with good businesses run by capable and trustworthy management, which have the ability to survive bad years comfortably and operate in industries having clearly visible and reasonably long growth trajectory. As simple as it sounds, this I believe is the most effective filter to reduce the number of potential stock ideas.
  • Valuation should not be ignored at any cost. But be ready to pay a fair price for good businesses. Every now and then, the markets will surprise by offering unbelievable deals on a platter.
  • You may have the courage to go out, but if you don’t have the cash, forget about taking advantage of such few-in-a-lifetime events. So be prepared with surplus funds to the extent possible. It will test your patience. But that is the price that you should be willing to pay.
  • There is a time to be brave and there is a time to not be brave. Don’t try to be brave all the time. Protect and secure what you have earned. Remember Buffett’s 2 rules about losing money. Be willing to be laughed at for your investment ideas. But that is when it will work. In investing, you want others to agree with you…but later.

 

Ravichand (S&L): Great set of rules, Dev. The importance of protecting your investing capital cannot be emphasized enough. When you read the investing rules of super investors, the point that return of money is more important than return on money becomes obvious. 

Next let’s talk mistakes. Mistakes are sometimes referred to as “unexpected learning experiences”. Can you share any investing mistake(s) you have made and what were the learning?

Dev: Let me talk about my mistakes.

One of my major mistakes (and I repeat it) has been to not average up when I entered in a good stock early on. You can say that I got anchored to the price I got in first. The result is obvious. I could have made a lot more money in absolute terms than what I made when you look just at the CAGR figures.

Selling early is also one of the crimes I regularly commit. The reason might range from increasing overvaluation to change in unintended negative signals that the management might be sending. But selling early has cost me in past. It’s like waiting for that elusive 20- or 50-bagger. For that to happen, you need to stay put and go through 5x, 10x, 15x and so on sequentially. You cannot jump straight to the 50x. Isn’t it?

At times, I did not pay attention to valuation when deciding to buy a stock. Very often, it backfired. One thing that we should not forget is that it’s not just what you buy that makes for a good investment.

It is also about what you pay for it. Valuation is something that really cannot be ignored. At least not for me. And you know what the biggest problem apart from these mistakes is?

keep repeating these 3 all the time. The frequency is reducing. But maybe I can just never eliminate these fully.

 

Ravichand (S&L): To be honest, I believe that these mistakes you have mentioned would have been committed by every single investor. It’s only with experience and spending time in the market that we can avoid these potential investing landmines.

From Mistakes let’s talk on the skills required to succeed. What do you believe are the skills one need to hone for becoming a better investor?

Dev: I am not too sure about how to answer this question. But I feel that investing is unnecessarily made out to be too complex. It is in essence pretty simple. Some are born great investors. For others, I think they should do/have the following:

  • Basic understanding of how businesses work and make money. Before investing, think of how you would be running the business of which you are planning to buy the stock. Have an owner’s mindset.
  • fair idea of finance, accounting and what numbers are telling or what they are ‘forced’ to tell or what they are hiding.
  • A growing understanding of how the market works and more importantly, how market participants (and not just investors) behave under different market conditions. This isn’t exactly a skill but for this, there is a need to study market history.
  • Reading is essential. To learn about how others have successfully invested and also because you will need to read annual reports, etc. if you are serious about investing.
  • Now this isn’t exactly a skill but eventually, one needs to understand that just being right or wrong doesn’t mean anything. As they say, amateurs want to be right but professionals want to make money.
  • So allow me to invoke George Soros here who rightly said that it’s not whether you are right or wrong that’s important, but how much money you make when you are right and how much money you lose when you are wrong that’s important.
  • You may call it skill, insight or art… whatever. But this is required to grow the portfolio.

 

Ravichand (S&L): Cannot agree more on the importance of reading in the life of an investor. Munger famously quipped “In my whole life, I have known no wise people who didn’t read all the time- none, zero” From skills required we move onto lessons learnt.

What has been the most important investing lesson(s) you have learnt from your time in the market?

Dev: You ask tough questions Ravi!

There must have been several important things that I must have learnt along the way. And to be honest, I may be still too young and inexperienced to know which one is the most important one for me.

But in recent years and as the portfolio size grows, I have come to realize that it’s not just important to push portfolio to grow faster. It is also important to start protecting what one has.

This may sound like being conservative at times. But that is what is necessary. As I said earlier, there is a time to be brave and there is a time not to be brave.

Of course when one decides to become aggressive and when one switches over to being conservative is fairly subjective. Mean reversion and how cycles work in the market is something that should be respected here.

We may not feel any urgent need to accept the cyclicity in market behavior when we start investing. But I think cycles are inevitable and more importantly, are heightened by the investor’s inability to remember the past.

Investor’s attitude toward risk also goes through a cycle. Of course the speed and timing of the cycle matters, but I hope you get the drift of what I am trying to say.

You need to position yourself and your portfolio after giving a deep thought to the cycle. Cannot ignore it. And that’s because at the extremes of the cycle, things can get really strange and uncontrollable if you don’t know what hit you or you aren’t positioned correctly.

 

Ravichand (S&L):  Loved the lessons especially the one on the need to be brave and act decisively when needed. All the bookish knowledge like “Be greedy when other are fearful” or “Buy when there is blood on the streets” etc. are not useful if we are not going to act on this knowledge. Brian Tracy put this beautifully “Think before you act and then act decisively. Fortune favors the brave.”

From lessons let’s move on to advises. What has been the most important investing advice(s) you have received on investing? How has it influenced your investing process?

Dev: I admire a lot of famous investors as they have provided the intellectual base for my investing life. And I am grateful and lucky to be influenced by them early on.

But I think the most important investing advice I received was from someone whom I regularly interact to discuss ideas. He is a not-so-small investor but likes to remain in hiding.

What he told me (and keeps repeating) is that if I wanted to make good money in the long run, I needed to have a thick skin. And I needed to become deaf.

Why?

Because successful investing is all about being contrarian and making people agree with you…but later.

So in between, you will have to listen to all the reasons from others about why you are wrong and why they are right. But assuming you have done your homework before taking the position, you need to ignore all the pressure that is coming to you.

And for that, you need to have a thick skin and turn deaf. If you watch the movie ‘The Big Short’, this is exactly what Christian Bale playing Michael Burry is symbolic of.

Being contrarian isn’t easy. If I see some good opportunity to invest and the market seems to ignore it, then chances are that the particular opportunity exists because the conditions aren’t favorable for it yet. Or else price would have moved up already.

So if you have a thick skin and you are deaf, then you can be comfortable with people misunderstanding you in the short term. Eventually and in long term, you will be right and make money.

I know that there is always a risk of being arrogant if you do so. Who knows and it’s possible that you may be wrong in your judgment and others might actually be right. But that is fine. In investing, even if you are right 4-6 times out of 10, then you can make serious money (depending on your position sizing).

Other important advice is more on the personal finance front. My father has always been of the view that the allure for more wealth is an unhealthy obsession. It’s unnecessary and it’s not worth it.

He has time and again told me that we don’t need a lot of money to feel good. Having enough money and free time is more important. And as I age, I agree with him more and more.

 

Ravichand (S&L): John Neff described the essence of contrarian investing nicely “It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized”. Indeed a contrarian strategy is highly rewarding as long as we take care of few key things about contrarian investing approach.

Next we move from advice to influencers. Is there any particular investor(s) or author(s) who have had a significant influence in your investment thinking?

Dev: I read a reasonable amount of text (and not just books). But as years pass, the incremental benefit I get from reading new books keeps getting smaller.

Nevertheless, the investors/authors that have had an impact on me are Benjamin Graham, Warren Buffett, Charlie Munger, Peter Lynch, Howard Marks, Seth Klarman, Nassim Taleb and Daniel Kahneman.

But I must say here that one should read a lot. We really don’t know which idea in which book might influence us in ways we can’t even imagine. And who knows what learning we get from any particular book might be used for our life decisions.

And we are always just one decision away from a completely different life. So keep reading. It’s your mind’s software update mechanism.

 

Ravichand (S&L):  Reading is a theme which gets emphasized by all the guests I chat with. Munger put it best “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” Next up is one of my favorite question.

Let us say a bunch of enthusiastic beginners approached you for advice on how to be a better investor then what would your advice for them be?

Dev:

  • It is very important to study great investors and also about companies that survived and ones that did not survive.
  • The market does not reward activity. Others will tell and push you to do something or the other at all times. But money is made by not doing anything most of the times. So be ready to do nothing 95% of the time.
  • Since you will have a lot of time, be willing to read a lot. And I mean a lot. And use this time to upgrade yourself with core knowledge as well as practical insights about how various industries actually work and make money.
  • Market cycles and investment behavior influence each other. Spend time learning about this aspect. For this read up on market history across cycles.
  • As you keep investing and learning, slowly build up your checklist of factors that you should judge a business and its stock on. No book or no one can teach you what comes from putting your money on the line.
  • So begin investing and learn in parallel. Losing hard earned money on your bets is the best teacher. It gives you a perspective that nothing else can.
  • Luck plays a lot bigger role in investing than you may attribute it to. Be humble and grateful and more importantly, acknowledge (at least privately) if you made money due to luck and not skill.
  • Have a thick skin but don’t be arrogant. This won’t come easy. So give yourself time to go through the process of growing a thick skin. Jokes apart, what I am trying to say is that be ready to take a contrarian stand and be ready to take brickbats for it.
  • But also be willing to acknowledge and backtrack if you have made a mistake. You are here to make money and not prove whether you are right or wrong. Bury that ego in a flowerpot.
  • This is difficult – as the years pass, try to be unemotional about investing. I don’t know how as there is no perfect recipe. But you have to gradually and intentionally reduce the role of emotions in your investing life.
  • If you are a beginner then you will not understand the gravity of this advice. But it is far more important than what people will ever realize.
  • You will only appreciate a good market when you have been through a bad one. So be ready to face the bad one sooner or later. It will humble you and help later in life when your portfolio is larger.
  • On a personal front, realize that time and health matter more than your wealth. And please do remember that you always know how much money you have, but you never know how much time you have. So act accordingly.

 

Ravichand (S&L): I think that’s a great set of advice for beginners. On studying great investors, that is precisely what Stock and Ladder is focused on. I also think your point on time and health is very important but we rarely bother about it when we are beginners. On health, I like what Jim Rohn said “Take care of your body. It’s the only place you have to live” Next question is on my favorite activity – reading. If you have to recommend 5 books that every investor must read then which ones would that be?

Dev: To answer your question specifically, here are the 5 books:

Also, re-read these books (or ones you respect) every few years. You will gain new insights from the same books as by then, you would have gained more experience. Also because you could relate the information in these books to various other texts that you must have read elsewhere in between your re-readings. I must mention here that reading is fine. And necessary and there is no substitute for it.

But reading alone is not enough. Don’t expect to be rich and happy just by reading a lot of books. You need to read, adapt and use the understanding to invest and live well.

 

Ravichand (S&L): Wonderful reading list and a great point on applying the knowledge as Aristotle put it “The mind is not only knowledge but also the ability to apply that knowledge in practice”. Even good things need to come to an end like this wonderful conversation and here’s the last question: Outside your passion for stock market and investing, are there any other interests / activities which are close to your heart?

Dev: I like to travel. And I am lucky my wife shares this interest too. We try to visit a new place every 6 months or so.

Also, I believe that I am an ancient mountain soul! So every year, I just have to spend at least a couple of weeks in the hills or mountains. That you can say is my indulgence.

As you might have already guessed, I also like to read. Not just books on money but a lot of other stuff as well. My interests lie in space science, science fiction, aerodynamics, ancient civilizations, etc.

Walking is something that I do a lot. No particular reason for it. I just like it.

Formula 1 is my longtime favorite sports. So almost 20+ weekends a year (that’s the approx. number of races) are booked to watch it. My wife hates F1 as they take up the weekends at odd hours.

Other obvious sports interest is watching cricket. I don’t play but spend a lot of time reading up on cricket records now.  Socializing a lot is not my cup of tea. But I am lucky to have a few good friends and we meet often. That’s it.

Thanks Dev, it was a very enlightening, interesting and insightful conversation. Wishing you the very best in your career and life.

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Interviewing a Rich & Anonymous Investor

Rich anonymous investor interview

This guy is financially independent. He prefers that I don’t call him rich. 🙂 Manages an 8-9 figure portfolio for himself and family. Is a full-time investor. Straight talker. Is smart and extremely sensible when it comes to money.

So I decided to interview him.

He agreed to answer my questions but only if I did not disclose his identity. I didn’t see it as a problem. Seemed like a small price to pay for the learnings.

So I will call him Mr. Anonymous Investor (or for simplicity, Mr. Anonymous).

Since I can’t tell anything more about him, let’s straightaway get into the questions…

 

Dev – Who are you? Tell us something about your story (obviously without disclosing your identity).

Mr. Anonymous – I am an economics graduate. In my earlier avatar, I have worked in the financial space. My past experience increased my understanding of the business and ofcourse starting capital.

I have been married for 15 years now. My wife is an MBA and works with an NGO. We have a lovely daughter with many years to compound ahead of her.

 

Dev – So how did you become a full-time investor?

Mr. Anonymous – I had very frugal lifestyle then. My wife was earning and she had some savings thanks to her Dad and her high salary. I thought that I could earn enough from equities for daily chores.

I found investing as very intellectual relative to running own business. Operations eat up a significant portion of the time and effort of a businessman. While business may earn high ROI in initial years, over time it may come down to earning just average ROIs.

So I was of the view that if I could manage to earn above average returns from equities over a longer time frame, I could probably be as rich as a businessman.

 

Dev – How did you invest when you started (even before becoming a full-timer) and what has changed now?

Mr. Anonymous – I started investing based on names of the companies and familiarity. I hadn’t mastered the behavioral element required for investing. I used simple and widely visible business to invest in. I missed Infy, Satyam and the likes. (Later I did buy TCS in IPO and kept on adding; I still hold it).

Then I picked up combining Low PE and High ROE strategy.

I gained confidence and decided to shun job and pick up full time investing. I didn’t have any track record when I left my job. I had no recency bias or overconfidence when I became a full time investor. I solely believed in my understanding of the business and had a decent starting capital.

 

Dev – What is your philosophy when it comes to money and investing?

Mr. Anonymous – About money, I think people don’t have set goals why they are saving or investing. Many want to just earn later to park it in bank FDs or buy some Real Estate. I don’t understand this fascination and such comfort. It’s just mental masturbation of bank balance.

I invest for roaming across the globe and retirement. I have achieved my retirement corpus long back.

So currently I am helping many friends and family to invest in equities through index funds atleast. I have Gold around 7-10% of networth for currency/govt. risk. Rest is all equities. I am excluding my occupied house from networth calculations.

Currently (in early May 2017) I have almost 25% in Liquid Funds due to lack of investment opportunities.

My investing philosophy may or may not suit all investors.

I usually scan companies that are currently undergoing some pains and trade at low multiples on cyclically low earnings. But once bought, I tend to hold them over long term.

But understanding management is not so easy. It took me 5-6 years to understand various kinds of managers. People often consider management good if he is growing faster than industry. But I try to see what he does in downcycles. It’s better to assume that almost all managements are frauds at the start. If I like the valuation I tend to take 3-5% position. If I find management great during the holding period, I increase the allocation. I may pay a higher price also if I believe the management is focusing more on ROE than revenue growth.

Occasionally, I scan what other research analysts are recommending and often get one or two ideas from them. I have benefitted from some advisors including Debashis Basu and a few MF monthly portfolios. I have subscriptions of Money Life and MoneyWorks4me. I also follow Quantum Mutual Fund and Prashant Jain of HDFC MF.

 

Dev – Concentrated or Diversified Portfolio? Why?

Mr. Anonymous – Ofcourse concentrated 🙂 I tend to hold around 10-14 stocks. But it may happen that two companies are in the same sector; though these companies may not have the same business model even if they belong to the same sector.

But I recommend early investors (typically having 1-3 years’ experience) to practice diversification. Not very large diversification but 20-25 stocks.

You also need courage to hold stocks in bear markets. If you hold 10% in a stock and it tanks 50%, you question yourself and move out at a loss. The stock may stay there for 2-3 years before it bounces back to desired levels.

People really underestimate emotional effects of drawdown and its impact on long term portfolio returns. Having a diversified portfolio of 20-25 stocks would give you the courage to hold onto your favorite stocks rather than losing patience and selling it all at a loss. This typically happens during market corrections (like in 2005, 2011, 2013, etc.)

 

Dev – Tell us something about your investing home runs?

Mr. Anonymous – Most home runs have happened in asset light business and secular long term trend. Luck part being that it experienced steep growth during my holding period.

I had one leading telecom company for 5 years, two housing companies for some years, one auto company, one building material and one information services company. All had underpenetrated markets. So long term growth is still there in all of them but it will be slower than the past. Having potential market is not enough, having the ability to scale up fast is the key. Cadbury and Kellogg’s took years to scale up despite big potential, but some grow very fast which is part luck.

 

Dev – Tell us something about your investing mistakes?

Mr. Anonymous – Mostly asset heavy and commodity business have given me nightmares (like GAIL, etc.). My mistakes have been buying a metals company thinking that it can manage to turnaround. But commodity cycles may take longer to reverse to the mean.

Also, most asset plays have given me some nightmares. Nowadays I prefer to invest in asset plays only for short term. If the valuation gap is not closing in say 1-2 years, I move to another undervalued stock.

 

Dev – Do your regret any financial decisions in your life?

Mr. Anonymous – I have been lucky to have made major decisions well. In hindsight, quitting the job and practicing full time investing was very beneficial to my family.

I can spend time with my daughter and my wife can continue working in NGO. I don’t like to manage the money of people I don’t know. It becomes difficult to communicate why we are underperforming or why we are not picking stocks now.

I don’t want to slog very hard as I have already reached my goal. I manage many accounts for free. Most of my friends don’t pay me for recommending a mutual fund.

 

Dev – You are a full time investor. And one of the hardest things to master for professional investors is coming in each day for work and doing nothing. What’s your routine?

Mr. Anonymous – I have rented an office space in my friend’s commercial complex. I typically work from 9 to 5. Sometimes, I prefer working from home. A lot depends on what mood I am in. If I feel like reading books I stay at home, if I am researching a company, I prefer to do it alone in the office.

On daily basis, I check my watchlist, 52-week losers, 3/6 month losers. I also check promoter’s buying and selling activity. Every month MFs publish buying and selling reports, I do check once in a while.

 

Dev – How do you analyse businesses worth investing? The process followed and what goes into your ‘Too Hard’ side of the table?

Mr. Anonymous – I don’t usually believe in fancy stories of turnaround or value creation. Why should I take businessman’s risk when I am not in control of things? I rather stick to established business models which have the ability to come out of temporary stress.

Sometimes, I go through good fund manager’s monthly report. Most of the time I reject what they are buying. Occasionally, I get 1 or 2 ideas worth exploring.

One such example was Power Grid Corp by Sankaran Naren. Though I bought FPO based on MoneyWorks4me’s recommendation. S Naren’s activity led me to dig more. However, I sold off the stock early as I got another stock idea.

Too hard bucket for me has been asset heavy business for now. Since the beginning I haven’t liked conglomerates. Conglomerates have weird cash flows structures and promoters pursue their dream/pet projects. I don’t wish to participate in promoter’s unrelated diversification. If promoter happens to be good, I rather enter later once he proves to be good. People are bullish on Piramals as if he has cracked Real Estate model already. As if he can’t make mistakes. As if he is Warren Buffett. 🙂

 

Dev – And once you have shortlisted the businesses, how do you decide which ones to buy?

Mr. Anonymous – I see 50% upside in next 2 years before I buy a stock. If it’s a stable business, then I look for 15% 5Y forward CAGR from today’s price. I don’t fantasize multibaggers. I stick to basics and keep finding new ideas.

Multibaggers happen in hindsight. I don’t build stories at the time of buying. While it’s true that 1-2 multibaggers can change your life at the time of purchase but you won’t commit 10% of networth because only in hindsight one would know which one of it was a multibagger.

I rather follow a process which will continuously help me generate above average returns rather than having the anxiety of finding a multibagger every year.

I believe Joel Greenblatt’s Little Book and Pabrai’s Dhandho Investor are good starting point.

 

Dev – How much returns should one expect from equities in the long run? How did you arrive at that figure?

Mr. Anonymous – People should check inflation numbers. Yes, government numbers can be fudged but you can work with proxies. Use 10Y Bond rate of 7% and add to it GDP growth of the country. If we say GDP growth rate is 5%, the average investor would earn 12% CAGR.

But add to it sticking to good companies and pursuing contrarian investing, one can add 2-3% more. This should be the starting point for filtering out ideas.

What I insist most of my friends and followers is to first try to generate market returns for yourself. This will not scare you away from equities.

While returns are important, more important what percentage of assets you put in equities. So index fund will give you courage.

After that, play around with new process on a small portion of your capital. Then slowly move more capital to that process.

Don’t jump into growth or value investing/concentration from day one. While a bulk of the portfolio will be earning some returns from the index fund, you will not have the fear of missing out. It’s ok to miss out 2-3 years of high returns. In 10-25+ years investment horizon, it will be a small blip. Don’t ruin future returns regretting over missed opportunities.

 

Dev – Your message to those who say getting 18-20% returns is easy?

Mr. Anonymous – Most businesses would grow at nominal GDP growth rate in future. Occasionally one would find a business growing faster than that but again he wouldn’t have full networth in the same.

On top of it, most mutual funds holding 50-60 stocks claim to earn 18-20% which looks impossible unless the economy grows at that pace going forward.

Someone with 10 stocks may as well grow at 18-20% in short run but over long term it will reverse to the mean.

Blow-ups happen! Shit happens! No one is as smart as or as lucky as Warren Buffett, till now. Don’t have the survivorship bias.

 

Dev – How to ‘actually’ be greedy when others are fearful and vice versa?

Mr. Anonymous – First of all one has to realize that he is holding a diversified portfolio of 15-20 companies. Few would definitely drown in next economic slowdown but some would rise.

If most of the stocks are quality (No debt, high ROE, asset light), then a high percentage of the businesses would come out of the economic slowdown. This will give you courage in buying/averaging those shares during market corrections.

I was scared but I did average most stocks in late 2008 and early 2009. I had started buying stocks much before than the actual bottom.

Stocks had fallen 20-30% after my first purchase. I went on to buy Bajaj Auto, HDFC Ltd, LIC housing, TCS, etc. I knew some would not do well. TCS and INFY had gloomy prospects given where BFSI stood in US then.

But then I wasn’t looking for a winner in every stock. If you look for a winner in every stock, you end up missing most bargains. Most bargains are available due to uncertainty. Uncertainty is the most favourable time to buy. Ofcourse, one may start with just 3-4% allocation and once uncertainty fades out, average up fast.

Same ways, realize that very high growth is not something you should assume over long periods, there will be some exceptions like HDFC Bank or Kotak but I won’t hold on to such stocks if prices factor in very high growth rate. I start trimming the position. Just like buying, I sell too in a staggered manner. If I really like the business I don’t sell out completely and may stick around with 3-4% allocation and later add up when the prices return to normal or bargain levels.

Investors should reverse calculate what growth rate market is assuming. Read Expectations investing by Alfred Rappaport.

If you believe the company can enjoy 30X PE due to growth, take entire growth period and apply 15-18X at the end of that year’s earnings. Refer to Prof. Sanjay Bakshi’s Relaxo valuation. Very simple way to value a company. This will give you reasonable valuation and reality. Don’t fool yourself with growth assumptions like 25% for 10 years. It isn’t easy and no company can do it.

Also, don’t have a bias for your portfolio companies. Most business would enjoy 14-18x PE only after growth normalizes. For example, if we see V-Guard, Nerolac, Havells, they are being bought as hope diamonds for growth. If I reverse calculate, V-guard should grow at 30% CAGR over next 5 years to justify today’s valuation. Similarly, Dmart and TVS Motors are steeply priced. Most consumer brands including consumer NBFCs are steeply priced. I don’t understand that in an era of low income growth and poor employment how would these companies grow at such high rates for long periods.

So when I say the market is overheated, third-grade SIP sellers get offended and abuse me for timing the market. 🙂 I ain’t timing the market, I am valuing a business and it’s not making any sense.

If you ask your customers to hold on to expensive stocks in the name of not timing the market, you are doing a disservice to them. Why do you even exist if you can’t help move out of pure equity dynamic or balanced funds till the time froth settles? Or simply, even you do not understand valuations or investing.

I was very lucky to have exited significant part of the portfolio in September 2007. Though I missed the BIG rally till Dec’17, I was spared from steep drawdown. That is why I could immediately start buying in mid-2008. Though I was early in picking stocks, I kept on buying till 2009. Luck always favors the brave and prepared. Those with ‘don’t time the market’ philosophy lost many clients during that period. Equity industry has lost those clients forever.

I just hope that period shouldn’t come soon looking at current scenario, especially in Mid and Small Cap funds. These funds are riskier than stocks. Their price correction happens due to illiquidity rather than fundamentals. And good luck believing that customer will hold on to them during the entire drawdown

 

Dev – As an investor, the hardest thing about investing is to find a balance between 1) riding out periods temporarily unfavorable to your views and 2) realizing your views are wrong and moving on. How should an investor maintain that balance?

Mr. Anonymous – I let it out such frustrations at clubs or twitter 😉 Most of the time, some sector or companies behave weirdly and stock prices go bonkers. I hated Jubilant Foodworks since IPO listing. It went to become large gainer. Now it has corrected a bit. Still a falling knife. Long way to go before the promoter corrects its positioning and branding exercise. The quality of food is bad and competition has increased due to delivery apps.

Similar foolish behaviour is seen in United Spirits. Baseless valuations. All stories. Currently, MFIs and NBFCs are quite buoyant. I hope I am wrong on this call or else many retail customers would burn their hands.

 

Dev – How does a common investor identify his limitations, create a simple mental framework and more importantly, implement this framework to avoid making big mistakes?

Mr. Anonymous – Avoid mistakes should be the core investment philosophy. Stick to asset light business. Diversify because shit happens.

Don’t get excited if the portfolio runs up. 1 or 2 years of run up is nothing if your investment horizon is 25+ years. One of my friend’s brother got very excited looking at 35%+ returns in Feb’16- Mar’17. I had recommended him Quantum LTE and HDFC Equity during that period. Both funds were worst performers then. It was part luck and some common sense. Similarly one or two years bad performance does nothing to your long horizon. Most of the potential blow-ups are bought during

Similarly one or two years bad performance does nothing to your long horizon. Most of the potential blow-ups are bought during bull market and they actually blow up when markets turn. If you get scared of markets during corrections and can’t think of which stocks to pick, stick to Index Funds. Index Funds inherently follow momentum investing. It will weed out real problematic companies and yield decent returns.

Choosing mutual funds is tricky. Fund’s process may be centered around some philosophy. And as we know sticking to one philosophy will not yield good returns every year.

To give you a checklist:

  • Diversify between 15 stocks based on quality.
  • MF investors should hold 5 funds.
  • They can choose index fund for 50% capital and play around 30-50% capital in various MFs.
  • Keep an eye on Index PE ratio Not very reliable indicator measure though but still some thumb rule for the know-nothing investor.

 

Dev – You have strong views against mutual funds. Why? And given that most people are better off not touching equities directly, don’t you think MFs are the go-to option for such people?

Mr. Anonymous – Unfortunately, MF industry doesn’t work for its unit holders.

Every industry has its good, bad and ugly. But financial industry has more of bad and ugly. The quality of advisors in India is too bad. Investors should check what qualification they have. Most don’t have experience of understanding investing too. SEBI doesn’t have good certifications. It isn’t strict and extensive. Even a 10th Standard student without experience would clear those certifications. Most of the Advisors are basically distributors labeled as advisors.

Talking about AMCs, they are clearly favoring distributor led model. They are not educating investors when to buy and which funds to buy. Most CEOs and Fund Managers keep saying consult your advisors (basically distributors). If that is the case, why in hell are you offering direct plans? Isn’t it your job to educate investor when you have a scheme directly offered to him?

I had seen misselling in 2007 too. A few fund managers were sceptical of valuations in capital goods and infrastructure. Still Infra and Natural resources funds were sold. I have one question for them, if they are reading this blog. If you are really honest, why are you hiding your salaries, your brokerage costs, your benchmark, expense ratios? Most large-cap funds have 30% Small & mid caps. Benchmark is Nifty 50. Why? Within Benchmark, they are not using Total Returns Index offered by exchanges? Holdings in their portfolio throw dividends too. Brokerage paid isn’t shown in annual reports. All transactions are shown net of brokerage costs. Why? Am I not suppose to know that you could have spent 1% in NAV to generate just 2% alpha on brokerage cost? What if the brokerage cost is paid to own sister concern to improve its profitability?

If you are really performing fiduciary role better show all these details. If they are talking about good intentions, their actions tell us something else.

 

Dev – Volatility is one of the most recognizable and hated aspects of equity markets. And because of volatility, most investors do the exact opposite of what needs to be done. They buy (on fear of missing out) when markets are high and sell (out of fear), when its low. So how does one start believing and also, convince others about the fact that volatility is an aspect of risk and it is not 100% same as risk?

Mr. Anonymous – Tough question. I believe that no one can do this exactly right all the time. There will be misses.

But you need some anchors. Anchors won’t be perfect but atleast better than no anchor. Like your website mentions Nifty PE ratio. It’s futile to buy equities beyond 22X despite longer investment horizon. That part of capital will compound at much lower rate. Anchors help in judging future course.

One should have simple thumb rules or mental notes. The note can be as basic as this:

“Market corrections leads to fall in valuations of the company. The business owner will not give up working just because prices have gone down. He will work towards improving business fundamentals and valuations. Markets will eventually move up. Since we are holding a diversified/index portfolio, we don’t have to fear one or two businesses going bad.”

 

Dev – There is too much noise out there. And most of it harms those who use it to make their investment decisions. What are the few factors investors can use to improve their decision making?

Mr. Anonymous – Whatever you see around has a reason for its existence. Media exists for making money from advertisement. They are not for your help but for making money from TRP.

Brokers/MFs exist to earn fees they get and not for you. While people do know that most politicians don’t work for us, they are not able to ignore the noise from media and brokers’ house.

Just like you ignore what Arvind Kejriwal said in last rally, ignore what stock experts like XXXXX or YYYYY say on TV. They are not your well wishers. They come on TV to generate large AUM for themselves.
That is the reason I have taken a contrarian stance in my communication too. When everyone is recommending you hunky dory scenarios, I warn people about RED flags and optimistic projections. This helps them get two viewpoints.

I never see SELL recommendations coming from Brokers or MF sellers. I warn people that markets are turning expensive or junk stocks are getting re-rated. I hope it helps some of them.

 

Dev – What do you find most annoying in the markets today?

Mr. Anonymous – Short term price pop excites people. I wonder what would they achieve based on just 1-2 years of good performance. One needs to have a process.

Returns from the process need not be too great but it can be REPEATED over long periods.

TV/advisory experts talk rubbish about multibaggers stories but later fail to come up with new ideas in subsequent years. Most crucial thing is to earn high returns than one is currently earnings in savings instruments.

Beating-markets comes much later, after you have mastered behavioural and valuation skills.

People are looking for 18% CAGR as if it’s their birthright.

I would ask such people what have you achieved in life, skill or position that you demand 18% CAGR? The ones who are earning are slogging day in day out and brushing themselves with knowledge everyday. Even if they earn high returns, most of it will be captured by them only in terms of fees as they have done all the effort.

Why should you earn a lot? Better earn atleast market return first then pursue higher returns over years by improving behavioural skills atleast if not business analysis.

 

Dev – What are you favorite books on investing, money and psychology / behavior?

Mr. Anonymous – To name a few:

Other than books, one can read:

 

Dev – Who have been your financial heroes? And what are the most important things you have learnt from them?

Mr. Anonymous – James Montier. I don’t have his track record but his research gives me a very good reality check. Howard Marks for Behavioral Finance.

 

Dev – What is your daily reading list? 

Mr. Anonymous – All pink papers. I skim through each one of them. But this is for someone who is full time investor looking for ideas. I have a subscription to Magzter for all Indian business magazines. I get HBR and Economist physical copies at home. Actually, my wife reads HBR but I like The Economist.

 

Dev – That’s all from my side. Thanks a lot for answering my questions in such detail. It was wonderful to have you share your insights.

Mr. Anonymous – Thanks Dev.

Interview with Jonathan Clements (1008+ Articles for WSJ)

I have been a fan of Jonathan Clements’ writings for years. He is a celebrated writer who writes about Personal Finance and Financial Planning – Best known for writing (hold your breath) more than 1008 articles for The Wall Street Journal!

Jonathan Clements Financial Planning

So when I did reach out to him for an interview, I was not sure whether I would get a Yes (or even a reply) from him. But Jonathan was gracious enough to grant me an interview. Lucky me. 🙂

The best part about his writings is that it cuts through the financial clutter like a knife. He tells you in clear terms how to think about money. His advice is typically ‘direct and seeks to unravel the confusion that often surrounds financial choices.’ 

Note – This interview has several links to articles on Wall Street Journal (WSJ). If you click on the link, you will be shown only a part of the article with an option to subscribe. But luckily, there is a work around. Just copy the article title and paste it on Google. From search results, click the WSJ link to that article. You will get access to the full article. 😉

So without any further delay, let us move to the interview:


Jonathan Clements Personal Finance

Image Source (link)

Dev: You are a celebrated writer. Tell me something about your journey. How did you get to where you are? Did you always want to write about money?

Jonathan: My father was a financial journalist for the first decade of his career – working in London for the Financial Times, the Daily Telegraph and for several other publications. That meant journalism, as a career, always seemed to me like a real possibility.

I was also interested in economics from a fairly early age. But I think what spurred my interest in personal finance was grappling with my own finances during my 20s.

By age 25, I not was only married to a PhD student with no paycheck, but also we had our first child. All the financial responsibility was on my shoulders – not an easy thing when you’re living in one of the world’s most expensive cities and earning a young reporter’s salary.

 

Dev: What is the most important thing you have learned about money (+personal finance) since you started writing about personal finance?

Jonathan: The secret to financial success is no secret at all – You need great savings habits. I’ve met thousands of everyday Americans who have accumulated $1 million-plus portfolios. Most were mediocre investors. Many had relatively modest incomes.

But almost all of them shared one key attribute: They were extremely frugal.

 

Dev: What is your personal investment philosophy?

Jonathan: I start with the assumption that I have no clue what will happen in the future. That’s a tough position to maintain, because the markets’ constant turmoil almost begs us to think about the future and what might happen next.

Still, I try to avoid the forecasting game and instead keep my focus on the things I can control – risk, investment costs, my portfolio’s tax bill, how much I save and spend.

 

Dev: Alright. Lets now move on to some questions related to investing in general.

Why are investors generally so bad at investing? Is it because Investors seem to be forever drawn to investments that they don’t understand because they think they’re sophisticated?

Jonathan: In my new book, How to Think About Money, I finger two major culprits: our hunter-gatherer ancestors and Wall Street.

Thanks to the instincts we inherited from our nomadic ancestors, we tend to spend too much today, we have too great a fear of short-term investment losses and we have too much confidence in our ability to outperform the market.

Meanwhile, Wall Street feeds the fantasy that we can outperform the market, because the fantasy is highly lucrative – for Wall Street.

 

Dev: In one of your interviews, you mentioned that you had put almost 95% of your portfolio into stocks in 2008-2009. Where does that kind of confidence in the markets and economy come from?

Jonathan: It was the one time I engaged in market-timing.

But in early 2009, it didn’t feel like market-timing. Rather, it felt like a one-way bet:

Either the financial system was going to collapse, in which case it didn’t matter what I owned, or stocks were going back up—so I bought stocks.

 

Dev: Why do people find it tough to invest for long term? Why is that it’s always about the short term for most people?

Jonathan: Part of it is our hardwired instincts, which I mentioned earlier (hunter-gatherer ancestors). Part of it is Wall Street, which makes money when folks trade.

And Part of it is the media, which sells more newspapers and attracts more television viewers when it focuses on short-term performance.

For money managers, there’s also a basic agency issue: They may know intellectually that the right strategy is to invest for the long haul, but their livelihood depends on performance over the next year or two, so that’s what they focus on.

 

Dev: And how to address this problem? Both as an investor myself and as an advisor?

I’ve come to believe that it’s crucial to have some sense of fundamental value, so you have an emotional anchor when stock prices go wild.

I tell investors to imagine a line rising steadily at 6% every year, which is my expectation for long-run returns on a globally diversified stock portfolio, based on current dividend yields and likely long-run earnings growth.

When annual stock returns are above that 6%-a-year growth path, we should be happy with our good fortune, but also realize we’ll likely pay a price at some point in the future, in the form of lower returns.

Conversely, when stock returns fall below the 6% growth path, we might be less happy – but we should take comfort in the knowledge that the market will likely play catchup at some point in the future.

 

Dev: You have said in the past that because we can’t control returns, focusing on the principles we can control is critical for investors. What are those principles?

Jonathan: As mentioned earlier, the things we can control are risk, investment costs, taxes, and our own saving and spending. The latter is easily the most important.

If you can’t control your impulse to consume, you’ll likely lead a life dogged by financial misery.

 

Dev: As an investor, the hardest thing about investing is to find a balance between 1) riding out periods temporarily unfavorable to your views and 2) realizing your views are wrong and moving on. How should an investor maintain that balance?

Jonathan: If you own a globally diversified portfolio, none of this is hard. It’s only hard if you make large investment bets on a small group of securities. If you own an undiversified portfolio, you’ll be constantly trying to figure out when to hold and when to fold, and probability suggests you’ll get it wrong half the time – which is why it’s an approach I avoid.

 

Dev: Now moving on to some questions on Personal Finance & Balance of Life & Money.

People try to address different aspects of their personal finances separately – like retirement, goal planning for children, taking loans, investing, etc. What this does is that people fail to see a big ‘total’ picture. They fail to understand how these pieces fit together and think about the tradeoffs we all need to make. How to solve this problem?

Jonathan: I think we should organize our finances around our paycheck – our so-called human capital – or the lack thereof.

Our human capital has 4 key implications for our finances.

  1. First, it provides us with a stream of income out of which we can save for future goals. We need to figure out which goals we can reasonably afford, based on the size of that paycheck.
  2. Second, a regular paycheck is similar to collecting interest from bonds, so it frees up those in the workforce to invest heavily in stocks.
  3. Third, those paychecks allow us to take on debt early in our working career, so we can purchase items we couldn’t otherwise afford. But we should also endeavor to get all those debts paid off by the time we retire and our paycheck disappears.
  4. Fourth, our human capital drives our insurance needs. We need to protect our family against the potential loss of our income by purchasing both life and disability insurance.

 

Dev: I am a conservative investor who focuses a lot more on Return of Capital than on just return on capital. Though every individual’s risk and investing profile is different, do you think that focusing on mistake-reduction is what investors should focus on?

Jonathan: In theory, you could add “avoiding mistakes” to my list of things that investors can control.

Problem is, avoiding mistakes is much harder than, say, controlling investment costs – and lots of investors fail.

They panic when the market goes down and grow overconfident when share prices rise.

I’m a firm believer that stocks will be the best-performing asset class over the long haul. But many investors should probably favor somewhat more conservative portfolios, where there’s less chance that they’ll be scared into making foolish mistakes.

 

Dev: I want to be rich – many people just invest with that in mind. Do you think having financial goals is important?

Jonathan: It’s crucial to have goals like buying a home, paying for your children’s college and funding your own retirement. But all these specific goals fall within a broader, overriding objective: We want to have enough money to lead the life we want.

If that’s the objective, it becomes much clearer how we should handle our money. Instead of investing to get rich – which brings with it the chance of ending up poor – we should pursue strategies that have a much surer chance of success, including diversifying broadly, holding down investment costs and opting to index.

 

Dev: Retirement is a key financial goal for most people. What are some suggestions you have to help investors be more prepared for actual retirement?

Jonathan: There’s plenty of advice available for folks who want to retire in comfort – and the most crucial suggestion is to start saving a healthy sum every month from an early age.

But even as we prepare financially for retirement, we should also think hard about what we’ll do with all that free time.

For many folks, retirement turns out to be a big disappointment, because they believe a life of relaxation will make them happy. Instead, I think retirement should be viewed as a chance to take on new challenges, without worrying so much about whether those challenges come with a paycheck.

 

Dev: Many people believe that they have to sacrifice their lives to have more money or vice versa. What are your thoughts on bridging the gap between money and leading a fulfilling life?

Jonathan: In How to Think About Money, I argue that our orientation shifts as we grow older.

In our 20s, what matters is external rewards—promotions, pay raises, that sort of thing.

In our 40s and later, we’re more focused on things we find intrinsically satisfying.

An obvious implication: Those in the 20s should ignore conventional wisdom, which says they should pursue their passions. Instead, they might focus on less fulfilling but higher paying jobs.

Meanwhile, those in their 40s and older might use the financial freedom they’ve earned – thanks to their earlier, higher paying jobs – to switch to a career that’s less lucrative but perhaps more fulfilling.

 

Dev: That is an interesting thought indeed. And since we are talking about financial freedom, do you think that a simplistic concept of financial freedom is enough? Or is there something much bigger that people need to target?

Jonathan: It depends on what you mean by financial freedom. If financial freedom is viewed as the freedom to buy anything you want and to sit around relaxing, you’ve set yourself up for an unsatisfying life.

If financial freedom is defined as the freedom to spend your days doing what you’re passionate about, you’re likely to be far happier.

 

Dev: One of the themes in your financial writing seems to be that investing is a means to enhance your life, not an end in itself. What can – and can’t – money do for us?

Jonathan: Money can do 3 key things for us.

First, having money can help us to avoid worrying about money.

Second, money can allow us to have special times with friends and family, which research suggests can be a huge source of happiness.

Third, money can allow us to spend our days doing what we’re passionate about, what we find interesting and what we think is important.

 

Dev: You write about “leading a thoughtful financial life.” What does that mean to you and why do you feel it can help investors get the most out of their money?

Jonathan: The research tells us we aren’t very good at figuring out what will make us happy.

We imagine that the new car or the bigger house will deliver a permanent boost to our happiness, yet the thrill proves all too fleeting.

If we’re to get maximum happiness out of our money, we need to think hard about how we spend it. One simple trick: Wait a few weeks or a month before making a major purchase. That’ll give you time to ponder whether it’s something you really want – or whether it’s just a passing fancy.

 

Dev: You have said in past that in pursuit of wealth, we shouldn’t neglect today. What do you mean by that?

Jonathan: If you aren’t happy with your financial life today, it’s unlikely that you’ll stick with your long-term plan. So what does happiness today mean?

You want to feel like you can pay your bills and handle rough financial times. You need a portfolio you’re reasonably comfortable with. You need to spend your days mostly doing what you enjoy. And you need to devote your spending to items that bring you a fair amount of happiness.

 

Dev: But you are also an advocate of delaying gratification. Now I agree that the idea of delaying gratification is very critical. Yet, in some way delaying gratification is about neglecting today. How does one decide what to do exactly?

Jonathan: It might seem like “delaying gratification” and “enjoying today” are in conflict. But they aren’t: If you don’t feel like you’re on track to meet future goals, you’ll have a constant, nagging sense of financial worry – and you won’t enjoy today.

 

Dev: You have been a staunch advocate of index-investing. But in a market like India, there are still fund managers who regularly beat the index. It might be due to maturity level Indian markets or due to some other alpha-sources. Do you think indexing can work in markets like India? Or does it make sense to give more weight to actively managed portfolios here?

Jonathan: I don’t know anything about the stock market in India.

But the logic of investing doesn’t change: Before costs, investors collectively earn the performance of the market averages. After costs, they must inevitably earn less.

Trading costs in emerging stock markets are notoriously high – so, arguably, indexing makes even more sense in emerging markets than it does in, say, the U.S. or Europe.

 

Dev: In one of your old articles written in 2006 (link), you talk about Combining Index Funds With Alternative Strategies. So it’s kind of a ‘Core and Explore’ strategy, where the idea is to have 80% of the portfolio in low cost index funds and exploring higher returns with 20% of the portfolio. Do you think this approach is still valid? Even for a market like India, where information asymmetry is higher?

Jonathan: I think core and explore works for emotional reasons.

If you invest 80% in index funds and make active bets with the other 20%, the 20% might provide an emotional outlet for your crazier impulses – while ensuring that at least 80% of your money earns decent long-run returns.

But the case against active management keeps getting strong and stronger, so I’d prefer that someone was 100% indexed.

Even hedge funds, which supposedly attract the best and brightest money managers, are rapidly losing favor as their mediocrity becomes ever more apparent.

 

Dev: Who have been your financial heroes? And what are the most important things you have learnt from them?

Jonathan: I’m not big on heroes. Everybody has their strengths and their flaws. But I do greatly admire Vanguard Group founder Jack Bogle. And not just because he founded and built a great financial company.

Jack is in his 80s and yet he’s still a fierce advocate of low investment costs generally and indexing in particular.

 

Dev: I know that you are an avid cyclist and runner. Do you think there are any parallels between successful investing and endurance sports?

Jonathan: Both require discipline and a focus on the long term. Those are the obvious parallels.

But there’s also another common ingredient: To succeed, you need to suffer at least some discomfort.

If your brain is screaming “don’t do it,” often that’s the sign that you’re running faster than ever – and that you’re buying stocks at just the right time.

 

Dev: With the increased availability of information, how do you filter out what is good and what is not to get to your daily reading list? How to become a good consumer of financial content?

Over the past 18 months, I have – belatedly – become a devotee of Twitter (@ClementsMoney).

If you follow a bunch of financial experts, you can quickly get a sense for what ideas are garnering people’s attention.

 

Dev: What is your daily reading list?

Jonathan: I read The Wall Street Journal and The New York Times every day. Every few weeks, I’ll go to the library and leaf through the various financial magazines.

I keep an eye out for new academic papers. Because I’ve been doing this for more than three decades, I find I’m at risk of quickly dismissing something with a curt “I’ve read that before.”

But I try to resist that impulse. Every so often, there is something that’s truly new – and, even if it isn’t new, it tells you what investors are concerned about.

 

Dev: 5 books that everyone looking to become better managers of their own money must read.

A decade ago, The Wall Street Journal asked me to write on this topic, and I came up with this list. And here are the names:

Please keep in mind that there are plenty of fine authors who aren’t on that list, including John Bogle, Burton Malkiel and Jason Zweig.

 

Dev: You are yourself an author of 6 personal finance books, including the award-winning Jonathan Clements Money Guide (which gets updated every year). Now you are coming out with a new book called How to Think About Money, which is already getting a lot of positive reviews from industry biggies. Tell us something about the book.

Jonathan: How to Think About Money is my attempt to explain why we make so many investment mistakes, what’s the right way to think about this sprawling messy thing we call a financial life – and how we can squeeze more happiness out of the dollars that we have.

The book pulls together certain ideas that have captivated me – the centrality of our human capital in thinking about our finances, the impact of rising life expectancies, the importance of managing risk and investment costs, the insights from behavioral finance and the shaky connection between money and happiness.

 

Dev: Your 5 favorite articles written by you.

Jonathan: Instead of five, I’ll give you six. These aren’t necessarily the best written or most insightful articles I’ve written. But they were all especially meaningful to me. Please note: The WSJ articles may not be available unless you have a subscription:

(added by Dev: There is a work around. Just copy the article title and paste it on Google. From the search results, click the WSJ link to that article. You will get access to the full article.)

  • Marathon Man: The Agony of Victory (1996) (link)
  • What’s the Weirdest Race You’ve Run? Welcome to the Antarctic Marathon (2001) (link)
  • 12 Ways to Make Your Kids Financially Savvy (2007) (link)
  • Parting Shot: What I Learned from Writing 1008 Columns (2008) (link)
  • I’m Not Apologizing (2009) (link)
  • 5 Ways to a Happier (Financial) Life (2015) (link)

 

Dev: That’s all from my side Jonathan. Thanks a lot for taking time out of your busy schedule to answer my questions. It was wonderful to have you share your insights.

Jonathan: Thanks Dev.


Note – I hope you liked this interview. If you are interested in reading more personal finance and financial planning related articles by Jonathan Clements, you can checkout his website or his columns in WSJ.

My Interview with Wealthy

It’s a little overwhelming to be asked questions. 😉 I’d rather be the one asking the questions.

That said, Wealthy.in interviewed me sometime back about investing, personal finance and what I think about money, in case you are interested.

So lets get straight to the interview…

My Interview with Wealthy

 


Wealthy – Hi Dev, How’s life??

I am doing great. Lately, I have been focusing a lot on Stable Investor and therefore, that is what I can call the center of my life right now.

 Update: From a lot, I have now moved on to focusing only on Stable Investor. 🙂

 

Wealthy – What does money mean to you?

At the cost of sounding too text-bookish, I will say that for me, money is simply a means to an end and not an end in itself. Having the maximum possible amount in my bank account at the end of my life is not what I aim for.

Now let me explain it further…

When we work in a company, we simply rent out our ‘time’ to our employers. So by that logic, having enough money should allow one to have the freedom to spend his time in ways that he wants, i.e. having enough money is a means to getting back the ownership of our own ‘time’.

Now I value my time, family and friends much more than money. And having money beyond a point will not let me spend more time with these people or pursue my passion of helping people with their finances (through Stable Investor).

Everyday, I see rich people who are almost always worried about money and complain of not having ‘time’.

That is not what being rich means to me. That is not what having lots of money should result in.

But having said that, it does indeed help to have a decently reasonable amount of money – an amount that will take care of basic needs, help improve quality of life and also take care of few aspirational needs like travelling abroad, etc.; and lets not forget that having money (and more importantly, properly managing it) helps secure our futures too.

Most people work for money. But with proper planning and common-sense, they can turn the tables on money and make it work for them! So basically, money is a game that people need to play. But unfortunately, it’s the game that ends up playing the people!

 

Wealthy – Can you tell us about your growing up?

I was born in a family of advocates and doctors. But I chose a different path and went on to become an engineer. As an engineer, I worked in the oil sector for few years. This was followed by an MBA and a few years stint in the banking sector.

Many readers of my website feel that it was my MBA that got me interested into the field of investing.

But that’s not correct.

There were infact two things that got me interested into investing.

My father used to occasionally bring home business newspapers. He had his money invested in shares of few MNC companies and would check their prices every few months. He told me that by buying shares, one could actually buy pieces (shares) of businesses.

This got me excited. Why? Because it seemed like the best way to buy part-ownerships in companies without having to setup any infrastructure or factories!!

Second thing that got me further interested into investing was the constant flow of dividend cheques arriving in our mailboxes. I just loved the concept of being paid to hold pieces of paper (physical shares). Getting a regular flow of passive income, without going to work for anybody else – seemed quite marvellous to me.

 

Wealthy – What was the first thing you saved for?

I have always been a avid reader. So when I was a kid, I used to save my pocket money for buying comics and yearbooks.

 

Wealthy – You travel to a new place at least once every 6 months. How do you manage that?

Travel is something that I can’t compromise with. Luckily, my wife shares my love for travelling.

To ensure that we always have money available for our trips, we keep a dedicated travel fund. We ensure that atleast 5% of our monthly income always goes into this fund, irrespective of whether we need to travel in near future or not. What this does is that when we have the time and opportunity to travel, we are not held back by fund constraints.

Also if the trip doesn’t cost much, we don’t withdraw from the fund. Instead, we manage the trip through regular income and let the travel fund grow for future travels.

Till now it has worked for me and we have been able to travel to a new place every 6 months.

 

Wealthy – Do your regret any financial decision?

I am only 31 but have been investing for more than 12 years. So I have made my fair share of mistakes in markets. One of my biggest regrets is that I should have invested more in 2008-2009 crisis. But ofcourse, I now have the benefit of hindsight when I say so.

To be honest, it is really tough to be greedy when others are fearful. Though its now much less difficult for me after all these years. But still, only time will tell how I react (buy) in the next market crisis. So keeping my fingers crossed and praying for markets to go down soon.

Another regret is that I should have realised the power of compounding when I started out. I ofcourse knew what it was in theory. But it was only when I was in my mid-20s that I realised the real, life-altering power of this concept. So I lost out on few early years of compounding.

 

Wealthy – Have you had to make any sacrifices in life ever to adhere to a strict investing habit?

Now that is an interesting question. When I save and invest (for future), I obviously have less to spend today.

But I won’t call it as sacrificing. That is because I don’t sacrifice anything that I value. I like spending time with my family. I like travelling. And I like indulging in few luxuries every now and then. Investing has not stopped me from any of it.

Also, I can still go out and buy something expensive (say car) right away. But that is not what I want. I value financial independence more than spending truckloads of money on short-term pleasures. So adhering to my investing habit is not actually a sacrifice for me

And this reminds me of a quote by Buffett’s famous partner Charlie Munger –

Like Warren, I had considerable passion to get rich, not because I wanted Ferraris. I wanted independence. I desperately wanted it.

 

Wealthy – How do you take care of ‘risks’ while investing?

As an investor, I know that I can never eliminate the risk of being wrong. At most what I can do is to diversify enough, so that my one wrong investment decision does not wipe out my entire net-worth.

When it comes to direct equity investing, I prefer accumulating stocks on a regular basis rather than going for big-bang lump-sum investments. In this way, I get time to judge my stock picks. In case, I am not convinced with the business, I can exit the stock. In case I am convinced, I can continue accumulating them till the stock is reasonably valued.

And as Shelby Davis puts it,

We feel a portfolio is like a flower garden. As portfolio managers, our job is to plant a few seeds every  year and weed out a few mature plants. It is not to uproot the garden. We have a portfolio mix where we hope that something will be in bloom all the time, but we do not expect everything to flower at once.

Now direct equity investing is fine when one has the time and intent to make the necessary efforts towards analysing businesses (stocks).

But when it comes to saving for important life goals, I strongly believe in doing goal-based investing through the Mutual Fund route. It helps reduce the risk as well as achieve adequate diversification across various assets classes.

Its not that hard to do either.

Identify the goal you want to save for, estimate the time you have to save for that goal, make a conservative return assumption and an above-average inflation assumption. Try to accurately calculate the amount that has to be invested on a monthly basis.

After that?

Start investing and stick to the plan.

But mind you, sticking to the plan is the hardest part.

To keep investing for decades (assuming one is in 20s-30s) requires discipline and patience. But there is no alternative to that. This is what needs to be done and hence, should be done.

Another risk that needs to be managed is that of liquidity. And I am not talking about a stock or market’s liquidity. I am talking about personal liquidity. If one has enough cash/income to take care of regular expenses, then one can wait years for long-term bets to pay-off.

But if that is not the case, then any unplanned emergency money requirement, can force you to liquidate your stocks/MFs (no matter how correct your buying decision was). In such times, you will be forced to sell even if prices are not acceptable to your (i.e. lower than what you want them to be).

So one needs to make sure that there is enough money that can be accessed quickly in times of need.

 

Wealthy – Dev, what’s your secret to successful investing?

I think it’s still too early to say that I am successful investor. I still have many decades left in front of me.

But I have been investing for more than a decade and every few days, market has something new to teach. So being in markets is about being a life-long learner. Having said that, I would also say that common-sense based investing i.e. sticking with good companies & buying their shares in times of temporary troubles, is what has worked for me.

I follow a core-satellite approach for my direct-stock portfolio. For the core, I try to stick with shares of predictable, well-run businesses. As far as the satellite part is concerned, I buy companies having higher growth potential & trustworthy managements. It is worth saying that I am not trying to find the next multibagger here. All I am trying to do is to simply buy shares in companies that have decent growth potential, lower downside risks, and a management that has proven its worth in past.

It might sound very simple, but it is what actually works when it comes to real long-term investing.

If I can’t find anything attractive enough to buy, I continue holding cash (earning near-about risk-free rate of returns) in anticipation of finding something. It is better any day, to hold cash than to buy an overvalued stock and see it go down. Isn’t it?

Being active in markets is considered glamorous by most. But it’s only glamorous and not profitable. History tells that most of the money in market is made by waiting and not by actively trading. So that is what my own method of investing is based on.

Another important part of investing is not paying too much for the investments. For example, in early 2009, buying any large-cap stock was the ‘most-obvious’ way of making money. But this required one to have the knowledge about overall market valuations. So, if index was trading close to P/E multiples of 12-13 and a large cap stock was available close to its multi year lows, and there was enough evidence that company was not going to go bankrupt in years to come, then it made perfect sense to buy that stock. It is same as waiting to buy clothes, shoes, etc. in annual sales of retailers, where discounts are close to 50%. If a person is ready to buy clothes at a discount, why shouldn’t one buy beautiful assets like stocks in a discount sale??

Having said that, I also make sure that my mutual fund SIPs continue irrespective of market conditions. Even if markets are falling (like they are currently), it only helps my case as I get more units for the same amount I am investing. Since my goals are still years/decades away, a falling market is a blessing in disguise for me. I welcome and embrace it.

 

Wealthy – What advice do you want to give a 20 something person who just get his/her first job?

First is read Stable Investor. 🙂

But jokes apart, the real advice is that if you are 20-something and you think that you are too young to invest, then don’t think so.

You need to become familiar with the real-life applicability of the concept of compounding and get convinced that ‘Compounding Works’. It has worked for our grandfathers, fathers and it will work for us too. Don’t spend years wondering whether compounding works or not. It just does work.

Spend wisely, save some, invest as much as you comfortably can. Focus on this process rather than the outcomes (like doubling your money overnight, etc.)

If you want to invest in stocks directly, be ready to put in the time and effort to find good stocks. It’s not easy. And to be honest, it should not be easy. If it’s easy, then everybody will become rich. Isn’t it?

Successful investing is simple, but not easy.

But if you don’t want to spend your time doing stock research, go for mutual funds. This financial product has done reasonably good in past. Under all probabilities, it will do a good-enough job in future too.

I would also advice that one should not get too much into thinking about money from the very start of life. Money does not think about you as much as you think about it. So don’t miss out spending time on the real joys of life in your race to earn more money. There is no point being the richest person in the graveyard. Isn’t it?


Thanks to the nice guys at Wealthy for finding me worth interviewing. 🙂 They are working really hard to simplify investing for everyone.

And for those who didn’t catch another one the first time around, I thought I’d share the link to an interview that was done with SafalNiveshak.

Interview with Morgan Housel – Part 1

Morgan Housel Interview Part 1

Morgan Housel is widely considered as one of the most insightful investment writers in the world today. He is a columnist at the Motley Fool and Wall Street Journal.

I have been a long-time admirer of Morgan’s ideas and can safely say that his writings should be in the must-read category for everybody, who is interested in improving his/her investment process.

I thank Morgan for agreeing to get interviewed for Stable Investor. Apart from his ideas about how to become a better and sensible investor, he also shares how he transitioned from Investment Banking to Private Equity to finally, Investment Writing!

So lets get straight to the interview now…

Dev: You are a celebrated writer. Tell me something about your journey. How did you get to where you are? Did you always wanted to write about investing?

Morgan: I knew I wanted to get into finance when I was a teenager. The idea of earning money for what looked like doing nothing (passive interest) just seemed cool to me.

When I was 17, I put $1,000 into a bank CD (similar to Indian FDs). I must have known how interest worked, but I remember a week later the balance was $1,000.03, and I thought it was the coolest thing I had ever seen.

And investing in – actually owning – shares of great businesses really caught my attention.

Throughout college I planned on being an investment banker.

That was plan A, B, and C.

But I got an investment banking internship in my junior year, and instantly hated it. The culture turned me off 100%, on the first day.

I like thinking things through, researching, learning … but the culture of investment banking was like a fraternity where people were just trying to prove that they were tougher and could work longer hours than the next guy without actually getting stuff done.

So I quit.

I got a job in private equity, which I really enjoyed. But this was summer of 2007, and credit markets blew up – not a good place to be when you need to borrow lots of money to buy companies.

I had a friend who wrote for the Motley Fool, and he said I should check it out. I never in a million years thought I’d be a writer. I really didn’t like writing. But I gave it a shot, and that was 8.5 years ago.

I’m still here, and I love it. Couldn’t imagine doing anything else.

 

Dev: What do you like more? Investing? Or writing about investing?

Morgan: I view them as one and the same. Writing helps me organize my thoughts and think through how I feel about investing and trying to identify what people do right and wrong in investing.

There’s no doubt that I’m a better investor because I’ve spent almost a decade writing down everything I see, how I feel, what I observe other people doing, etc.

Even if you’re not a professional writer, I think everyone should keep an investing journal. It’s a great way to turn half-thoughts into fully formed theories you can live by.

 

Dev: In an interview of yours, you said: To get ahead in investing you have to do something other people can’t do or won’t do. So according to you, what are those things?

Morgan: Doing something that other people can’t do means being smarter than everyone else.

But that’s nearly impossible these days, because there are so many brilliant investors. And a lot of the market is now driven by computer machines that humans will never outsmart. So to get ahead you have to be willing to do something other investors aren’t willing to do.

To me, that means having a longer time horizon.

Almost anyone can do that, but very few are willing to do it.

If you can think about the next five years while everyone else is thinking about the next five months or five days, you have an edge over the competition that will serve you well over time.

 

Dev: Market is a volatile animal and it will remain so. So as a long term investor, how should one control oneself to not to panic? Also, when should one panic (say, panic to buy more when markets falls a lot)?

Morgan: It’s two things. One is knowing enough market history to realize how common volatility is.

If you’re new to investing, a 10% decline seems really strange. You’ll say, “Wait, I just invested $10,000, and now I only have $9,000. This doesn’t seem right. Someone’s scamming me. I’m out.”

But if you know market history, you’ll see that a 10% decline has occurred, on average, about once every 11 months over the last 100 years – a period when the market increased in value by 18,000-fold (in US markets).

Once you know that, you might view volatility as something that’s normal and common, like a big snow storm, rather than something indicating a serious problem.

Second, you have to have an asset allocation that fits your personality. Some people have a low risk tolerance, regardless of age.

If you’re not comfortable having a ton of money in the market, don’t’ feel ashamed to have a lot of your assets in cash and bonds. The low returns from bonds and cash are nothing compared to the devastation you can do to your wealth by selling stocks after a big bear market because you couldn’t stand the pain.

Everyone needs a plan that works for their personality and disposition. For reasons I don’t understand, we rarely talk about that, and pretend that all investors of the same age and income have the same risk tolerance.

Continued in Part 2 and Part 3.