Interview with John Huber – Part 2

John Huber Basehit Investing Interview


You can read Part 1 of this interview here.


Dev: 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)?

John: This just comes from maintaining a discipline about your investment philosophy.
I think it’s helpful to keep in mind that stocks aren’t trading vehicles, but pieces of real businesses. And if you’re buying a business that produces x amount of cash flow, the lower the price, the better.
As Buffett says, whether it’s stocks or socks, we like buying merchandise when it’s marked down.


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? Or lets say that just like in the game of Tennis, its best to first work towards reducing unforced errors. Does it help in winning the game of investing too?
John: Absolutely. I think the vast majority of investment mistakes come from “stretching” too far for upside potential at the expense of downside risk.
The tennis analogy is a good one—amateur tennis players win matches not by making the most forehand winners, but by making the fewest mistakes. Just hit the ball over the net. In investing, it’s very difficult to make up for losses. So keeping a relentless focus on preventing losses has always been at the core of my investment approach.
To use one more sports analogy—focus on base hits, not home runs.


Dev: As an investor, 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?
John: This varies case by case, but certainly you have to be honest with yourself. If you’ve made a mistake (which all investors do, and will continue to do), you should be honest in your assessment, sell the stock, and move on.
Of course, the market is volatile so sometimes general market conditions take all stocks lower, and this volatility might have nothing to do with the intrinsic value of stocks in your portfolio.
So company specific situations should be differentiated from general market volatility.


Dev: In his book Thinking, Fast and Slow, Daniel Kahneman talks about two approaches to thinking. System-1 (which is fast, instinctive and emotional) and System-2 (which is slow, effortful and calculating). How can an investor make use of these two systems to invest? At the face of it, System-2 seems like a better choice. But are there any market situations, where thinking in System-1 mode can work wonders for long-term investors?
John: I’m not very familiar with Kahneman’s work, although I’m familiar with his ideas you referenced.
I think generally speaking, my style of investing falls very much in category #2. Thinking logically, rationally, and patiently has always been beneficial to me.


Dev: Do you think lack of preparedness is what causes most investors to miss out on wealth creation opportunities in stock markets? (Both mental as well as financial preparedness)
John: I think that has a lot to do with it. But I think the biggest reason investors probably fall short of what they hope to achieve is lack of discipline (selling during downturns, and buying when outlooks are more optimistic). Generally, investors need to do the opposite to do well over time.
For people with full-time jobs and excess earnings, building wealth is a very simple formula.

Spend less than you earn, and invest in a basket of good businesses (or a broad index fund) over long periods of time.

In America especially, earnings of S&P 500 companies will be much higher 10 and 20 years from now, dividends will be two or three times the levels they are now collectively, and stocks will be much higher.
Dollar cost averaging works – as long as you’re not buying into bubble-level valuations (like 2000). Try to buy stocks when they are down, save more than you earn, and you can’t help but become wealthy over a working lifetime.


Dev: How do you manage your own money? Funds? Direct Stocks? How do you go about it?
John: I invest in stocks. Saber’s strategy is to buy well-managed businesses with stable competitive positions, predictable cash flow, and high returns on capital. I try to invest in these high quality compounders when they are priced well below my estimate of their fair value (or the value a private owner would pay for the entire business).
Because of my standard of looking for both high quality and discounted price, I tend to only invest in a small group of stocks at any given time.
I feel that owning a few things that I understand very well is much less risky than owning a lot of things that I don’t know so well.


Dev: What is your advise for those who are just starting their investing journey?
John: Read about value investing – specially Warren Buffett. I think the simple logic of value investing makes intuitive sense, and it works over long periods of time.
I think investors who don’t have time to manage their own money should invest in index funds, or possibly with an investment manager who uses a straightforward value investing approach, but the best way to learn is through practice.
Those who want to learn to manage their own investments should get in the habit of reading a lot. Study Warren Buffett’s letters, and begin reading company annual reports. Knowledge is cumulative, and it’s possible to do well in investing with the right approach combined with the right temperament.


Dev: For most common investors, it’s suggested that they should Dollar-Cost Average through mutual funds. Not trade much in individual stocks. Buy some shares directly here and there. Tell me what is wrong about this that these people fail to understand?
John: I believe this is good advice generally, but I would say that instead of mutual funds, I would prefer most investors using simple, low-cost index funds (ETFs). These are similar to funds in that they are diversified with hundreds of stocks, but different in that they are passively managed (they are designed to match the performance of an index, such as the S&P 500 in the US).
The costs of these index funds are much lower than the cost of actively managed funds. Of course, a good investment manager can outperform the index over time, but these managers are rare and it’s often easier to focus on just putting money into one or two diversified passively managed index funds.
Dollar cost averaging simply means putting more money to work over time, and I think this is a good approach for working people because they are steadily getting more money each month from their paycheck. Some months will be making purchases at higher prices, but some months will be at lower prices.
This mechanical method is helpful because—if one sticks to it—can help you be disciplined when bear markets (and fear of stocks) come around again. That is the time to buy as much as possible.


Dev: As someone who spends his day in midst of financial data and news, 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?
John: I generally stick to my routine. I get up each day at 5am, read the Wall Street Journal (and sometimes a few other papers), and then (after spending an hour helping my family/kids get ready for the day) I begin working on whatever research project I have going on at the current time.
I don’t pay much attention at all to mainstream media (CNBC, Bloomberg, etc…). I spend most of my time reading primary materials (company reports, industry reports, trade magazines, etc…). I also make phone calls to people to learn more about businesses, but most of my time is spent reading. So I pretty much stay away from mainstream business media.


Dev: What is your daily reading list?
John: Wall Street Journal, Economist are daily reads (Economist comes each week, but I read a few articles each day).
I also read NY Times, Financial Timesand a few other papers, but not necessarily daily.
But most of my time is spent reading about companies through books, annual reports, industry research, etc… this varies from day to day, but each day involves a lot of reading.


Dev: 5 quotes that should be framed and put on every investor’s desk?

John:
  • There are two rules of investing: #1: Don’t lose money. #2: Don’t forget rule #1. – Warren Buffett
  • I will tell you how to become rich: Be fearful when others are greedy, and be greedy when others are fearful. – Warren Buffett
  • An investment in knowledge pays the best interest. – Ben Franklin
  • Just practice diligently and you will do very well. – Johann Sebastian Bach
  • And the one thing that all those winner bettors in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom. – Charlie Munger
  • It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it – who look and sift the world for a mispriced bet – that they can occasionally find one. – Charlie Munger (an extension from the previous quote).

Dev: 5 books that everyone looking to become better investor must read. Atleast one each from domains of building processes, psychology and financial analysis.

John:

Dev: Lastly, I know this might sound funny, but how to find a company like Google, Apple, Tesla, Berkshire, etc. early on. And more importantly, how to have the conviction to stay with them?
John: This one is tough. We should all be so fortunate to find one of these in a lifetime, but most of us won’t. The good news is, you don’t need to find the next Google or Microsoft to become a very good investor over time.
I’m not sure there is a specific way to describe how one could locate such an investment.
It’s part preparation, paying attention, working very hard, and learning about a variety of companies.
But to find an investment of the kind you mentioned, it’s also part luck – being in the right place at the right time.
If you find such a great business, it takes discipline and foresight to stick with it through periods of seemingly overvaluation and short-term underperformance.
It’s hard to specifically set out to find such an investment. I think focusing on working a specific investment process is a better approach. Look for base hits, and maybe one day you’ll come across a home run idea.

Ben Graham made 20% per year buying bargains, and then happened across GEICO, which made him very wealthy. He had many base hits, and one home run. But the home run wasn’t necessary to produce.


Dev: That’s all from my side John. I thank you for answering my questions. It was wonderful to have you share your insights.

John: Thanks Dev.




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Interview with John Huber – Part 1

John Huber Basehit Investing
John Huber is portfolio manager at Saber Capital Management and author of the popular investing blog Base Hit Investing. In his own words, his investment style (which is amazingly methodical) is influenced by Warren Buffett, Ben Graham, Walter Schloss and Joel Greenblatt.
 
I have become a big fan of his writing and thought process, ever since I came across his blog and strongly recommend it to anyone interested in following a structured approach towards investing and improving as a rational thinker.
 
I thank John for agreeing to get interviewed for Stable Investor.
 
So lets get straight to the interview now…



Dev: Hi John. Tell me something about your investment journey. How did you get to where you are?

John: I’ve always loved investing. My father was an engineer by trade, but was very active in the stock market (investing his savings) and by extension, I became interested in stocks.
 
But I came to the world of investment management unconventionally. I began my career in real estate, and I established a few small partnerships with family members and friends to begin buying undervalued income producing property. We bought residential properties as well as small multi-family properties.
About ten years ago, I began studying the work of Warren Buffett. Like many value investors, the simple logic of value investing really resonated with me right from the start.
 
I began studying Buffett’s letters, and reading various Buffett biographies. I set a goal early on to establish a partnership that was similar to the partnership Buffett set up in his early days.
 
After a number of years, I was fortunate to build up enough capital to support my living expenses while also seeding my investment firm. Saber Capital Management was established in 2013 as a way for outside investors to invest alongside me. Saber runs separate managed accounts, so clients get the transparency and liquidity of their own brokerage account. Our goal is to compound capital over the long run by making concentrated investments in well-managed, high quality businesses at attractive prices.
 
Dev: I know you focus a lot on having a process-oriented approach towards investing. How should one go about creating and refining one’s investment process?
John: It’s a great question. I think developing an investment philosophy is very important.
 
There are many different investment approaches out there — even within the value investing category. I think it’s important to first identify an investment program that will work (value investing — or buying stocks for less than what they are worth) works over time.
 
But I also think it’s important to understand your own personality, your own skill sets, and your own circle of competence.
Look at Benjamin Graham and Charlie Munger as an example. An approach that worked for Ben Graham was a completely different approach that ended up working for Charlie Munger, yet both were fantastically successful. But they both had different skill sets and preferences.
Graham loved numbers, he loved the mathematical aspect of investing. He thought of a portfolio like an underwriter would think of the insurance business—buying stocks for less than their net asset values worked collectively as a group over time, but any one individual situation was difficult to predict (just like insuring 1000 automobile policies with a given set of underwriting criteria would lead to very predictable results—although on a case by case basis it would be very difficult to predict which driver would end up making claims). So Graham’s preference for these investment tenets led him to manage a diversified portfolio of value stocks.
On the other hand, Charlie Munger became fascinated by great businesses. He wanted to own companies that could compound at high rates of return over long periods of time. He loved thinking about the intangible qualities of great businesses.

He once asked an associate to write up an investment thesis on Allergan, and when the associate came back with a list of Graham-esque metrics, Munger told him to forget the numbers and research why the company had such an advantage over its competition.

He was interested in brands, pricing power, predictability of earnings, high returns on capital — things that produced growth and compounding value over time.
Both Graham and Munger were enormously successful in their partnerships—both producing around 20% annually over the period they managed money, but both did so in very different ways.

Neither were right or wrong in their approach, but both managed money according to their personalities.
I think if you first identify what works in investing, and then you tailor it to what you like and what you understand, you’ll do well over time.
Along with value principles, discipline, and patience, perhaps Polonius has some good words of advice when it comes to setting up an investment process when he told his son Laertes in Hamlet: “To thine own self be true”.
 
 
Dev: How to generate new investment ideas and more importantly, how to filter those Ideas?
John: I used to do a lot of screens and other mechanical methods to generate ideas, but I find the best way to look for good investments is just to read as much as possible, build watchlists of good companies that you feel you can understand, and then patiently wait for opportunities to buy stocks on that watchlist. Inevitably, if you have a list of 50 or so businesses, there are almost always opportunities on at least a few of them to make an attractive purchase of an undervalued stock.
So most of my time is spent reading about companies and trying to always increase my understanding of the companies I follow, while also slowly expanding my circle of competence.
 
I read a lot of company annual reports, but I have also found a lot of value reading books about businesses, or books about general industries. I also read numerous newspapers, and the Economist.
Often, investment ideas come from situations that occur within companies on my watchlist that I already know well. Other times I read about a special situation or corporate event in the news that might offer an interesting investment idea.
 
So while my method isn’t scientific, my routine is quite replicable, and it basically involves a lot of reading and thinking. I would say that it is an approach that helps me always be tuned in to a variety of interesting situations where opportunities often pop up. But most importantly, it’s an approach that helps me continually learn, and I enjoy that aspect of investing.
Dev: Do you believe in importance of having an investment checklist?
John: I do think having a checklist can be a very valuable exercise. I’ve discussed checklist items before, but I’ve also adapted this point of view in recent years as well.
 
While I consider various checklist items when evaluating a business, I have found that because each investment situation is so different, that unlike flying an airplane that requires the same multi-point checklist before each flight, each investment is like a snowflake—it is unique and not exactly like any other investment.
 
So while I’m 100% sure that studying case studies is a valuable exercise (especially investment failures of great investors — something Mohnish Pabrai discusses which is a great idea), I’m not sure that a single checklist will be suitable for each investment idea. 

Studying why Dexter Shoe was a bad investment is a very valuable exercise. But the lessons learned from that case study might not transfer directly to another investment situation with its own unique set of variables.
So I don’t have a practice of running a bullet point mechanical checklist, although I think that might work for other investors and it’s certainly not a bad idea.
 
Instead, I choose to try and locate investments with very few variables that are required for the investment to be a success. I try to identify those variables, and then evaluate them over time as the investment plays out.
I think studying case studies probably helps you build a mental database of checklist items, so maybe indirectly we all have checklists as investors, but I choose to focus on each individual investment as its own situation with its own set of variables, and I try to reduce risk as much as possible by locating ideas with very things that can go wrong. The lower the hurdle, the better I like it.
 
Note – John has agreed to share a checklist which he prepared few years back. Below is the snapshot of the checklist. Though he doesn’t strictly follow the checklist approach anymore (as discussed above too), it can still be a great starting point for those who are setting out to build their own checklists. You can read about it in detail here.

Dev: It’s very easy to say that investors should only invest when value on offer is blindingly more than the price that needs to be paid. But how does one implement that in reality? Being greedy when others are not, is actually quite difficult to do.
John: As I said before, each individual investment is different, so there isn’t necessarily an exact approach that can be implemented with each stock being evaluated.
 
But I think the first thing is to stick to businesses that you can understand. This is widely discussed, and highly touted, but I think it still might actually be under-appreciated. 
 
Reducing unforced errors in investing goes a long way to producing great results over time. And reducing mistakes comes from sticking to what you know, and picking your spots.
 
I think patience is a real virtue in investing, and over the course of time, there will be a number of opportunities to buy good businesses at prices that are clearly well below their intrinsic value. The key is to have a list of companies you know very well, and then just wait for one of them to fall significantly below your range of estimated values. Easier said than done, but being patient is very key.
 
It is also a necessity in investing to have a calm demeanor and a contrarian attitude in general — the market is often correct, so being a contrarian for contrarian’s sake alone isn’t rational, but you must be able to be detached from the crowd so that in times of general market panic, you are willing to buy stocks even when the near term outlook is bleak. This is also easier said than done, but it helps if you have a long-term view of stocks, and stick to owning good businesses that you understand well.
One other thing to point out—I’ve read the average NYSE stock fluctuates by 80% annually (meaning the 52 week high is 80% above the 52 week low for the average NYSE stock). This holds true across every index, and every country (probably much more pronounced in many countries than it is in the US).

Note – Check out a similar analysis on Indian markets here.

So stock prices are very volatile. There is no way that the average company’s intrinsic value fluctuates this much on an annual basis.

So this of course means that stock prices fluctuate much more dramatically than true values do, giving investors an opportunity.
And since these statistics refer to annual levels, it means that there are a lot of opportunities each year in the stock market to buy undervalued merchandise.
 
Dev: Joel Greenblatt (of Magic Formula fame) once said, “My largest positions are not the ones I think I’m going to make the most money from. My largest positions are the ones I don’t think I’m going to lose money in.” What are your thoughts on this?
John: I completely agree with this. In fact, my largest position right now is Berkshire Hathaway, which became my largest position in February (I wrote a post recently outlining my thoughts on Berkshire).

The stock doesn’t have tremendous upside as its capital base is so large now, but it has—in my opinion—virtually no chance of any permanent downside.
 
These are my very favorite investment ideas because they allow you to put a lot of capital to work with no risk, and I’ve found that often the market “corrects” itself sooner, meaning that sometimes 2 or 3 year return potentials occur in a year or less, simply because of general market volatility.
 
1) Don’t lose money.
 
2) Don’t forget rule number 1.
 
Trying to stick to companies you understand and sticking to businesses that are growing value over time helps reduce risk.

I think keeping a relentless focus on capital preservation is the best way to produce great results over time.
 
Dev: Another of Greenblatt’s idea has been to focus on the Key Variables of an Investment. He mentioned once that he might be average when it comes to the valuation exercise. But was above average at putting the information in context, remembering the big picture, and being able to pinpoint what factors really matter to an investment. How does an investor focus on what really matters?
John: I agree with Joel on this point as well. I think many investors get lost in the weeds — they become too focused on their models, their excel spreadsheets, or trying to predict what margins will be in 2019, etc.

I think gaining an understanding of the big picture is usually the most important objective when looking at a stock.
 
The big picture often means identifying the most important drivers of value in a business.
These value drivers could be things like cost advantages (Wells Fargo gathers deposits cheaper than just about every other bank), network effects (the more people that use Visa’s network, the more valuable it becomes), supply chain management (Amazon), economies of scale (Walmart’s leverage over suppliers), sometimes brands are very valuable assets (Nike, or even Apple for example), and sometimes it could be the management team that is just executing a business model well or is very adept at allocating capital (Berkshire Hathaway is an obvious example, but there are many companies that owe large portions of their success to the management team).
 
Many of these things can’t be measured by simply looking at the financial statements, so it helps to identify these things and keep them in mind when analyzing businesses, because often these big picture items continue to be the reasons for the company’s success going forward.
To be continued…

An Open Letter to my 18 Year old Self


Letter To Myself Investor


Hi Dev
Congratulations on officially becoming an adult now. I know how relieved you would be feeling having completed your school education – which in any case, you did not like very much.
Before you start wondering who I am, let me introduce myself. I am your future self – 12 years in the future to be exact. No don’t worry. I don’t have a terminator-like mission to protect you or something. And I am just future-you, writing this letter to you while sipping a hot cup of coffee at 12 midnight.
I don’t know what you will do in future – may be you will do your engineering, work for some energy company, do a MBA, then work for a bank, etc. – I don’t know. But to be honest, I actually know it. But let life surprise you. I am not telling you.
But one thing, which I do know is that you really like getting involved in managing money and helping others, do it. It sounds ridiculous to take advice and listen to an 18-year old. But I don’t know why my (our) parents and others do it.
I know you don’t want to listen to all this but there is one important thing which I want you to know. I am sure you know it theoretically – you were pretty good in mathematics. But what you do not know is how it can impact your future financial life. And I want to tell you all this because you have recently started dabbling in stock markets. Luckily our parents have been very supportive of you doing it. But there will be many others, who will tell you that it’s a place where you will only loose money. My advice: Ignore them. They are all full of noise Dev. Just ignore them.
Stock market is the place, where if you are diligent in your groundwork and have a sensible head that has the ability to cut down noise, then you can make truckloads of money. But when I say cut the noise, I also mean that you need to find sensible people to listen to. And you don’t necessarily need to meet those people. Many of them are already dead. But you can read what you they have already written. So get those books. Don’t wait too much. Read those books even if you don’t understand them completely. Because the next time you read it, you will understand it a little more.
But lets not waste more time. I know your friends are waiting for you to join them for a bike ride. 🙂
So Dev, when I said that you know the mathematical concept, I was referring to the concept of compounding. I know you know it and how the calculations are done. But before you run away, listen to me.
Do you know how much returns can stock markets give? Great investors can manage above 20% for decades. But we are not great like them. So lets be sensible and pick a number that is much lower. Lets take 15%. Now the next two statements will tell you what I really wanted you to know.
If you can just invest Rs 5000 a month for next 12 years, then do you know how much you will have when you reach my age? More than Rs 20 lacs Dev!
You might say that Rs 20 lacs may not be a big amount after 12 years. But I know it Dev. It is a big amount. And it is still better than having nothing at all. Isn’t it?
And just think about it. Isn’t it a big number to achieve considering you only have to put aside a small amount of Rs 5000 every month? I know. Initially it might seem tough to find that amount of money. But as you age and start earning yourself, you will find that it is not tough.
And you know what? You can earn much more than 20 lacs if you can just increase your monthly investment amount every year!! You might even be able to save 35-40 lacs!! Sounds awesome. Great! It will feel much awesome(r) when you have that amount when you turn 30. I can swear that. I should have done it myself when I was at your age. But I had no one to tell me all this. But please don’t repeat my mistake of underestimating the power of investing small amounts. It can cost you a lot when you grow older.
You might feel that you can make a lot more money by investing directly in stocks. Yes you can. And I am not saying that you don’t invest in stocks. Do it. It’s a good learning exercise. But at the core of your investment philosophy (which you should have in place by the time you are 30), should be to invest as much as possible every month through mutual funds. And if you do recognize a good, sustainable, business that is selling at sensible valuations, go and buy truckloads of its shares? If you can’t buy truckloads of it, accumulate it slowly and steadily till the valuation remain reasonable and business remains attractive and growing.
I know I am using big words like ‘valuations’, ‘sustainable’, etc., which you might not understand completely at the age of 18.
But don’t worry.
Just focus on Compounding. And go and do a Google search for what Einstein (your childhood Physics hero) had to say about Compounding (link). Yes Dev. Even he knew what compounding could do.
But this is getting really long now. And I better get some sleep now. Have finished my coffee long time back. And my wife has already called me twice. Another advice Dev – Always respond to your wife before she needs to tell you something for the third time. 🙂
But jokes apart, future is always bright. It is what we should atleast choose to believe. In life as well as in investing. You are just entering the most exciting phase of your life Dev. And remember that though its good to have money (which I am sure you will make using the concept of compounding), it is not the most important thing. I will not tell you what is the most important thing. You will figure it out yourself in next few years.
All I can tell you is that you will meet some amazing people in next 12 years. Some in person, and more of them in books you are going to read. So keep a sane head. Never let your ego do the thinking part for you. Brains have the responsibility of doing it. Stay calm and be stable. This reminds me of something Dev. The word ‘Stable’ will mean a lot to you in years to come. No. I can’t tell you anything more than that.
Now go and get hold of your friends for that bike ride.

Be original,
Dev

Case Study – How a 10-Year delay can Destroy your ‘Get-Rich’ Plan?

It’s not easy to become rich. And while making such a statement, I am ready to ignore the definition of ‘Rich’ too. If you don’t consider yourself to be rich, then you already know how tough it is to become one.
And just to verify the concept of ‘Being-Rich-Is-Difficult’, go out and ask someone you consider to be rich. I am sure that they will also tell you that it is not easy to become rich. And it’s even tougher to stay rich.
But no matter what anybody else tells you, my view is that the biggest tool you have in your journey to become rich is Time. If you have time on your side, even small amounts can become eye-popping(ly) huge – as you will see in this case study.
So lets get straight into a some numbers….


There are two friends named Vineet and Raunak. Both are of same age (25) and earn decent amounts of money, which theoretically gives them the option of investing a fixed amount every year (after expenses).
Scenario 1:
Vineet is frugal and believes in saving. He knows that he does not have a rich inheritance and hence, needs to save for himself and his family. Vineet starts investing Rs 1 lac every year. But he does this only for 10 years between the age of 25 and 35, i.e. he saves a lac rupees every year for 10 years and then stops.
His total contribution is Rs 10 lacs (between age 25 and 35).
Raunak on the other hand thinks that since he is quite young, he can postpone saving/investing for future. He thinks that if he does not save starting from the age 25, and does it after a few years…even then he will be able to become very rich.
So in this example, Raunak starts investing the same amount as Vineet (Rs 1 lac) at the age of 35 and continues doing it upto the age of 60.
Raunak’s total contribution is Rs 25 lacs (between age 35 and 60).
Now comes the day of reckoning. Both have reached the age of 60.
What’s your guess? Who has more money at age 60?
It might sound surprising, but the answer is Vineet. Having contributed just Rs 10 lacs, Vineet now owns a huge corpus of Rs 6.65 Crores!!
And what about Raunak? The answer is that he becomes rich too. But having contributed Rs 25 lacs, he has accumulated a much smaller corpus of Rs 2.36 Crores. And that is despite having invested for 15 more years than Vineet.
Scenario 1: Vineet (Rs 6.65 Crores) – Raunak (Rs 2.36 Crores)
Here is the calculation sheet for your reference. The return assumption in this and further scenarios is 14% per annum.

Delay in Investing Scenario 1
Lets go on and evaluate a few more scenarios…
Scenario 2:
Vineet is still frugal and still believes in saving. Like the first scenario, Vineet here also invests Rs 1 lac every year from the 25 to age 35. But Raunak has changed. Though Raunak still does not save anything between the age 25 and 35, he now does realize the power of compounding. So he decides to invest the double amount (than that of Vineet) between the age 35 and 60.
That is, Raunak invests Rs 2 lacs every year for 25 years.
So in this particular case…
Vineet’s total contribution is Rs 10 lacs (between age 25 and 35).
Raunak’s total contribution is Rs 50 lacs (between age 35 and 60).
Once again, the day of reckoning arrives and both reach the age of 60. What’s your guess now? Who has more money at 60?
Answer once again, and surprisingly enough is Vineet!
Vineet still attains a corpus of Rs 6.65 Crores as in the first scenario. But Raunak after doubling his investments is still able to reach Rs 4.73 Crores. Now you see? This is the power of investing early. And so big can be the difference when you delay your investments. 
Here is the calculation sheet for your reference.
Delay in Investing Scenario 2

Scenario 2: Vineet (Rs 6.65 Crores) – Raunak (Rs 4.73 Crores)

Lets move on to other scenarios now…
Scenario 3:
Now lets make this analysis more realistic. As we progress in life, our incomes generally rise. And so do our expenses. So shouldn’t our investments and savings also rise with time?
Suppose you start your career earning Rs 20,000 a month. And you also start investing Rs 5000 a month at that time. After a few years, your salary is almost Rs 70,000. And if you are still investing just Rs 5000, then you are fooling yourself. Investing is done for one’s own future. And it’s one’s own responsibility to maximize it as soon as possible.
So lets get back to this new scenario.
Here Vineet starts by investing Rs 1 lac at the age of 25. But over the next 10 years, he increases his yearly investment by a small 5%. So over a period of 10 years (between 25 and 35), he invests Rs 12.58 lacs.
On the other hand, Raunak starts late at 35 with Rs 1 lac a year. But he also starts earning more and more every year and is able to increase his yearly investments by 10% (double that of Vineet’s 5%). His total contribution over a period of 25 years (between 35 and 60) is Rs 98.3 lacs.
Day of reckoning…
I wont even ask you this time. 🙂
Once again, Vineet has more money when he retires at 60!! Vineet manages Rs 7.94 Crores in comparison to Rs 5.08 Crores accumulated by Raunak.
Isn’t this amazing? Starting as early as possible and just investing for few years and then just waiting. And after a few decades, you have more money than someone who started late, invested many times more than what you invested.
This is indeed the 8thWonder of the World. We need to give standing ovation to the concept of Compounding. 🙂
Here is the sheet for 3rdscenario’s calculation.
Delay in Investing Scenario 3
Scenario 3: Vineet (Rs 7.94 Crores) – Raunak (Rs 5.08 Crores)
So lets move on to the 4thscenario.
Scenario 4:
There is only one change in this scenario over the 3rd one. I am making this scenario more realistic. And the change I am making in this one is based on the question that why should Vineet stop investing at age of 35? Shouldn’t he continue further and upto the age of 60?
So here is it….Vineet does not stop investing at 35. He continues investing upto 60 and increasing his contribution by 5% every year. Compared to him, Raunak increases his contribution 10% every year.
To cut the long story short, after 60 years, Vineet has Rs 13.3 Crores and Raunak has Rs 5.08 Crores.
I have nothing more to say for this scenario. 🙂
Scenario 4: Vineet (Rs 13.30 Crores) – Raunak (Rs 5.08 Crores)
Here is the sheet for your reference.
Delay in Investing Scenario 4
I can go on and on with more scenarios but that would only help the case of investing early, which we have already proven in previous four scenarios. For example, we can reduce the return assumption from 14% to smaller numbers, etc. But the point which I am trying to make through this post, is, that there are some really amazing benefits of starting early when it comes to investing.
You can start later and still get to the same final corpus. But that would require you to earn much higher rates of returns…and that too for many years – which is neither easy nor practical.
And just to illustrate this, here is the 5th scenario 🙂
Scenario 5:
Vineet invests Rs 1 Lac for 10 years (from 25 to 35)
Vineet’s Return assumption = 14%
Corpus at age 60 = Rs 6.6 Crores
On the other hand,
Raunak invests Rs 1 Lac for 25 years (from 35 to 60)
Raunak’s Return assumption = 20%
Corpus at age 60 = Rs 6.8 Crores
Scenario 5: Vineet (Rs 6.6 Crores @ 14%) – Raunak (Rs 6.8 Crores @ 20%)
Both have accumulated almost same corpus after reaching 60. And Raunak has started 10 years late and invested for 15 more years. But do you think 20% per year return can be attained? I don’t think so. It’s almost impossible. It is not a reasonable expectation to have.
For your reference, here is the calculation sheet of Scenario 5
Delay in Investing Scenario 5
All these five scenarios show that if you start early, you don’t need to earn eye-popping rates of returns to accumulate big sums of money. All you need is time. And when you start early, you have a hell lot of time. The earlier you start, longer does your money have the time to grow.
And to end this analysis, I leave you with a very small 4-Step guide to help you become amazingly rich:

1) Start early

If possible, invest from the day you start earning your first salary. You would be surprised at how much these small amounts can increase when invested for long periods of time.

2) Treat Investments as Monthly Bills and be regular with them.

Unless and until you have the discipline to invest regularly, you can forget about accumulating a large corpus by the time your retire. You should invest first and then use remaining money for expenses.

3) Do whatever it takes to maximize the amount you can invest

First thing is that no matter what happens, you need to invest regularly. And in case you have surplus money, make it a point to invest as much of it as possible.

4) Be patient. And in long term, you will need loads of it

One of the biggest mistakes people make is that they withdraw/touch the money they start accumulating. The biggest problem of compounding, or I should say the power (not available to many) is that it works best, when you do not disturb it. In initial few years, the results will seem extremely slow. And you will start losing your faith on it. But hold on. In a few more years, you will realize the power of compounding.
This post clearly indicates that there is price to be paid for any delay in investing. And mind you, this price is not small. You can delay and still become rich.  But remember that the biggest side effect of procrastination (when investing) is that you will not become as rich as you might have become, had you not procrastinated.

Investing Later Now Procrastination

So irrespective of your age, do not wait any further. Go on…Now is the time to begin investing for long-term. And remember that the cost of delaying your investment is enormous. Even one year makes a huge difference.

In 2 Minutes, I Can Tell You When You Will Retire!!

Read the title of this post again.This post will not help you to retire in 2 minutes. But in less than 2 minutes, it will tell you how long will it take for you to retire. And that too without having to make any big and complex calculations.

And you can do it yourself!

But for you to do it, you need to be familiar with TheRule of 72

What is Rule of 72?

Rule of 72 is nothing but a financial shortcut to calculate the number of years required to double your money.
 
How TO Double Your Money Rule Of 72
Rule of 72 | Calculate Time Required To Double Your Money
 

For example, if you want to know how long will it take to double your money at 12% interest, divide 72 by 12. The result is 6. And this 6 is the number of years required to double your money. It is as simple as that.

Lets take another example: At 8% interest, which is the average rate offered by banks for keeping your money in recurring deposits and fixed deposits, your money would double in 9 years. (How:  72 / 8 = 9 Years)

Note – This rule is applicable only for compound interests and not simple interests. Also it works better for smaller numbers.

Lets go further..

How to Use This Rule of 72 for Retirement-Years Calculation?

Please note that this post does not tell you about the amount required for your retirement. But this neat little number trick will tell you the (approximate) number of years required to reach that amount.

Let us suppose that you need Rs 2 crore as your retirement corpus. And as on date, you have a saving of Rs 6.25 lacs.

Note – I have chosen this strange figure of 6.25 to make further calculations easy.

The assumption here is that you are a rational human being, who doesn’t want to take too many risks with his retirement kitty. And neither do you want to earn comparatively lower returns offered by bank deposits.

So you decide to take a middle path of 10%.

This is higher than 8% offered by National Savings Certificates and bank deposits and and lower than 12% plus offered by inherently risky stock markets.

Now lets back calculate…i.e., starting from the final retirement requirement of Rs 2 Crore.

Mathematically, 72 divided by 10 is 7.20

Now if we get 10% per year for our investments, it will take 7.2 years to double our money. (Using Rule of 72, we know that 72 divided by 10 equals 7.2 years)

Now to double your money from an amount X to Rs 2 Crore, it will require the amount X to be 1 Crore. And using the Rule of 72, we have that Rs 1 Cr doubles to Rs 2 Cr in 7.2 years, i.e

1 Cr to 2 Cr = 7.2 years

Similarly,

50 Lacs to 1 Cr = 7.2 years (Total: 14.4 years)

And so on..

And the calculation continues as follows:

 

Money Double Rule Of 72

This simply means that starting from Rs 6.25 Lacs, it will take you 36 years to convert it into Rs 2 Cr, which is the target amount.

But wait…

I know you must be thinking that 36 years is too long for anyone to keep saving. But here is the magic. Did you notice that you started from Rs 6.25 Lacs? And you ended being a Crorepati, twice over.

But you did not put in any new money in these 36 years!!

Yes. You need to understand that it takes 36 years to convert Rs 6.25 Lacs to Rs 2 Crore without any additional investment and without doing anything in stock markets. 🙂

That is the power of starting early, when it comes to investing.

The above example is a very simple and basic usage of this Rule of 72.

So in case you decide to make additional investments every year, you can reach the target of Rs 2 Cr much earlier than 36 years.

For example, if you additionally invest Rs 1 Lac every year, then you can reach the goal by 27th Year.

And if you somehow manage to save Rs 2 Lac every year, then you can reach your goal in less than 23 years!!

Try doing 3 Lacs an year and you will retire in less than 20 years. Doing 3 lacs an year means doing 25,000 every month. And if you earn decently, then saving this amount every month towards your retirement should not be very tough.

Warning: This exercise to calculate these numbers for your own retirement can be a scary one. But it clearly illustrates that if you decide that instead of going for one time investment, you are ready to contribute regularly to your retirement fund, then you can drastically reduce the time required to reach your retirement target amount.

So how much are you targeting to save for your retirement? And how much time will it take?