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Being Wise about Spending Today Vs Saving for Tomorrow

Spending Today Vs Saving for Tomorrow

Should I spend money today (to enjoy life) or save for the future?

This is a common dilemma faced by most people.

The amount of money you have is (sadly) limited. Naturally, you have to decide whether to use it to spend on things today or to save it for the future.

People have thousands of reasons for not saving for the future. Some will say that they don’t make enough money to save – which is acceptable if true. Others cant stop spending money as according to them, life is so uncertain and therefore its better to live for today and deal with future… in future.

On the other hand, there are many who save a lot. At times, they end up saving a little too much. Result? They have big bank balances or portfolios. But sadly, they are unable to enjoy their lives optimally.

So spending today vs. saving for tomorrow – What is right here? Or is it even worthwhile to contemplate about taking sides here?

How can one enjoy life today while saving for tomorrow?

This is not an easy question to answer.

 

Why Spending Today is important?

Now this question may seem strange coming from a financial advisor.

But it is important to not shortchange your life today. What is the use of having saved up crores of rupees without any rhyme or reason?

A relative of mine has a young daughter (with no plan for more children). He went to the extent of saying that given his high income, he saves much less than what he can actually save.

That’s because at the end, his daughter will get married and he doesn’t want to be remembered as an ultra-rich father-in-law who saved a lot.

🙂

Interesting way of looking at things.

To put it simply (and as my wife once told me), we should not screw up a very long journey for the sake of a distant goal. It may really not be worth it.

Take for example a person who works very hard, sacrifices his family life, his passions, saves a lot of money and doesn’t spend much. At the end of the day, he will be very rich. And when he dies, even then too. But what is the point of being the richest person in graveyard?

saving vs spending

People constantly regret not having lived their lives to the fullest.

 

Why Saving for Tomorrow is Important?

Now before I move forward, please understand that by ‘saving’, I don’t mean ‘not spending‘. These are two very different things.

And you will find countless examples of people who don’t have much savings despite their best efforts to not spend money. It can be frustrating.

I have no doubt (and neither should you) that savings is important. Even if people close to you need some convincing.

It doesn’t feel good at first but its necessary. Just like exercising or going to the gym. It hurts at first but pays handsomely later on.

Saving is necessary because one day in future, you will stop earning (retirement). You will then have to have a big pool of saving from which you can withdraw money to survive in your retired life.

And mind you… most of you reading this won’t die early or the day after retirement. 🙂 Thanks to our doctor friends, most will live for atleast a couple of decades after retiring. So you do need a lot of money for your non-earning years. And you can’t depend on your children to be your retirement fund. Its that simple.

That is not all.

Retirement is not the only financial goal.

There are several other important financial goals lined up on your way to retirement.

Children’s education, their marriage, your house purchase, car purchase, a foreign trip, etc. All these require money and most times, a lot of it.

You can’t fulfill the fund requirements for these goals from regular income alone. You need to save for these goals and allow your savings to grow on their own. That is how you will find the money you need to achieve these goals.

So saving today is necessary. Period.

But what if you feel like…

 

Let’s Spend Money Now. Will save MORE later. Does this work?

It might work. But here is the practical difficulty here.

Lets say that when you are young, you decide to spend money freely and save later. But since your parents were pushing you hard to save something, you decide to save 5-10% of your income to show respect to them.

But saving just 5-10% of your income also equates to the fact that you are permitting yourself to spend 90-95% of your income!

saving 10 percent

And so with each annual increase in your income, you are continuously raising your lifestyle costs too.

Now when you say that later on in life, you will start saving more (and it better be a lot more as this proof shows), it will be difficult for you to downgrade your lifestyle expenses.

And its quite possible that inspite of saving much more later on, your savings turn out to be woefully inadequate because spending and lifestyle costs have increased so much.

So if saving is so important…

 

Then why do Most People avoid saving for the Future?

Maybe its because of how we humans have evolved from the animals.

In the book Art of Thinking Clearly, the author points towards a human bias that is similar to animals:

Animals will never turn down an instant reward in order to attain more in the future. You can train rats as much as you like; they’re never going to give up a piece of cheese today to get two pieces tomorrow.

As humans, we give more weightage to the present than to the future. At the cost of better options in future, most of us chose less better options today. That is a reality. And that is why people find it tough to save for future.

There was a famous experiment that was conducted to highlight people’s ability (or rather inability) to delay gratification. In this experiment, which was called the Marshmallow experiment, children were given a choice between:

  • A small prize (1 cookie) that they can have right now
  • A bigger prize (2 cookies) later on

And the results were interesting. Have a look at this video:

Or if you can’t see the video above, click here for the direct link to video.

 

Balancing the Two

Being on the extremes can be glamorous. But its not sustainable.

You can’t just keep spending without going bankrupt sometime in future. And you also can’t keep saving everything without screwing up your normal life.

So as far as I think, balancing the two is what we should aim for.

How you will achieve that balance depends on your actual situation. There is no one fixed right answer here. In addition to saving and spending, there might also be a 3rd option in many people’s case – prepaying loans.

But somewhere between spending 100% and saving 100% (both theoretical), there is a sweet spot where you can live well today and also save reasonably well for tomorrow.

balancing saving and spending

And the easiest way to do it is to…

Decide on your ‘YES’ to know when to say ‘NO’

Confused?

Previous sentence highlights that if you are clear about what you really want in the short and long term (lets call them your real financial goals), it will be easier for you to stay focused and spend accordingly.

Take an example from your childhood. If you had an examination tomorrow, you will not spend your time fooling around today. You will sit and study. Or in many cases, you will be forced to study. 🙂

So in reference to spending vs. saving debate, if you know what you are saving for and how important it is for you achieve it, you will spend accordingly.

It will help you stay on track.

For example, you want to make a large down payment for your house after 3 years. Now if you are reasonable, you will do everything in your capacity to save as much money as possible in next 3 years for the downpayment. Most people in that situation will not go out every weekend for parties and spend thousands of rupees.

Repeating again:

You need to decide on your ‘YES’ to know when to say ‘NO’

So once you know your Big YES (i.e. save for your dream home’s downpayment after 3 years), you will know when to Say NO (i.e. spending money recklessly on parties).

And by doing that, you are not depriving yourself if you don’t spend money on parties. On the contrary, you will be depriving yourself of what you really want (house), if you spend money on parties.

Delaying gratification is not a happy experience to start with. But the trick is to put in place strategies that can help you do that. Because doing that is the only option to achieve your goals by balancing today’s spending against saving for tomorrow.

I am not asking you to save everything.

I am also not asking you to not save anything.

But take some time out and have a hard look at your spending habits.

Certainly, there will some fixed expenses that you just can’t wish off. But apart from those, spend on things that are truly important. It might mean cutting back in other areas today to save for tomorrow. But there will always be better things in future that are worth that trade-off.

It is possible to save wisely and live a good life simultaneously. And even before you decide about taking sides on saving vs spending debate, sit down and think deeply about what you really value.

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P/E Ratio Analysis of Nifty Returns – 2017 Update

Edited: An updated and more detailed analysis is published in 2019 and is available here.

This is the detailed annual analysis – comparing Nifty P/E with Investment Returns.

It compares returns earned (during various periods ranging from 3 to 10 years) when investments have been made at various PE levels of the Nifty-50.

Before we get to the findings, lets try to understand the purpose of this analysis.

Purpose of comparing Nifty PE with Returns

First of all, this is not a sure-shot method to make money.

Just because we can find some clear trends from past data doesn’t mean that same will be replicated in future. Markets are dynamic and history is no guarantee of future. The sole purpose of this analysis is to realize that there is obvious relation between the market valuations and returns you will get. If you buy low (valuation wise), chances of earning good returns increase and vice versa.

This study tries to highlight the historical trends about possible returns one can get when the money is invested (in Nifty 50) at various PE levels. That’s it.

How to Analyse PE Vs. Returns?

What I have done here is that I have calculated returns earned on investments made at all Nifty PE levels. The time periods for return calculations are 3 year, 5 year, 7 year and 10 years.

Lets use a simple example to understand this.

Suppose you had invested money in Nifty on 24th-February-2004, when its PE was 19.97 (actual data).

Now I have calculated returns starting from 24th February 2004 for periods of 3, 5, 7 and 10 years. The CAGR returns have been 29.3%, 8.5%, 17.0% and 13.0% respectively.

This calculation has been done for each and every day since 1st January 1999 (day since when Nifty PE data is available). I had several thousand data points for each of these periods. The days that do not have forward returns for 3-years have not been considered in analysis of 3-year returns (likewise for 5, 7 and 10 year studies)

To simplify the findings, I have grouped Nifty PE into 5 groupings.

Nifty-50 PE Ratio and Investment Returns

So this is what I have found:

Nifty PE Ratio Returns 2017

Clearly, the data shows that when you invest at low PEs, your expected future returns are high.

So if one had the courage to invest in Nifty when PE was less than 12, the average returns over the next 3, 5, 7 and 10 year periods would have been an astonishing 39%, 29%, 22% and 19% respectively! But sadly, its very rare to find days where Nifty is trading at such extremely low valuations.

On the other hand, if investments were made when PE ratios were above 24 (which is the overvalued territory), the chances of earning high returns in near future are pretty low. Infact, money invested at such inflated valuation levels, for the next 3, 5, 7 and 10-years have earned on an average are (-) 5%, 3.4%, 9.6% and 12% respectively.

Also Read: Why I chose PE of 12 and 24 – Do Indian Markets Bounce off Nifty PE 12 and 24?

At the time of writing on this post, the Nifty PE is about 23-24 (more details can be found here).

But it is important to note that these figures are based on historical data (of last 18+ years). The trends no doubt are easily evident here. But they may or may not be repeated in future. There are no guarantees in markets.

Markets won’t behave as you expect them to behave just because you have found its rhythm. You will not get returns just because you want them.

This shows that if you invest in high PE markets, your chances of low (and even negative) returns increase substantially. Investing at lower PEs can give bumper returns! But it is not easy. It takes a lot of courage, cash and common sense to invest when everybody else is selling. It is very easy to sound smart and quote things like ‘be greedy when others are fearful’. Unfortunately, very few are able to be actually greedy when others aren’t.

But lets focus on another important fact here.

Risk with dealing with Average Returns

The table above depicts a very clean and obvious relationship between P/E and Returns.

But the above numbers are just ‘averages’. And that can be risky if you solely invest on basis of averages.

To explain this more clearly, lets take an example. Imagine that your height is 6 feet. Now you don’t know swimming. But you want to cross a river, whose average depth is 5 feet. Will you cross it?

You shouldn’t – because it’s the average depth that is 5 feet. At some places, the river might be 3 feet deep. At others (and unfortunately for you), it might be 10 feet.

That is how averages work. Isn’t it?

So this needs to be kept in mind…always.

Adding More Data points to PE-Analysis

A better picture can be painted if in addition to average returns, we also find out:

  1. Maximum returns during all the periods under evaluation
  2. Minimum returns
  3. Standard deviation

Have a look at tables below now:

Nifty PE Ratio 3 Years

 

Nifty PE Ratio 5 Years

 

Nifty PE Ratio 7 Years

 

Nifty PE Ratio 10 Years

If you have observed carefully, there are big differences between the minimum and maximum returns for almost all periods

So the returns that you will get will depend a lot on when exactly you enter the markets. Two people entering the markets at (lets say) PE=17.2 would have got 5-year returns ranging from 2.6% to 33.0%. Shocking! Isn’t it?

My previous statement ‘returns that you will get will depend a lot on when exactly you enter the markets’, does sound like timing the markets. But this is a reality. For those who can do it, timing the market works beautifully.

Hence even though the average returns give a good picture for long-term investors (look at the table for 10 year), its still possible that you end up getting returns that are closer to the ones that are shown in minimum (10Y Returns) column and not the Averge Returns. 😉

This is another reason why I introduced the column for standard deviation in all tables above (see last column).

Analyzing standard deviation tells you – how much the actual return will vary from the average returns. So higher the deviation, higher will be the variation in actual returns.

Can You Catch the Markets at Right PE Multiples?

Ideally and armed with above insights, it makes sense to buy more when valuations are low. Isn’t it? Buy Low. That is the whole idea of investing.

But real life is not that simple.

It is very difficult to catch markets on extremes. Its like a pendulum – keeps oscillating between overvaluation and undervaluation.

So should you wait to only invest at low PEs? Though it might make theoretical sense to do it, fact is that it is very difficult to wait for low PE markets.

Just have a look at this 5-year table I shared earlier in this post too:

Time Spent PE Levels Market

 

Look at the time spent by the index at sub-PE12 levels.

It is just about 1.7% of the time since 1999 (Ref: Column name ‘Time Spent in PE Band’ in tables above).

Markets at below PE12 are extremely rare.

For common investors, it’s almost impossible to wait for such days. Infact, such days might be spaced years apart.

So the best bet for common people is to keep investing as much as possible, via disciplined investing (like SIP in equity mutual funds). Its not perfect (like buy low sell high) but it is your best bet given all the constraints.

Long-Term Investors have Better Chance of Doing Well

Another insight that this study gives is that as your investment horizon increases, the expected returns more or less are reasonably good enough, even when one invests at high PEs.

Have a look at 10-year returns table below:

Long Term Investing returns

Now 10-year is long term.

So, even if an investor puts his money in the index at PE24, the historical average returns are more than 12%. That’s pretty good. And what about the maximum and minimum returns achieved when investing around PE>24? At 13.8% and 10.5% respectively, these are not bad either. This is what really shows that if you are investing for long term, equity is your best bet for wealth creation.

The longer you stay invested, higher are the chances of making money in stock markets…even if you have entered at higher levels.

Caution – I know that’s a dangerous statement to make but to keep things simple, please read it in the right spirit.

On the contrary, if someone was thinking to invest at high PEs (above 24) for less than 3 years, then there are very high chances that the person will lose money:

Short Term Investing Overvalued

Asking Again – Whether This Approach works in all kinds of investing?

My answer is that no one strategy can work in all conditions.

Knowing the broader market PE gives a fair idea about the valuations of overall markets. It tells you when the market is overheating and that you should take cover. This in turn can help reduce the chances of making mistakes when investing. Similarly, this knowledge of PE-Return Relationship also helps in identifying when markets are unnecessarily pessimist. If you are brave at such times, you can make some serious money.

And please don’t think about investing in individual stocks just because Nifty PE is low. Individual stocks have their own story and need more in-depth analysis.

What about Nifty changes? Does it not impact this analysis?

That’s a valid point.

The index management committee that is responsible for index (Nifty 50) maintenance regularly bring in and move out companies from the indexes. The Nifty composition of 2007 was quite different from that of 2017. Similarly, the index composition of 1999 might too be different from that of 2007 and 2017.

Try to understand it like this. If the index is made up primarily of companies that are low PE-types, then index at overall level will tend to have low-PE. Whereas if the index is made up of high-PE companies, it will tend to have high PE. So actual definition of high and low PE will be different for both type of companies, and so in turn for index. A PE of 15 for low-PE company might be very high whereas for high-PE company might be very low.

This is an important factor that should be kept in mind.

I have written about how changes in index constituents can impact PE analysis earlier too.

What Should You Do as a Common Investor?

I am assuming that you are not Warren Buffett. 🙂 But jokes apart, fact is that most people do not have the skill or time to get into deep investing.

So what should such people do?

First thing is to simply stick with regular disciplined investing (easily achievable through MF SIPs).

With that taken care off, you should try to invest more when market valuations are low. This will help increase your overall returns in long term.

There is a strong (but not guaranteed) correlation between the trailing PE ratio and Nifty returns. And this small study proves the same and provides some useful insights. If we were to go by the historical data, the Nifty delivers higher return (in long term) whenever the PE ratio is low. On the other hand, it tends to deliver very low to negative returns, whenever the PE is very high and investment horizon is short.

You as an investor can use this insight as a backdrop to take your investments decisions.

Recommended Reading:

In case you are interested in reading previous years’ analysis, then you can access them here:

I regularly update PE and other ratios of Nifty50 and Nifty 500 on State of the Indian Markets page.

Timeless, Timely & Timing

timeless timely timing investing

Timeless

There are very few things that an average investor can refer to as – timeless advice.

Know what goals you are saving for. Know how distant these goals are in future. Know how much these goals will cost you. Understand the asset allocation required to achieve these goals (it may be different from what your risk appetite might suggest). Keep your base SIPs running all the time irrespective of market conditions. Don’t mix investments and insurance. Don’t put money in something that you don’t understand. Say ‘No’ often. Reducing your expenses is fine but there is a limit to that – focus more on increasing your income (but don’t kill yourself doing that). If everyone is doing something, chances of making profits in that ‘something’ are low.

Its not tough to understand these things if you give them a deep thought. But it requires common sense to stay on course and benefit from these timeless principles.

Timely

Then there are things that have to be done in a timely manner. Or else, there are huge costs to be paid in case of being late.

Simple example can be that of buying a life insurance. If you are under-insured and you die without much savings for your family to depend on, you would have put your family’s future in jeopardy.

A simple way to assess whether you are under-insured or not is to calculate the money you family gets if you were to die today (= insurance money + savings + investments – outstanding loans). If this amount is sufficient for your family’s future needs and goals, then its fine. If its not, then you are gambling with important things (your family’s future) and which I think is unpardonable.

Timely purchase of insurances (all types – life, health, disability) and putting in place a solid emergency fund – can be the biggest building blocks of your financial life. Its like fortifying your personal finances before you actually start your wealth creation journey. And these require you to take Timely actions.

Timing

Coming to timing. We all want to time the market. Don’t we?

After all, it is as important as time in the market – if you can do it well and on a regular basis.

But 95% of us cannot time the market 95% of the time. So odds are stacked against us.

Its not easy. I won’t say its impossible. But its tough.

For common investors, if you have surplus money that you don’t need for 7+ years, put it in equity-heavy instruments. That is as good a timing-act as most people can and should do. 🙂

As for real timing of markets as we perceive it (getting in and out of the markets frequently), its best left to those who can do it.

If you don’t know whether you are good timer of markets or not, chances are high that you are not. 🙂

But if you think you are a good timer of market, then go ahead and do it. No one should stop you from making money if you can do it.

I don’t consider myself to be a good timer of markets. A large part of my portfolio is based on ‘Timeless’ principles whereas a small part is based on ‘Timing’ decisions. Also, I firmly believe in few things –

My family’s present or future should not be put in jeopardy because of my time / timing / timely / timeless decisions. Time in market is more important than timing. But there will be times when I can make money by simply participating (forget timing and not timing) in markets. And there will also be times when I will not be able to make money no matter how good I have been with my analysis or timing. So I need to be ready and mentally prepared for all such times.

State of Indian Stock Markets – September 2016

This is the September 2016 update for the State of Indian Stock Markets.

But before I get to the regular analysis, I want to share my thoughts on the recent aggression at our borders.

On 29th Sept – as soon as the government announced that the Indian army had conducted “surgical strikes” on terrorist launchpads in Pakistan the previous night, the Indian markets reacted negatively. The strike was in response to the attack on Indian soldiers in Uri just 10 days back.

A fall in market is something I welcome. But this is not how I want markets to fall.

I am no expert on defence or geo-political matters. But as far as the economy is concerned, a war is not a good thing. Resources have to be diverted towards war and growth suffers. A friend sent me a message asking whether I was happy with the fall in markets?

The answer is that I am not happy. Even though current valuations make it very easy to predict a correction.

I want markets to fall but not for this reason.

Its easy for all of us sitting here to share our views about whether war is good or not. But it is fought there at the borders – not by us but by our defence forces. And we all know what happens when wars take place. People lose their lives.

I bring this up because I was disturbed after the attack on Indian forces in Uri (I have a few friends in army). And I was happy by the counter-measures taken by Indian forces later.

But we should be careful what we wish for.

War is the easiest solution that our mind throws up. But is it really? Think of those who actually will be fighting on ground. You answer might change…


Lets move on now…

As usual, this monthly update includes historical analysis and Heat Maps of Nifty50 as well as Nifty500‘s key ratios, namely P/E, P/BV ratios and Dividend Yield.

Please remember that these numbers are averages of P/E, P/BV and Dividend Yield in each month. Neither Nifty50 heat maps nor Nifty500 heat maps show the maximum or the minimum values for each month.

Caution – Never make any investment decision based on just one or two ‘average’ indicators. At most, treat these Nifty heat maps as broad indicators of market sentiments and a reference of market’s historical mood swings.

So here are the Nifty 50 Heat Maps…

Historical P/E Ratios – Nifty 50 (Monthly Average)

historical nifty pe ratio

P/E Ratio (on last day of September 2016): 23.4
P/E Ratio (on last day of August 2016): 24.09

Historical P/BV Ratios – Nifty 50 (Monthly Average)

historical nifty pb ratio

P/BV Ratio (on last day of September 2016): 3.27
P/BV Ratio (on last day of August 2016): 3.36

Historical Dividend Yield – Nifty 50 (Monthly Average)

historical nifty dividend yield

Dividend Yield (on last day of September 2016): 1.29%
Dividend Yield (on last day of August 2016): 1.22%

Now, to the historical analysis of Nifty500 companies…

As the name suggests, Nifty500 is made up of top 500 companies which represent about 94% of the free float market capitalization of the stocks listed on NSE (as on March 31, 2016).

Nifty50 on other hand is an index of 50 of the largest and most frequently traded stocks on NSE. These represent about 65% of the free float market capitalization of the NSE listed stocks. So obviously, Nifty500 is a comparatively broader index than Nifty50.

Historical P/E Ratios – Nifty 500 (Monthly Average)

nifty 500 pe analysis

P/E Ratio (on last day of September 2016): 27.49
P/E Ratio (on last day of August 2016): 28.23

Historical P/BV Ratios – Nifty 500 (Monthly Average)

nifty 500 pb analysis

P/BV Ratio (on last day of September 2016): 2.95
P/BV Ratio (on last day of August 2016): 3.01

Historical Dividend Yield – Nifty 500 (Monthly Average)

nifty 500 dividend yield

Dividend Yield (on last day of September 2016): 1.24%
Dividend Yield (on last day of August 2016): 1.19%

You can read the last month’s update here. The State of Markets section has also been updated with new Nifty heat maps (link). For detailed analysis of how much returns you can expect depending on when the investments have been made (at various P/E, P/BV and Dividend Yield levels), please have a look at these 3 posts:

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.

17 Honest Facts You Might Not Know About Me

  1. Quite contrary to my interests now, I graduated to become an engineer. A first in a family of doctors and lawyers.
  2. Even though I am an MBA now, my legs are still pulled for being the least educated one in my family – where many are double post-graduates and PHDs.
  3. When I was young, I wanted to become a painter – then a locomotive driver – then an astronaut. As of today, I have not been able to manage any of these three.
  4. I remember being pretty good at drawing and sketching. I even got admission in India’s best architectural college. And that too without doing any preparation for competitive exams. But somehow I never thought of becoming an architect and so never went for it. You might be wondering that if I was not interested in it, then why did I even give the exam? The answer is because of forced by my friends to give all the exams, which they were giving. 🙂
  5. I have the honour (which some refer to as the biggest mistake of my life), of quitting a very safe government job. I don’t regret it. But somehow, the people who come to know of it seem sadder about it. 🙂
  6. Currently, I have a day job. I am now a SEBI-registered Investment Advisor. So you can say that Investment Advisor via Stable Investor is the only thing I do.
  7. I started a financial blog way back in 2005. But somehow, it never got many readers. So I deleted it. I once again tried my hands at financial blogging in 2011 when I started Stable Investor.
  8. I have been an avid blogger since 2003 and used to maintain a personal blog till 2010. But once I started writing here, there was almost zero motivation to write on the personal one. I am once again planning to start a personal blog.
  9. In 2002, I started a free monthly E-Magazine. After 2 months, I made it paid. Any guesses on how many people bought it? Zero!
  10. My mother and wife are much better at managing money than me. I still wonder how they do it.
  11. I love travelling. And if possible, I want to move to the mountains permanently.
  12. I got interested in Buddhism (as a way of life) in the early 2000s. Never converted though. But still believe a lot in simplifying life. Till now, it doesn’t seem to be getting any simple. I am still trying.
  13. When I was young, I used to maintain cricket record books. And I used to update these books every day after reading the sports section of the newspaper. Even today, quite a lot of my time online is spent browsing through the Statistics section of ESPN-Cricinfo’s website.
  14. One of my dreams is to write a script for a movie about stock markets. And to tell you the truth, the story is already half-baked in my head. So if you know some directors or producers or someone from Bollywood or Hollywood, you now know whom to refer. 🙂
  15. There are quite a few people, who think that it was after talking extensively with me, that their finances are in much better shape today. This at times, makes me feel that it is very easy to give advice, but very difficult to implement it personally.
  16. I love to write. When I was a kid, I used to write every day during my summer holidays. And that was not for completing some summer projects or homework. It was just for the heck of writing.
  17. I am a non-vegetarian. I can eat hundreds* of kebabs when in my hometown famous for world-famous kebabs.
*I exaggerated. But can still manage around 20 10 now.
17 Fact About Me
Congratulations on having read through this list. I am not sure if everyone would be interested in reading a list of fun facts about a my life. But I still wanted to share all this with you.
 
So if you did manage to read all of it, I thank you. And if you didn’t, never mind…I don’t think you will miss anything important. 🙂

Boring Tuesdays – Three Things to Read Today – 9

Hi Friends
 
Today is 10th of March and I am sure that many of you would be trying to find ways to save taxes this financial year. After all, only 21 days remain for you to do so…right? But for the next year, my suggestion to you (and myself) is that instead of trying to do tax planning in last month (March 2016), it would be better to do it in the first month (April 2015) itself. 
 
But lets leave that discussion for some other day.
 
 
Here are three interesting articles, which I want to share with you today…
Article 1
 
Though I should have read this letter earlier, you can still do it if you are under 30. A beautiful letter explaining the connection between cigarettes and Ferraris!! And why and how you can be rich!! This short Open Letter To Everyone Under Age 30 is full of wisdom and a must read for everyone.
 
 
Article 2
 
This 24 Year Old started with $10,000 and now owns real estate worth $4 million. An interesting story about how he managed to do it in less than 5 years!!
 
 
Article 3
 
In this very small post* (actually an extract from a book named Stop Acting Rich), the author clearly points out the hidden problem in actions of those, who don’t even understand what being rich means. It clearly shows the difference between those who are Acting Rich and those who are Actually Rich.
* Author has removed the post now.
That’s all guys…
 
If you missed the last two posts of Boring Tuesdays series, you can read them here and here.
 
And if you find some interesting articles which you want to share, please copy+paste the link to that article in comments or drop a mail to stableinvestor@gmail.com. Don’t worry if your comment is not visible as soon as you post it. Anti-Spam filters detect hyperlinks in comments (which you are sharing) and automatically park it for my review. I will eventually be notified about your comment. 🙂