My Interview Stable Investor

My Interview with Stock & Ladder

My Interview Stable Investor

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

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

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

So here it is…

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

Dev: Thanks Ravi, for considering me worth interviewing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

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

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

Dev: Let me talk about my mistakes.

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

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

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

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

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

 

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

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

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

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

 

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

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

Dev: You ask tough questions Ravi!

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

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

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

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

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

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

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

 

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

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

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

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

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

Why?

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

 

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

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

Dev:

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

 

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

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

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

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

 

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

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

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

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

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

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

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

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

Interview – A Financially Independent Entrepreneur

Interview Financially Independent Enterpreneur

This interview is of a person who has already achieved his Financial Independence and FIRE (What?).

In his previous avatar, Ram Medury has worked as a CIO in IT and Financial sectors. Currently (and after achieving his Financial Freedom), he is busy building his startup. You can connect with him on LinkedIn here.

I thought it would be interesting to learn from his journey of Financial Independence.

So here is the interview where Ram answers my questions about how he managed to exit from the dreaded race and started living a more fulfilling life.

Dev – Tell us something about yourself (background, professional life, etc.). How did you reach where you are.

Ram – I come from a South Indian middle-class background and have spent my teens in the North. This helped me gain a cosmopolitan outlook. I had a carefree childhood, was interested in computers since then and picked up my graduation in Computer Science which was followed by an MBA.

When in college, I got a chance to interact with the founders of Infosys. After that meeting, I made up my mind that I would join that company when I pass out of college.

My love for computer programming (i.e. seeing logic take shape as code and in turn solve big problems) and the pursuit to do different things led me to different countries and different roles at Infosys.

After spending 13 years there, my first switch was when I joined ICICI to head their general insurance company as a CIO.

I continued in CIO roles for 7 years before finally deciding to start a company that uses technology to solve real problems for common people.

Dev – When did you start taking personal finance seriously?

Ram – As a child I never experienced lack of money as my family gave a good upbringing. I guess being from a family of modest means helped us in meeting our needs and limiting our wants. For example, we rarely went out for dining, or travel for vacations. But that in no way made us feel that we were missing out on something.

This habit helped a lot once I started earning money.

In the initial years, I did not have a meticulous plan on how to save money. Neither did I define any goals. I would simply save in post office schemes, PPF and VPF.

I liked to see money compound and keep adding up in the passbook. 🙂

Expenses were moderate and I would spend on travel, books and music. I would travel like crazy. Exploring places around Bangalore first, then Japan, US, Europe, etc.

Around the time we had our first child, I started taking stock of my finances – income, expenses, cash flows, etc. and started taking investing seriously.

Dev – How were you managing money before that and after that?

Ram – I have already covered the ‘before’ in Q#2 above.

After that, things became a bit more structured. I would have an excel sheet tracking all the things I did in terms of cash flow.

Since I was in the US at that time for some months, tools like Quicken really helped in this. Later my excel took over as we then did not have any such tools or apps. But soon enough and due to my regular tracking, I had a good picture of what my needs were, my financial goals and where my investments were.

I added some equities and mutual funds to my portfolio after the initial years. This helped increase the pace as is the case with equity. When direct mutual funds were launched a few years ago, I promptly switched my holdings from regular to direct plans which further accelerated the journey.

Dev – I am sure the idea of FI didn’t come on day 1. But what made you think about FI in the first place?

Ram – The idea of FI was in the back of my mind – not as an end in itself, but as a means to do things without fear. Without fear of family needs not being met, or fear of failing if I started a business.

There is this romantic notion of retiring by 40 (Early Retirement) that I used to read and hear about. But it was not a goal for me – or so I thought.

But in my mid-thirties, as compounding started to help my investments, I started to wonder if it was possible.

Dev – And how did you plan for it? Give details and how long did it take to achieve it after you had decided to aim for it?

Ram – I guess I was enjoying the journey of saving and investing, without necessarily charting out the destination. I already had major goals listed in my excel sheet and I could see that I was being able to meet them.

As I realised that I was getting there, the first reaction was “Am I really there?

And then… “Did I err in my math”?

So I would ask some of my good friends and senior colleagues on what they thought Financial Independence meant and what kind of numbers they would be comfortable with.

It seemed strange to me that I was kind of there and some of them were not.

Then I had this question: What is stopping me from doing what I really wanted to do?

This process took about 12 months as I was nearing 40. I then used the biological clock as a trigger to finally quit the corporate career. It was a tough decision as I was doing quite well and giving up a very lucrative salary.

But the call I had to take was: Am I working in a job only for the money?

  • If yes then I am not being true to my values and aspirations I had.
  • If NO, then what the Hell… 🙂 Go for it!

So this is like the coin toss made by Amitabh Bachchan in movie Sholay. Any which ways, FI-RE was the way forward for me. 🙂

Dev – There are easy thumb rules for people looking for FI. Like 25x or 30x of annual expenses. Did you incorporate some in your planning?

Ram – I read voraciously about everything available on the internet on this topic. Basic search threw up sites like MMM (Mr. Money Mustache) and ERE (Early Retirement Extreme) which helped me clearly see that there are practical tools out there.

It was very reassuring since the FI movement in India was and is still nascent.

The rule of 25x appealed to me a lot. Adding some conservative buffer to it by jacking it up to 30x makes one feel safer.

The other important aspect is planning for the non-retirement goals.

The main one being children’s education. There are some parents who wish to ‘go for the best’ – say an Ivy League education for the child and spend a lot. If $50-60k p.a is required then we are talking about half a million dollars for two children, which can make attaining FI tougher for many people.

This is a tricky topic but I wish to be open-minded about this.

If the child is really deserving and needs some help (financially) to get into a particular school then fine. But one doesn’t know as the child is still very young. If the child is deserving anyways, he or she could get a scholarship; education loans are also available easily. It puts the onus on the child to ‘fight’ for what he or she wants, and repay any student loan if required. If the child is not so deserving, then why give the child a sense of entitlement, early on?

The point here is to be realistic about the amount required for the education and understand how it relates to your FI calculations. And not to stress over it.

Put a definite number and if you fall short then other options are anyway there.

Dev – In our conversations, you mentioned about how frugal living helped you achieved your goal. Talk us through that.

Ram – We know how much we spend as a family and are comfortable in that. This includes occasional eating out, annual vacations – we usually spend a week or two in the High Himalayas.

There are so many ways to enjoy life without having to indulge in excessive spending.

I often prefer to bike to work (one of the benefits of doing a startup is you get to decide where you work from). The commute is something that costs a lot – not just in terms of fuel, car expenses, but also in the time it takes and the toll it takes on health.

Dev – I am sure your spouse had a major role to play in your journey. How did she support you in your journey?

Ram – Fortunately my wife and I share similar views on how to spend and how to make the most of whatever we spend.

She is a good critic… so that my half-brained ideas shape up well. 🙂

Once an idea takes shape she is there to help in the follow through.

Dev – Before achieving the target corpus, I am sure you used to track various things. What were they and how did you track them?

Ram – Tracking expenses was a must to know that we were on the right path. Without knowing the asking run rate, how can you win a cricket match while chasing? Isn’t it?

Tracking the portfolio and how it is growing, the asset allocation mix is also critical. I track it usually once a month and try not to look at it each day.

Then I tracked readiness for the essential financial goals of life like childrens’ education and marriage. And the retirement corpus using a thumb rule like 30x.

Dev – What about other financial goals? I know people who in a hurry to reach FI, end up putting less money for other goals. And that doesn’t work well. How did you balance that?

Ram – For me knowing that the other goals are well taken care of was a must. Without that, I would not have the peace of mind to start my next big project.

So I picked only a few goals other than retirement plan – childrens’ education and my startups 2-3 years capital and focused on them. And added a 20% buffer for that extra peace of mind.

The fact is that retiring at 40 doesn’t mean idling away the next 20 years. While the startup will guzzle capital initially, it has to start making revenues after some time. While making a lot of money is not the focus (why would I quit a ‘big’ job then), there will be additional income coming in as you deliver value to your customers. So that adds (or will add) to the ‘buffer’.

More than the numbers this is a journey of knowing oneself, being very comfortable in one’s skin and not be swayed by ‘comparisons with the Joneses’. It requires a certain degree of Stoicism of which I am a big fan. A certain poise, very similar to a comfortable and steady Yoga asana!

Dev – Share your emotions of the big day – when you finally decided to call it a day.

Ram – It was a steady journey that eventually culminated in the decision.

I cannot recall the exact day. Incidentally, I was going through a phase of life when I was meditating very regularly up to 1 hour daily for almost 3 months. Then decision happened sometime in that quarter.

But of course, when I put in my resignation after working in corporate jobs or 18 years, it was a moment of trepidation. I knew that it was a new phase of life, no going back. So I was sandwiched between ‘mustering the guts to quit’ and the excitement of embarking on something new.

There was a lot of fear and in hindsight, I now realise that I was able to overcome the fear of fear itself. Most of the anxiety comes from fearing something ‘fearful’ that never materialises.

Dev – I am sure it was not just hunky-dory all the way. What were the challenges you faced in this journey?

Ram – With the 20-20 hindsight wisdom that I now have, I can say that I could have done this earlier. Maybe 5 years if not earlier. If I had drawn a clear path and stuck to it by investing in equities in my 20s the goal of financial independence would have been reached much faster.

In fact, I now have built a small heuristic that if one saves 50% of the salary and assuming that the investment grows at 10% and salary also increases by 10%, then one can ‘break free’ in just 7 years!

Tweak the returns up, and it could be faster. Add some buffer (after all one gets married and has kids in this phase!) if you wish, and the timeframe should not exceed 10 years.

Dev – Achieving FI at a young age is fine. But it’s equally important to have a plan for after-FI-life. How do you manage your money and time now?

Ram – I am 3 times busier now with the startup and enjoying doing everything hands on from business strategy, marketing, product management to coding, setting up the servers etc. Bumming around is the last thing on the mind 🙂

This particular phase is not the time for me to sit back and travel the world, though I can afford to do it. Once the startup settles into a rhythm, then maybe I can balance things better.

Yes, the children are growing up and I make sure that I do spend adequate time with them. I remind myself that this time won’t come back, and time is much more valuable than money.

Having been CIO at large organisations before, I also get calls from industry folks for advice on their business-technology plans. I have no plans as of now, to do a full-time IT Strategy Advisory but I do get many such opportunities.

Though I have declared FIRE, I have not yet found the time to delve deeper into my longer term aspirations: Yoga, Spirituality and Vipassana – given the projects I have started. And there will be a definite time for that in future.

I also have a sky-high reading list and hope to catch up on that some day.

Just these things can keep one fully occupied 24×7. Basically, I have better things to do that are keeping me really busy. Things more important than ‘making more money’

The point is that if one has a few passions, then after-FI life is one of great opportunity and immense fulfilment. That would be the real life – not just hanging on to an identity derived from one’s profession or job or upbringing.

Dev – What do you think holds people back from achieving financial freedom?

Ram – Several things – many think it is not possible and don’t make any attempt. Many are stuck in the rut and cannot imagine a life beyond their standard job.

Some are scared of what it means, what will they do after FI. They cannot imagine the immense possibilities.

Many live their entire life running towards more and more possessions, stuck in debt servicing the loans taken to buy them. And doing all this doesn’t make them happier either because they are always chasing the next thing. No redemption for such folks who live on this hedonic treadmill.

Some may have an interest but may not have the discipline to invest diligently and smartly. Some are stuck in high-cost investment instruments or altogether wrong investment products like ULIPs, traditional insurance policies, etc. All these mistakes add up and delay Financial Independence almost up to the age of their retirement!

So to pull it off it requires a lot of things: confidence in oneself, conviction to not do what the herd does, being stoic enough to live well within your means, ability to manage your money & enjoy the number journey, and finally the badassity (as MMM says) to see it through.

Dev – People feel saving a lot (which is necessary for FI) means sacrificing today for an unknown tomorrow. What do you have to say on that?

Ram – I disagree that saving today means denying your tomorrow.

Life is too vast to define it in narrow terms of currency.

There are enough studies to show that happiness and money are not correlated. Beyond a basic minimum number, money has limited ‘marginal utility’. Bill Gates himself despite his billions said:

“Once you get beyond a million dollars, it’s still the same hamburger”.

You can spend smart and still enjoy your today.

  • How about having friends and family at home over a nice dinner, instead of a dinner at a high-end restaurant? The money saved will be in thousands of rupees and the fun will be 10x.
  • How about going for a hike near your city outskirts vs visiting a shopping mall? Money saved will (again) be in thousands and health gained and a lot of family time.
  • How about using a bicycle to commute instead of splurging on an SUV?

I can give hundred such examples.

More than money, these are lifestyle choices and if chosen well they give you much better health and happiness. Besides being far more planet-friendly. FI actually becomes a nice byproduct.

Much of modern life (post Agricultural Revolution) is sheer nonsense and after Industrial Age, we have managed to both wreck ourselves and this one Earth that we have.

Equipped with these choices, you enjoy the journey and before you realize, you would reach the FI destination. The beauty is that life is great even after FI.

Dev – Any influencers whom you tracked during your journey to FI and that helped you stay motivated?

Ram – None in particular, as I was enjoying my journey.

Yes, had I discovered some of the online resources 10 years before or even earlier, my ‘desitnation’ would’ve been reached 5-8 years earlier.

Dev – What’s your advice to the people who seek financial freedom and early retirement?

Ram – Firstly one should design a great life around things they are passionate about. These will give great pleasure in your journey, and could also become post FI business ideas. Examples could be farming, blogging, crafts, music, building a business etc.

This is important to envision a life beyond a 9-to-5 job or the next company switch.

Secondly, one should track ones spend carefully and target a realistic savings rate – for some it could be 50% and for someone else 20%. If one likes to spend on certain things in life and enjoys it, then include it in your spend – don’t deny yourself. But please be realistic.

Third, one should invest in a simple portfolio with an asset allocation that meets their risk profile. The portfolio should meet their own financial goals and be primarily invested in instruments like PPF, SSY and good Mutual Funds.

In a nutshell, keep things simple, design a great life, grasp the simple match of FIRE (required savings rate and portfolio returns) and before long you will reach your destination!

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

Ram – Thanks Dev!

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.