investing

Of Quotes and Learnings, From Investors and Hindi Movies

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“The problem with famous people and their quotes is that I don’t understand which one to apply when.” Swami remarked, as he walked in for our coffee meeting with a disappointed, confused face. He had a book of quotes with him.

“Is India a leaky boat?” he asked suddenly. Surprised, I looked up to my broker friend for a reply, as I did not understand the question.

But Swami continued. “I read in this book that Warren Buffett once said that if you perennially find yourself in a leaky boat constantly fixing patches, it is better if you devote energy to changing the boat rather than fixing the patches. So I was wondering with all our problems currently, is India a leaky boat?”

Jigneshbhai, my broker friend, maintained a studied silence.

On getting no response, Swami peeped into his book and read out. “He also said that when a management with a good reputation joins a bad business, it is the reputation of the business that stays. So is India a bad business?”

Again, Jigneshbhai maintained a studied silence, perhaps not quite sure what to say.

Meanwhile, Swami was in his own world of quotes and learnings.

He continued. “But he also says that we only attempt to be greedy when others are fearful, and fearful when others are greedy. So is it time for me to be greedy or fearful?”

Swami’s questions were relentless. Jigneshbhai’s silence was unending. Swami continued.

“And there is also a quote where he says that it is better to buy a wonderful company at a fair price, rather than a fair company at a wonderful price. So in the current situation, which one is India and its companies? I am getting confused.”

laugh2He was just not stopping and Jigneshbhai was just not speaking. His studious silence was not making things easy for Swami.

Just then, I noticed that the wealthy man in the palatial bungalow who lived next to me was also sitting in the coffee shop. He must have heard our conversation – actually Swami’s monologue – for a while. We had known from earlier interactions that he speaks little, and whenever he does it is cryptic.

He had probably finished his coffee, and while leaving, he walked up to Swami and smiled.

“अब इन्हें दवा की नहीं दुआ की ज़रूरत है. So wait for the miracle.”

As he walked away, I could see that the wealthy man and Jigneshbhai were looking at each other and sharing a smile.

The Dilbert One Page Summary: All that one really needs to know

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dilbertA couple of days back I was reading “Dilbert and The Way of the Weasels”. While this is a funny book, a small section has some amazing insight quietly embedded. In that book, the author claims, perhaps jokingly, that everything that a person really needs to know about personal finance and investing can be summarized in one page. Which actually, I thought, is quite true.

Exactly the kind of problem that I had been facing for a while, when a friend of mine asked me why I don’t write about specific stocks or do more frequent analysis. And all I could tell him is I felt it was not important, and also that I honestly did not have anything to write.

There is only so much you need to know about finance and investing, as an ordinary investor. If a reader reads the earliest few posts written in this blog about investing, and garnishes it with some of the book synopsis or guru speak posts, that’s all that any one needs to know. And that’s also an overkill in my view, and perhaps, even unnecessary. The truth is everything that one needs to really know does not take much writing. The tougher part is in following the simple things with discipline and without emotion.

As an individual investor, if you are interested in a really brief and simple summary, Dilbert’s summary is all that is necessary, honestly. Simple, but by no means, easy to follow.

So here are the 10 things mentioned in the ‘Dilbert One Page Summary’, adjusted a bit with my own inputs. The things that one really needs to know, and would work for most individuals in ordinary conditions:

1. Pay your credit card bill in full, and stop using credit cards. Use only debit cards – money that you already have.

2.  Get term life insurance as early as you can in your life, and keep adding cover every 5 yrs as your income increases. Don’t buy any other insurance, except health insurance every year.

3. Contribute to your employer’s PPF/ Retirement scheme by making mandatory as well as voluntary contributions if you can.

4. Buy a house, if you want to live in your house, and if you can afford it assuming you don’t take more than 60% of house value in loans, which should also be less than double your annual post tax income.

5. Put 6-9 months of your expenses in a liquid fund or cash equivalent that you can liquidate in a day or two.

6. Save at least 25% of your post tax income.

7. From your savings, put 65% in a stock index fund, 25% in a bond fund (or fixed deposits based on tax slab), and 10% in a gold fund. Make increments every couple of years. Do not touch it till retirement.

8. In case you are adventurous, replace the stock index fund with (or add) 3 actively managed diversified equity funds which are rated 4 or 5 currently on Morningstar (or Value research online or similar). Once you choose them, stick to them for at least 5 years, else replace them with the index fund.

9. If any of the above is confusing (specially step 7 and 8), hire a fee-only based financial planner (not someone who takes a fee based on percentage of assets or transaction size) for a two hour advice session and follow whatever he tells you.

10. Ignore everything else that any one tells you.

Anything else is likely to be a waste of time (and money perhaps) more often than not. Even if it does give you some incremental returns for some time, the costs and lack of sustainability are unlikely to make it worth it.

At the crux of it, honestly, that is all there is to it.

Guru Speak: Timeless Wisdom from Benjamin Graham

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bengrahamBenjamin Graham, widely known as the Father of Value Investing, was a professor and an investment manager. Known as the founding father of the profession of security analysis, Graham wrote two of the most valuable books in the area of investing: “The Intelligent Investor” and “Security Analysis”. Credited by Buffett as the key influence on his investing approach, Graham is also famous for his timeless gems of investing wisdom that have stood the test of time.

1. Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.

2. Wall Street people learn nothing and forget everything.

3. The individual investor should act consistently as an investor and not as a speculator. This means… that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.

4. I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities.

5. To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.

6. Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.

7. It is absurd to think that the general public can ever make money out of market forecasts.

8. If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.

9. Individuals who cannot master their emotions are ill-suited to profit from the investment process.

10. The underlying principles of sound investment should not alter from decade to decade, but the application of these principles must be adapted to significant changes in the financial mechanisms and climate.

11. Obvious prospects for physical growth in a business do not translate into obvious profits for investors.

12. The investor’s chief problem – and even his worst enemy – is likely to be himself.

13. Finance has a fascination for many bright young people with limited means. They would like to be both intelligent and enterprising in the placement of their savings, even though investment income is much less important to them than their salaries. This attitude is all to the good. There is a great advantage for the young capitalist to begin his financial education and experience early. If he is going to operate as an aggressive investor he is certain to make some mistakes and to take some losses. Youth can stand these disappointments and profit by them. We urge the beginner in security buying not to waste his efforts and his money in trying to beat the market. Let him study security values and initially test out his judgment on price versus value with the smallest possible sums.3

14. Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

15. Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

16. The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.

17. It is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities.

Why Bulls, Bears, Pigs and The Big Fish don’t matter, and Cows and Goats do

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“The ocean in Mauritius is just wonderful, blue-green and pristine. Truly is a paradise island”, said my South Indian friend, Swami who had just been back from his vacation. One of the few times I had seen him happy, without much to complain about. Just when I thought he was in a good mood, he said, “But I got badly tanned. Got fully blackened, and for two days, I could not get out of my house.”

“So did you do any under water activities?” asked Jigneshbhai my broker friend.

“Yes, I think that and the sun is the reason for my tan. But it was worth it. The sea life – the fish and other sea animals were just wonderful to see up close under water.” Swami remarked. Clearly, his vacation had got more positives than negatives out of him. I was glad to note that he loved the sea, the fish and the sea animals more than he disliked the seafood. And if this is what Mauritius could do to Swami, I am sure it must be really be paradise for normal mortals. Jigneshbhai and I exchanged a smile on that thought.

But our thoughts were interrupted.

“I am not interested in the small fish. It is not useful to check even what the big fish are doing.”

We just looked around to check who had spoken. It was the wealthy man in the sprawling bungalow who had just joined us. I am sure he must be frequently going to Mauritius – I hear it is some sort of tax haven for wealthy people and foreigners. So not surprised that he had a view on the sea life there.

“No, sir. I could see only the small fish, we did not go deep enough to see the big fish. But the small fish were very beautiful and interesting, sir!”, Swami remarked, trying to disagree with the wealthy man.

“No point in following the small fish or the big fish. I am not interested in either the bulls or the bears also”, said the wealthy man.

He was known to speak rarely, and when he did, it was cryptic. But I was not sure he realized that we were talking of Mauritius. As far as we knew, bulls or bears were in the safari or at best in the markets. We just stayed silent, trying not to look awkward.

But Swami could not resist continuing. “Sir, we did not go to mainland Africa, only to the island of Mauritius. So did not see any bears, bulls or other animals in the safari.”

“Well, Africa is still the new frontier. You should be more worried about the Pigs in Europe – I hope someone takes care of them.” As he said this, we were almost getting on the edge now. Swami and I were desperately trying to make sense of this conversation.

I think Jigneshbhai got what the wealthy man was trying to say now. He quietly signaled to us to stay silent and asked, “Sir, got it. Those economies – Portugal, Italy, Greece and Spain are in trouble, and I understand that this is good time to ignore the bulls, bears and all the big and small fish or anyone who has a view on the markets.”

“Yes, indeed. You are right”, smiled the wealthy man, finally satisfied that someone understood what he was saying.

While both Swami and I were clueless, Jigneshbhai eagerly asked, “Sir, in that case, which animals do you prefer?” This left us further dumbstruck. Looked like he had picked up the animal language.

The wealthy man replied, “Honestly, I prefer goats and cows. They are easy to maintain, need just simple grass, and are sure to give you milk regularly. As they grow older, they almost always multiply easily. If they don’t, their meat is useful. So even if you pay a high price, goats and cows are useful, valuable animals.”

While Swami and I were wondering what happened to our conversation on Mauritius, Jigneshbhai was happy hearing what the wealthy man said, almost cheerful and thanked the wealthy man as he left back for his sprawling bungalow. And while leaving, the wealthy man turned back to us and said, “There’s a lot of animal instincts out there. So don’t go with the herd.”

Are you Waiting for Godot when it comes to investing?

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“Have you seen that play called ‘Waiting for Godot’?” asked the wealthy man living in the sprawling bungalow next to my house. He was known to speak sparingly and in a cryptic manner when he did. We had just met him at a common friend’s wedding reception.

“Have heard and read about it, but never got myself to watch the play,” I remarked.

“It could be called either funny or absurd or nonsensical on the one hand; or, it could be called philosophical, existential or even having a spiritual message on the other hand. I get reminded of it a lot when I see the constant chatter and commentary on the markets and economy in today’s media.”

The wealthy man looked up Wikipedia on his smart phone for Waiting for Godot and narrated to us what he found:

“Waiting for Godot follows two days in the lives of a pair of men who divert themselves while they wait expectantly and in vain for someone named Godot to arrive. They claim him as an acquaintance but in fact hardly know him, admitting that they would not recognize him were they to see him. To occupy themselves, they eat, sleep, converse, argue, sing, play games, exercise, swap hats, and contemplate suicide – anything ‘to hold the terrible silence at bay’.”

The wealthy man chuckled when he read that. He said “If you see or read the play, your first reaction would be ‘what kind of absurd play is this?’ It is about two men Vladimir and Estragon waiting for someone called Godot. There is a sequence of events that happen over the two days where we are shown three characters –  Pozzo and his slave dog Lucky who keep forgetting, and an unnamed boy who keeps getting messages from Godot. During the two days, many times the two men decide to leave, but every time say that they can’t as they are waiting for Godot. At the end of the two days, eventually no one knows who Godot is, and he never appears!”

Elaborating further, he continued, “I am just an audience, not an expert on the play, but I have found it funny, boring or profound based on my mood. People who study the play have called it everything from absurdist, meaningless, humorous, philosophical to a ‘representation of repetitiveness of life itself’ in which the two men represent mankind and Godot is God.” Obviously it looked like depending on how you saw it, there were multiple interpretations of it.

I asked him, “So why do you see parallels between the play and life in the markets?”

He said, “Indeed. most people seem to be like Vladimir or Estrogen, waiting for a Godot or a set of Godot’s who never come. And then there are the people who complicate things more than required – seeing patterns where none exist.”

“So what did the author actually mean when he wrote this play?” I asked eagerly, not quite sure I was able to comprehend it completely.

He smiled and replied, “You know, Beckett who wrote this play was always a bit cryptic and non-committal when asked this question. Beckett clearly realised that one of the reasons for the play’s success came down to the fact that it was open to a variety of readings and interpretations, and that this was not necessarily a bad thing. Beckett was actually surprised when people started analysing it, and had once remarked in honesty, ‘Why people have to complicate a thing so simple I can’t make out.’ Not very different from what we see around us in the markets, I guess – the complications, the analysis and interpretations, the lack of simplicity, the various characters, and the endless waiting for Godot.”

What does the US Economy suffer from? Diabetes or Heart Disease

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I often wonder what is a worse condition to have, diabetes or heart disease. And what is easier to live or die with.

Like the wife says it is easy to fix heart disease if it is only that. You may be able to detect it before you get a heart attack, and do something by quickly having an open heart (by-pass) surgery. At least for a while, that’s enough.

And the wife also says a diabetic may not seem very ill, but must realize he is suffering from a chronic condition that has no cure. The only cure is to get out of that condition. And it is only possible to get out of that condition, if he eats and exercises well, and also takes the insulin and medicines.

And it is tough being a diabetic, specially if you are unable to manage it. The first step is to accept that it will be a chronic condition that you can live with and manage. But that does not mean it is not serious, and will not affect you eventually, if you do nothing about it.

Like I sometimes feel that the US Economy got a heart attack 3 years back, and the doctors of the economy thought this needs quick fixing. So they did something like a quick and urgent by-pass surgery, so that the world does not go into a seizure. That it was required at that time to save the patient, and it actually did.

Like it worked for a while, but seems like there are blocks in the heart that keep coming up every now and then in the US and other Western economies. And every time you do an angioplasty or a by-pass surgery here and there, you seem to have fixed the problem.

But it seems that the real cause of the heart disease is a chronic spell of diabetes over the past 3-4 decades. When people and governments gorged and gorged, despite high levels of sugar, and now are unable to understand why the heart disease is not getting fixed.

Like every time they go on a diet and insulin for a while, they seem to be getting back into shape, but some part gives up as it is not used to it, and asks for more food. And it seems life threatening every time, or does it?

Like the doctors and patients need to realize that it is diabetes. And diabetes is not something that can be fixed overnight. In fact it cannot be fixed at all. It can only be lived with and managed. It needs a change in habits and lifestyle. But if you do not do anything about it for 30 years, don’t be surprised if your eyesight becomes bleary.

The only cure is to manage your diet, build an exercise discipline, and pray to God that everything gets better. It eventually will, but that’s the only way – time and discipline.

And you may still need to keep checking your heart to look for impending heart attacks.

As Buffett said in one of his letters, “No sooner is one problem solved than another surfaces—never is there just one cockroach in the kitchen.”

Diabetes is the lurking cause, heart disease is the effect.

And so I met my broker friend and told him about my theory excitedly that the Western Economies seem to suffer from diabetes, and the doctors of that economy are giving them medicine for heart disease. And how it won’t cure the economy and it is the wrong medicine due to a wrong diagnosis.  He just flashed a wry smile at me, as if I was the last person in the world to come to that conclusion.

In a worried tone, he said, “That is fine. Just hope and pray that it is not Cancer.”

डर के आगे जीत है: Why Long Term Investors should not fear Market Crashes

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canwepanicnow“Can we panic now?” asked Ron Weasley to Harry Potter in “The Chamber of Secrets” when they suddenly find themselves surrounded by giant spiders in the Forbidden Forest. That is how a lot of us feel in the current market situation, perhaps. It is one of those times when everyone seems to ask everyone else this question. Is it time to panic?

Like so many things in finance, this is the wrong question with many answers that seem right. The reality is everyone may have a view, but no one can claim to know the answer for sure. The fact is that it is the wrong question to ask.

There is no doubt that in stomach churning times of volatility, the first thought that strikes you may be – sell everything and run. Sometimes, the second thought may be – buy everything quick, because things have gotten cheaper. Both the views are wrong because they depend on timing activities based on market events, rather than based on a plan.

Mr Market can get into manic-depressive moods as well as exuberant moods at the drop of a hat. If it forces one to get either too happy or too sad, one is turning one’s basic advantage into a disadvantage. Think of stocks as a crate of coke or a basket of potato chips that you buy for weekend parties. If you bought something on Wednesday, and your neighborhood supermarket announced a 10% off sale on Friday, will you think – Oh no! I think I should sell the coke and chips I have, and conserve some cash! At best you may think, let me buy more as the prices are great, and I am going to need them next weekend anyway. If you are a rational consumer, you are likely to weigh your decision – based on whether you need more coke and chips, whether you think it is worth stocking up, and whether you think the sale is genuine or is it on old stock. Unfortunately, a lot of individual investors do not think about stocks like that, and hence the fear associated with market falls. Therefore, headlines read ‘Global Bloodbath’ instead of ‘Sale, Sale Sale!’

Take this quiz that Buffett wrote in his 1997 letter to his shareholders – “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices. ”

And finally he adds: “So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.”

darrkeaagejeethaiThe really good long-term returns from equity come not despite the falls, but because of the falls. For someone who invested in US equity 10 years back and forgot it, he may look at his portfolio today and say – this has gone nowhere. Similarly, for some one who invested in Indian equity 4-5 years back, again the scenario is similar – broader market levels in August 2011 are more or less where they were in August 2007. But for someone who rode the falls, and invested at that time to whatever small degree, even partially in the right stocks or funds, the returns have come. So it is not that the long-term returns from equity have come despite the fall. The long-term returns from equity come because of the fall. The problem is no one can say for sure whether a fall is the end of the falls, or the beginning of another set of falls. Life has to be lived in forward mode, and can only be analyzed in reverse mode later.

But one thing is clear. It is during the times of sudden, big falls that fear is at its highest. It is in such times where it is most important for an investor – firstly not to sell, secondly do nothing, and thirdly buy something. Because truly, in such times, the risk of permanent loss of capital gets lower. If one manages to neglect the value of investments already made (and hence notional losses or reduction in profits), buy the right things in large proportions during times of ‘darr’, and can withstand, or better still, buy more during further falls if they happen, he is sure to be on his way to ‘jeet’  – may be not in a few weeks or months, but surely in a matter of many years. As long as one is committed for the really long haul, and makes rational choices, there is no doubt that there is truth in the saying – डर के आगे जीत है.

5 Star Rated Advice: Deciphering the S&P US Downgrade

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“Who is this S&P?” asked my South Indian friend Swami to my broker over a cup of coffee.

Swami, who generally spends time with his family over weekends, suddenly called me on Sunday afternoon, and said he wanted to meet my broker friend Jignesh who knew a thing or two about investing. I was not quite sure what it was about, but being a close friend, I arranged for the meeting. Swami seemed quite perturbed when he came home. “Arre – they are saying Indian market will fall because some S&P downgraded US. I want to understand why”, he explained as the reason for this sudden meeting, while we were leaving my house. So at around 6 pm, we met over coffee.

“Arre, it is a rating company”, responded Jigneshbhai. “Means?” queried Swami, not quite sure what a rating company does. “They provide ratings for different things, like companies, governments, anybody or anything that has a financial instrument or offer.” “Why?” – continued Swami, still not sure why something like that is needed by anybody.

Now Jigneshbhai thought it was time to really explain things properly. “Dekho – how you read reviews of movies in Times of India sometimes, and then decide whether or not to watch the movie. If it gets 5 star, it is a hit, so you go and watch it, if it is 1 star, it is a flop, and you don’t watch it. Like that, S&P provides star ratings to anyone who wants money – like companies, countries or anyone else. If it is AAA rating, people who have money, give them money easily, if it is lower, then they will think more, or charge more interest. Like that – understood?”

Finally, some spark dawned on my south Indian friend, who was otherwise quite a bright chap. But not fully lit up, he continued, “So that S&P is saying US has lesser money than earlier? So their economy is in trouble” “Something like that” responded Jigneshbhai, not quite wanting to get into detailed arguments about fiscal deficits, interest rates and recession, I assumed. He thought this was the end of the discussion, hoping he does not have to explain more, and quickly started asking me how are things at home and work in general.

But his hope was short-lived. After a few sips of coffee, Swami came back. “Arre Jigneshbhai – but sometimes I have seen that the same movie gets different ratings in different papers. Also, Times of India ratings are wrong also sometimes. They give 5 star and I watch the movie, it is rubbish. And they give 3 star, and movie becomes a big hit.” I could sense a mix of curiosity and optimism in Swami’s eyes as he asked this.

Now that the question was asked, my broker friend decided to go the whole distance and provide solace to Swami’s unsettled mind once and for all. “Yeah, sometimes, they can give 5 star to stuff that is rubbish, and low rating for good stuff too. Sometimes it matters, sometimes it doesn’t. Sometimes it also depends on who the producer or star actor is – isn’t it? If the season is bad, sometimes all movies flop for the time being.” I could see that this confused my south Indian friend a tad bit more, as he lost keeping track of the metaphors.

Continuing, my broker friend said, “But why do you worry about it? If a good movie gets a 2 or 3 star rating, its opening may suffer, but if it is good, people will decide for themselves, and go and watch it later anyway, no? So – if companies continue to increase profits, they will become hits, people will buy their shares and markets will go up, else they will become flop shows. So, you just focus on selecting good movies to watch and good companies to put money on” laughed Jigneshbhai, giving my south Indian friend 5 star advice.

Finally as we finished our coffee and left, he added, “The world is worried because the US went from AAA to AA+. Rather than worry about the US getting downgraded, I wish someone in our country worried about how we will upgrade from our BBB rating.”

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