The Opinions and Views mentioned in this Blog are my personal opinions and views and does not reflect the views of the organization that I am working for.

02 September 2014

The power of compounding in Life

This an article that I posted in LinkedIn Pulse. You can either read it here, or if you prefer, you can read it from the horse's mouth
I am currently in a self-created project of reading 50 books on Finance, Investment and Wealth creation and writing their reviews in my blog. So far I have covered twelve books.
You can read the reviews HERE
One of the biggest benefits of this exercise for me has been the knowledge and the value add that I am gaining. Since the field of Finance deals with money and money influences behaviour, a good book on Finance can add a lot of life lessons to your repertoire. Especially if they are based on the lessons learned by highly successful investors.
My LinkedIn post on 'Sitting Tight' was based on one such lesson that I had learned from the Book 'Reminiscences of a Stock Operator'
This post is about another lesson that I learned from a book that I just completedreview. It is about the power of compounding and the opportunity cost of inconsistency.
To set the tone, let us start off with some math on Investing.
Assume that you started off with three portfolios A, B and C investing 10000 in each. Your holding period for all the three portfolios is 30 years and they are expected to return 10% annually. Portfolio A gives you consistent 10% returns over your holding period, portfolio B gives you Zero returns in the years 10, 20 and 30. Portfolio C gives you negative 10% returns in years 10, 20 and 30.
At the end of 30 years, you would have;
About 171000 in Portfolio A
About 131000 in Portfolio B and
About 96000 in Portfolio C.
Even though your absolute loss is about 17000 in Portfolio C, the power of compounding has ensured that your holding period loss is about 76000. While each of the losses in Portfolio C were meagre, about 2000 in year 10 for example, the cumulative effect is humongous.
Lesson? Consistency pays. In finance.
And in life...
In my school and college days, my performance was inconsistent with a big I. I will perform exceptionally well in one year and exceptionally bad in another year. For example, till class 10, I was very poor academically and in Class 10, I did exceptionally well, then did very badly in Class 11 and performed exceptionally well in Class 12....
Each of those years when I performed poorly, were all non-evaluation years. The examinations were perfunctory. For example, Class 11 exams did not mean much, but Class 12 exams decided your career direction. So I lost focus in class 11 and regained focus in class 12.
What I am saying is that I considered the cost of each of my poor performance to be very low. I could always make up if I want to, I justified my inconsistency to myself. I was like Portfolio C in the above example, doing well sometimes, and doing badly at other times.
That pattern has been followed in most of my adult life. Give me a challenging job, I do well. But I go through the routine work at a very slow pace. I love working on projects since they are time bound and are filled with a lot of intellectual and interpersonal challenges. However, I don't do that well when it comes to routine activities, which are also very important.
Another example. My weight fluctuates between 80 and 87 Kilos. Every time it touches 87, I go to gym, I diet, I walk a lot.... Past experience has shown me that these strategies will be successful and my weight will ultimately reduce to 80, which it does. The problem is that once it touch 80, I stop the activities. Though I don't binge and all that, I go slow on all those strategies that helped reduce my weight from 87 to 80.
If you are a reader of one of MY BLOGs, you will see this inconsistency in action. My month-wise number of blog posts reads like Virat Kohli's test match scores in England ("Kohli's scores in the past 11 innings including Wednesday's blip read, 1, 8, 25, 0, 39, 28, 0, 7, 6, 20 and 0"). In some months I have written more than 30 posts and in others Zero.
This pattern is as regular as a clockwork. How is this inconsistency affecting me in the long-term? I have never even tried to analyse.
After reading the above math, I have come to realize the tremendous cost of my inconsistency. They (inconsistencies) pile up, they compound and I am sure that they have cost me huge opportunity costs over the long-term.
It is said that awareness is the step before change. While I was always aware of my inconsistent behaviour, the above example helped me become aware that I may be paying significant opportunity costs for the inconsistency.
I am sure that I am not alone. Many of us perform with inconsistency, and still may be successful in what we do. We get lazy, we are not in the mood, we lose our mojo, we procrastinate....reasons abound. This post is to help all of us see how better we can perform, how huge our returns will be, if only we were to add consistency to our recipe.
Wish you a consistent life.

11 August 2014

Work Life Balance? Tell that to a Class X Student in India...

Countless are the number of articles that I have read and the number of videos that I have watched which relates to the topic of 'Work Life' Balance.

Most of them talk about the rampant intrusion of technology into their personal lives and how it has made it possible for their bosses to be in their bedroom. The theme of all those articles is that we should strive to achieve a balance between our 'Work' and our 'Life outside of work'. The implicit assumption is that we can easily bifurcate our time, that there is a line of separation, between our 'Work Time' and 'Other Time'.

As per all those articles, 'Work Life Balance' is good and is necessary.

Tell that to a kid studying in Class X in India...

Here is the story of a typical Class X student. For the purpose of this article, let us say it is a boy.

Currently he is studying in 10th Standard in a school here in India. The school follows CBSE Syllabus. The syllabus has three parts. Part 1 is the Scholastic Skills. Part 2 and Part 3 are what are known as Co-scholastic skills, which were recently introduced by CBSE, with the ostensible objective of making Indian children all rounders and Jack of all trades.

The Scholastic part of the course, though tough, is manageable. The challenge is when you mix Co-scholastic activities with the scholastic activities. He has the following co-scholastic activities.

1. Life skills: This deals with the psychological and emotional development of the child. The school conducts something called ECUBE with mandatory attendance
2. IAYP: I forgot the expansion of the abbreviation, but this deals with the development of Social consciousness in the child. As a part of IAYP, he is expected to spend 24 hours in a year on voluntary social activity. This typical Indian kid has taken up teaching disabled kids one hour every week as the activity
3. Arts and crafts: This included performance arts. This boy is studying Carnatic Music as a part of this program. The teacher is very demanding. Since the teacher is very busy, he announces the classes just about 2 hours in advance leaving the boy's schedule into disarray
4. Sports activities including Yoga classes
5. First aid lessons,,.

All of the above have their own attached homework and he is expected to maintain regular records.

In addition, as  a part of his regular scholastic work, he has to do at least 8 Formative Assessments and 2 Summative Assessments every year for each subject. With 7 subjects, including 2 languages, this works out 70 assessments in a year of about 9 academic months, which works out to almost 8 assessments in a month.

Add to that the fact that he is now in Class X and like the typical Indian kid, he is expected to join either Engineering or Medicine in some leading institute in India. To supplement his regular studies, he has enrolled for special studies in an Institute which trains him on clearing the highly competitive Engineering and Medicine entrance examinations (these Institutes have their own entrance examinations !), which conducts parallel classes and assessments on the main subjects of Physics, Chemistry and Mathematics. The classes are held in the school on all days of the week including Saturday after class hours. 

And of course, these Institutes have their own classwork and homework which are more demanding than the regular school classwork and homework.

The typical Indian kid, leaves for school at 7 AM and returns at around 6.00 PM. Immediately afterwords he starts on his homework. After that he is expected to do regular studies. He is expected to study till about 10 PM. (the key word is 'expected', which is different from 'actual) On Saturdays he attends the special classes held by the training institute in the mornings and music sessions in the evening with weekend homework thrown in for good measure !.

On Sundays, he goes for the Social Work and comes back and continues on his pending homework.

Recently, I attended a parent-teacher session conducted by the school where they exhorted the kids to take their annual vacation in the summer of 2015 and for next two years focus only on their studies !

As I mentioned, I hear a lot of people talking about 'Work Life Balance'. People complain about their work having invaded their entire life leaving them little time for their personal life.

Well, try telling that to a kid studying in Class X in India...

12 June 2014

Book Review: The Millionaire Next Door: Authors:Thomas J. Stanley & William D. Danko

Please Note: This is the first book review in my very ambitious project of Reviewing 50 Books on Finance and posting the review in my blog. l have consolidated the book reviews and moved the same to my Investment Blog. You can read other reviews HERE

Who do you think is richer? A neighbourhood garage owner who seem to be busy all the time, always in a Khaki pants and a Sweat shirt and drives a 4 year old Maruti Swift, or the neighbourhood doctor, who lives in a swanky apartment, has a six figure annual income, wears the latest Armani, sports the 50000 rupee mobile phone and drives around in an Audi...

Ok, I guess I gave away the surprise.

It is the doctor, right? 

Wrong. Chances are that your neighbourhood small business owner is richer than the doc who has substantially high income. 

That is the surprising conclusion that the book 'The millionaire next door' comes up with. As per the book, there are various reasons why a doctor is not as wealthy as he should be.

1. Doctors normally start earning late in their lives. The garage owner probably has a 10-12 year headstart over the doctor when comes to earning the income. This is applicable to many educated folks who spends a lot of time studying prior to entering the workforce.

2. Doctor has to live a 'high class' lifestyle. The profession of the doctor calls for a high class style of life. Since they are exposed to people all the time and are being judged regularly, the pressure to live up to your income is high in case of a doctor. They live in high end localities, wears expensive dresses, drives expensive cars all of which eats into their income leaving little as savings

3. Doctors have bad investment habits. They do not spend enough time on understanding wealth creation, do no learn about investing, are not consistent in investing and finally, tend to choose bad investment consultants and lawyers. 

The book is not about doctors, it is about millionaires. It is about how to become one. It is about the behavioural traits of wealthy people. The book is about what to do and what not to do to become wealthy. 

'Frugal' is a word that you see a lot in this book. The wealthy people are frugal. They live in inexpensive neighbourhood, stay in a 3 bedroom apartment for the last 20 years, most of them are self-employed (Two thirds of them), most have been married to and living with the same woman for over 20 years, they are very good at financial planning and their wives are better at financial management than they themselves are.

And they are frugal. They have conservative tastes, drives second hand cars and their spending on dress is only 33% of their more ostentatious neighbours.

The first question that the authors try to answer is 'What is Wealthy'? How do you define wealth?. The authors maintain that your wealth, which includes all your assets (House, Investments) less all your liabilities (Mortgage, Credit Card Debt) should be at least equal to your annual income multiplied by your age divided by 10. 

A person earning Rs.20 Lakhs per year and aged 40 years should have a wealth (also called 'Net Worth') of 20 Lakhs X 40 / 10 = 80 Lakhs. The authors call those who have wealth above this value as 'Prodigious Accumulators of Wealth (PAW) and those who have wealth below this as 'Under Accumulators of Wealth (UAW)'. What do you call those whose wealth is around this number? 

They are called 'Average Accumulators of Wealth (AAW)'

Authors argue that PAW share different behavioral traits from UAWs. We mentioned some of them above. In addition to the above, one fundamental difference between PAWs and UAWs lies in the nature of their income. Authors divide the income into two types. One is the unrealized income. These are incomes which keep accumulating but are not realized by the investor. These are in the nature of incomes which are due to appreciation in the value of their investments including investments in Stocks and Bonds. The characteristic of unrealized income is that since the income is not realized, you don't have to pay tax on the income. 

The other type of income is the realized income. This is the the income that you earn and which is credited in your bank account. Income from Salary is a good example. The moment the income is realized, it becomes eligible to be taxed at the personal income tax rate which in most countries is about 30%. 

Your total income is your realized income plus your unrealized income. 

Authors point out that PAWs usually pay between 2 to 3% of their wealth as income tax whereas a UAW will pay anywhere between 8-15% of their wealth as taxes in a year. That is because most of the income for a PAW is 'Unrealized' while that for a UAW is more 'Realized' in nature. 

Authors use an earthy Texan phrase for a person who looks and acts rich as 'All hat no cattle'. 

Other than being frugal, what else do PAWs do right? According to the authors these are the seven habits of wealthy individuals.

1. They live well below their means
2. They allocate their time, money and energy efficiently, in ways conducive to building wealth
3. They believe that financial independence is more important than displaying high social status
4. Their parents did not provide Economic Outpatient Care
5. Their adult children are economically self sufficient. 
6. They are proficient in targeting market opportunities
7. They choose the right occupation.

The wealthy people are very good at planning and budgeting. They have a clear idea of how much in a year they spent in Food, Clothing, entertainment etc. They also have clear financial goals and plans to meet those goals. 

In addition they spend a lot of time (Almost double that of the time spend by UAWs) in identifying the right professionals who can help them to generate unrealized income. They choose their lawyers and investment advisers very carefully. They own their investment decisions. They are consistent with their investments unlike the UAWs who are very inconsistent with their investment decisions. PAWs have investment plans and do not renege on their plans under any circumstance. UAWs invest in fits and starts. They are the targets of unscrupulous investment advisers. 

The average annual realized income of a wealthy person is about 6.7 percent of their wealth and they pay a tax of less than 2 percent of their wealth.

One interesting concept that the authors bring out is that of 'Economic Outpatient Care'. This is the phenomena where the adult children of UAWs are themselves UAWs and despite reaching their earning age, are still dependent on the support provided by their parents. Authors point out that since the behaviour of UAWs are responsible for their status as UAW, their children tend to inculcate their spending behaviour and themselves become UAWs.

Sometimes the opposite can happen. The book provides the example of a gentleman who grew up very poor. He was motivated to overcome his impoverished circumstances and studied very hard and reached a very successful position earning annual income in six figures. However, he was hellbent on trying to become 'Better Off' than when he was a child. He has a fleet of value depreciating assets. 

PAWs are also good at taking calculated risks. Where they see opportunities, they will invest in those opportunities. When it comes to UAWs they ignore opportunities. The authors discuss the case of multiple UAWs who despite working in blue chip companies like Microsoft or Walmart, do not own a single share of the company.

After reading this review you may wonder if you have it in you to become wealthy. The authors want you to answer the following four questions.

1. Does your household operate on an annual budget?
2. Do you know how much your family spends each year on food, clothing and shelter?
3. Do you have a clearly defined set of daily, weekly, monthly, yearly and long-term goals?
4. Do you spend a lot of time planning your financial future?

If your answer to the above questions is 'Yes' or 'Mostly Yes', then you are one of the lucky few to have what it takes to generate wealth.

Part of the book is tedious. For example, the authors spend considerable time on how much time UAWs spend on purchasing a car. Another complaint is that many of the points discussed in the book are not applicable to young people. Mind you, young people will benefit a lot by reading this book. The habits expostulated in this book are universal and are not age specific. But to expect a young person, barely into their working career to have a net worth calculated by the formula?

I mean, come on !

There is one area where I want to caution the readers. It is mentioned that wealthy takes calculated risks. This is an advice that I am very much worried about. The question is which came first, the wealth or the risk taking. One can say that wealthy can afford to take risks BECAUSE they are wealthy. In my opinion, by following a consistent savings and investment habit, one can build a very comfortable nest egg without taking too many risks. 

The authors have one advice for the youngsters who are at the beginning of their working life. "Start Investing Early". Perhaps, the same advice, removing the word 'Early' is applicable to all of us. 

07 June 2014

Is passion overrated?...

Internet is crammed with articles on helping you find your passion. I searched Google for 'Find your passion' and it came up with,
About 11,10,00,000 results (0.33 seconds) 
I searched for 'finding your passion is overrated' and came up with
About 2,42,000 results (0.30 seconds) 
So when I start a topic like above, I am already in a huge minority. 
There are a few reasons why I think that 'Finding your passion' is overrated. In the Linkedin Tradition of numbered points, here are my reasons for arguing that as a whole this 'Passion' business is overrated.
1. Is the idea of 'Finding your passion' a middle class fad?
Poor people are so busy living their daily grind that they don't have time to think about anything other than their work. If you are a daily wage earner and if you do not do your work because 'it is not your passion', you and your family will stay hungry that night. What about Super Rich? Did they become Super Rich because they found something passionate. My gut is that if you ask them, most of the Super rich will tell you that they started doing something, they became interested in that, they did the job well, they took some smart decisions and here they are !. That is not passion. That is doing your job well.

But when it comes to us, the middle class, most of the motivational books and speakers exhort us to find our passion, to find our potential, to be the best that we can be. We get carried away by this rhetoric and spend our lifetime trying to find our passion.

All the while....
2. 'Your passion' is in your perspective of your current situation...
Most of us have heard the story of three Stone Cutters. One of them is just cutting the stones, another is building a building and the third is building a residence for god. Guess who is more passionate about his work?
There is a janitor who works in my company. He is always happy and enjoys his job. I asked him how he is so happy with the work when his job is to clean the toilets. His response was an eye opener. 'Sir, this is the place where you come to wash your face and spend a few seconds relaxing, before you go back to your work. If this place is dirty, you will feel irritated as you leave and that will affect your work. Once it affects your work, it will affect the performance of the company that I work for. So, it is important that I keep the place clean so that you are happy to do your work better and that makes my company performance better.'
He is passionate about his work because of his perspective. He sees a higher purpose in what he is doing now.

  • How do you see your work?
  • Do you look forward to the day with anticipation or a sense of drudgery?
  • Do you think that you are performing a higher purpose or are you an intelligent pen pusher?
  • Can you redefine your work in your mind so that it meets a higher purpose? I am sure most of the work that you do has a higher purpose like the case of the janitor above. The trick is to analyse your work to find the higher purpose behind it. 
Most of the time, you can find the higher purpose by identifying your customers and see how your work helps them. Sometimes you can find your higher purpose if you have the knowledge of the context in which you are working. 
3. Which comes first? Passion or hard work.
I think that many of us have got that equation on the reverse. We spend our time trying to 'Find our passion' and ignore our current work. When we do that we get negative feedback from other stakeholders. Since we do not want to accept blame for our poor work, we put our blame on some esoteric stuff named 'Passion' which is somewhere 'out there' and which we have to be 'Constantly in Search of'. We spend our whole life living in the future, trying to find our 'Passion'.
Maybe we should focus on the 'Now'. Rather than living in the future, we should put our heart and soul into our current work and accumulate positive feedback. That will start the virtuous cycle of hard work --> Positive Feedback --> Passion. If you are a traffic constable (I guess you are not) you should try to be the best traffic constable in the Universe. 
Let me tell you the example of a neighborhood traffic constable. Anyone who know India will tell you that it is very, very hot in this country in the summer. There is this old traffic constable, who should be close to his 60s, who mans traffic near my house. It is pleasure watching him do his task. He is always smiling, has kind words for passers by, very enthusiastic about his work. Watching him man traffic is like watching an expert dancer dancing to the tune of the traffic. He has everything under control. I have seen him work in the morning, noon and evening. I have seen him work in Summer, Rains or Winter. His demeanor is always the same, pleasant and enthusiastic.
That is passion. Doing your current job extremely well is passion. Passion is an outcome of doing a good work. It is not the means to do good work. 
So the question is, are you doing your current work exceptionally well? Or are you waiting for your passion.
In Indian philosophy, 'Yoga' is a word used to for anything that will help you find yourself. Many of us conflate Yoga with Meditation. That is only one type of Yoga. In Indian philosophy, there are many ways to find out about yourself. One of them is called 'Karma yoga' loosely translated to 'Realizing yourself through your work'. As per this philosophy, if you do your work passionately (?), you will attain self realization. 
Isn't that the whole purpose of searching for 'Passion'? To know what you are capable of achieving. To realize your full potential.
4. What is 'Passion' anyway?
How do you define 'Passion'? 
Many people equate 'Passion' to liking. Instead of saying 'I like writing', the 'Passionistas' will say 'I am passionate about writing'. No you are not. You 'Like' to write. You enjoy writing. Doing something which you like or enjoy is not passion. It is a hobby. 
I am not immune from this habit. Recently I attended a Blogger's conference. In the registration form I had two write a response to the question 'Why do you blog?'. I sort of pompously wrote 'Blogging is my passion'. 
No it is not. I like blogging. But it is not my passion. 
If blogging were my passion, I would,
1. Make plans and act on making blogging as a full time career.
2. I will eat and sleep blogging. My mind will be continuously brimming with ideas on how to improve my blog.
3. I will become a full time blogger. I will write and post at least one blogpost a day for the rest of my life
4. I will network with other bloggers. Share ideas on how to change society / future through blogging.

5. I should be able to earn money to feed my family from blogging.
The problem is that while I will continue to blog, I know that Blogging is not going to be my career. Once it becomes a career, it becomes my 'Work'. I have to get ideas to blog, I have to find publishers who will buy my work. I have to feel guilty for not meeting my writing targets. I have to do mundane stuff like editing and polishing my work. I have to 'Sell' my work to readers..
Once it becomes my work, it no longer remains my passion. 
Viola, I am again in the market, searching for my 'Passion'. 
5. Finally, Searching for your passion and doing your current work well are not mutually exclusive.
I want to end this post by pointing out that finding your passion is a process. You are not going to get up one day and miraculously find your passion. While continuing to do your current work well, you could experiment with other ideas, other areas of work. You could experiment with blogging, photography, dancing....Anything. But be clear if you just 'Like' doing the stuff or are you ready to undertake major sacrifices to enter into the field that you are 'Passionate' about. 
If you can't make those sacrifices, then try finding a higher purpose behind what you are currently doing. I am sure that whatever you do will help someone else do their work better. That itself is a higher purpose.
We all feel happy when we are of service to others. So if you find the 'Receiver' of your service and find out how you are helping  them do their work, you will feel happy with what you are doing and that may translate into passion.
Here is wishing that all of you find work that you enjoy and are passionate about. 

06 June 2014

Are you an idiot?....

At any time when you feel that you are smart and other person is stupid, then follow,

Byron Katie's method of self inquiry. 

Ask yourself the following for questions: 

1. Is it true that Joe Smoe is an idiot? 

2. Is it absolutely true that Joe Smoe is an idiot? 

3. Who would I be without that thought? 

4. How is the opposite of the statement true? Ex. How is Joe Smoe smart? How am I an idiot? 

 Then come up with examples of how Joe is smart and think of the stupid things you yourself have done. You will be surprised to find that our judgments of others is really about ourselves.

04 June 2014

Schumacher is right: Small is beautiful (In Stock Investing)...

In another article in this blog, I argued just the reverse

In that article, I argued that one of the mistakes that retail investors make is to focus on Number of Shares they own instead of focusing on Return on their investment. My point in that article was that for the same amount of investment, Large Caps provide higher returns to a retail investor than small and midcaps. 

In this article, I am going to argue the reverse. With a BIG CAVEAT.

If you are willing to hold on for long term (5 years to 30 years), if you are able to identify the good midcap, if you are willing to ride the storm of ups and downs in the share price, all the time staying invested to your convictions.....

If you do all that,

Then small is beautiful.

Let us take some examples.

If you had invested Rs.3500 in ICICI Bank in 1998 (which I did) and stayed with the stock till today (which I didn't, I am  a retail investor remember?) that investment would be worth Rs.140000 today.

If you had invested Rs.5000 in SBI in 2000 and stayed with it, that investment would be worth Rs.270000 today.

If you had invested about 10000 in WIPRO in 1980 and stayed with it, that investment would be worth  Rs.480 Crores today !!

An investment in Infosys of Rs.9500 in early 90s would be worth about 12 Crores today !!

Huge returns are possible in stock market if,

You identify the right companies
You buy early
You stay with it for long term across market cycles


If you are plain lucky Like Sridhar's Father in Law

Sridhar is an advertising professional in Bangalore. He is a friend of Nandan Nilekeni. In early 90's when Infosys came out with IPO, Nandan asked Sridhar to invest in Infosys. While he is not into stocks, Sridhar invested Rs.95000 in the stock to purchase 1000 shares of Infosys since he was not able to say no to Mr.Nilekeni.

Those were the days of physical certificates. Sridhar was fully allocated the shares and he got 10 gleaming Share Certificates each for 100 Shares.

That was the time he had got married. He wanted to impress his wife by gifting something to his Father-in-law (men do such stupid stuff all the time). Sridhar gifted his FIL with 500 shares of Infosys. 

Since the shares were in physical form and share transaction costs were high and there was not much demand for Infosys shares early in the 90's and also as a courtesy to Nandan Nilekeni,  the FIL did not sell the shares.

That investment of 47500 (0.05 Million Indian Rupees) is worth 60 Crores (600 Million Indian Rupees) today !

His Father In Law thinks that Sridhar is the smartest Son-in-Law in the universe.

Sridhar, on the other hand, feels that he is the stupidest Son-in-Law in the universe.

Coming back to the topic, the question is, do you have the courage of your convictions?

I don't. When I buy a share at a low price, I have very modest expectations. If the price goes up by about 50% I sell. I make profit all right, but I don't build wealth.

But you should have. 

So here is my advice. A new bull market is starting in Indian stock market. There are going to be huge opportunities if you are ready to buy good and wait. This is the right time to enter. Once you enter, stay. Do your due diligence (Can you see the product of the company, have you used the product, what others are saying about the product, is the firm making profits....) and buy. Once you buy do stay for at least 3 years. You will make huge profits, I can assure.

This is the best time to buy low and sell high...

Like Schumacher said, small is beautiful in stock investing.

03 June 2014

Schumacher is wrong, small is not beautiful (In Stock Investing)...

While investing in stock market, there is a rookie mistake that retail investors make. 

Number of shares is given more importance than the return on your investment.

Let us say that you have Rs.5000 to invest. You have a choice between two stocks. One, that of ABC Ltd is trading at Rs.50 per share. The other of XYZ Ltd is trading at Rs.2500 per share. 

Which company shares will you buy?

If you  are like what I was about 3 years ago, you will do a calculation as follows.

If I buy ABC Limited, I will get 100 shares and in case of XYZ company, I will get only 2 shares. 100>2 ergo, I will buy shares of ABC Company. 

Another logic that you will use, like I used to do, is that if the company declares 10% dividend, you will get Rs.100 in case of ABC Company and Rs.2 in case of XYZ Company.

There are many fallacies here that I have learned over the course of having made losses multiple times. 

1. There is a reason that ABC and XYZ are trading at the respective prices. ABC is a novice, it is just testing the waters. XYZ is tried and tested. It has a history of giving good returns on Investment to the share holders. Many people want to buy that stock and that is why it is trading at a higher price. You must at least analyse why the respective shares are trading at their prices. 

One reason may by that ABC is in an industry undergoing recession. For example, if ABC is a company in commodities, its share price will be low during Commodity Downturn.

Another important reason the share price of ABC is low may be due the large quantity of floating shares available in the market. Due to the sheer number of shares, the price per share will tend to be very low. The share price will find it very difficult to climb upwards since for every rise in share price there will be many people who may want to offload their shares. 

2. What about the dividend calculation, you may ask. As per my math, you may say, ABC will give me Rs.100 while XYZ will give me only Rs.2. To you my counter question is, have you checked the dividend history of XYZ before you did the math? Chances are that it will give dividends much in excess of 10%. Total dividend from XYZ may turnout to be much higher than Rs.100.

Anyway, you are not buying stocks only for dividend. Most of the return that you expect from a stock is through capital appreciation. 

Which brings me to my next point.

3. Look for the expected Return On Investment, not on the number of shares that you have.

As an investor, you are investing Rs.5000 and you are looking to maximize your ROI. Since most of the ROI in stock investing will come from Capital Appreciation, you have to look at how fast your investment is expected to increase. For example, if you are looking at a return of 50% on your investment, the price of a share of ABC purchased at Rs.50 has to increase to Rs.75, while the price of XYZ purchased at Rs.2500 has to increase to 3750. Since there is more demand for the shares of XYZ, the chances are that the price of XYZ will touch 3750 quicker than price of ABC touching 75. 

I learned these lessons about three years ago. While looking at my portfolio, I found that absolute value of my returns, for the same amount invested, was significantly and consistently high for the shares of companies like XYZ, (Large Caps, as they are called) than for the shares of companies like ABC (Small and Midcaps). To get a good absolute return in ABC Company, I have to invest significantly high amount of money in those companies and that was leading to increase in my Risk Profile. 

I also found that over a multi-year, large caps have given me positive returns irrespective of at what price I purchased the shares. I remember that I had purchased shares of a company at 1100 about 3 Diwalis ago, and price having gone down to 300 in the interim, it has climbed back to my purchase price.

And I received good dividends and one bonus in those three years !.

So friends, here is my advice. While investing in stocks, always focus on Return On Investment and never focus on the number of shares that you are buying.

Despite what Schumacher says, small is not beautiful when it comes to investing in stock market.

01 June 2014

Why Mrs.Preethi Malhotra will not make money in Stock Market?

Mrs.Preeti Malhotra (PM in Short) is my neighbour in my apartment complex. What with my work taking me away from home early in the morn and dropping me back close to naptime, I hardly get to meet my neighbors. However, the news has gone around that I know a bit about investing and is enthusiastic about giving free advice.
So I have somehow become the neighborhood investment consultant.
I hardly get to meet PM. The other day, I met her in the market.
"Hello Ram, good to see you here", says PM, "I was planning to meet you. Needed some advice on investment. I have about 3 Lakhs (300,000) to invest. I was wondering where I can invest.. What are my options?"
"Why don't you invest in Stock Market?", I ask an innocent question.
"Baap re baap, no, no. no...I don't want to invest in Stock Market. Last time I invested, I lost some money. I invested in a stock of Wipro at 700 and soon after it came down to 500. I sold it off and cut my losses", came the emphatic reply.
('Baap re baap' is the ultimate emotional statement of dislike for an Indian Lady. It loosely translate to 'Oh My God', and is normally followed by a negative statement.)
"But now the price of Wipro is 1500", I pointed out.
"Yes, but I lost money no?" came the irrefutable statement. Who can argue with that?
"Let me ask you something. What are you going to buy in this market?", I enquired, pointing around.
"I came to buy some vegetables-you know tomatoes, onions and other vegetables", she responded.
"How much do you think is the fair value of a Kilo of Tomato?" I asked.
"I don't know, may be around 20 bucks", she replied
"What if you find that the price is 10 bucks per Kilo? ", I asked
"Then I will buy 2 or 3 Kilos. It is difficult to get good tomatoes even at 20 rupees. So 10 bucks per kilo will be a flea market bargain", she responded
"What if the price is 50 rupees per Kilo?"
"Then I will cut down on tomatoes. May be buy a quarter Kilo", said PM.
"Now let us look at Stocks. What do you think is the fair price of the stock of ABC Company?" I asked.
"Considering their last quarter earning and the earning potential, I think 200 rupees is a fair value for the Stock,", PM replied.
"Suppose today you open the paper and see that the stock price of ABC Company is Rs 100, will you buy the share?"
"Of course not", PM replied, "I don't know why the price fell. May be there are some bad news about the fortunes of the company that is floating around that is bringing down the stock price. I will wait for the price to turnaround."
"Assume that it has bounced back from 100 to 200 (your fair value), will you buy now?" I queried.
"No, I won't. I think that I should have purchased it at 100, I feel that all the profit potential has been factored in. I will wait for it to come back to 100". She replied.
"What if it didn't come to 100? Instead it went up to 500, will you buy?" I persisted.
"I think I will take an interest in it. When it has come from 100 to 500, there should be some news about it that I don't know of. I will buy it. Definitely", PM responded
"And you will sell if, after you purchase, the price come down to say 400. This is what you did with Wipro." I pointed out.
"True, I will assume that I made a mistake and get out of the stock", she was categorical.
You see, right there, you have the reason why Mrs.Preeti Malhotra will not make money in stock market. When she buys a food item like Tomato, she has a fair value in mind and if the price is less than the fair value she will buy more of the same and if the price is high she will buy less. This is the typical Demand Curve.
The demand curve based transactions have been tested and perfected over 5000 years. It is the most effective way to buy anything.
Except, for some people, when it comes to buying stocks.
When the price falls lower than the fair value, they get afraid and do not buy the stock. Or they buy less. And when the price have gone through the roof, when everyone and their mother in law has made money in Stock Market, people like Mrs.Preeti Malhotra become greedy and will venture into the world of stock market.
It is the cycle of fear - greed - fear.
Smart people in the market are waiting for people like her to enter the market. Her entry into the stock market is a cue for them to exit the market. Their exit leads to market downfall, bringing down the price of PM's shares as well.
So PM lose her money in the stock market. This reinforces her perception that she is not good at investing in stock market.
Let us summarize our purchase experience of buying Tomatoes vs buying Stocks.
In case of Tomatoes, if the market price is less than fair price, buy more.
In case of stocks, if the market price is less than fair price, wonder what you are missing, become skeptical and fearful and stay out of market. After all who can tell when a crash is impending?
In case of Tomatoes, if the market price is higher than fair price, buy less.
In case of Stocks, if the market price is higher than fair price, wait for it to correct. However if the price still keeps going up, become greedy and buy at a high price.
And when the price falls soon after you buy the stock, sell it and book a loss. And congratulate yourself on having got out of market with minimal losses. Vow to never invest in stock market again. Become an 'Anti Stock Market Propagandist'.  After all you are the living proof that investment in stock market is a gamble and that the game is rigged and that you can't win the game.
What about people who made money? 
They must have rigged the market. Or have insider information. Or they may be just lucky.
"So PM, where are you going to invest your three lakhs?" I asked.
"I think I will invest in some Bank Fixed Deposit", replied the lady.
There is no way Mrs.Preeti Malhotra will make money in stock market !!.

29 May 2014

Book Review:On a clear day you can see India: Author: C Balagopal

Have you ever felt this?

You casually saunter to the library, with the intention of returning books that you had borrowed earlier, and you espy a small little volume, lying there on the table, with an eye catching cover...

You take it and see that it is full of text, reams and reams of it and you put it back on the table. Something pulls you back, the title perhaps, and you borrow that book from the library, sure that you are going to get bored in the first three pages and return the book in a day or two...

Yet another of those half read books of yours. Yet another waste of time....

That is what the author of this Blog (A Blog Grandly named 'Grow Together') felt when he saw me lying there on the table in the library. I am nothing much to look at. A book of medium size, I am filled with text in small font, written by a guy with good linguistic skills and a propensity to use grand words (For him the telephone never 'rings', it 'Trills') and who do not seem to realize that people talk in real life.

No dialogues in the entire me. None. Zilch. Nada. Nope

My name is 'On a clear day you can see India' and detail the experiences of Mr.C Balagopal, a junior IAS Officer who started his career as a bureaucrat working in the hills of Manipur. Mr.Balagopal is a very good raconteur (See, I am also using grand words !!) who like to build his stories word by word, idea by idea and text and more text. Mr.Balagopal (CB to his friends) lucidly expresses through me, various experiences that he had while working in various roles in his early career in the state of Manipur.

Like a passenger train chugging out of a station, each chapter in me starts off slow. While he was writing me,  after one or two pages into a new chapter, I used to wonder if there was a point coming up sometime in the next one or two pages. I can't blame the reader if she wanted to take a peek to the last few pages to see if something is going to happen eventually !!. Likes to start slow, does Mr.CB. Starts off by describing the mountains, the chill, the greenery, the people, his driver, his worn out jeep, his liking for 'Old Monk' rum...

If not the scenery, the chapter will start with a description of his office. Each chapter is one incident in the author's career. While writing me, the author is never judgmental. He writes me like a dispassionate albeit compassionate observer. No attempt to blame anyone. Author's love for the state and its people come through in each paragraph. The focus is on explaining events as they unfold, with an amused detachment and subtle sense of humour.

The title of the book comes from a passage in the first chapter. Mr.CB and his boss are standing on top of a hillock and his boss is showing him various places that lie in different directions. To the east, says the boss pointing in that direction, lies Burma. To the north lies Nagaland and Mizoram.
To the south lies the Central District and the South District. And there, to the west, my young friends, on a clear day you can see India.

My first four chapters details Author's experiences with his boss. In the first chapter, they go on an inspection of a 'Pineapple Farm' funded by Government funds, but no pineapples are visible anywhere. The author witnesses the tough side of his boss, who summarily suspends the SDO, who was responsible for signing on the 'Pineapple Farm', for waste of public property. In chapter two, the author talks of  Father Joseph, a catholic priest who is found admonishing the simple folks of his village with dire threats of god's wrath. The poor father was not spared of the wrath of the DC who gives him a stern warning not to go for that kind of propaganda again.

Chapter 5 is where I pickup steam as it were. From now on, the focus is entirely the author is on his own as it were. He gets his 'Posting' as an SDO of a District. He was there all of 29 days.

Some of the incidents that the author expresses are very amusing were they not ludicrous. For example, on his first day as an SDO, the author is sitting in his office and a gentleman named Peter comes to meet him. Peter introduces himself as the SDO of the district. Seeing the shock on CB's face, Peter gently explains that he is the SDO of the 'Revolutionary Government of Manipur'. Peter goes on to regale CB with various stories of life in Manipur and Northeast in general. 

Once Peter leaves, CB is abashed at the feeling of empathy that he felt in company of Peter.

In me you will find slices of life as a Bureaucrat. There is an amusing story of how a Chilly wind saved everyone from what could have been a disastrous clash with a group of protesting school teachers who were blocking the road to Rajbhavan. There are stories of authors role as a the Returning Officer of 13 constituencies, of author's role in a Magisterial Inquiry against CRPF and how some Malayali CRPF Jawans tried to influence him to provide a lenient view in the above case. There is a chapter on an evening in Manipur when he and his colleague went in the dark of the night to a dangerous village nearby in search of liquor, there is a story of countermanded election....

What have you...

The chapter on the extensive communication network setup in Manipur on a shoestring budget will warm the cockles of your heart. Knowing that there are competent people like Mr.Nair to man the Indian Bureaucracy is a very energizing thought. So will the story of the DC who nonchalantly stood up to the powers of the Chief Secretary.

Even bureaucrats are not safe in some parts of Manipur is illustrated by the story of an IAS officer who is arrested by the Police on charges of helping a couple elope. The couple belonged to different castes and ultimately it was found that it was the girl's uncle who helped the elopement !!.

I observed with some satisfaction that after some time I had become 'unputdownable'. This reader woke up in the morning, picked me up and started reading. He was reading me in his car on the way to the office, on his return from the office and at home while having dinner and on bed before going to sleep. I heard him chuckling to himself as he read the amusing parts of the book or even when admiring the excellent play of the words presented in the book.

My author, Mr.CB left the Services in 1983 to take up business. So he was not there when Manipur and the Northeast in general became the playground of Army and Politicians. Manipur became corrupt and came to be known as 'Money pur'. In the last chapter of the book, author laments about the steady decline in the condition of Northeast and wonder as to how the situation reached this pass.

Over all I am an excellent book. I have no doubt that the author of this blog will recommend me highly and encourage everyone to read me for the different perspective that I provide about life in Northeast, the excellent use of the language and the author's love of humanity.

Are there some areas of improvement in me? Of course they are. I am too 'Prose'y. Too much of text, too verbose. I have one news for CB. 

People talk.

I would have been more interesting if I was filled with more dialogues. And human stories. Most of the stories are work related anecdotes. I would have been more interesting if CB has told more about himself. His likes, fears, motivators, what keeps him going. Also I am far too detached from CB as a person. Apart from a sly mention of his father being a plantation manager, there is no mention in me of his family, about his childhood, about how CB came to be what he was.

The book is about Manipur. Author is highly focused.

Also too much talk of 'Paan' Chewing. It is almost as if everyone in Manipur is chewing Paan all the time. 

Please cut it out.

16 May 2014

How Nair sir handled the Village Bully...

Begin Story of Sajimon

Sajimon was the village bully in my native village.

This incident happened long time ago when one kg of onion used to cost 2 rupees and weight of the vegetables procured was far, far higher than the weight of the money given to procure them.

The village used to be shrouded in innocence. A poet might say that 'Nattakom' (our village) was where sun god pays his obeisance (not to confuse with Obesity) before proceeding to bring light to millions across the globe.

A more romantic poet will probably mention that Nattakom was the village where gazelles learned to frolic and swans learned love by seeing the loving couples who used to sit by the village stream and say sweet nothings in each others ears...

Just kidding. Ours was a regular, boring village where nothing happens, any time, ever...

This was the village where Sajimon roamed around as the village bully.

Always itching for fight, was Sajimon. Nothing good ever came out of his mouth. Always needling people, always wanting to fight (but backing off at the first sign of aggression from his prey), terrorizing the village maidens, speaking loudly and crudely to women making them cringe by his comments...

Sajimon was a bully, a class one at that...

( It is funny. In Malayalam language, 'Mon' is the affectionate term for a boy and 'Mol' is for girls. You will hare names like Sajimon, Shajimon, Sunnymon, Lizymol, Rosamol...)


Like any typical bully, Sajimon was bad at studies. Even with a very lenient educational system which tried to push and shove students from one grade (Class) to the next, Sajimon was like a snail, taking his own time to move from one class to the next. He spent two years in class 6, another two years in class 8...

One gets the point. 

People either avoided him or used him. Those who wanted to take revenge on others used Sajimon as a tool. Like a typical bully, Sajimon was always susceptible to manipulation. A well placed news about someone would see Sajimon extending his wrath on a mostly unsuspecting person.

This was Sajimon.

And then there was Nair Sir.

Nair sir and his family relocated to our village when Nair Sir joined as a Professor in a nearby Engineering College and was allotted a free accommodation by the college. He had two daughters Beena and Sheena. Beena was about our age (did I mention earlier that Sajimon was of my age? No? Must have missed it) and Sheena was about 3 years older. They also had a brother names Aji and a step brother named Gopi. 

Along with his wife, that completed Nair Sir family.

Though she was of our age, Beena was small and cute (In English Language, it is called 'Petite', I think). She was very pretty, with dimples as deep as Grand Canyon. In addition she had a faint squint (which made her pretty and mysterious, in my opinion) and Sajimon took a morbid fascination to her squint. Every morning he will stand in the path that Beena took to go to the school and bullied her about her squint. Every evening he bullied her as she returned from the school.

It was bad. It was only a matter of time before something gave.

That came one afternoon. I was sitting at home playing marbles and thinking things. Suddenly, Kosh, my childhood friend came all a'runnin. Panting like a dog, was Kosh, and his eyes bulged out like Google Glass. To say that he was excited and little scared would be correct.

Kosh was one of the minor recipients of Sajimon's bullying largesse. A minority shareholder, if you will. 

"Did you hear about Sajimon?", asked Kosh, all inhaling and exhaling laboriously (Panting, I mean). 

"What happened to him? Did he get religion?" I inquired, all sarcastic.

That was our fond hope. That Sajimon will one day get religion and realize the futility of bullying.

"No, no. Nair sir found him bullying Beena and caught him and tied him to a pillar in his house. He has sent for Sajimon's brothers to come. He want to discuss with the brothers before releasing Sajimon."

In a village where the only exciting thing that happens is when Pillachan runs after his chicken, to catch them of course, in preparation for afternoon repast, this was news.

Sajimon tied to a pillar. This was big news

Breaking news...

We kids went to see Sajimon. From outside the gate we could see Sajimon. And he could see us.

We gave him a sympathetic smile. He responded with a sheepish smile. As limp a smile as you can imagine. Tied to the pillar, Sajimon was as listless as a Pelican caught in BP Oil Spill.

But his eyes said it all. He was scared. He had seen the limits of his bullying. He had seen that power did not lay in shouting, rather power laid in quite firmness. Power laid in moral authority rather than loud sound. Power laid in deeds and not in words.

(Later his brother came and got him released)

From that day, there was a perceptible change in Sajimon's attitude. A few of our friends encouraged (needled) Sajimon to seek revenge on Nair sir by actively targeting Beena. But other than occasional shouting at night while walking in front of Mr.Nair's house, or an occasional long distance whistling as he espied Beena on the horizon, Sajimon was like a mouse when he approached Nair Sir's house. The pillar seemed to scare him.

And slowly his bullying tendency also reduced.

He had a series of failures since then. He failed class 10 multiple times. 

These failures can take a toll. They can either make you into a more vicious bully or as it happened in Sajimon's case, can mellow you and can even lead you to religion (this did not happen in Sajimon's case).

Thinking about those times, I still wonder. What if someone had given a good direction to Sajimon when he was growing up. In this case, he was unfortunate, that his family was not very educated and they did not have it in them to give a good direction to their kid. Sajimon had talent, it was obvious, but he lacked direction.

That is how it happens. That is life.

End Story of Sajimon.