Money Mantras….(4)

I’ve sent earlier 3 mails on pearls of wisdom from Warren Buffett. I’m planning to continue to do the same. However from now on, I’m also planning to include other great investment masters like Charlie Munger, Peter Lynch, Benjamin Graham, Philip Fisher, Sir John Templeton etc. in my series of Mails on the above subject. Hope you would all find this series insightful, enjoyable and rewarding.

 

1) Investing is simple, but not easy- Warren Buffett

 

2) It’s true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard. – Warren Buffett

 

3) In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm, thinking that its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond – Warren Buffett

 

4) Somebody once said that in looking for people to hire, you should look for three qualities: integrity, intelligence , and energy. And if they don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without the first, you really want them to be dumb and lazy. – Warren Buffett

 

5) Money, to some extent, sometimes lets you be in more interesting environments. But it can’t change how many people love you or how healthy you are- Warren Buffett

 

6) We like pessimism because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.- Warren Buffett

 

7) I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing. – Warren Buffett

 

The stock market is a no-called-strike game. You don’t have to swing at everything–you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum! – Warren Buffett

 

9) I quickly convinced myself that the true key to happiness lay in a modest standard of living which could be achieved with little difficulty under almost all economic conditions. – Benjamin Graham

 

10) There are two times in a man’s life when he should not speculate – when he can’t afford it and when he can – Mark Twain

 

(Originally drafted and sent on 25^th November’08)

Perils of trading in stock market

Stock Market is a giant casino.

 

Surprised that this statement comes from an investment advisor who invests in stocks and equity funds and who also advises clients on the same. Let me explain.

 

More than 90% of the people in stock market treat it as a Casino and so it gives results accordingly to them. In a Casino, who earns? As you are aware, Casino is a zero sum game. The only guy who earns consistently in a Casino in none but the Casino Owner. Likewise since most of the people in stock market treat it a like a Casino, the only guy who consistently earn here is none other than your stock broker who keeps providing you almost daily trading tips.

 

If 90% of the people in market only continuously speculate and trade in market and end up loosing money in the long run, why are they doing it? This is similar to why someone is a smoker or alcoholic or drug user knowing fully well it is injurious to health. The answer is addiction! Like wise, for the speculators and traders in the market it is an addiction for continuous action. This continuous action only makes their adrenaline flow.

 

That is why the world’s greatest investor Warren Buffet says ” Never ask the barber if you need a haircut. There’s very little money to be made (by a broker) recommending our strategy of buy-and-hold.Your broker would starve to death. Recommending something to be held for 30 years is a level of self-sacrifice you’ll rarely see in a monastery, let alone a brokerage house.”

 

As Personal Finance legend John Bogle points out,the way to wealth for the stock brokers is to persuade their clients and say ” Don’t Just stand there. Do Something”. But the way to wealth for the clients is the opposite maxim

 ” Don’t do something. Just Stand there.” This is the only way to avoid playing a looser’s game.

 

Stock or an equity mutual fund is not a lottery ticket. It means that you are part owner of a corporation (as in the case of stock) or corporations (as in the case of equity mutual fund). Roughly only 10% of the people who are involved in the market think on those lines. They are not worried about every day stock price movements. All they care is whether they are invested in a company which is continuing to grow or invested in a diversified fund which is a consistent performer and is able to beat the Benchmark returns. Their typical investment horizon is 10 to 20 years or more and the barest minimum period they look for  equity investment is 5 years. Only this 10% would have earned the annualised return of 18% provided by the Sensex in the past.

 

For a trader, few weeks to couple of months itself a long term and for an investor, as I mentioned above 10+ more years is only long term.

 

Please read the book ‘Fooled by Randomness’ by Nassim Nicholas Taleb. You would get more insight on the issues I’m speaking above. Less than 5% of the traders ever make big money in the long run and the remaining 95%  are complete loosers. If you are a long term investor, in a growing economy like India, the chances are almost close to 100% that you would make good money in the long term.

 

Would you want to be an investor or trader? Would you want to be in the 90% loosers category or 10% successful category?

 

I want my clients to be in the 10% successful category who makes good money in the long term, who do not worry about short term volatility, do not track the stock prices and NAV on a daily basis and see where one stands. Once you a take a short term perspective greed or panic would set in and you would end up being like a casino player. Market rewards people with patience and extreme emotional discipline. But be sure that the reward is worth the wait.

 

But we should also be thankful to these speculators and traders. Because of their greed and panic they keep providing us periodic opportunities to keep rebalancing our asset allocation and build our wealth. To explain, you should always follow an asset allocation. How much of your financial assets you want in Equity (Shares, Equity Funds) and how much in Debt (FDs, Postal deposits, Debt Funds etc.). When due to their greed speculators keep raising the shares to the extraordinary levels, your equity as a percentage of financial assets would go up. Then book some profits and put more in debts. When due to their Panic when speculators sell heavily and stocks are available at dirt cheap prices like now, your equity as a percentage of financial assets would go down. Then move a portion of your debt into equity by investing in shares / Equity Mutual Funds. This has been put more succinctly by Dhirendra Kumar in the following paragraph. 

 

“One of the more interesting ideas in asset allocation is to change the balance according to market conditions. The concept is that over medium to long terms, equity markets inevitably move in cycles. There is a part of the cycles where equities are clearly underpriced and there are parts of the cycle when equities are clearly overpriced. In the former, one should give more weightage to equities and in the latter, less weightage. Then, as the markets go through their cycle, the investor will be best able to capture an optimum level of safety with that of returns.”

 

By the suggestion I’ve mentioned above, you may not get the maximum returns from the market, but would definitely get a very decent return with optimum level of safety.

 

I’m a champion of long term ( 10 to 20 years) investments in markets especially through SIP (Systematic Investment Plan). As your corpus in SIPs keep growing and once exceeds the asset allocation ratio, we can continue to rebalance your asset allocation by infusing the fresh money into debt funds. For people who do not have fresh money to infuse at that time, a part of the equity holdings can be sold / redeemed and moved into debt funds.

 

There is no point in reviewing asset allocation too frequently. Some people even look at it daily !!!. Once in a year is sufficient to review and rebalance the asset allocation, if required. Considering our tax laws, yearly rebalancing would be more tax efficient too.

 

So please be an investor and not a trader. Then you would never fail in stock market and would end up building a substantial wealth.

 

As I indicated above, it needs enormous emotional discipline to be an investor. I wish that all of  us develop the same and reap excellent rewards which Indian stock market is waiting to offer.

 

(Originally created and mailed on 24^th November’08)

On a brighter note……

Couple of days ago I was having a discussion with one of my client and we were lamenting as to how the previous central government gave lot of thrust to developing infrastructure, especially roads whereas the present government is not prioritizing infrastructure. In fact, the last government laid more roads and highways  in 5 years than what was totally laid in the first 50 years of Indian independence. Their focus on infrastructure and sowing right seeds paid off when current government assumed power resulting in 9% GDP growth every year. After reading a Bloomberg report yesterday, now I’m convinced the good work which began earlier by the past government is being continued by current government too. As per Bloomberg, the 100 kilometers (62 miles) of rural roads that India is adding each day may save Asia’s third-largest economy from the worst of a global recession. Please read the full article below.

 

“After national highways, the Indian government’s effort to provide all weather road connectivity in rural areas under the Pradhan Mantri Gramin Sadak Yojana (PMGSY) is beginning to bear fruit. It is finally triggering off meaningful socio-economic transformation and rapidly opening up new routes for growth. Quite literally! As per the government body, rural roads are the biggest contributors to poverty alleviation and an investment of Rs 10 m in roads carries the ability to lift 1,650 people above the poverty line. Also, rural connectivity has the potential to add to domestic consumption, which makes up 55% of India’s economy, compared to 37% in China.

 

As per Bloomberg, the 100 kilometers (62 miles) of rural roads that India is adding each day may save Asia’s third-largest economy from the worst of a global recession. New roads built so far under the US$ 27 bn program have brought urban markets within reach of 60 m village dwellers over the past five years, letting them earn money selling fruits, vegetables and milk that would have spoiled otherwise. These villagers are now spending their cash just as the world economy falters. Particularly because they not just have the roads for commuting to the markets but also extra income during the non harvest season due to the employment generation schemes.

 

Spending on the road project by the PMGSY was about 5% of GDP in 2007. A vision statement for 2025 drafted by the Ministry of Rural Development estimates that the investment needs to increase from current levels to US$ 8 bn a year until the 14th Five Year Plan (2022-27). Given the Finance Ministry’s estimates that inadequate capacity can shelve two percentage points off the nation’s growth each year, the emphasis on rural infrastructure seems undeniable. “

 

(with Inputs from Equitymaster)

 

(Originally drafted and mailed on 21’st November’08)