Investment Strategy

How much do I invest in stocks?

A very common question in the mind of new investors is how much do I invest in stocks? There can be multiple strategies to figure this out, but my favorite is by the method of goal setting. To understand this, let's look at two very simple & extreme investment strategies:

Strategy-1

How about all I have (all in)? Too risky, stock market is not a lottery game and should not be played like one. Rarely will you succeed. Most likely you will be taken out immediately by the more experienced players in the market. And being fully invested, you don't have a Plan-B. You are screwed :)

Strategy-2

Ok, let's play it very safe then and invest only as much as I can afford to loose completely. Good strategy? No, unfortunately meaningless. Remember you are not in stock market so that you can afford a family pizza outing every weekend. You are here to become rich, truly rich or even vulgar rich.

Show me with an example, what do you mean?

Let's say you are a master investor and can manage 30% CAGR on your investments. If you follow Strategy-2 and invest meager amounts, you will end up with meaningless profits. The table below shows what you get by starting with Re 1 at the end of 20 years at 30% CAGR. Rs 148.6. Will that change your life? For the same variables, if you start with Rs 1 lakh, you end up with approximately a crore and half. Sounds like a decent amount?

20 Year ROI Table at 30% CAGR (in Rs)

So Should I start with one lakh?

No, reverse engineer your requirement. Start with what you would like to have and by when. Assume a reasonable ROI of 20-30% (below this you are better off with fixed deposits and corporate bonds, above this you are fooling yourself. Miracles do happen but let's not assume it will). 

So let's say you need 4-5 Crores in the next 15-20 years, then what do you start with? simple.

So to conclude ...

Above example is purposefully simplistic to demonstrate one of the many possible thinking processes to figure out how much capital investment to start with in stock market. Practically in real life, you will have diversified investments spanning a combination of real-estate, gold, fixed deposits, mutual funds and stocks (maybe sheeps too, I mean anything you have a fancy for. I collect rough opals) and you would follow a systematic investment plan spread over a period of time with small installments invested periodically. But you get the idea, you are smart !

Above is a picture of a rough ethopian wello opal, beautiful isn't it?

Money trade-offs

I promise you, that you will be richer by the time you finish reading this blog :)

money is money .. but ..

time is also money
information is also money
health is also money
relationship is also money
heck everything is money ..

yet we spend most of our time worrying only about the paper money and metal coins. Ever wondered what we are losing then? What is the trade-off here? (everything is a trade-off, trust me) Unfortunately in a country like ours where money is practically worshiped, we grow up to be too focused on it and worry about it all the time. Immediate expenses, planned & unplanned expenses, month end salary credit, before month end balance debit, monthly bills, future expenses, family expenses, the list could go on .. Our salaries keep on growing and our worries keep on growing even faster, what's going wrong? I would recommend Srimad Bhagvad Gita if you really want to find out. But considering our materialistic existence, let's take a materialistic view at it for now.

Why am I discussing this? 

One of the most important deciding factor for success in stock market and investments is going to be based on how you deal with financial losses, which I will cover below and encourage you to keep an open mind. This topic is important but tricky. Maybe not applicable to everyone but surely to most of us. I think so, because I see many of my friends who are top bracket earners also worry over very trivial things when it comes to money matters. We are not poor, but we are too attached to money.
If you worry a lot about money and cannot handle volatility in your net savings, then stock market is not for you. But it need not be that way. Maybe our parents are to blame for this (for them, it is their parents). First we must stop this cancer of money-worries that we are living with for generations. For that we need to understand what money is? and what it means to earn or loose money? It means nothing, trust me. Once you understand that everything is money and there is nothing like earning or losing it, instead it is always a trade-off, you will probably stop worrying about it. I did, I hope you do. It took me a long time (several years) to get to this, but it is one of the most important things to learn before dipping into the money market.

Let's define money again

Simply put money is just means to exchange something I need with something you have. Remember the good old barter system? Paper notes and metal coins were just invented to standardize this exchange process. But I hope you realize by now, that we constantly exchange lot of things on a day to day basis and they do not involve any paper notes and metal coins. In-fact the exchange with paper currency forms a very small routine part of our day to day or lifelong transactions.
For example, a goodnight kiss between kids & parents is an exchange of expression of love, we don't use paper money for this, but it's a pleasant exchange. On the other hand, example of an unfortunate exchange could be, unpleasantness due to a bad trading day spoiling a lifetime relationship with a loving partner. You could have had the biggest loss of your life in a single day on a perfect bet (it's almost like the markets conspired against you), but you should be able to laugh it off without affecting any thing else that is important to you, for you. Don't trade away more important things for less important things. I want to cover this because I have seen many individuals & families fall apart once they get into stock market in a serious way, but are unaware of the traps that lie in there. It plays on your mind if you are too attached to it. Remember the horrible 2007-2008?. If not, don't get too obsessed about it but remember that it will happen again (bigger & uglier), so it is important to keep the trade-offs in mind.
Also remember that if ever you blame me for introducing you to stock market, I will point you to this blog. It is my big and elaborate disclaimer about stock market :)

Don't worry, I will not let you go down that path. In-fact hopefully I will be able to show you that you need not worry about money at all. Not only in stock market, but in life, in general. Money is the most silly thing to worry about. Remember you should not disrespect it, but you should not worry about it (worrying about it is same as disrespecting it, don't do it!). This is why I say, stock market is a way of life. All lessons that are applicable to stock market, are applicable to life in general. Interesting isn't it?

Money trade-offs in stock market

What do you gain by losing money in stocks? actually a whole lot! By experience, I hardly ever learn anything from my profitable trades, but I always learn a lot from a loss making trade. I make it a point to introspect on all my losing trades, figure out what went wrong and then follow it up to the end and turn it around. It helps me refine my trading, avoid making similar mistakes in future, and even spot new ones without falling for it again. For me trade-off in stock market is simple "profit vs experience" and trust me the losing trades are dearer to me than the profiting ones. In-fact I believe that for the first two years in stock market you should experiment a lot to learn about the game without worrying about profit or loss. You should be happy even if you are losing money in trades but gaining great market insights from it.

How do I stop worrying about money? 

Best way to stop worrying about money, is to practice losing small amounts of money and not worrying about it (train yourself, practice makes man perfect). Start with simple things. Don't worry about auto rickshaw charging you 20 bucks extra, he should have not, but if there was no other way and if you saved time instead then that's a great profitable trade-off of time vs money, think about utilizing that extra time well. Don't worry about the bank giving you a dollar conversion rate of 64.2 when actual rate was 64.45, focus on what you want to do with what you have in hand. Don't worry about petrol being more expensive by Rs 2 per liter, it helps reduce the subsidy bill for your country which is anyways taken out of your hard earned income as tax and can be used for other development activities. Don't worry about paying Rs 2 per kg extra for potatoes & onions, let the farmers earn a little extra, it builds a stronger foundation at the bottom of the pyramid and the benefits will reach you through several indirect channels. Give away some money for charity and feel good about it, here the trade-off is "blessings & luck vs money" and it is a highly profitable one again. Effectively get rid of that inherited middle class mentality (may not be applicable to all), stop focusing on savings and start focusing on earnings.

Get rich immediately .. now!

Once you realize that you have so much more money than just some number in your bank account, you are immediately a lot richer ! Learn to be detached from paper currency and metal coins. Learn the trade-off's in day to day life. Get rich in your mind by getting rid of your money-worries, material riches will follow easily. A worry free mind will help you make wiser trade-offs and you will grow richer everyday by gaining on what is more important and losing a little of what is less important (net gain, remember baazigar? kuch paane ke liye kuch khona padta hai .. very wise ..).
If you can do this, you are ready for my next blog and almost ready for stock markets. I promise, my next blog will cover actual stock picking & investment strategy, till then good luck on practicing losing money without losing your mind.

Do let me know if the trade-off between the time spent on reading this blog vs anything you got out of it was profitable or not?

Low Risk High Return

High Risk High Return

To understand "low risk high return" first we need to correct our understanding of the most misunderstood principle of investment and that is "high risk high return". I am not sure how many lives have been screwed because of misinterpretation of this basic principle, but I am sure it is a pretty high number and practically the single largest cause of all bad investment decisions.
So am I saying that "high risk high return" the term that all the qualified investment advisers of the world use to scam poor investors and sell them junk investment schemes, is completely wrong. No, but it needs to be understood in proper context.

What context?

Fixed deposits vs stocks

If you are comparing investment in stocks to investment in fixed deposits, then yes "high risk high return" is absolutely true. You can earn higher returns in stocks by taking higher risk of investment loss compared to fixed deposits which is a fixed return instrument and very low risk.

Stock-A vs Stock-B

But the problem happens when you apply the same logic, to compare investment in Stock-A with investment in Stock-B. In this case Stock-A is a good quality stock with credible management, rock solid business, predictable income & good growth, offering stable returns and consistent dividends year after year. Stock-B on the other hand is a penny stock, with a management you never heard of, running some business that is worth a billion dollars but you never saw or used its products, income is expected to double / triple every year, and as far as returns are concerned, this stock is your ticket to the millionaire club by putting in just a few thousands. Soon all your dreams are going to come true and you will never have to work a single day in your life! And the best part, for some great reason you are among the chosen few who came to know about this stock in a market full of expert bargain hunters, an undiscovered gem. You understand that there is high risk in this investment but hey "high risk high return" right ? WRONG.

Why choose Stock-A?

If you choose Stock-B for investment, this is exactly where things go wrong. This is exactly where "high risk high return" is absolutely wrong and guaranteed to bring you misery. This is where "low risk high return" becomes true and "high risk high return" becomes completely foolish. You should have invested in Stock-A instead of Stock-B and you would have made a decent return for yourself. It will not make you a millionaire overnight, but remember, STOCK-A WILL MAKE YOU A MILLIONAIRE (by power of compounding, a separate topic).

Moral of the story

When comparing equity investments with fixed deposits, "high risk = high return". When comparing Stock-A with Stock-B "low risk = high return". SIMPLE. MIND IT!

Retirement Planning

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One Crore Retirement Plan

A stupid retirement plan

First the stupid part ...
Everyone has a retirement plan and usually it is linked to some amount of accumulated wealth. I will retire once I accumulate one crore, and so on. One crore retirement plan is the most stupid and unfortunately also the most common plan. So is two crores for retirement a better plan? No, it is equally stupid. How about ten crores for retirement? equally stupid.

Why stupid?

There is a fundamental flaw in the one crore retirement plan. Earning money is tough, accumulating wealth takes a long time but losing money is easy and takes no time at all. One, two, ten crores might sound like a big amount, but is very small when you consider how easily it can be lost. To list a few, family emergency, health emergency, failed business venture, failed partnerships, loss in risky assets, real estate & land deal delays, legal entanglements, cheating & fraud victimization, heck even basics like healthcare, marriage, parenting and education. And then the unknowns, from sinkhole under your house to WWIII and what do you think will be the cost of a bottle of drinking water twenty years from now? (If you don't believe this, read about Amitabh Bacchan and his ABCL Corp venture)

An ideal retirement plan

Second comes the better part ...
What is a good retirement plan? Well, ideally you should never aspire to retire until you expire. But there is a  problem here too, our skills will not always be relevant to the industry and our health will not always be supportive. So what should one do?

A practical retirement plan

Third comes the bitter, better part ...

One should always focus on building perpetual streams of income instead of savings. It could be anything, room rentals, royalty payments, ad income from popular websites, compounding investments, ebay shop, art & hobby, snack shop, gardening & farming, e-commerce, freelance photography, writing, coding, anything that interests you. It's important that it should be something that you enjoy doing, so that you can happily do it forever as long as you live. You should be passionate about it, so that it does not seem like hard work. You should get a "life is good" feeling while working on it and you should feel proud when you think about what you are doing.

Plan well before you start

Ideally look for things that are independent of location. If you want to go to Shimla or Alaska for retirement, it should not disrupt your perpetual income source. Look for something that is fairly automatic and does not require too much manual labor and time. If you are unwell for sometime, it should not disrupt your perpetual income source. Look for something with minimal dependencies, it means fewer things that can go wrong. Try to build multiple such sources. If one or two things go wrong temporarily, it should not disrupt your perpetual income source. Don't start with a grandiose plan that can have a high cost of failure, start with something small and scale it up if it works. It should be perpetual in nature, small and continuous income spread over a lifetime is much better than one big income followed by nothing. It should be renewable. At any point of time if you lose everything you earned until that day, you should be able to start all over again without any worries. If you have expertise in your domain, it will be easy for you to rebuild. If you choose something you enjoy and do it for a long time, you will develop the expertise needed.  It will test your patience, but have patience. Don't quit your job, most jobs offer a decent social and intellectual environment (besides career, money, blah blah) and is good to be engaged with, as long as feasible.

A good time to start 'no retirement' planning

Start early, start now. It will take time. But you will be happy in future that you started this today. Best of luck and happy retirement free life !