Author: Growthfiniti@admin

As dramatic as it may sound but its the truth our relationship with money can shape our financial destiny for the good or the bad.

Money impacts us in many ways. Becoming financially self aware is a starting point to financial wellbeing and freedom. Companies or individuals laden with unmanageable debt, who’ve been careless with “nothing will happen” attitude and when things go awfully wrong are stuck at the wrong end, of course not everyone’s intention can be questioned but one has to plan and be more judicious, its not free money after all, debt has to be paid back. Reason this with the smart individuals who have an amazing ability to pile on debt and build a fortune and yet be able to pay it back on time.

I have come across several personalities in my career. I will put them in 5 buckets.

THE SAVER : Your motto is to buy everything cheap. You wait for the best discounts. , queue up in a mall or their favourite store if there’s a fire sale. You are conscious to turn off the lights when you leave a room. So if your the saver then start investments mostly in favour of a balanced nature.

THE SPENDER : You love hitting the bar the day the salary is credited. When I was in Oman the malls used to be crowded with expat (foreign) wives every Thursday afternoon and I used to wonder why. I realised that their husbands salaries were paid every week on Thursdays. You enjoy the best latest of everything. Spenders drive themselves from a FOMO (Fear of missing out) and just the joy of spending what they earn. Breaking this loop is hard. So if you’re a spender start investing small monies and make this an habit. This will help rein urges to spend. For heavens sake , don’t live on “Buy now, Pay Later”

THE DEBTOR : Unfortunately, You spend more than what you earn. That means borrowing more and more to sustain spending. You live on credit cards. Someone I knew was in the habit of borrowing at 5% interest per month, this is insane, desperation. This happens because your credit scores are poor and you have no option but to visit what I call the “shark lenders”. You need to start creating a budget and make a list of purchases that are completely avoidable or can be postponed. Save, Save and Save and pay off your debt before you even start investing. You also need to keep working on your skills and performance to keep earning higher every year.

THE IGNORER : You re someone who ignores your personal finance and find it too difficult to deal with the subject. More often than not you have no idea on your finances, this doesn’t mean that you don’t have the money, buts it’s so boring a subject that you want to take it easy. One possible factor is lack of knowledge or anxiety about making choices and taking difficult decisions. The first step is to have the knowledge in becoming aware of how much money is coming in and where is it going, having this knowledge can be the first step in building great habits. The second step is to find a trusted wealth advisor who can fix this for you. And finally….

THE INVESTOR : You have a clear picture of your financial situation and are actively working towards financial independence. You spend far lesser than you earn but more importantly unlike the saver you invest. You love putting money to work. However one caution here is don’t leverage, you may just go from being an investor to a debtor. Investors are in general well off, they have more options for financial choice and freedom. That said if you identify yourself as investor then congratulations you’re on the right track and the benefits should notch up over time.

The key is to know your strengths and your blind spots. Folks who come for advice , I always ask what does money mean to you and what is it about money that gives you sleepless nights. Recogising this will help you understand what stage you are at and ultimately find you a path to better financial outcomes. If you liked this newsletter do share it with your family and friends , you may write to us at info@growthfiniti.com

“I am a brain, Watson. The rest of me is a mere appendage”-Sir Arthur Conan Doyle. Thales of Miletus was the founder of the school of natural philosophy, a contemporary of Aristotle and one of the seven sages of Ancient Greece. Tasked with inscribing short words of wisdom onto the Temple of Apollo at Delphi, Thales was asked what the hardest and most important task of humanity was, to which he replied, “To know thyself”.

He was then asked the inverse and replied that “giving advice” was the the thing least profitable to humankind but that came very easily. Unfortunately for investors, Dalal Street has done a great deal of the latter and very little of the former, sometimes with disastrous consequences. Fortunately for you, we are going to make that right here and now. If knowing oneself is the sine qua non of successful investing, there is no better place to start than the seed of knowing – the brain.

In an effort to to understand how the brain processes , measuring the brains activities of participants as they made a series of choices with either immediate or delayed monetary reward. The ventral stratum . Medial orbitofrontal cortex and medial pre-frontal cortex were all used- these are parts of the brain implicated to addiction and impulsive behaviour.

The prospect of an immediate reward provided a flood of dopamine that respondents found hard to resist. Choices among delayed rewards, on the other hand, activated the pre-frontal and parietal cortex, which are parts of the brain associated with deliberation. Our ability to control short term impulses toward greed are limited and that we are more or less wired for immediacy. Our brain is primed for action. In an effort to isolate the parts of the brain implicated in making the sell and hold decisions, researchers placed participants in two groups with different market conditions and then mapped their brain using electroencephalogram technology.

Group one began in a market that showed steady positive growth and Group two was placed in a more volatile market. After the participants spent some time the roles were reversed. What they observed next was fascinating and surprising. People used different parts of their brain to make future investment decisions based on their early experience with the market. Those in group one who had started with an orderly , predictable market organised their brain activity to create rules and search for universally applicable principles. Conversely, those who began in the more chaotic conditions utilised entirely separate parts of the brain to cope with the volatility of their market. Since the volatility of the market did not lead itself to the formation of an consistent rule, those in group two learned to make situation decisions and this improvisational style carried over even to the calmer market. They were effectively scarred by their bad experiences in the market and were never able to fully search for rules and best practices, even when they became more available.

Possibly, one of the greatest books ever to be written about Investing is the classic “Security Analysis” by Benjamin Graham and David Dodd. This thesis is as relevant today as it was in 1934 when it was first published. The book begins with a couplet from the poet Horace, which goes like this “Many shall be restored that now are fallen, and many shall fall that now are in honor” Nothing explains the concept of “reversal to mean” better than this. Everything in the stock market has its normal trajectory. If some stock, or sector does extremely better than its normal trajectory (or extremely worse), that should trigger an investment decision that bets on the phenomenon of reversal to mean.

For a 10-year period April 2003 – April 2013, the BSE Sensex (a large-cap index), The BSE Midcap Index and the BSE Small Cap Index had a compounded annual growth rate (CAGR) of 20.7%, 20.9% and 21.0% respectively. But from April 2013 to Mar 2022, the CAGR returns for all the indices have been lower. Now, there are points that favour a higher expectation of growth from smaller companies. From a smaller base, their percentage growth can be higher than very-well established companies, but there is a limit to which one can expect the higher trajectory of growth to continue, and the valuation levels of such stocks, in comparison to their own history of valuation, is a good indicator of such expectations. Besides this, the extent of volatility exhibited by stocks of smaller companies is higher and the extent of liquidity provided by them is lower, and both of these points must be borne in mind while deciding upon overall asset allocation.

No investor can precisely estimate the exact date in which the reversal to mean would occur. When valuations of portfolios begin to hit higher and higher levels, we believe it is better to err on the side of caution and more into portfolios where the level of valuation is not exorbitantly high. This strategy provides a better protection in terms of a sharp downturn in portfolios.

As distressing as the past year has been, most balance sheets have survived more or less intact. But even if your finances are still healthy, take note, amidst the ups and downs and twists and turns of the economy and stock and bond markets – plus all the other forces that buffeted your finances – there are lessons that could help us make better decisions the next time calamity strikes.

Building wealth helps us reach our goals as well as setbacks. Stock markets corrections and bear markets , recessions, health emergencies, job loss etc are here to stay. An honest assessment of whether we should allow emotional, psychological or other behavioural miscues to nudge us to make money or regret such as exiting the stock market low and missing the rebound. We are not wired to easily make rational decisions when our fear is through the roof. Mistakes are learning opportunities that put us on track to accumulate even more wealth.

Here are 7 tips that will help you building & keeping the wealth :

STICK WITH EQUITIES Equities is a volatile asset. What if we make volatility our friend. We can’t control market moves , but we can control ours. The NIFTY 50 over the past 25 years has given a CAGR return of 11%, however, high quality business’s have yielded far higher. Its always a good idea to find such underlying business’s and stay with them. Here is an example of one of the oldest funds with a 25 year track record , a systematic investment in one of the oldest Flexi Cap fund of just Rs10000 has yielded in a corpus of Rs8.74Cr with a annualised return of 20.58%. Let’s accept we all Rs10000 a month for investing, its just that we weren’t disciplined about it. So investing for the long term helps.

SPREAD THE WEALTH AROUND Another lesson for investors from the pandemic . the Ukraine War, is that Mr.Market is unpredictable. And that highlights the importance of having a diversified portfolio. Diversification won’t protect you from losses but it will smooth out your ride in the long run. Start with an asset allocation plan , decide first up how much you want to hold in stocks, bonds, global funds, real estate , gold etc. A portfolio for a moderate risk investor with a 10 year horizon can fold 40% in bonds, 50% in equities, 10% in cash.

PUT MORE MONEY INTO SAVINGS As a child we had a piggy bank. Consider your savings account as one. Every month the idea is to save first and spend later. This I think is the most powerful idea. Compulsorily on receipt of any compensation at the start of the month, watch all the expenses prudently. The endeavour is to postpone unnecessary expenses. The money saved is reinvested in equities while we start with the month new & repeat the cycle again. I have done this all my life.

TAKE CONTROL OF YOUR DEBT We generally avoid debt. Having a credit card debt is the worst debt to have. One way to reduce the credit card debt is to find and transfer the balance to a lower rate card. As a thumb rule I prefer all the other EMI on mortgages should not exceed 30% of your post tax income. Form a contingency plan at least have 12 months of your month expenses in a liquid fund. There is often a temptation that if the markets are doing well then let me not pay off my loan and enjoy the market ride, this I believe is an event awaiting a disaster, in the last 13 years we have had two occasions where the markets have crashed 50%. It needs to go up 100% for your to get to the starting point. I don’t want you to be in that situation, so all lump sum gains like bonuses, incentives etc should be used to pay off the loans. The earlier you get debt free the earlier you get to invest with a relaxed mind.

RECHECK YOUR INSURANCE Insurance doesn’t help you build wealth but it helps you protect assets. Without an adequate coverage any emergency will decimate your savings. A general thus rule, A life insurance cover of 5X your nett income , a health insurance of 10X your nett income & a critical illness rider of Rs50lakhs is the least you can do for your self & your family. (Please contact your insurance advisor for a plan specific to you). Also just stick to a term plan and do not fall for any traditional insurance, money back etc plans. Most likely the guys who sell you these insurance plans won’t buy them.

STICK WITH YOUR ADVISOR Consulting a pro (like me “:-)) to help you make important financial decisions either on an ongoing basis or when major decisions loom – can help you avoid mistakes that could cost you down the line. The key point here is the advisor needs to have your interest as first then everything else.

PROTECT YOUR LEGACY The pandemic nudged a lot of people to take action on an estate plan. Most of us leave without a will or a estate plan. Having an estate plan is important for everyone and it’s crucial as you approach retirement. You tend to have more assets at this stage of your life and you’ll want to be certain that your spouse and your children will be well taken care if anything happens to you.Without a will state law will dictate distribution of your assets. Succession requires probate if a will is existing which is time consuming. You can avoid a probate by setting up a trust, the most common of which is a revocable living trust. This is helpful incase you have a specially challenged legal heir. An estate lawyer specialising in all this will be of immense use .