Author: Growthfiniti@admin

“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 .

Currently, some of the discussion points out in the industry out there revolve around “Quality vs Value stocks”. I would like to weigh in with my perspective. The concept of quality is familiar. People make judgements about it every day. Yet articulating a clear definition of quality is challenging. Open most dictionaries and you will see a dozen or more sub-definition for it but none of which makes any reference to quality in corporate or investing context. One of the best explanation appears in ‘’Zen and the Art of Motorcycle Maintenance’’ that ‘’…even though Quality cannot be defined, you know what Quality is!’’ Quality investing is a way to pinpoint the specific traits, aptitudes and patterns that increase the probability of a particular company prospering over time – as well as those that decrease such chances.

As mentioned in the book ‘’Quality Investing: Owning the best companies for the long term’’ by Torkell T. Eide, Patrick Hargreaves & Lawrence A, Cunningham, ‘’Three characteristics indicate quality. These are strong predictable cash generation; sustainably high returns on capital; and attractive growth opportunities. Each of these financial traits is attractive in its own right, but combined, they are particularly powerful, enabling a virtuous circle of cash generation, which can be reinvested at high rate of return, begetting more cash, which can be reinvested again.’’ It is relatively easy to identify a company that generates high returns on capital or which has delivered strong historical growth – there are plenty of screening tools which make this possible. The more challenging analytical endeavour is assessing the characteristics that combine to enable and sustain these appealing financial outputs. While I remain watchful on the ongoing earnings season, we continue to maintain a positive bias in favour of quality and strong balance sheet stocks.

I dedicate this news letter to the learnings from Seth Klarman.

#1: Value Investing isn’t Easy

Value investing requires a great deal of hard work, unusually strict discipline, and a long-term investment horizon. Few are willing and able to devote sufficient time and effort to become value investors, and only a fraction of those have the proper mindset to succeed.

Like most eighth- grade algebra students, some investors memorize a few formulas or rules and superficially appear competent but do not really understand what they are doing. To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough.

Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don’t when they don’t. Value investing is not a concept that can be learned and applied gradually over time. It is either absorbed and adopted at once, or it is never truly learned.

Value investing is simple to understand but difficult to implement. Value investors are not super-sophisticated analytical wizards who create and apply intricate computer models to find attractive opportunities or assess underlying value.

The hard part is discipline, patience, and judgment. Investors need discipline to avoid the many unattractive pitches that are thrown, patience to wait for the right pitch, and judgment to know when it is time to swing.

#2: Being a Value Investor

The disciplined pursuit of bargains makes value investing very much a risk-averse approach. The greatest challenge for value investors is maintaining the required discipline.

Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds. It can be a very lonely undertaking.

A value investor may experience poor, even horrendous, performance compared with that of other investors or the market as a whole during prolonged periods of market overvaluation. Yet over the long run the value approach works so successfully that few, if any, advocates of the philosophy ever abandon it.

#3: An Investor’s Worst Enemy

If investors could predict the future direction of the market, they would certainly not choose to be value investors all the time. Indeed, when securities prices are steadily increasing, a value approach is usually a handicap; out- of-favor securities tend to rise less than the public’s favorites. When the market becomes fully valued on its way to being overvalued, value investors again fare poorly because they sell too soon.s

The most beneficial time to be a value investor is when the market is falling. This is when downside risk matters and when investors who worried only about what could go right suffer the consequences of undue optimism. Value investors invest with a margin of safety that protects them from large losses in declining markets.s

Those who can predict the future should participate fully, indeed on margin using borrowed money, when the market is about to rise and get out of the market before it declines. Unfortunately, many more investors claim the ability to foresee the market’s direction than actually possess that ability. (I myself have not met a single one.)

Those of us who know that we cannot accurately forecast security prices are well advised to consider value investing, a safe and successful strategy in all investment environments.

#4: It’s All about the Mindset

Investment success requires an appropriate mindset.

Investing is serious business, not entertainment. If you participate in the financial markets at all, it is crucial to do so as an investor, not as a speculator, and to be certain that you understand the difference.

Needless to say, investors are able to distinguish Pepsico from Picasso and understand the difference between an investment and a collectible.

When your hard-earned savings and future financial security are at stake, the cost of not distinguishing is unacceptably high.

#5: Don’t Seek Mr. Market’s Advice

Some investors – really speculators – mistakenly look to Mr. Market for investment guidance.

They observe him setting a lower price for a security and, unmindful of his irrationality, rush to sell their holdings, ignoring their own assessment of underlying value. Other times they see him raising prices and, trusting his lead, buy in at the higher figure as if he knew more than they.

The reality is that Mr. Market knows nothing, being the product of the collective action of thousands of buyers and sellers who themselves are not always motivated by investment fundamentals.

Emotional investors and speculators inevitably lose money; investors who take advantage of Mr. Market’s periodic irrationality, by contrast, have a good chance of enjoying long-term success.

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My financial literacy journey began when I was 28 years old. By chance, I met the girl of my dreams, and before I knew it, we were getting married. At that time, I was living in Muscat, Oman, and doing well professionally. However, every penny I earned was being spent. We decided to return to India in 1997, and I chose to pursue my Master’s degree. I joined Aditya Birla Capital in 2002, where my journey into financial literacy truly began.

Working in the toughest business within an insurance company, it was a privilege to lead the Group and Direct Marketing business, and later, the Wealth business. For me, the exhilaration of building these businesses from the ground up has been the highlight of my 33-year professional journey. I was fortunate to work alongside fantastic colleagues, some of the best money managers, and a power-packed leadership team.

My exponential learning, stemming from extensive reading and my experiences with companies like Modi Xerox, Canon, Aditya Birla Capital, and Emkay Global, can be summarized simply: Treat other people’s money as you would your own, and keep it straightforward.

Imagine going to a prospective customer for five years (yes, five years!), and during that time, they never do any business with you. Each time, they hear you out, and you attempt to address their next worry. Most people would give up at some point, but what if that was the only customer you had in your entire career? You wouldn’t have the option to give up. If your strategy is purely to sell your product or service, you probably won’t succeed. But if you focus on solving their problems, addressing their challenges, and understanding the impact, you might win them over.

If you get the model right, the rewards can be substantial, especially given the size of pension liabilities in India, which have soared to over $40 billion. This can make you think, especially when you’re interacting with some of the brightest minds in corporate India.

I developed a strong work ethic and became a saver and conscientious spender. Staying frugal in my early years helped me become debt-free and avoid credit card debt. (On a lighter note, credit cards are best used for collecting points!) Building financial security has always been a priority for me. Every month since I began working in 1989, I’ve saved diligently. I sacrificed in my formative years to afford a nice home, a car, and great holidays in my 40s. This practice continues to this day and has shown me the power of investing and compounding.

Growing up in a middle-class household that valued education, hard work, and integrity instilled in me great habits and discipline.

Having a personal finance plan is essential. COVID-19 has taught us just how much we value our lives. I’ve experienced some of the worst tragedies, including losing the love of my life to cancer in 2021. It’s never easy. There’s no guarantee that the plan you have is the perfect one—there will always be ups and downs, whether in your career or personal life. But you have to act; even an okay plan is better than no plan at all.

After working for these prestigious institutions, managing client investments totaling over $2 billion, and being answerable to thousands of customers with different risk profiles, mindsets, and goals, I’ve learned to develop bespoke solutions for diverse needs.

One of the greatest lessons I’ve learned from working with some of the brightest money managers is that “Wealth creators are built differently—they have the resilience to endure drawdowns and volatility.”

There are many approaches to investing—value investing, growth investing, net-net strategies, etc. But if your goal is to create wealth, there are no shortcuts. It’s a continuous process. More often than not, “Leaders create wealth.” It’s a simple concept, yet one that many struggle to grasp.

One day, a good friend might introduce you to their wealth manager. After completing your risk profile and the day comes to part with your money, it’s only natural to feel nervous about whether you’re making the right decision.

My own investments reflect my conservative approach, yet I remain proactive when opportunities arise. Reading is an underrated form of learning and wealth creation, and it has refined my understanding, giving me the confidence to manage my own money while helping others on their journeys.

In conclusion, whether you’re a professional, in service, in business, an entrepreneur, or an inheritor, having a second source of income and a solid financial plan is essential. I feel secure knowing I have my own financial safety net. It gives me more control over my life and future.