 "Revealing the 100X strategy: The ultimate instrument of wealth creation")
For most Indians, investment means buying gold, land and real estate. The middle class, especially, has a strong affinity for gold as an investment. A lack of financial literacy prevents most people from managing their money smartly and growing it. Even the education system does not include financial literacy in any significant way—it is all oriented towards engineering, technology and science. Even those who study finance end up simply earning a salary and investing it in fixed deposits, gold and real estate. Fixed deposits or FDs are the best alternative to gold, land and real estate for Indians. Most people are vehemently in favour of FDs in which, they believe, they can make a lot of money. They are thus surprised to discover that the bank only insures the first 5 lakh (DICGC) in FDs. In real estate and gold, the insurance is that these asset classes are tangible and have physical form. The stock market cannot be touched and felt for assurance and so people think it is risky — it is this misconception that makes people wary of investing in it. The asset class that has really created wealth in any country is the markets. If someone had invested Rs 1 lakh in the Sensex in 1998, it would have grown at a CAGR of 13.7 per cent to Rs 19.3 lakh from 1998 to 2022, while other asset classes grew at lower than 10 per cent CAGR in the same period. Learn, and teach your children about appreciating and depreciating assets. The sooner they learn, the lower the chances of them dying poor.
Most people who have grown up to adulthood in the past few decades have not lived life by their own wits. They live as per society’s expectations. They buy homes, cars and expensive phones to show off. The smartest people take decisions wisely and they never buy expensive things to impress others. Starting early, even with the smallest amount, leads to unbelievable benefits. Less time means more panic, more churn, more mistakes—the later one starts the investing journey, the more returns one needs to generate to meet the end goal. If a person who needs Rs 10 crore as a retirement corpus at the age of sixty starts investing at the age of fifty-five, they would need to save and invest a whopping Rs 10 lakh per month for the next five years and the money would have to compound post-expenses, post-tax at the rate of nearly 19 per cent. On the other hand, by saving just Rs 6,000 per month for thirty years, and if one’s wealth compounds at about 19 per cent, one can comfortably achieve a corpus of over Rs 10 crore. It is true that 19 per cent is too ambitious considering that Nifty or Sensex, including dividends and corporate action, compounds at about 14 per cent over longer periods. Thus, even if one consistently, and in a disciplined manner, keeps investing Rs 18,000 per month just into Nifty, the corpus will hit the Rs 10 crore mark. This is common knowledge; even an Excel formula can compute it easily. What is not known or not realized is the elasticity of expenses and the inelasticity of income—income increases at a slower rate than expenses.
In middle age, when that person gets married and plans to start a family, expenses multiply while income remains the same, with lower chances of a significant jump, as time needs to be divided between family and work. On the other hand, when a person is single, they have more time in hand to work, and work hard, to get bonuses and incentives and with relatively lower expenses. Thus, if one builds the habit of saving and investing from a young age, the rest of life will turn out to be relatively easier.
The habit of having an appreciating asset or a depreciating asset
As businesses grow, owners and employees both make more money through bonuses and salary hikes, but these bonuses and salary hikes usually lead to higher expenditure than a rise in sporadic or windfall income. When there is a windfall income, the tendency is to buy a depreciating asset like a vehicle or spend on discretionary items, which only results in incremental expense for today and for the future as well. A simple example is purchasing a high-end car with a bonus. One is comfortable with the car one is using but due to this windfall, one upgrades the car and buys and expensive one. The new car exhausts all potential savings and investments that could have led to the growth of the corpus, and wear and tear and repair in case of accidents or damage mean that the future expenses are also poised to jump, thereby reducing the percentage of savings further. Another common example is getting the walls of one’s house covered in fancy wallpaper. The walls of the house are in good condition but remain the same in colour and appearance. The wallpapering is more to have something new and exciting in the décor than for any utility. The wallpaper peels off after a year or so, need to be replaced and are four or five times more expensive than painting the house. This onetime expense, made for ‘status’, becomes a recurring expense of the future.
Once the habit of overspending sets in, shedding it becomes a challenge and is a very painful process that is connected with the psychological concept of deprivation. Thus, the elasticity of expenses is always higher while income is relatively inelastic. So, a jump in income should never mean a jump in expenses. On the contrary, a jump in income should mean increase in savings and investments.
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Abstract yet essential traits necessary to win in investing
Successful investors have written a lot about cognitive biases—some say ten, some say thirty and some say fifty. The list is long and can be looked up easily. Most know about these biases but fall into the same traps anyway. We are wired to choose the easier path and our cognitive biases lead us to those traps, perceived shortcuts and quick fixes, to meet our challenges. What can combat cognitive biases is muscle memory, or, simply put, habits. Habits are the reasons why those very few who flourish realize their peak potential. Good habits, once formed, often save us and help us move ahead. The formula for this is called PCR Matrix.
Patience: This seemingly simple attribute is actually fairly complex. Most believe the meaning of patience is the ability to wait. However, the key is the ability to wait without getting apprehensive, anxious or annoyed, yet keeping the goal in sight and continuing to prepare to reach it. Patience is generally lost if there is a lack of information or information asymmetry. This is where due diligence and notes made during diligence come in handy. When the mind gets vulnerable with impatience, the notes remind one of their beliefs and convictions with which one started. Almost all fund managers and investment houses have notes about investments, popularly called ‘investment thesis’. The irony is that generally, no one looks at these when things start to go south. People start looking for the latest piece of information, which then supersedes all prior knowledge gathered. This is how the world works—the last quarterly results, the last performance of the sportsperson and last month’s achievement of the salesperson determine people’s immediate behaviour towards it. This brings us to the second point.
Cutting the noise: In the 5G world, information, misinformation, facts, fake facts, perceptions and impressions are aplenty. Two experts from the same field can form diametrically opposite viewpoints from the same data, exactly the way there is a buyer and there is a seller at the same price in the stock market, both having exactly opposite viewpoints on the same business at a particular point. Too much noise leads to fogging in the mind and thus to muddled decisions. This cannot be emphasized enough—due diligence on the business, valuation, ecosystem and moats should be conducted before putting your money in, not after the investment has been made. When too much uncertainty prevails, accompanied by too much noise, go back to the basics—basic business model and cash flows. Value, growth, special situations, etc. are only semantics—everything will make money at a price and with patience.
Resilience: When it comes to investing, the resilience of mind is equally, if not more, important as the resilience of the business one is investing in. As the equity markets go through volatile periods, one should have the capacity to withstand tough situations and ignore unnecessary noise emerging from factors extraneous to the business. If the business is robust and its fundamentals are sound, an investor must not worry about short-term market fluctuations. Every investment goes through volatility, and those who stand steady when everyone is flustered and fearful usually emerge victorious and inspire others. Thus, the last behavioural trait is remaining resilient when the going gets tough.
A few other tips one should remember while investing are:
Boring is beautiful: A lot of excitement and constant changes can be detrimental to the growth of the business and free cash flows. The businesses that try to capture every new opportunity in unrelated spaces finally end up misallocating capital and that will lead to the downfall of the firm.
Cutting/reducing costs: Costs are certain while growth, income or revenue from the investment is uncertain. Thus, costs certainly will compound while returns or income may or may not compound. Cutting and reducing costs by every paise matters to ensure compounding.
Churn is costly: Churn means buying and selling stocks frequently. Churn entails regulatory costs, heightened taxability, intermediation costs and brokerage cost, and so heavy churn can be expensive and can harm the investment.
Go beyond the obvious and dig deeper for why and what: The numbers and data are known to every analyst. Dig deeper into how motivated the management and promoter are to grow the business. Often, the businesses one owns in the portfolio are those whose products one uses. While buying the product or using the services, our experience as a customer or in dealing with the retail outlet or retailer of the product provides an understanding of what the future of the business looks like.
Capitalising on irrational mispricing of markets: Markets or sectors often provide opportunities where mega bucks can be made through irrational oversold positions due to the macro supercycle or international business ups and downs or global sector rotation. As a result, getting into a business when it is dirt cheap due to extraneous factors can be handsomely rewarding.
Avoiding herd mentality: A herd generally chases the same thing when many receive the same information, and the popular perception is that nothing can go wrong. People join the bandwagon only when a large portion of the gains are no longer available. So, never chase momentum. Be wise and don’t fall into this trap.
Neither greedy, nor fearful, neither pessimistic, nor overly enthusiastic, just optimistic—more money is made on the long side than on the short side. Growth, positivity and a favourable outlook are always helpful.
Don’t get married to losers: Cut the losses, cut the umbilical cord. Capital always has a cost. If the capital has no cost, then there is an opportunity cost. Mistakes are bound to happen, but cutting losses and moving on is the hallmark of a successful investor.
Taking a higher risk doesn’t guarantee higher returns: There are two kinds of risks in the market: systematic risk and systemic risk. The systematic risk is the market risk and is difficult to predict, but the systemic risk is a company or business-specific risk that can be estimated to a large extent from the company’s history and trajectory. The simplest way of reducing systematic risk is having a longer holding capacity during longer periods of uncertainty by keeping a certain amount of capital in the safety pockets.
Predicting the cash flows and earnings trajectory is the key, not predicting the stock price:
A successful investor is able to gauge earnings and the earnings growth trajectory with reasonable accuracy. Even if the guess is not entirely accurate, money will be made if the direction and trajectory are correct. Cash is real, the rest can all be cooked up.
(Published from The 100X Formula: How to Win in Investing, Life and Relationships by Siddhartha Rastogi and Koushik Mohan, with permission from Penguin Random House India) Disclaimer: These are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper