Chaitanya Patel

Let us call it the #1 Investor mistake that destroys returns. This is called HEADLINE investing. When the headlines of a newspaper encourage you to invest. The worst thing is this is worse compounded by CONTINUING the same.

Let me explain. The day the government announces A very big solar project and tells you that the business is very big. Exactly on that day YOU go and buy some solar company’s shares. THIS is exactly the professional wanted you to do. He was waiting for this headline (which sometimes he can even manipulate).

Or take the case when the Macro news is poor. “When employment is so low, why would you want to own shares” . Very smart sounding, but very very stupid article. Or another article saying “the rainfall is inadequate in Andhra Pradesh’ – which will soon be followed by an article saying “Coromandel International sells most of its fertilizer output in AP. Your mind conveniently reads this as “Sell Coromandel”. This is again YOUR problem.

Similarly when the mood is good they urge you to buy. When the mood is bad they do a stupid article like “over the past 7 years it is the lowly public provident fund which has given better returns than equity” . Your mind reads it as “For a conservative 55 year old like me it is better to be in debt rather than in equity immaterial of what Subra has to say. And EXACTLY at a time when you should be buying equity, you end up selling equity.

So be careful when the newspapers carry an investor’s statement like “why invest in equities when the  economy is going nowhere” – this could perhaps be a great buy signal. When Na Mo was sworn in I was told “he will work magic on the PSUs” I sold BHEL and NTPC. I got a chance to buy back both these shares, I chose to buy only NTPC and have benefitted by that decision.

And after urging you to sell in 2017, 2019, 2022, and 2024 they are likely to do a heart burning article saying “If you had done a SIP from 2014 to 2024 in the following 10 funds you would have got returns in excess of 20% CAGR. And you will wonder why did you react to their articles all this while.

Who creates Headlines? MSM.

To avoid headlines avoid the press. Do not watch. I am doing one better – stopped coming on Tee Vee. Yes it helps.

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Indian stock market P/E ratio zooms upward, while earnings growth has been horrible for the Nifty. Here’s the standalone metric:

We’ve added two metrics here – one is an area coverted by green lines, a one standard deviation from the average (which is about 19). Most of the time the Nifty is within the 1 SD range.

The orange dotted lines is a 2 standard deviation move – that is, a much higher extreme. (beyond 2SD is noted at about 5% of the observations).

We are currently at about 23.4 – probably a little bit higher today. The 25 P/E number is a good 500 points away – the Nifty needs to be beyond 9000.

But Earnings Growth Sucks

The last two times we crossed 23 P/E, our Nifty earnings were growing strong, or trending up.… (Read On...)

First up, a very very interesting quiz in the NY Times that you should all try out. Don’t worry about hating numbers or anything else like that. Spend some time on it, very well worth it.

Next up, an article on what Greece may be able to do next. Semi related, how 16th century Spain dealt with a bankruptcy.

Euthanasia is a difficult and hard topic to discuss, here is a good article on how some countries are dealing with it .

Indian companies bypassing banks, and going directly to the public for funds.

Pakistani mall charges an entry fee with a certain exceptions, and people are not happy about it. I think they missed a trick here, could have simply exempted people who buy something inside, but made it elitist instead.

Finally, a great article on what makes the expat lifestyle attractive.

From PJ O’Rourke’s Parliament of Whores:

“Authority has always attracted the lowest elements in the human race. All through history, mankind has been bullied by scum. Those who lord it over their fellows and toss commands in every direction and would boss the grass in the meadow about which way to bend in the wind are the most depraved kind of prostitutes. They will submit to any indignity, perform any vile act, do anything to achieve power. The worst off-sloughings of the planet are the ingredients of sovereignty. Every government is a parliament of whores. The trouble is, in a democracy the whores are us.”

And a bonus quote:

“No drug, not even alcohol, causes the fundamental ills of society. If we’re looking for the source of our troubles, we shouldn’t test people for drugs, we should test them for stupidity, ignorance, greed and love of power.”

I believe that most of those in government today — everywhere, not just in third world countries — would test positive for stupidity, ignorance, greed and love of power.

Happy 4th of July.

Creating a Retirement Egg Nest is actually in 3 parts:

1. Earning well so that you can think of Retirement as a great luxurious product that YOU can afford.

2. Accumulating well -saving and investing smartly.

3. Learning how to withdraw once you have retired.

Now about (1) I cannot do anything. You need to study well and then decide whether you want to earn quickly (banker, insurance executive, fund management, etc) – however this life could mean a burnout at age 45. The other option is you become a professor in a Govt. subsidized college with life time guarantee of a job till you are 70 and an indexed pension after that.

We will look at the 2nd part – of accumulating well for retiring.

How much is too much for Retirement? 

Remember if you retire at 54 and die at 94 it means you will live 40 years in retirement and if your wife dies at her age of 94, it means about 44 years in RETIREMENT. It is easily a very long time to live WITHOUT A PAY CHEQUE – UNLESS you create one. So given the fact that we do not know

a) how long we will live

b) how much we will spend in retirement

c) how smart or stupid our asset allocation that we will do

d) we may want to shift to a “No brain, no tension, simple portfolio” by the time we are 75

etc. etc.

we cannot ever estimate how much money we are likely to need.

Also if you retire at say 54 you are likely to seek some entertainment (man does not live by bread alone!) and entertainment is expensive. Whether it is travel or sport or a combination of the two you will need money to do it.

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“Chocolates!” replied Soham, my nephew, with a glint in his eyes. That was his response to my question “What is happiness?”

“So you think the secret of happiness lies in chocolates?” I quizzed him further.

“Yeah! It’s bliss,” he blurted while going around in circles in his tricycle.

“Bliss?” I thought to myself, “That’s quite a mouthful of adjective coming from a five year old.”

“Okay! Here is a chocolate. Tell me if it makes you happy?”

“Thanks Mamaji (that’s what he calls me),” he screamed as he literally snatched it from my hand and in no time the chocolate was gone. He was ecstatic. May be he was right. Chocolate is bliss.

“So if one chocolate makes your happy, more chocolates should make you more happy. Isn’t it?” I was attempting to play Socratic Solitaire (the tradition of asking question that helps somebody discover the wisdom) with an unsuspecting kid.

“Yes…more bliss!” he quipped, while making bigger circles with his tricycle and relishing the after taste of the first eclair. Where in the world did he learn this word ‘bliss’, I wondered.

“All right. So here is another chocolate and let me know if this one makes you more happy than the first one?”

With this move, I thought I was just a few steps away to make the kid realize the futility of materialism. However, what the smart alec inside me didn’t know that in next few minutes, that little boy was going to stump me with his raw intellect.

“Very happy!” he screamed again and gulped the second eclair too.

After two more chocolates, as I expected, Soham’s excitement for the chocolates dwindled and he didn’t look interested in the fifth chocolate.

I started telling him, “So you see, you don’t want the fifth one as much as you wanted the first chocolate. It means happiness is not in chocolates.”

I expected a blank stare from him followed by the expression where the truth dawns upon him. Instead what he said left me dumbfounded.

“No. It’s not in all chocolates. Happiness is in the first four chocolates,” and he took off in his super bike leaving me with my chocolates and the seed for a remarkable insight.

The insight, of course, was about an important mental model from the field of economics. It’s called the Law of Diminishing Marginal Utility.

For the rest of this post, we will use the acronym DMU because it saves screen space, computer memory, internet congestion, and my keyboard strokes.

Let me define DMU now. As a person increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that the person derives from consuming each additional unit of that product.

In other words, for each additional unit of a good (in my nephew’s case, a piece of chocolate) the added satisfaction you receive from consuming the good decreases.

Let’s deconstruct it and look at each term in isolation first. What does the term “utility” mean?

In economics, scientists are concerned with examining issues of the supply and demand of goods and services. This theory assumes that people are perfectly rational and make choices about purchasing goods or services depending on what is in their best self-interest.

And how do you measure what is in someone’s best self-interest? This is where the concept of utility comes in. Think of utility as the benefit a person gets from consuming a good or service. For Soham, utility was the satisfaction he gained from eating chocolates.

Now imagine how utility changes (increases or decreases) as a person consumes more of the same good. In Soham’s case, the utility was the highest for the first piece of chocolate. Even the second and third chocolates delivered the same utility as the first one. However, the satisfaction he got from the fourth piece was definitely not as high as the first three. As a result, he refused the offer for the fifth chocolate.

It is important to understand that the concept of utility is a relative one. As a kid, I probably had a higher threshold than Soham and would have accepted half a dozen more eclairs. Different people gain different levels of satisfaction from eating chocolate depending on their preferences.

My friend, Jana has penned a useful post on this concept using the example of pizza consumption.

Let’s explore some areas where DMU surfaces in the world around us.

DMU and Buffet (not Warren!)
I am sure you must have been to one of those “all you can eat” food buffet restaurants offering wide array of food items. Have you wondered how do they manage to provide you so much quantity and variety for such reasonable prices?

Buffet restaurant owners would not make the promise of unlimited food if they weren’t going to make a profit. The simple truth is, they know a secret. And the secret is that we can’t eat all.

Why? DMU, buddy!

Restaurant owners know all too well that each additional plate of food provides less utility than the plate before. By the time we get to our second or third serving, we’re so full that eating anything extra will actually harm us (dis-utility). So, in reality, there is no such thing as all you can eat because we simply cannot eat it all.

By the way, did you know that Coca Cola’s (yes, that caffeinated, celebrity promoted, black coloured sugar syrup) flavour is designed in such a way that it leaves very little aftertaste in your mouth, which means your marginal utility of coke consumption doesn’t diminish as rapidly as it should with any other sugared drink. That is, unfortunately though, the beauty of Coca Cola’s product.

Let’s talk about something other than food.

DMU and Taxes
Benjamin Franklin once said –

In this world nothing can be said to be certain, except death and taxes.

I don’t know about death (haven’t experienced it yet) but there is an interesting rationale behind progressive tax rates. Progressive taxation results when the rate of taxation increases with an increase in income. The logic is based on the assumption that the rich have lower marginal utility of money as compared to the poor people. Hence the rich should be taxed higher.

Loss aversion and DMU
Once you get a hang of DMU, it’s easy to understand Daniel Kahneman’s loss aversion theory which states that losses hurt more than gains feel good. Simply put, the pain generated by a loss of Rs 100 would be more than the pleasure of gaining Rs 100.

This explains why people’s fear of loss is much greater than desire to gain.

Look at the graph above. It shows how the utility goes down with every incremental step. To summarize the graph, if Rs 100 is added to your wallet which already contains two hundred rupees, it gives you a pleasure worth of 15 units. Another hundred, and your pleasure increases by a relatively smaller amount, i.e., 10 units. And so on.

When somebody moves from point B to point A, the utility derived by getting Rs 100 is 15 units. Whereas when one moves from point A to point C, 10 units of utility is derived by gaining Rs 100.

In the same graph, if we start from point A and move towards point B, loss of Rs 100 sets us back by 15 units of utility. On the contrary, if we move from point A to point C, a gain of Rs 100 fetches us a utility of 10 units. So the loss of Rs 100 is heavier, in terms of utility, than a gain of Rs 100. That proves the loss aversion theory.

DMU in Business and Investing
The concept of marginal utility is also useful in thinking about the idea of marginal cost in businesses. Marginal cost is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit.

For a business which sells software products, the marginal cost of an extra piece of end product is close to zero. However, for a typical brick and mortar business, selling tangible products like FMCG, the marginal cost of additional product is significant.

Consider social networks like Facebook, Twitter or Linkedin. The marginal cost of signing up one additional member is close to zero. But each new member brings non-zero, sometimes pretty substantial, value to the entire network. In general, marginal cost favors businesses that have differentiated products and brand names.

So, extending the above logic, if a manufacturer wants to make a decision about producing more, it should keep producing unless the per unit revenue is less than the marginal cost of production (assuming that all products can be sold). However, this strategy can be fatal for commodity type of business, where every competitor cuts prices so that the price hovers just above the marginal cost.

Airlines is a great example of being victim of marginal cost. So much so that, Charlie Munger calls them ‘marginal cost with wings’.

Many researches have proven that DMU is applicable in case of portfolio construction also. Having multiple stocks in your portfolio decreases the risk of permanent capital loss. However, every additional stock in your portfolio brings down the risk in diminishing order. So much so that, after certain point (many expert suggest that number to be 20), the risk doesn’t decrease at all by adding more stocks.

Increasing Marginal Utility
Your knowledge about an idea, or mental model, isn’t complete until you know where it fails to work. What’s more important, than an idea itself, is the knowledge about its limitations.

Charlie Munger said –

I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.

So let’s see where DMU doesn’t work. Many a times the marginal utility or the marginal cost remains constant with additional unit of consumption. Can you think of an example?

If you buy 1 kg of gold bar for x rupees, how much would you have to spend for 2 kg of gold? 2x. And the equation is linear. No DMU here!

Can you think of an example where the marginal utility not just stays constant but increases with each additional unit of consumption? Some of you might be tempted to say “alcohol”. Well, I like the way you think but I am calling it a dry day today.

Diamond! The price of a 10 carat diamond is not twice the price of a 5 carat diamond. In fact, the price for every additional carat increases pretty rapidly and non-linearly.

“Anshul, can we please talk about something other than jewelry and Jack Daniels?” I hear your concerns. Okay, how about stock market?

In stock market, when somebody wants to buy a meaningful stake in a company, perhaps with an intention of acquiring control, the marginal utility of every additional share and its cost increases. That’s why most of the acquisitions happen at a large premium to the current market price.

We can call this phenomenon as the law of increasing marginal utility. I am not sure if this term is recognized by economists so lets just keep it between you and me.

Oh, I almost forgot to mention. The pleasure I derive out of writing this Latticework series – that follows the law of increasing marginal utility for me. How about you? I hope it’s not DMU for you.

Conclusion
What we learnt today is that people aggressively place a lower value to each additional unit of something that they get in increasing abundance.

I am sure you can spot many other use cases where this mental model applies. I would be glad to hear from you.

We’ve had some great insights shared by our tribe members in previous posts. Let’s not lose the momentum. I urge you to keep the ball rolling. Let it become a snowball. A snowball of learning and worldly wisdom.

Take care and keep learning.

The post Latticework of Mental Models: Law of Diminishing Marginal Utility appeared first on Safal Niveshak.

    

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The post iYogi Launches IoT Platform On Microsoft Azure [Free For Up To 1mn Devices] appeared first on NextBigWhat.

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My last post has many implications. I want to make them clear in this post.

1. When you analyze a manager, look at the repeatability of his processes.  It’s possible that you could get “the Big Short” right once, and never have another good investment idea in your life.  Same for investors who are the clever ones who picked the most recent top or bottom… they are probably one-trick ponies.
2. When a manager does well and begins to pick up a lot of new client assets, watch for the period where the growth slows to almost zero.  It is quite possible that some of the great performance during the high growth period stemmed from asset prices rising due to the purchases of the manager himself.  It might be a good time to exit, or, for shorts to consider the assets with the highest percentage of market cap owned as targets for shorting.
3. Often when countries open up to foreign investment, valuations are relatively low.  The initial flood of money in often pushes up valuations, leads to momentum buyers, and a still greater flow of money.  Eventually an adjustment comes, and shakes out the undisciplined investors.  But, when you look at the return series analyze potential future investment, ignore the early years — they aren’t representative of the future.
4. Before an academic paper showing a way to invest that would been clever to use in the past gets published, the excess returns are typically described as coming from valuation, momentum, manager skill, etc.  After the paper is published, money starts getting applied to the idea, and the strategy will do well initially.  Again, too much money can get applied to a limited factor (or other) anomaly, because no one knows how far it can get pushed before the market rebels.  Be careful when you apply the research — if you are late, you could get to hold the bag of overvalued companies.  Aside for that, don’t assume that performance from the academic paper’s era or the 2-3 years after that will persist.  Those are almost always the best years for a factor (or other) anomaly strategy.
5. During a credit boom, almost every new type of fixed income security, dodgy or not, will look like genius by the early purchasers.  During a credit bust, it is rare for a new security type to fare well.
6. Anytime you take a large position in an obscure security, it must jump through extra hoops to assure a margin of safety.  Don’t assume that merely because you are off the beaten path that you are a clever contrarian, smarter than most.
7. Always think about the carrying capacity of a strategy when you look at an academic paper.  It might be clever, but it might not be able to handle a lot of money.  Examples would include trying to do exactly what Ben Graham did in the early days today, and things like Piotroski’s methods, because typically only a few small and obscure stocks survive the screen.
8. Also look at how an academic paper models trading and liquidity, if they give it any real thought at all.  Many papers embed the idea that liquidity is free, and large trades can happen where prices closed previously.
9. Hedge funds and other manager databases should reflect that some managers have closed their funds, and put them in a separate category, because new money can’t be applied to those funds.  I.e., there should be “new money allowed” indexes.
10. Max Heine, who started the Mutual Series funds (now part of Franklin), was a genius when he thought of the strategy 20% distressed investing, 20% arbitrage/event-driven investing and 60% value investing.  It produced great returns 9 years out of 10.  but once distressed investing and event-driven because heavily done, the idea lost its punch.  Michael Price was clever enough to sell the firm to Franklin before that was realized, and thus capitalizing the past track record that would not do as well in the future.
11. The same applies to a lot of clever managers.  They have a very good sense of when their edge is getting dulled by too much competition, and where the future will not be as good as the past.  If they have the opportunity to sell, they will disproportionately do so then.
12. Corporate management teams are like rock bands.  Most of them never have a hit song.  (For managements, a period where a strategy improves profitability far more than most would have expected.)  The next-most are one-hit wonders.  Few have multiple hits, and rare are those that create a culture of hits.  Applying this to management teams — the problem is if they get multiple bright ideas, or a culture of success, it is often too late to invest, because the valuation multiple adjusts to reflect it.  Thus, advantages accrue to those who can spot clever managements before the rest of the market.  More often this happens in dull industries, because no one would think to look there.
13. It probably doesn’t make sense to run from hot investment idea to hot investment idea as a result of all of this.  You will end up getting there once the period of genius is over, and valuations have adjusted.  It might be better to buy the burned out stuff and see if a positive surprise might come.  (Watch margin of safety…)
14. Macroeconomics and the effect that it has on investment returns is overanalyzed, though many get the effects wrong anyway.  Also, when central bankers and politicians take cues from the prices of risky assets, the feedback loop confuses matters considerably.  if you must pay attention to macro in investing, always ask, “Is it priced in or not?  How much of it is priced in?”
15. Most asset allocation work that relies on past returns is easy to do and bogus.  Good asset allocation is forward-looking and ignores past returns.
16. Finally, remember that some ideas seem right by accident — they aren’t actually right.  Many academic papers don’t get published.  Many different methods of investing get tried.  Many managements try new business ideas.  Those that succeed get air time, whether it was due to intelligence or luck.  Use your business sense to analyze which it might be, or, if it is a combination.

There’s more that could be said here.  Just be cautious with new investment strategies, whatever form they may take.  Make sure that you maintain a margin of safety; you will likely need it.

1Mantri Developers is at it again. They’re offering 100% assured returns on your “investment”, and SEBI/RBI do absolutely nothing! In fact, they even compare their offered guaranteed returns to things like equities and mutual funds!

From their web site:

Sachin tweets this incredible image:

Note: Someone forgot their mathematics. If you double your money in 3 years, the rate of return is 26%, not 33%.

Plus, the “safety” of your principal is exactly what here? What

Remember, Mantri did it again last year : Guaranteeing 100% returns on a property in Bangalore.

According to @tarun their modus operandi is that you pay 20% down payment, and 80% is a bank loan. They pay interest on the bank loan for three years, and buy back the flat at 120% after three years. Awesome no? (Btw, not legally guaranteed it seems)

Let’s assume this is true.

What’s in it for Mantri?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

Greece debt crisis is deepening. Neither the Greece government nor its creditors are ready to budge this time around. Greek Prime Minister Alexis Tsipras has been making contradictory statements which has made this crisis more complicated and the creditors are now readying themselves for an actual default.

Two days from now on July 5th, Greeks will cast their votes in a referendum in which they decide whether their government should accept or reject the proposals made by its creditors – International Monetary Fund (IMF), European Union (EU) and European Central Bank (ECB). These entities are collectively known as the Troika.

If Greeks vote ‘NAI’ (YES) while casting their votes, it would mean that they have voted in favour of the Troika’s proposals and they want the Troika to provide the Greece government a much needed bailout package. In exchange of this bailout package, the Greece government will have to implement some strict austerity measures involving spending cuts, tax increases and speed up economic reforms.

On the other hand, if they opt for ‘OXI’ (NO) while voting, it would mean that they are not in favour of any kind of austerity measures or tax increases and they are ready to live in a situation in which their government could be officially announced as in default and their top banks would go bankrupt in no time.

Tsipras has urged Greeks to vote against the bailout offer, saying ‘No’ to the proposals. It seems that a ‘No’ to the creditors’ proposals in Sunday’s crucial referendum would lead Greece out of the eurozone and probably out of European Union as well.

All these developments could derail an already fragile global economic recovery and would put more pressure on the global central banks to try and introduce more innovative measures to keep their respective economies floating.

It is a highly uncertain economic environment that we are living in for the past few days and it seems that uncertainty will prevail for a few more days, weeks and months before a clear picture emerges out of this crisis.

FIIs continue to sell equity as they sold about Rs. 3,300 cr. in June in equity. However, they have been net purchasers of debt with about Rs. 1,700 cr. worth of purchased positions.

While they have sold equity positions in May and June, it’s still a big positive for the whole year. And in Debt too:

Foreign investments might have slowed but it looks like domestic investments have come to meet them more than half way. In the near term there are two fears that will keep foreign money tentative:

• The impact of Greece (the eventual default impact will be known only next week)
• The eventual US Rate Hike

Meanwhile Indian markets are running up like there’s no tomorrow! We should expect extreme volatility…and not in one direction, so this is pretty much par for the course. … (Read On...)

After careful thought, I now think that it is a bad idea to mandate that regulated entities should store and retain records of all digital communications by their employees. Juicy emails and instant messages have been the most interesting element in many prosecutions including those relating to the Libor scandal and to foreign exchange rigging. Surely it is a good thing to force companies to retain these records for the convenience of prosecutors.

The problem is that today we use things like instant messaging where we would earlier have had an oral conversation. And there was no requirement to record these oral conversations (unless they took place inside specified locations like the trading room). The power of digital communications is that they transcend geographical boundaries. The great benefit of these technologies is that an employee sitting in India is able (in a virtual sense) to take part in a conversation happening around a coffee machine in the New York or London office.

Electronic communications can potentially be a great leveller that equalizes opportunities for employees in the centre and in the periphery. In the past, many jobs had to be in London or New York so that the employees could be tuned in to the office gossip and absorb the soft information that did not flow through formal channels. If we allowed a virtual chat room that spans the whole world, then the jobs too could be spread around the world. This potential is destroyed by the requirement that conversations in virtual chat rooms should be stored and archived while conversations in physical chat rooms can remain ephemeral and unrecorded. Real gossip will remain in the physical chat rooms and the jobs will also remain within earshot of these rooms.

India as a member of the G20 now has a voice in global regulatory organizations like IOSCO and BIS. Perhaps it should raise its voice in these fora to provide regulatory space for ephemeral digital communications that securely destroy themselves periodically.

We all have heard of an Equity Glide in retirement have we not? If you have say 50% in equities while at retirement …you keep reducing the equity portion in such a way that by the time you are 65 years of age you have only 35% in equities. This is the normal logic and what people do.

However I have tried different things for different portfolios. Hence I am amused when somebody comes and asks “Annuity or tax free bonds” – I KNOW THAT these products are not at all fungible. It is like saying “Kishore” or “Rafi”. I listen to both, and I think both are geniuses. Some days I listen to Rafi and some days Kishore. I realised early on in life that very few things are really fungible.

Let us say when you are retiring at age 55 the market is at a PE of 30 and you are a little jittery of putting a lump sum in equity. However you have the money NOW and it has to be invested. What do you do?

Put a big portion in a liquid / short bond fund combination and do a STP into an equity fund. Let the money go into a large cap fund, a multi-cap fund and a small cap fund.

CONTRARY TO NORMAL thinking…this investment strategy has to come with a “this is being done by experts and do not attempt it unless you understand Value investing, dividend yield, delivery based trading, and have the discipline to do it.

In such a type of investing we do what is called the inverse glide – going from a low equity to a high equity – again targeted with strict understanding and planning. For one such person I shifted out of Rs.50L of equity to buy an annuity at his age of 72. Sure there is still equity left, but this one annuity is likely to take care of all his expenses. For one such senior citizen I have bought an annuity, kept money in a short term bond fund but am doing a STP from the short bond fund. This is a 5 year STP – and at the end of a targeted accumulation in the equity fund I am planning to redeem it and put it back in the bond fund.

So I do tell people that many things are available in the product – you need to know what suits you when. While it is easy to dismiss fixed return products when you are young and arrogant, annuities are very useful when you are 80 and do not wish to tax your brain.

So Mira D there are no easy answers, only easy questions.

Exactly why this bog is about questions – you need to find the answers YOURSELVES – that I think is the essence of learning. There are other websites who are hoping to give you answers, use them. Come here just to be poked.

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Photo Credit: David Warrington

Investing ideas come in many forms:

• Factors like Valuation, Sentiment, Momentum, Size, Neglect…
• New technologies
• New financing methods and security types
• Changes in government policies will have effects, cultural change, or other top-down macro ideas
• New countries to invest in
• Events where value might be discovered, like recapitalizations, mergers, acquisitions, spinoffs, etc.
• New asset classes or subclasses
• Durable competitive advantage of marketing, technology, cultural, or other corporate practices

Now, before an idea is discovered, the economics behind the idea still exist, but the returns happen in a way that no one yet perceives.  When an idea is discovered, the discovery might be made public early, or the discoverer might keep it to himself until it slowly leaks out.

For an example, think of Ben Graham in the early days.  He taught openly at Columbia, but few followed his ideas within the investing public because everyone was still shell-shocked from the trauma of the Great Depression.  As a result, there was a large amount of companies trading for less than the value of their current assets minus their total liabilities.

As Graham gained disciples, both known and unknown, they chipped away at the companies that were so priced, until by the late ’60s there were few opportunities of that sort left.  Graham had long since retired; Buffett winds up his partnerships, and manages the textile firm he took over as a means of creating a nascent conglomerate.

The returns generated during its era were phenomenal, but for the most part, they were never to be repeated.  Toward the end of the era, many of the practitioners made their own mistakes as they violated “margin of safety” principles.  It was a hard way of learning that the vein of financial ore they were mining was finite, and trying to expand to mine a type of “fool’s gold” was not a winning idea.

Value investing principles, rather than dying there, broadened out to consider other ways that securities could be undervalued, and the analysis process began again.

My main point this evening is this: when a valid new investing idea is discovered, a lot of returns are generated in the initial phase. For the most part they will never be repeated because there will likely never be another time when that investment idea is totally forgotten.

Now think of the technologies that led to the dot-com bubble.  The idealism, and the “follow the leader” price momentum that it created lasted until enough cash was sucked into unproductive enterprises, where the value was destroyed.  The current economic value of investment ideas can overshoot or undershoot the fundamental value of the idea, seen in hindsight.

My second point is that often the price performance of an investment idea overshoots.  Then the cash flows of the assets can’t justify the prices, and the prices fall dramatically, sometimes undershooting.  It might happen because of expected demand that does not occur, or too much short-term leverage applied to long-term assets.

Later, when the returns for the investment idea are calculated, how do you characterize the value of the investment idea?  A new investment factor is discovered:

1. it earns great returns on a small amount of assets applied to it.
2. More assets get applied, and more people use the factor.
3. The factor develops its own price momentum, but few think about it that way
4. The factor exceeds the “carrying capacity” that it should have in the market, overshoots, and burns out or crashes.
5. It may be downplayed, but it lives on to some degree as an aspect of investing.

On a time-weighted rate of return basis, the factor will show that it had great performance, but a lot of the excess returns will be in the early era where very little money was applied to the factor.  By the time a lot of money was applied to the factor, the future excess returns were either small or even negative.  On a dollar-weighted basis, the verdict on the factor might not be so hot.

So, how useful is the time-weighted rate of return series for the factor/idea in question for making judgments about the future?  Not very useful.  Dollar weighted?  Better, but still of limited use, because the discovery era will likely never be repeated.

What should we do then to make decisions about any factor/idea for purposes of future decisions?  We have to look at the degree to which the factor or idea is presently neglected, and estimate future potential returns if the neglect is eliminated.  That’s not easy to do, but it will give us a better sense of future potential than looking at historical statistics that bear the marks of an unusual period that is little like the present.

It leaves us with a mess, and few firm statistics to work from, but it is better to be approximately right and somewhat uncertain, than to be precisely wrong with tidy statistical anomalies bearing the overglorified title “facts.”

That’s all for now.  As always, be careful with your statistics, and use sound business judgment to analyze their validity in the present situation.

Many people have moved into their 90s and a few people going into their 100s is becoming common. Though many of us are in a denial mode, somewhere it is lurking in our minds that we could live too long. Too damn long. 120 or thereabouts!! This will mean a life time of 70 years in retirement / semi retirement.

Living long is celebrated – good lifestyle choices, good medicines, good food,…etc. etc. However the downside of living so long is that you are bound to run out of friends, energy and money!! On this blog we will see what to do about the money part.

How should you tweak your portfolio?

1. You MUST buy an annuity when you are 65, 72 and say 80 years of age. Why 3 annuities? to take care of inflation. Why annuity? to counter longevity – so it should be 5 years certain and for the rest of your life and your spouse’s life. Many of today’s half balked financial planners are dismissive about fixed return products. These guys have no clue about portfolio design

2. Stay in a new flat (buy it when you are 60) and be willing to do a reverse mortgage at your age of 74 – assuming your spouse is 70.

3. Learn about equity investing (you can and will move from an equity portfolio to a managed fund portfolio to an index fund as your age increases). However you will NOT move to a zero equity portfolio – at least not till you are in your nineties. If you are 65 years of age YOU CANNOT afford to be purely in debt instruments.

4. Do all investments along with your spouse – form filling, investing online, equity trading online – whatever make sure that she knows how to switch, give certificates from the bank on an annual basis “I am alive” certificates as I call them. And in return help her for cutting vegetables and doing odd jobs in the kitchen.

5. Adjust your withdrawal from your portfolio: many people go with a “one size fits all” kind of a portfolio. You will have to be flexible with your withdrawals. Look at the American economy – the interest rates ar kept artificially very low. So if your debt funds are NOT GENERATING enough returns your drawdown from the equity funds will have to be larger. Simple to say, but very difficult in a volatile market.

5 is nice to start with….

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I would technically want to write something beyond Greece. But it beckons. Because:

Greek Banks to be closed on Monday after ECB freezes liquidity tap:

Greece will introduce capital controls and keep its banks closed tomorrow after international creditors refused to extend the country’s bailout and savers queued to withdraw cash, taking Athens’ standoff to a dangerous new level.

The Athens stock exchange will also be closed as the government tries to manage the financial fallout of the disagreement with the European Union and the International Monetary Fund.

Greeks can only withdraw 60 Euros a day after Tuesday. (As in, banks are closed, but ATMs will reopen)

The ECB won’t give any further liquidity (it stays at current levels). Greek people have already withdrawn 1.3 billion euros just over the weekend and only 40% of ATMs had any money in them before this call.

Also read: One third of Greek ATMs Emptied as Greece Goes Political: Greece has a referendum next Sunday on whether they should accept the bailout or not.… (Read On...)

It’s hot, humid, and extremely rainy down here in SW Florida in the summer. And that sure makes it easy to save money. Who wants to spend the day outside and spend any money when it feels like you’re going to melt?

Of course, we generally get about seven months of absolutely gorgeous weather from October to April which more than makes up for the hot summers. And it’s 90 degrees right now in Boise, Idaho (same as here), but they also have to deal with ice, snow, and cold in the winter.

But we are going to brave the temps and go downtown a little later this evening. There’s this great Thai spot that serves up some amazing stuff. And then we’ll probably grab a coffee and chat for a few hours. Not the cheapest way to spend a Saturday night, but also not the most expensive. It’s really just a matter of getting a good value for your money, not going overboard with it, and maximizing happiness.

In other news, I just today received my first royalty payment from my book, which is incredible. Really looking forward to sharing what that looks like and maybe even writing a post on my experience with writing a book and everything else that went into it. I have to thank everyone out there that purchased a copy and/or spread the word on it. It was purposely priced low so that as many people as possible could buy it and hopefully benefit from the content. Like I’ve said many times now, it’s not going to radically change my life in terms of how much money I’ll make from it. But if it can change even one life out there for the better, that’s a huge win for me.

There are two more posts coming for this month. And they’ll both be about stock purchases I made with the money I received from the Lorillard Inc. (LO) acquisition by Reynolds American, Inc. (RAI). Keep an eye out for those posts.

I’m also very excited to get some great content out in July. I want to review my goals for the year, update the dividend growth numbers, and cover a few new topics that have long been on my mind. Another really busy month ahead. In addition, July’s net savings rate is shaping up to be one of the best in years. Life is very good and I’m so fortunate. I sincerely appreciate all of your support out there and I continue to put out the best content I can.

In that regard, I’m including a collection of great articles I’ve come across recently. Hope you all enjoy the articles and have a great weekend!

These 34 Dividend Growth Stocks Go Ex-Dividend Next Week
A little self-promotion, but only because I think there’s a lot of value here. This post includes 34 stocks that go ex-dividend next week. And every single stock you see listed here is culled from David Fish’s Dividend Champions, Contenders, and Challengers list. The ex-dividend date is basically a cutoff date – it separates the haves from the have nots. If you want to collect the next scheduled dividend from any stock, you’ll have to own or buy that stock at least one business day before the ex-dividend date.

Take a Spin on the Wealthometer!
J. Money shared a fun post here. Plug your numbers in and you might be surprised at just how far ahead of the average you are. I came up in position #66 which while solid is somewhat low because there are three members of our household (I’m including Claudia’s son). Take a spin!

Special Report: The war on big food
Fortune has been putting out some great stuff lately. This article is especially relevant to many of us dividend growth investors that invest in food companies. I recently invested in Hershey Co. (HSY), and I found this exchange with Will Papa, head of Hershey’s global R&D, really interesting:

This relatively new notion that a treat—which by definition is something that gives pleasure—should also be good for you, coincides with what Papa calls the “unreasonable consumer.” Explains Papa, who spent close to 30 years at P&G before coming to Hershey: “It used to be I could have great cellphone coverage and pay a premium for it, or I could have slightly lesser coverage and get a deal,” he says. “Now consumers want great cellphone coverage all the time and the deal. Because they’re getting it many places, they now expect it everywhere.” Translation: If we’re going to eat something bad for us, we want to know it’s the best kind of bad we can get.

PepsiCo’s CEO was right. Now what?
Keeping with the food theme, Fortune covered PepsiCo, Inc. (PEP) and some of the challenges facing the beverage and snack food company. Another great exchange here:

So while Nooyi was right to anticipate the health trend, her fun/better/good distinction may no longer make sense. For example, the company once viewed Diet Pepsi as “better for you”; few would agree with that opinion today. Nooyi herself was astounded by a recent encounter with a $9 bag of fried kale chips, which she called a “fat bomb.” “The consumer has turned the definition [of healthy] upside down,” she says. “If it is non-GMO, natural, or organic, but high in sodium and high in sugar and fat, it’s okay.”

The railroad with better profit margins than Google
Fortune also took some time recently to cover Union Pacific Corporation(UNP), which just so happens to be another company I’m buying a stake in. This is a great read if you’re a UNP stakeholder or just interested in the company and/or railroads in general. Check this out:

The railroad’s superior strength in Mexico isn’t lost on Buffett. During his presentation alongside Berkshire vice chairman Charlie Munger at the company’s annual meeting in April, Buffett remarked, “Union Pacific’s rail network is much better positioned for Mexico than BNSF.” Buffett might have picked the wrong railroad to buy, but he knows a great business when he sees it.

Union Pacific: A Good Bet for the Long Haul
Morningstar also recently covered Union Pacific, which is another great piece. In addition, Morningstar recently discussed why railroads in general have incredible competitive advantages.

Investment Plan Island Interview with…. Jason from Dividend Mantra!
Jason from Islands of Investing took some time out of his day to interview me. Really appreciate this opportunity and I enjoyed answering some great questions. No surprises here for anyone that’s been following me for a while now, but it was interesting to think about what would happen if the market were to absolutely tank all of the sudden.

Recent Buy
JC picked up some shares in Exxon Mobil Corporation (XOM). I wouldn’t mind a chance to average down on XOM at some point here, but it’s trading not far below my cost basis. I initiated my position in the company at $86/share when oil was about $100/barrel. So I find shares less attractive now at $84/share with oil at $60/barrel. Nonetheless, XOM is one of the premier companies in O&G.

Adding CVX To My Portfolio
Dividend Dreams made a similar move by buying up stock in Chevron Corporation (CVX) recently. Another great O&G play here. Similar situation to the one above, it’s trading not far below my cost basis. And that cost basis was locked in when oil was a lot higher. But a great long-term play if you’re looking for long-term energy exposure.

Recent Buy – Bank of Nova Scotia
Roadmap 2 Retire decided to add to his Bank of Nova Scotia (BNS) position. I continue to like the Canadian banks here. Solid valuations, high yields, and a very favorable competitive environment.

Recent Buy: June 17th, 2015
Ryan initiated a position in T. Rowe Price Group Inc. (TROW) not long after I added to my own position. Great company with excellent fundamentals across the board. The stock could prove volatile if the market severely corrects, but short-term volatility is just a long-term opportunity, in my view.

Recent Buy – Boeing (BA)
American Dividend Dream decided to pick up shares in Boeing Co. (BA) with cash from the LO acquisition. Not a bad play at all. BA has performed exceptionally well over the last few years.

What version of the “truth” do you believe?
Steve wrote a great piece on finding your own truth/belief system. Everyone thinks they have the right solution for problems, but the reality is that truths can be highly subjective. And they can change over time. Don’t be afraid to discover new truths and ways to think about life and happiness. Attempting to rigidly quantify everything in life and then sticking to that rigidity might not be in your best interest.

Coca-Cola’s 20 Billion Dollar Brands & Future Growth
Ben went over Coca-Cola’s 20 different billion-dollar brands, future growth potential, and the valuation of The Coca-Cola Co. (KO) shares right now. Although this is still primarily a carbonated soft drink company, they have incredible diversification both in terms of the beverages they offer and the geographies in which they operate and sell those beverages. I remain a very long-term shareholder here.

Why I Gave Up a $95,000 Job to Move to an Island and Scoop Ice Cream
Not quite sure how I even ran into this article (I promise I’m not a regular reader of Cosmopolitan), but it’s a great piece. I love it when people decide to shift gears and live a new lifetime. And Noelle decided to let a journalist lifetime in New York die to live a new lifetime of living a more leisurely and enjoyable lifetime in the Virgin Islands. Even better, she may be living a totally new lifetime in a few years, as she alludes to. Inspiring stuff. Reminds me a little bit of letting my lifetime of being a full-time service advisor die off only to be reborn as a blogger/writer. Except the whole tropical island thing. But I already live in Florida (after moving here years ago in similar fashion to the author), so that counts a little.

I Quit My Job and Built a Tiny House so I Could Travel
Another person pursuing a totally new and different lifetime, this is a pretty interesting story. Not sure of all the economics involved, but those tiny houses sure can pack a lot of punch in a small space. I continue to be surprised at just how robust and beautiful they can be.

This Unique Fund Has Beaten the Market for 40 Years
Looking for proof that buy-and-hold investing works if you stick with it for the long term? Here you go.

The one lesson about Warren Buffett’s success that no one wants to hear
DGI is correct in that Buffett has worked incredibly hard all his life to be in the position he now enjoys. Of course, Buffett doesn’t really view it as work (I probably wouldn’t, either) – he says he “tap dances to work”. Now, maybe Buffett wouldn’t be the multibillionaire he is today without the structure of the early partnerships or the insurance float he’s enjoyed. But there’s no doubt he was destined to be incredibly successful and wealthy, regardless. Work hard, live below your means, and invest intelligently and you almost can’t lose. It’s a formula that almost anyone can copy and do well with. Besides, nobody needs billions of dollars to be successful and/or happy.

What Do Bodybuilding And Investing Have In Common?
Zero to Zeros made a really interesting and apt comparison between bodybuilding and investing. And they have a lot in common. I actually speak from some experience here as I was a competitive bodybuilder in my teens and won a state championship in Michigan way back in the late 90s. One needs to stay patient, consistent, and persistent, whether it’s in the name of building muscle or building wealth. I would say that they have one major difference in that if you quit working out, your muscles will disappear somewhat; quit investing new money and your current investments will very likely still continue to grow over time. So I do like the fact that money doesn’t atrophy like muscles!

Full Disclosure: Long RAI, HSY, PEP, UNP, XOM, CVX, BNS, TROW, and KO.

Thanks for reading.

Photo Credit: gubgib/FreeDigitalPhotos.net

This might finally be the Greece Endgame. On Friday, the Euro nations gave Greece a proposal that allows it to repay its debt. On Friday, Greece rejected that proposal because it still contains too much austerity for the country to recover. And largely because the bailout proposal will effectively just do this to Greece:

How to explain in one gif, why the loans never helped the Greek people pic.twitter.com/IxBs0nHTM8

— αλεπούδα (@alepouda) June 26, 2015

(Note: Cat you see is Greek people. Cat you don’t see until it’s too late = the IMF, the ECB and all those other people)

Greece will hold a Referendum, And Whoa.

In what is a huge political coup, Greek president Tsipras announced a referendum on July 5, which is the next Sunday, for the Greek people to decide to accept (or not) the deal. Hugo Dixon has a good analysis of the situation politically – this is pretty much a referendum of whether Greeks want to stay in the Euro.… (Read On...)

There are 1000 of Mutual Funds in India. How to choose the Mutual Fund is difficult. Can one choose the mutual fund based on one’s investing type? Outlook money has come up with list of equity funds based on investor types. What are the various investor types?

Too Many Choices: A Problem That Can Paralyse

In the past ignorance was due to lack of easily available information or facts on which to base conclusions. For example, it was thought that the world was flat due to lack of observable and verifiable facts. And conclusion,faulty one as we know now, was If you sail too far, you will fall off the edge. A wrong fact results in wrong conclusions which results in wasted or damaging actions with real world negative outcomes. As relevant data could be collected, of course, humans changed their conclusions, so today we know the Earth is not flat, though World is.

Today, we end up ignorant, but for the opposite reasons. We never reach a point where we have just enough information to make informed decisions. We have way too much information that sounds relevant, no mechanisms in place to provide checks and balances on what information gets distributed, no way to confirm most of what we hear.  In his 2004 book, The Paradox of Choice  Why More is Less, American psychologist Barry Schwartz argues that eliminating consumer choices can greatly reduce anxiety for shoppers.

Have you seen a kid in an ice-cream parlour which offers many types of ice-creams. He has to make a choice,would chocolate chip or mango cream be better?  His fear, he says, is that whatever he selects, the other option would have been better. So Does more choice give more freedom or we end up spending so much time trying to make choices?

Overchoice, also referred to as choice overload, is a term describing a cognitive process in which people have a difficult time making a decision when faced with many options. The term was first introduced by Alvin Toffler in his 1970 book, Future Shock. The phenomenon of overchoice occurs when many equivalent choices are available. Making a decision becomes overwhelming due to the many potential outcomes and risks that may result from making the wrong choice. Having too many equally good options is mentally draining because each option must be weighed against alternatives to select the best one.

Too Many Mutual Funds 

With over 1000 schemes , finding mutual fund scheme to invest is an onerous task. With several hundreds of schemes on offer, mutual fund investors are spoilt for choice. There are large cap, small cap, equity, debt, gold, ETF, sector based funds such as tech, financial, retail or energy to commodities to foreign indexes. The sheer number of mutual fund schemes on offer  can intimidated anyone. It’s like the buffet in the marriage party which has everything from Chinese, Chaat to Mexican, Samajh hi nahin aata khaoon kya aur choodon kya? Bhai pet tu ek hi hai na. Googling “How to choose a mutual fund” gives me more than million results (that too in 0.25 seconds). One is overloaded with information about style of fund, benchmark returns,category returns, fund manager, size of fund,risk parameters, such as standard deviation and beta, parameters for risk-adjusted return, such as Sharpe ratio and Treynor ratio. One feels like one is drowning in information. Our article Rantings of a Mutual Fund Investor talks in a light humorous way of the decisions that  a  Mutual Fund Investor  faces Meri investing ki thinking mein itne ched ho gaye hai, itne ched ho gaye hai,ki hum to confuse ho gaye hain ! Kya kare kya na kare yeh sun lo mere bhai , Koi to bataa de iska Hal o mere bhai. 

Choosing Mutual Funds based on Investor Type

Outlook Money had come out with the list of best funds in 2000. They pruned list of the best funds resulting in the Outlook Money 50 or OLM 50 funds s offered a fair bit of choice, which was diligently updated each year. Realising  lesser-the-better  approach would work for a mutual fund investor resulted in birth of the Elite list in Jan 2015. The OLM Elite aims to concentrate investors attention on a sensible number of high quality funds.   The Elite list is perennial work in progress to ensure the reader has an updated and relevant list of funds to pick from. Outlook money will regularly scan the universe of funds for each category to not just recommend funds, but from time to time, also suggest exit from funds Please note that the list of Mutual Funds based on Investor type is an investment aid and does not constitute advice or a personalised recommendation to invest.

The Elite list solves the investor’s problem by categorising funds into groups that meet their investment needs. As a first step, Outlook Money defined four types of investors:

• The Beginner : New to investments and needs to experience investing with minimal risks. The funds recommended for a first-time investor are a Mix of tax-saving and balanced funds.
• The Safe player : Cautious with a 3-5-war investment time-frame :  They look for low risk which is why funds from the large and mid-cap categories find place here
• The Ultracool investor with a long-term aim : Moderate returns expectation and has a marginally more than five-year investment horizon
• The Adventurer : Seeks high returns and can tolerate higher degrees of fluctuation with returns. Mostly funds from the mid- and small-cap segments find place here for the high-risk-reward proposition.
• Each investor stereotype addresses a core investment need without being constrained by the number of funds to meet those needs. Each of these four categories has five hand-picked funds that each investor type can choose from.
• Every fund chosen has a minimum three-year history, with most having at least five-year history or more. Outllook Money says “We have adhered to the mutual fund disclaimer on past performance and brought in an element of quality based on our experience by speaking to fund managers to list funds that we think are most likely to outperform their peers in future.“

Funds  based on Investor Type

OLM Elite funds based on the Investor Type from Apr 2015 Edition of Outlook Money are as follows

Mutual Funds for Beginner

Mutual Fund for Safe Player

Mutual Funds for Safe Player

Mutual Funds for Ultra Cool 

Mutual Funds for Ultra Cool

Mutual Fund for Adventurer

Mutual Funds for Adventurer

Bemoneyaware take

 Often we just end up collecting and comparing information. We look for that 1-3% extra gain and lose on +10% gain.  Choose a fund with good pedigree, well managed and which has preferably seen many market cycles.  As Mr Amitabh Bachchan reminds us lines from his fathers book Madhushala

Dr Harivansh Rai Bachchan’s Madhushala

Related Articles:

• Why Mutual Funds in India are not popular
• How to Choose Mutual Fund : Ratings, Fund House,Size
• Growth and Dividend Option in Mutual Funds
• Investing in Equities: Stocks vs Mutual Funds
• Investing in Mutual Funds for Beginner

Do you think Choosing Mutual Fund by Investor Type is a good idea? How do you choose your mutual funds? Do you get swamped by lots of information?

I am not sure whether many people over the age of 70 read my blog but here is an article dedicated to them.

What are the 2 risks in a Retiree portfolio?

– running out of money during your last few years

– or living too frugally and leaving back just too much for your heirs

So let me sum up the mistakes that I see – which leads to the above 2 situations.

1. Not adjusting withdrawal to accept market realities: If the value of the portfolio comes down you need to withdraw less. Or withdraw more for yourself. People get into a trap and keep withdrawing amounts which could hurt them if they live long. I know one couple which has exhausted its capital. Their daughter has brilliantly kept them under an illusion that it is their money that is being spent because she is getting them a 13% interest on Fixed deposits. Keeps everyone happy.
2. A fixed amount withdrawal has worked in India because interest rates have not come down now for a long time. However when interest rates start coming down this will hurt the older people whose corpus is less. Children will have to subsidize some part of their parents life. Yes, the children will have to move in with them or ask them to move in with them….
3. Refusing to accept the rising cost of care givers – and pretending that they do not need it.
4. Refusing to accept that their children have a physical and financial cost of looking after parents.
5. Refusing to accept that if they are 70 now there is a serious chance that they will live to 93 – and thus have to be financially and physically prepared to live for another 20+ years. Which means if you are 55 years you need to prepare for another 35 years ahead. Alone or with spouse.
6. When I tell them they can withdraw 7% without any worries, they do not understand that this includes INTEREST and capital together. Which means if they have say Rs. 1 crore they can withdraw Rs. 7 lakhs a year. NOT 7l + THE INTEREST that they receive!!!

7, Getting out of equity too quickly. I think having about 10% of liquid net-worth even on deathbed is not a very bad idea.

8. Insisting on being in Fixed deposits and paying taxes even at the age of 77! : shifting to a combination of mutual funds can dramatically bring down the tax incidence – most of the senior citizens think it is a crime NOT TO PAY taxes. One senior citizen got so scared that he thought I was asking him to do something illegal. His son being a CA DID NOT HELP.
9. Not seeking professional help: If you have indifferent and incompetent (from an investing point of view) you will need outside professional help to manage your small portfolio also. Most of them are in complete denial and make a mess of their portfolios.
10. Not understanding that withdrawing from the capital will not hurt them if they are already 75+ and Reverse Mortgage can work well for a person of that age.

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Among IFAs (Independent Financial Advisors), we’ve the largest SIP book size in Tamilnadu, second largest in South India and among top 25 in whole of India. We are being recognised for this in the professional community. This would not have happened but for your trust and support. I’m grateful to each one of you for the same.

You may know Peter Lynch, one of the best mutual fund managers who managed Fidelity Magellan Fund and produced an outstanding performance. He once said that more than 50% of the investors in his fund lost money despite the fund being an outstanding performer. Reason? Inflows were more after few good quarters and outflows were more after few bad quarters.

Boston based Dalbar releases a QAIB (Quantitative Analysis of Investor Behavior) report every year. Dalbar compares how much the investment gave versus how much the investors made. The difference is called performance gap. From 1984 to 2014, for a period of 30 years, the S&P 500 has given an annualised return of 11.11%. Whereas equity fund investors earned only average annual return of 3.69%. The performance gap is 7.42%.

Why performance gap? When a fund, after expenses, over a 10 year period, gives 18% returns, the investors also should have also made the same. But this rarely happens in a real life scenario. Investors invest more when the markets are high and redeem more when the markets are low. Added to that they keep chasing performance. A good fund is ditched because it had a bad year. A risky fund or not so good fund but which shows recent good performance gets lot of inflow. All these ensure that investors as a group earn less than what the funds provide. In many cases, people actually lose despite markets and funds doing well over a period.

You are aware that we rarely make changes to portfolio. Our general advice is always to stay the course through both ups and downs. There are many advisors in the markets, mostly banks, who keep churning the portfolio very frequently. Recently there was a news item that Standard Chartered Bank churned a customer’s portfolio 200 times over a period of 19 months.

Churning is done for both psychological and monetary reasons. Investors constantly want action in their portfolio. Not all investors are matured like you to understand that inactivity is best when it comes to investing. Every time there is a churn, the advisor earns an upfront commission. That’s why unscrupulous advisors cater to the investors’ misplaced need of constant activity to line up their pockets.

There is a change in fund manager recently in IDFC Premier Equity Fund. We see many using that as an opportunity to churn and make money. Over a 20 year investing period, a fund may have change in fund manager couple of times. Also even a good fund may have 3 or 4 bad years out of every 10 years. This is no reason to change a fund. Many experts opine that chasing the recent performance is one of the primary reasons for long term under performance of a portfolio.

When Fidelity got sold to L&T, lot of money went out as many advisors happily used that opportunity for churning. Since we were closely in touch with the fund house and monitored the developments, we advised you to stay the course. Our decision proved to be correct and those funds are one of the good performers today.

Templeton funds are continuing to do well even after Sukumar & Siva has moved away from their fund management roles. ICICI Discovery continues to be a good performer even though Naren no longer manages the same.

Every time there is a change in fund manager or a below average fund performance, investors press the panic button. Advisors (I repeat, in India, it is mostly banks) use that as an opportunity to earn commission by churning the portfolio.

You may all know Prashanth Jain, one of India’s best fund managers. Despite he proving himself for last 20 years, whenever there is an underperformance, he is immediately criticised and investors start complaining. Advisors too berate him for losing his edge. If this is what happens to Prashanth Jain we can understand the plight of equally good but lesser known fund managers.

Investors need to have better maturity. It is unreasonable to expect someone to perform every year (which is extremely difficult in investing) or stay in the same job for decades. If there are no short term pressure from investors, fund managers would be in a position to take better long term calls.

Though our longevity is increasing, we are getting more and more short sighted with the investments. Investors need to control their habit of constantly tinkering with their portfolio and show the door to advisors who encourage this habit for their personal gains.

Many people wanted a lecture on personal finance in Pune…here it is

https://www.instamojo.com/Ganesh123/subras-lecture-on-personal-financial-plannin/

saying Going on FB has no meaning…it has to be registered here…on a first come first serve basis about 54 people can be accomodated

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