Benefits of SIP – nothing to do with the image above

Financial Independence, Uncategorized

I am a person whose attention span is very limited.  I end up getting attracted to the next bright object all the time.  It’s extremely easy to distract me.  Due to this, even in my office I have taken a room which is in the corner so that my distractions are limited.

Whether its books – my other hobby – the moment I am given a reference of a new book, I end up buying it from Amazon for my Kindle.  I have more than 30 books which I have bought and not even started reading and there would be another 30 which would be in semi-read state.  This does not account for the number of physical books that I have which are lying unread and semi-read, in my book-shelf.

Similarly its with investments.  I see a new theory or a new company or a new investment avenue and I start researching it on how I can benefit from it.

That’s where the benefit of investing via a Systematic Investment Plan (SIP) comes in.  It’s forced money which gets deducted from my bank account.  And since I don’t want to get a message saying that the SIP was not executed because of a lack of funds, I end up ensuring that there are always enough funds to cover my SIPs.

I originally started my SIPs with just Rs1000/- per month in 2013.  Thats about USD16/- that’s all.  Over a period of  time I have been increasing the amounts in various mutual fund schemes.

While I was investing in the equity mutual funds, I was also studying some of the good companies.  I read a whole lot of books on this – I have shared names of the books in an earlier post – and took every opportunity to watch videos on Youtube where legendary investors shared their knowledge.

Once I was able to analyse some of the good companies which had good management, I started SIPs for those individual stocks, again with very small amounts.  The “kick” of investing in individual stocks is

  1. I don’t have to pay a service charge to the mutual fund manager.  The 2.5-3% service charge that they take for managing our money can substantially reduce the overall wealth you can create.  I have shared complete tables of these calculations in earlier posts.
  2. When the company declares a dividend or gives bonus shares then the pleasure I get is immense.  This does not happen when you have mutual funds.

Having mentioned the two points above, I still have a lot of SIPs going into mutual funds, because I am not in a position to identify mid and small companies on my own because of paucity of time.  Having a fund house do that for me makes more sense even if they are charging me a percentage, which eats up into my returns.  Once I take my retirement, I intend to even do this on my own.

Another psychological advantage of SIPs is that your brain now works to live within the limits of the money which is leftover after accounting for the SIPs. This is a very important factor for people like me who end up choosing the next bright object.  This keeps me focused on ensuring that I take up any new adventure only after I have paid for my SIPs.

From a financial perspective SIPs ensure that you get the advantage to being able to buy more when the price goes down thus ensuring you take advantages of the draw down in the market.  On your own you would never be able to time the market so well.

I even started a few SIPs for my son so that he gets the advantage of age on his side.  Even to my friends, I force them to start these for their children at as young an age as possible so that they get the power of compounding on their side.

Whatever your age or whatever you earn, you can start investments into a SIP and make your money work while you sleep.

Especially women (and girls) – they have this big “mindblock” on not knowing finance.  With a SIP you don’t need to know anything about finance or stocks.  You just need to tell your financial advisor about the amount of risk you are comfortable and she will suggest a scheme for you.  You could also go to sites like valueresearchonline.com or moneycontrol where they showcase the risk ratings of funds.  You could just choose from any of those.

Till the next time.

Carpe Diem!!!

How much do you actually need for retirement

Financial Independence, Uncategorized

I don’t know the answer. For each of you it will be different.  So you need to find it out for yourself.

So why this post.

Recently I was having lunch with one of my colleague who is just crossed 60. He was talking about how he had a discussion with a relative on what is needed after retirement.

So he had the following calculation:

If he needs Rs100000/- per month then he will need Rs12,00,000/- in a year.

If he is in the 30%+ tax bracket then he has to account for tax, which means he should make approximately Rs18,00,000/-.

If he has a fixed deposit which will give him 7% RoI then he will need a corpus of Rs26,000,000/-. Now since he is no where close to this figure he was getting depressed on how he will handle the situation.

For all of you who live out of India, the retirement age in India in most offices is either 58 or 60. Some jobs do have 65 as the age.  Private companies do have people working after the age of 58 but that is on contract, not as a full time employee with all the benefits. Even in India the average age of both males and females has been going up every decade. In the cities especially with access to better medical treatment, the average age has crossed 70 now.  Which means a lot of people in the cities will now live to cross 85.

Being an absolute optimist I highlighted a few things that were flawed in his argument.

  1. The tax rate is different once a person crosses a certain age level in India.
  2. 30% tax on the whole amount does not include the deductions which the government allows as standard to all citizens.  So the taxation is rarely on all your income.
  3. While its good to have a large portion of your money in a fixed deposit, so that you are saved from the fluctuations of the stock market, it does not mean that you should have all your money in such low interest yielding paper. There are a lot of decently safe options which could give you safety as well as a higher rate of interest.
  4. You need to account for inflation especially medical inflation in India which is going crazy.
  5. You need to have a financial advisor who can suggest you ways to come into the lowest tax bracket.

If you were to take all the above items into account then the figure may not be the depressing number of 26,000,000/- given above.  It could be almost 30-40% lower.  That got my colleague a little relaxed.

Having given the above example however the fact remains that after retirement, you may want to travel across the country or abroad.  How do you finance those spendings?

For an India perspective, I would suggest you read the book by Saurabh Mukherjea Coffee Can Investing.  He has taken some very specific cases and built a hypothesis of how you should be investing to get to spend your old age well. At a broad level his belief is that for taking part in the stock market without risking majorly, ETFs are the best bet because they have low expense ratios(in one of my earlier post I have shown how an incremental 1-2% difference in returns because of expenses charged by mutual fund houses can impact your returns dramatically).  However for the small cap stocks he still recommends using some of the renowned mutual funds.

For all my readers from the US and Canada, I will not tire of recommending Tony Robbins’ book Money Master the Game.  Its a thick book but it’s a book which will give answers to a lot of your queries.  Most of the so called advisors don’t answer the questions adequately well.  Tony has been able to get you answers from some of the best people in the world who handle trillions of dollars combined.  He has also given a perfect asset allocation breakup.  Also all the advisors are very clear first on not losing money.  And last they all suggest index funds again because of low expense ratios.

All of us have to retire one day. Death and taxes are the only 2 realities of life.  How you manage your taxes and investments so that you live well, till you die. The earlier you start investing the better off you will be in the later stages of your life.  I have been giving various examples of how compounding can do magic even if you don’t earn much – if you start early and invest in decently size returns.

Till next time then…find out how much you would need to retire and then work backwards to achieve it.  Have a life.

Carpe Diem!!!

 

The Star Principle & the Coffee Can Portfolio -looking at the same picture from different angles

Financial Independence, Uncategorized

I was re-reading the book – The Start Principle: How it can make you rich by Richard Koch.  If you have been following my posts you will know that I am quite a fan of his writings and have almost all the books that he has written.  Each time I re-read them, I identify something which I had not noticed earlier.

For all those of you who haven’t heard of Richard Koch, he was the first one to write a book on the 80/20 principle, also known as the Pareto principle.  He has written a lot of books related to the application of the 80/20 rule but in addition to that his basic slant has always been on strategy and has a lot of wonderful books written with strategy as the back drop.

If you want to read an author who simplifies strategy, not only for corporates but in real life, then he is one author you should read.

This time while I was reading the Star Principle once again, one aspect which leaped out of the book was that the Star Principle is so very similar to the Coffee Can portfolio which is covered by Saurabh Maukherjea in his book – Coffee Can Investing.

As per Richard if you invest in a company which is a leader in the market place and the market itself is growing at more than 10% compounded, then you will make money hand-over-fist if you can see that the market itself has longevity.  His logic is- if you invest in such a company in its early stages, then the possibility of making massive returns is even higher.  These companies are very few and far between and hence are STARS.

The concept of Stars, Cash Cows, Dogs and Question Marks was first propagated by the consulting company BCG (Boston Consulting Group) where Richard had his first job.

The concept of the Coffee Can portfolio was first espoused by Robert Kirby in 1984.   It was serendipity because Kirby had recommended a certain portfolio to a friend’s husband who did not sell any shares in the portfolio over a period of 10 years while Kirby did.  The amount of wealth that the portfolio created was way higher than what Kirby created in his portfolio.  This is the central concept of compounding which I keep harping about in each of my posts.  If you let something compound over long periods the amount created is enormous.

Saurabh takes the concept further and shows us examples with research, done over multiple blocks of 10 year periods, on companies which grew every year at a minimum of 15%.  If you had bought shares in those companies and then forgotten all about them for the next 10 years you would have got a very large return on your investment.  The number of such companies would be quite small.  If you extend the research to 15 year periods then the number of companies which had such consistent growth would be even smaller, but the certainty of returns would be much higher.

At the end of the day if there are only a few companies which can grow consistently year on year over such long periods of time then thats only possible if they are market leaders in the niche they occupy.  They also cannot continue to keep growing over long periods of time at such high rates, if the market itself is not growing fast enough.  Which then end up being STARS by the definition given by Richard.

The one difference which I perceive is that the Coffee Can portfolio does take into account the fact that some of the companies may close down  or lose market leadership by emphasising that you need to have a “portfolio of companies” with these characteristics.

So its not only about compounding but about creating a sensibly constructed portfolio of STARS which can create enormous wealth.

Wealth generation is not complex if you follow some simple rules….its not easy either though.

Till next time.

Carpe Diem

Compounding & successful organisations

Financial Independence, Uncategorized

Recently Tim Ferris had a podcast with Jill Collins.  If you have not heard of Jim Collins, he is the author of a lot of books which study how businesses succeed and fail.  One of his most famous books is Good to Great.  If you have not read it then its a must read for anyone who is even remotely interested in the corporate world.

If you haven’t heard of Tim Ferris or read any of his books the I highly recommend that you read his book The four hour work week and others.  The advantage of the podcasts is that you get to hear real life people and Tim goes into the interviews with a very detailed structure so that you can get maximum benefit

Coming back to the podcast with Jim Collins(if interested you can listen to the podcast  here). It’s a fabulous talk spread over about 2 hours but covers a very wide range of topics from “writing’ to Peter Drucker and to the Flywheel concept.  Jim had first introduced this concept in the book Good to Great.  But there it was more a chapter on how successful companies built systems to ensure each step helped them grow to the next and kept feeding.

However this flywheel concept was not elaborated further for a long time.  In the podcast Jim spoke about how he’s done more research on the Flywheel concept and written a monograph.  For me a monograph was a new concept. It’s a detailed study of a given topic. It’s less than a book but more than a whitepaper.

Since I was very interested in the flywheel concept from the time I had read the book, I immediately bought to read.  The big concept which stands out int he flywheel is the positive feedback loop.

Most of you would know of the negative feedback loop.  It helps control a process near a defined setpoint.  For example if you put car in cruise control, then if due to a gradient the speed starts going up then automatically the pressure on the acceleration pedal is reduced.  Another example of a negative feedback in your everyday life is the temperature control in the water heaters.  If the temperature reaches the set-point then the heating is stopped.  Negative feedback loops ensure control.

Positive feedback on the other hand is compounding at its core.  One good thing leads to another and another.  So Jim Collins gives multiple examples of companies like Amazon, Intel, Vanguard have used positive feedback to grow exponentially over a consistent period of time.

Which brings me to another book which looks at this same concept from a different angle.  Its a book by Perry Marshall called 80/20 Sales and Marketing.  Perry was influenced by Richard Koch who wrote the famous book on 80/20 many many years back.  Perry has taken the concept of 80/20 and explained the fractal nature of this law.  If you are in anyway related to sales or marketing you will find enormous nuggets for helping you in your sales or marketing career.

When I read “Turning the Flywheel” it reminded me of a similar concept in nature which Perry shows on how the Grand Canyon was formed and how the same positive feedback loops can be used to dominate Google Adwords.

More and more as I come across successes I am convinced of the fact that positive feedback (or compounding) changes everything in nature, businesses and financial life of people.

Would love to hear from you’ll if you’ll have seen any place else the impact of positive feedbacks.

Till next time.

Carpe Diem!!!

grand canyon during sunset

Photo by David Ilécio on Pexels.com