Habits

Financial Independence, Uncategorized

I just finished reading the book The Power of Habits by Charles Duhigg.  I had bought this book long back but it was lying on my Kindle… forgotten.

It has been my habit, that whenever I saw a new recommendation, I ended up buying the book.  Especially so when it was available on Kindle because then there was the instantaneous gratification of having the book in my possession.  This was not a good habit because I always had a huge backlog of books to be read.  Now I have taken a sabbatical from buying any more new books, till I finish the complete set lying on my bookshelf as well on my Kindle.   I haven’t bought a book in 3 months and I have a feeling that I may not need to buy for another 6 months because of the backlog.

This book is a very interesting read and Charles shows with very interesting examples of how it’s very difficult to break a Habit He talks about the loop – “Cue – Habit – Reward”.  If you are not cognisant of this loop you cannot change behaviour.

Recently on ETNow there was a news item which mentioned that the amount of SIP flows had not changed dramatically even-though the stock market had been faltering over the last 12-18 months.  {If you have been following my posts then you would know that a SIP is a Systematic Investment Plan where money is directly debited from your bank account every month automatically}

This news item came as I was finishing this book and it got me thinking – is it that the flows have not reduced because of a habit as Charles Duhigg says or because of inertia or because the investing population in India has become so mature that they realise that in equity investment the short term rise and fall of markets have little significance.

Only one of my friends asked me, if she should change the scheme in which she had the SIP to another scheme for the SIP.  She did not mention about stopping her SIP.

I doubt if the population investing in Mutual Funds has become more mature.  This could be pure conjecture but the SIP culture in India is not more than 5 years old.  So a population maturing in 5 years becomes doubtful.

What could play is that people have inertia. So they do not go to the mutual fund agent or to the mutual fund site to stop the SIP.  My wife I think is from this constituency and the fact that I keep telling her that equity is for long term.

After reading the book I realised that there could be a third play here.  The media and the association of mutual funds has made SIP investing more like a movement. Now as Charles points out, once something becomes a movement then it creates leaders from individuals at the community level and the movement keeps going from strength-to-strength.

He gives a clear example of Rosa Park and Martin Luther King and how that one incidence in the bus and the links that Rosa Park had propelled the civil rights movement in  the USA.

I have a feeling something similar is happening here with the SIP movement.  Since people in offices and homes are now all talking about SIPs there will be a lot of peer pressure on a person if she thinks of shutting – off their SIPs.

Another thing which I think could be happening is that since the individuals have got into the Habit of living on a smaller amount in the bank, they do not feel a pinch if the amount they have out into a SIP does not appreciate for a few months.

Due to the amount of SIPs continuing the amount of money coming into the stock market has not fallen dramatically.  Due to this the market has not fallen because when the foreign institutional investors take money out the domestic institutional investors keep buying.

the AMFI and channels like ETNow need to be congratulated on creating this movement with their sustained initiatives in India.

Do you know of any such movements for creating a better financial future in your country…I would like to hear.

Till next time….

Systematic Investment Plans

Financial Independence, Uncategorized

 

Recently I was watching a program on television channel ETNow ….it was programming related to Systematic Investment Plans. I am generally not very interested in watching content based on SIPs. It’s a well understood concept to me about how time and price averaging over long periods gives amazing results because of the discipline of continuous investing with small sums and the magic of compounding.

What however got me interested was the concept the speakers were talking about “Sahi SIP”. “Sahi” is a word in Hindi which means the right thing. So what got me interested was the idea that not all SIPs are the same. You could search for this episode on the Youtube channel of ETNow.

SIPs have to be decided based on your goals.So not every SIP can be applicable to everyone

While the basic concept of SIP is that you automate your investments and pay yourself before you pay others.

If regular investments are left to decisions of human beings then they will every month find some reason why they are not able to invest.

However with SiPs because the money goes outfrom your bank account  before you even know, you learn to adjust your expenses according to what is left. The first few months are a little tough but eventually you figure out ways to get your expenses into control. i am a ready example of that.

Now coming to the”sahi or right” SIP….. what the speaker mentioned was that based on your goals you need to decide on the investment vehicle or mutual fund scheme and the amount that you will be willing to invest.

One other aspect was how inflation eats into your goals. However because of inflation you also get salary increases. If you can increase the amount of SIPs based on a certain percentage of increase in your salary, then you can control the inflation monster from hurting your goals.

So there is no one size fits all. You need to identify the goals at different stages of your life and accordingly decide on the type of schemes you want to invest.

However the one thing which I have been mentioning for a long time in all my posts still stands….. you need to start early in life. The longer your runway the bigger is the magic of compounding.

Till next time….

Other articles, reports and videos that helped me

Financial Independence, Uncategorized

 

Photo by Pixabay on Pexels.com

If you have been reading my blog posts regularly, will remember that I saw one of my mutual fund investments suddenly after 15-16 years and the Rs2000/- I had invested had over the years become close to Rs90000/-.

After this I became a regular at trying to identify various mutual fund schemes and slowly building SIPs (Systematic Investment Plans – where monthly a small amount of money directly gets withdrawn from the bank and invested in the respective schemes). Even today this is an important piece of education for me.

This was a very good mechanism because it brought about a lot of financial discipline into my life and I slowly started accumulating wealth.  The good thing was that in 2013 when this dawned on me, the Indian equity markets were at a very low level and subsequent to that there was a rally over the next 5 years which helped me gain a lot in terms of reaching my goals.

Around 2014-15 I read the Tony Robbins book Money Master the Game. While this book is focused towards the US economy and the shares and financial markets in the US, there were some nuggets of wisdom in a few areas which stuck with me.  One of the items was how even a 1-1.5% reduction in interest over a long period of time can make a very large difference in the compounding machine.

In India the mutual fund industry is quite regulated by SEBI and the total expense ratios of schemes are quite well controlled.  Inspite of that the MF schemes can be charging upto 3 odd percent as their fees.  This got me thinking how far I can be from my goals because my compounding machine has this leakage of about 3%. ( I even had a whole blog post related to how small differences in interest rates over long time periods can have massive impact on your wealth)

But I did not know, how to pick stocks myself.  So how could I invest in equity.  That’s when I started scouting for books on investing.  These were the books I wrote about over the last few posts.  However most books were US based stock market related and I could not relate to the Indian markets.

While searching for some simple inputs I came across people talking about the letters written to the shareholders of Berkshire Hathway by Warren Buffet.  I would recommend anyone anywhere, if they want to learn about basics of investing in simple terms then this is one of the best sources and is free of cost.  These letters are available on the Berskshire website and tabulated so you can search for them by the year they were published.

Inspite of these letters being written so well, I was a novice and was not able to relate to a lot of concepts with respect to the Indian companies, because American companies have different kinds of share holding patterns.

Accidentally I happened to chance upon the Wealth Creation studies created by Raamdeo Aggarwal Jt. Managing Director of Motilal Oswal.  These were similar to the Berkshire Hathway reports in that they came out each year but were better because they were talking about Indian companies and the Indian stock markets.  And to top it, they were also free.

I devoured on these reports and now am a big fan of Mr. Raamdeo Aggarwal who authors these reports.  Recently they have released the 23rd wealth creation study.

Most channels also get Mr. Aggarwal to discuss on the stock markets on a regular basis.  On YouTube you will see episodes of ETNow or CNBC TV18 where he is featured on a regular basis.  However last year the channel Bloomberg Quint ran a 4 part series with him on investing.  This is the best 4 hours you can spend on learning investing from one of the stalwarts of investing.

There is another person whom I admire from seeing his interviews on television.  he is Riddham Desai of Morgan Stanley India.  You can also see his interviews on either ETNow and CNBC TV18 or on Bloomberg Quint.

Between Riddham and Raamdeo the difference is the fact that one can distill the macro perspectives of the Indian economy so simply and present while the other can focus so well on the micros amazingly.

Have a look at these reports and videos and you will get a great input on how to evaluate stocks.

However stock picking is a tough call and if you don’t want to put in the hard work, then Mutual Funds and ETFs are the best route for you to take.

Till next time….

 

How a 15 year old can aspire to be a billionaire

Financial Independence, Uncategorized

Last weekend I was at one of my relatives place.  She has two young kids.  One of them is around 19 years and the younger one might be around 14-15 years of age

I was very glad to notice that they had an interest in making investments at such a young age.  I also loved the idea that their father was actually instilling in them a habit of trying to evaluate different avenues in investing.  This means that in India the efforts of channels like ETNow and  CNBC TV18 & the efforts of the mutual fund industry and stock exchanges like NSE are starting to bear fruit.  If kids and parents start discussing financial products then the future is definitely bright for the Indian middle class.

When they came to know that I write a blog on achieving financial freedom, they thought of asking me for some recommendations on stocks and other investments, which I denied. I prefer not to give advice on any specific type of instruments or stocks, because a) I am not qualified and b) because everyone has a different risk appetite.

Since I like to look at just the basics and compounding and the rule of 72 are simple things that anyone can do at the back of an napkin, I just spent time with them on that.

Using the above I just explained to them without any use of even a calculator how wealthy he could grow.

If the younger son invests today Rs10000/- at the age of 15.  India’s long term growth rate has been about 15% average.  Even the indices therefore will grow at a long term average of 15%.

Therefore if he was to put this 10000/- in a Nifty ETF, it would also grow at an average of 15%.  By the rule of 72 if he divides the number 72 by 15% then he will double the money in about 4.5 years.  For simplicity let’s assume 5 years.  which means every ten years it will grow 4 times. So his investment table, if he keeps invested with this 10000/- would look like below.  Just staying invested without doing any hard work (incidentally staying invested could be the hardest thing) he can convert his Rs10000/- into Rs10million or (Rs 1 crore)

Age Amount@15% Amount@25%
25 40000 100000
35 160000 1000000
45 640000 10000000
55 2560000 100000000
65 10200000 1000000000

The second column is if he looks out for investments which can lead him to compound at close to 25%.  then you see the magic.  The amount converts to Rs1 billion (100 crores).  Look at what happens between the ages of 45 and 65.  At 45 he would have Rs 10 million and at 65 Rs 1 Billion.  Even Warren Buffet’s wealth if you Google at age 65 and now at age 85, he is one of the richest men on earth just because of this phenomenon.

Obviously getting 25% on a consistent basis is not going to be easy, over a long period of time.  But the key is going to be about staying invested.  I hope the young guy can.

If you have any young guy you know, just show him this table of what his 10000 today can do for him over  30-40 years.

Till next time….

Carpe Diem!!!