Financial Planning - Keep it Simple, Stupid

Hi Friend,

What the master (read Mr. Warren Buffett) does when he tries to invest in a business in his own words:

"When we look at the future of businesses we look at riskiness as being sort of a go / no-go valve. 

In other words, if we think that we simply don't know what's going to happen in the future, that doesn't mean it's risky for everyone. 

It means we don't know – that it's risky for us. It may not be risky for someone else who understands the business".

But we think it's also nonsense to get into situations – or to try and evaluate situations – where we don't have any conviction to speak of as to what the future is going to look-like. 

I don't think that you can compensate for that by having a higher discount rate and saying, "Well, it's riskier. And I don't really know what's going to happen. Therefore, I'll apply a higher discount rate." -Warren Buffett.

Because he accepts that he doesn't know it, either he puts in effort to improve his knowledge about the business that he is evaluating to buy (by learning from others, by reading or by hiring someone to handle such a situation or by doing all these) or he keeps off the business if he can’t fathom it. 

But, he never buys ten businesses with the “hope” that one will work out as he understands that all the ten businesses that he chose may go bust if he has chosen them wrongly in the first place.


What we ordinary mortals do:

Well, we have perfected the art of pretending.We always try to look in control. 

In the process we try to compensate the lack of knowledge by “diversification” across asset classes like land, gold, fixed income instruments, art, equity (both Indian and abroad) and what not (or try to pretend that we are diversifying across these asset classes though most of the “Indian” assets are concentrated in land / buildings. 

By the way do we Indians understand the risks involved in real estate properly? 

I don’t think we do, otherwise we wouldn’t be investing the kind of sums that we are investing in Real Estate).

Those smart looking financial planners / financial advisers on business media “keep strengthening” our belief in diversification as it serves them well too. 

In a society where looking busy / knowledgeable is more important than being busy with a genuine cause / having knowledge for real is, what option these poor chaps have? 

Moreover we don’t give business to someone who "acts smart" and doesn’t fall in line with our “aspirations”(read - as we wish), do we?

The obvious question that springs to our mind is if it is so easy, why should I pay an adviser? 

We forget the basic fact that it is not easy but is being made easy by the knowledge and skill that one has developed due to an endless effort and hence need to be paid generously.

If we are only willing to pay for an adviser who presents an “elaborate”(read complex and mostly confusing) financial advise, instead of simple advise, then why the hell on earth would an adviser / planner make it simple for us?

One more nugget of wisdom from the master,

“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

Do we like to see ourselves in that “Business school mold” or do we like to see ourselves in the “Buffet / simple mold”?

Let us keep it simple:

Basic frame of a Financial Plan should contain

• Life Insurance: A term insurance policy to take care of a situation where “I” am 'no more' in “My Financial Plan” and 

• A Health Insurance Policy to make sure that a financial plan lasts its intended life span without being chopped midway due an adverse health condition. Buy your own health insurance policy even if you have group cover as group covers are “dependent on your company” and hence are less predictable than our own health policy. 

• Contingency or Emergency Fund that takes care of less probable events like loss of job, bad health and short term needs (the money one needs within 3 years) etc. This money should ideally be in fixed deposits and not in tax saving bonds / instruments as they defeat the basic purpose of a contingency fund i.e. liquidity .Anything beyond this is for the long haul and should be invested where Mr.Buffet invests it i.e. in Equity (through Mutual Funds).

Please don’t forget that a good adviser makes it simple and easy for you to stay the course.

Happy investing.

Cheap Online Term Policies - Our eternal quest for Free Lunches

Hi Friends,

It seems our logic goes out of the window when we perceive something to be very cheap (a clear indication of greed working overtime) and that generally becomes a starting point for an inferior decision making process.

Almost all the online term insurance policies are being sold either without riders or with nominal riders (like accidental death benefit rider) as if the companies want to avoid this uncomfortable question of “Why riders aren't given in online policies?”. 

They conveniently avoid critical illness rider (though some are offering a  stripped down version of the same), premium waiver benefit rider, total permanent disability rider etc.,

If a term policy can be sold online by writing software, it should not be too difficult to write a few additional lines of software and add the riders too to the online policy. Then why aren't the insurance companies doing it?

Interesting fact is, most of these companies while selling the online “cheap” term policy without riders, have a very costly offline “with riders policy”.

As an example, we may check the variation in premiums of HDFC life insurance Company’s online term policy(named “HDFC Life Click2Protect” ) and offline term policy(named “HDFC Term assurance Plan” ) by making use of the following link and toll free numbers

http://ops.hdfclife.com/ops/click2protect.do?source=W_HP_CMenu_T2P

Toll free numbers for finding the premium (of offline term policy - as I could not find the link to calculate the same on the company’s website) 18002669777 , 1800227227 .

We may find that offline term policy with riders would be Two to Three times as costly as online term policy.

Logic tells us that companies are not comfortable giving online term policies with riders at  or near the price point that they are offering now. 

The reason is, there is an insurance regulation / law, titled "Insurance Regulatory and Development Authority (Protection of Policyholders’ Interests) Regulations, 2002", that says "The allowable rider or riders on the product shall be clearly spelt out with regard to their scope of benefits, and in no case, the premium relatable to all the riders put together shall exceed 30% of the premium of the main product".

Please check the following link, to read the above regulation,

http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo50&flag=1&mid=Grievances%20%3E%3E%20Regulations

If the risk involved in riders has to be correctly priced-in, in the policy then the above condition necessitates that some of the price has to be transferred to the base policy premium. 

Hence, overall premium of the policy increases for those policies that offer riders. The higher the risk involved in a rider the higher will be the premium.

This condition is put in place, as the name of the regulation indicates,  to "safe guard policy holders' interest", by not allowing the companies to go bankrupt, as the law simply doesn't allow them to sell 'under priced' policies to 'beat competition'.

When insurance companies cut down the riders, they are not only cutting down the premium, but are also cutting down their risks significantly. Meaning benefits to the policy holder gets reduced significantly too.

An additional benefit for companies with online term policies is, they can attract a large section of people for whom "the only differentiating factor" is "price". Two birds with one stone. Good isn't it?

Insurance prices in every thing, even a company's brand gets priced in. It may be an emotional thing for us, but is a business for companies that sell it.

So, it is better that we pay a bit extra for a "quality product", rather than buying a "below par" product.

Online comparison sites offer data and there is no dearth of data these days. But, how we interpret the data is a matter of skill and that is where an adviser comes in to play.

One more question we have to ask ourselves is, we know that an agent / adviser is being compensated by us through fee / commission and is accountable for us. How are these online comparison sites being compensated ? Who are compensating them? How are they surviving?

No Free Lunches my friends.

Time cost of house / housing loan

Hi Friend,

Major investment in the initial days of one’s career for a majority of the salaried class will invariably be a house. 

It happens due to a variety of factors like pressure from family members, peer pressure, to save taxes etc.,

In most cases we need to take a housing loan to buy a house. 

Obviously buying a house by investing huge sums and also by taking a loan is a crucial financial decision, but somehow it seems that not many people evaluate financial implications / understand the financial implications of taking the decision properly. 

Let us check two major reasons given to buy a house and their veracity to understand the impact of buying a house so early in our career.

1. Financial Reasons: 

These mainly include saving taxes, rents etc., 

The logic being given is the rent that we pay will easily compensate the EMI and we will be left with the house in the end. People tend to forget the calculation part of it. 

A double bed room flat that costs Rs.45,00,000/- to buy would cost us Rs.15,000/-monthly (approx.) if rented. 

That is a rental yield (annual rent / apartment market value) of 4%. 

Wherever we are in the country, in a majority of cases rental yield would be in the range of 4 - 6%. 

To buy a Rs.45,00,000/- apartment, the down payment requirement will be around Rs.10,00,000/- and a loan of Rs.35,00,000/- for 20 years would result in an EMI of Rs.35,000/- (Approx.). 

Running the calculation on the following link would tell us the total amount that we have to pay for the loan.

http://emicalculator.net/

Even if we take an optimistic estimate of the value of the apartment after 20 years it would hardly beat the amount that we put in.  So, financially it may not be so wise a decision.

2.Emotional reasons: 

We certainly like to have a house of  our own for psychological comfort. But, one question that troubles me is that, are we really so attached to the house that we buy? 

If it is really the emotional attachment let us ask ourselves a simple question. Do we like to live in the same house that we bought in the initial stages of our career even after accumulating a wealth of Rs.20 crore or even more? My guess is, not many people would. Or is it the fear of losing money in other investment options that forces us to buy a house?

Whatever be the reason there is a cost associated with every financial decision. 

Let us try to find out the cost of buying a house early in one’s career.

A person(30 years of age) decides against buying a house:

Instead of taking a housing loan and buying house, let us assume, a person decides to invest the initial down payment of Rs.10,00,000/- in Equity based mutual funds until after he retires (say for 30 years). 

Let us also assume a compounded return of 17% (last 30 odd year return of SENSEX) on this investment. 

That would grow into a corpus of Rs.11,10,64,650/- . 

Please make use of the following link to do the calculations,

http://www.moneycontrol.com/planning_desk/planning_magic.php#

Another person(30 years of age) goes for housing loan: 

If a second person takes a housing loan, he will be left with little capital to invest as his / her initial earnings will be completely consumed by a housing loan normally. 

Let us assume the second person invests the same Rs.10,00,000/- after 20 years (after repayment of housing loan). 

He will be left with 10 years only until his retirement. 

At the time of his retirement with the same 17% return assumption he / she would get Rs.48,06,828/- .

The difference in both these cases is more than Rs.10 Crore and that is time cost of buying a house. 

We tend calculate tax benefits, saving in rents etc., but time can be really costly as the above example shows and should never be ignored in investment decisions.

As a majority of us ignore the importance of time, we tend to buy house so early in our careers and rob ourselves of an opportunity to be rich and financially safe. 

Shall we commit the same sin?

Happy investing.

Land reforms in India - Quantum of money that could flow in to Equity

Hi Friend,

Whether land reforms will be put in to practice?

Two of the biggest sources of parking capital are (Third one obviously is Business/Equity).

1. Banks
2. Land 

Had anyone of us predicted about 8 years ago that PAN card will be mandatory for crediting cash of Rs.50,000/- or more in Bank accounts? 

And that Tax department will have complete control on the banking data through core banking solutions? 

That is the impact of computerization and that certainly is happening in land records as well. 

So, it is not a matter of “Whether” but a matter of “When”? 

That is exactly the reason that I mentioned “over the next 10-15 years” in my earlier article.

Quantum of money in Land deals in India:

To understand the impact of anything we better have data. Take the example of Andhra Pradesh(A.P.) where Budgetary estimate of revenues due to registrations are approximately Rs.7,000/- crore for 2013-14. 

Please check the following link to know more.

http://www.thehindu.com/news/national/andhra-pradesh/registration-charges-shoot-up-in-andhra-pradesh/article4564665.ece

An income of Rs.7,000/- Crore is possible only if the transactions “as per government’s market value / registration value” are over Rs,1,00,000/- Crore. 

We all know that actual market value of land is much higher than the registration value and would be 4 to 5 times of the same or even more. 

Meaning, the quantum of deals could be Rs.5,00,000/- Crore or even more. 

But, we have not considered the deals that happen through “agreements” to avoid registration charges. 

If we consider all these transactions, actual real estate deals in A.P. could be in upwards of Rs.8,00,000/- Crore per annum.

There should not be an iota of doubt that there are much bigger real estate markets than A.P.(Like Delhi, Maharashtra, Tamil Nadu, Karnataka).

Considering the above, land transactions across India would easily cross Rs.50,00,000/- Crore per annum.

Quantum of money that could flow into Business / Equity:

Even if 10% of this money from land deals gets diverted into business / Equity (due to land reforms) that could be a diversion of Rs.5,00,000/- Crore per annum.

What Rs.5,00,000/- Crore investment in Equity / Business could do:

Rs.83,424/- Crore pumped in by FIIs (Foreign Institutional Investors) made the SENSEX jump from the rock bottom of 8000 to 18,000 in the calendar year 2009. 

Please check calendar year data from the following link,

http://www.sebi.gov.in/sebiweb/investment/statistics.jsp?s=fii

Imagine what Rs.5,00,000/- Crore per annum could do then? 

We should see the big picture clearly. Then only we will be able to ignore daily market fluctuations and will have the courage to invest a substantial capital over the next 10 years to benefit from such huge capital flowing in.

Happy Investing.

"Good Boy" Syndrome

Hi Friend,

The most neglected aspect of successful investment seems to be, investors in general underestimate the impact of understanding their own psychology and the impact of how they react to the demands of the society as far as their investments are concerned.

Since childhood we are so attuned to be called “Good Boy” that all our actions, thoughts, movements etc., are focused on getting this universal stamp of approval from our family members, relatives, classmates and everyone else on the street. 

For the fear of losing that stamp of approval we are doing things that we are not happy doing at all or do things that we know are sub-optimal. 

This process of half-hearted approach makes us fail. Failure is not a pleasurable experience and certainly has the potential to make us unhappy.

Imagine a situation where Warren Buffet has to take permission or get the approval from his parents, uncles, aunts, sons, daughters, friends etc., before making an investment decision!! Would he be Buffet then?

The following two quotes from different men with different words indicate that we better get rid of this Good Boy Syndrome to be Happy.

"I much prefer the sharpest criticism of a single intelligent man to the thoughtless approval of the masses" - Johannes Kepler

“A public-opinion poll is no substitute for thought ”

- Warren E.Buffet

Starting on the path of happiness requires courage and following are the words of wisdom to muster that courage,

"Courage is the price that life exacts for granting peace" - Earhart Amelia

"Whatever you do, you need courage. Whatever course you decide upon, there is always someone to tell you that you are wrong. There are always difficulties arising that tempt you to believe your critics are right. To map out a course of action and follow it to an end requires some of the same courage that a soldier needs. Peace has its victories, but it takes brave men and women to win them" - Emerson Ralph Waldo

"Courage is not simply one of the virtues, but the form of every virtue at the testing point"- Lewis, C.S

"When the fight begins within himself, a man's worth something" - Robert Browning

Happy investing.

Land Reforms in India - How they are going to affect investment options over the next three decades?

Hi Friend,

The Origin: 

• Continued pressure from the public to plug corruption - What better way to reduce corruption than closing down the avenues where ill-gotten money can easily be hidden i.e. Land/real estate?

• Socio-economic issues like naxalism etc.,

How it is being done?

New Land Acquisition Act: 

• The parliament has recently passed land acquisition bill which makes it difficult to grab land in the guise of industrial projects etc., from ordinary people that too without paying a proper price. 

• The bill mentions “Market price” for compensation indicating that the government’s valuation of land will converge towards reality. Please check the following link for further information, http://www.livemint.com/Politics/FXZ9CrJApxRowyzLd8mb2O/All-you-wanted-to-know-about-new-land-acquisition-Bill.html

Increase in Registration values of land 

• It is already being done so that it reflects reality and also to increase government revenues in this tough economic environment. 

• As the registration values increase the buyer (who in some states need to produce PAN at the time of registration) will be prone to tax risk. If asked by the tax department, has to prove his / her income sources. 

• Net affect is, Black Money will be discouraged from entering Real estate there by reducing real estate returns in the longer run. 

Modernization / Computerization of land records: 

• Four States – Haryana, Tripura, Gujarat and Karnataka – had completed the process and with central government’s push the rest are on their way to do the same. 

• If all the land records are computerized at the click of a mouse the government can easily find out who owns what and so can the tax department. 

• Benami holding of land becomes that much more difficult and so will hoarding of land. 

• Please check the following link to know more, http://www.thehindubusinessline.com/industry-and-economy/modernising-land-records-next-on-agenda-jairam-ramesh/article5146707.ece

Draft policy wants States to limit land holdings to 15 acres: 

• The result is bigger guys will be discouraged from buying large tracts of land so it limits the sudden surges in land prices in particular areas(which has always been the tempting factor for most us). 

• Fifteen acres land limit may be too small to get the bigger guys interested and their money will look for alternative investment options. 

• Please check the following link on Draft policy,       http://www.thehindubusinessline.com/economy/draft-policy-wants-states-to-limit-land-holdings-to-15-acres/article4509303.ece

TDS on transfer of immovable property: 

• Anyone buying an immovable property (other than agricultural land) exceeding Rs 50 lakh in value will now have to deduct 1% TDS (tax deducted at source) before making a payment to the seller. 

• The tax deduction will be 20% if sellers do not disclose their Permanent Account Numbers (PANs). 

• The 50 Lakh limit is an initial limit and may be applied to all the transactions at a latter date as is happening with e-filing of income tax returns. 

• Taxation of real estate properties will reduce the attractiveness of real estate as an investment avenue, thereby reducing the rate of price rise. 

• Please check the following link to know more about this provision, http://www.moneycontrol.com/news/tax/all-about-tdstransferimmovable-property_902596.html

The net effect of these land reforms:

• It makes land transactions transparent. 

• But, it will also reduce the returns on real estate in the longer run say 10-15 years down the line and force people to look for alternative investment options that would yield better returns. 

• Where would this money go then? 

• What are the other options available which could absorb such huge money (even a small percentage of what is invested in Real estate at present could be in lakhs of crores of rupees)? 

• The obvious choice seems to be business or equity.

How Investors in Equity based mutual funds will benefit from this change in investment choice over the next Three decades or even beyond:

• We know that Indian Equity markets are dependent on Foreign investments for their growth. 

• Our markets go up or down based on Foreign investors’ mood and perception. 

• If most of the Indians feel that Equity is the only best alternative then our dependence on foreign flows will reduce resulting in less volatility in our equity markets. Lower fluctuations make our markets more attractive thereby encouraging more people to invest. 

• Valuations of the market will improve significantly. 

• To put it simply what people are willing buy for Rs.10/- today may be willing to buy for say Rs.12/- or for even more then.

• Availability of more capital means less dependence on debt (making fixed income instruments like FDs, Bonds etc., less attractive).This causes interest rates to fall there by making businesses even more profitable. If businesses are more profitable then investors who invest in them get higher returns.

• When the cost of capital decreases more businesses will spring to life creating a higher employment in the country and higher growth in the economy which is a definite positive for the markets.

Who will benefit the maximum from the above changes that are happening:

The investors who have the courage and discipline to invest in these troubled times and are patient over the next 10 years would have invested a meaningful amount of their capital and would have positioned themselves to reap these benefits over the next Three decades.

Happy investing.

Real Estate (Land and Buildings) as an Investment option in Indian Context

Hi Friend,

Land is OK, but how about a Better Quality Life with  Better Wealth?

Let us find out how...

We all Love Real Estate:

If we don’t accept this, let us check the percentage allocation to Real Estate in ours as well as our friends’ portfolio using the Following link, by typing in the values of various assets that we possess.

http://www.mathcracker.com/pie_chart.php

We would find that 60-80 % or even more, of our assets , are concentrated in Real Estate , either by passing-on of these properties from elders or due to the strong emotional need "to own a house of my own" or due to the feeling that land is the “safest asset- as its price can not go down” etc.,

When we love something too much, we won’t mind paying a bit extra for it and in most cases, we end up paying more than the asset’s worth.

Also, we don’t question its ability to generate good returns and consequently we don’t bother about checking its relative performance against other asset classes like Equity.

Its illiquid nature- one may not be able to sell it within a short notice and in some cases (especially if the demand is not there) for a very long period (years together).

The problem with illiquidity is, we may accumulate wealth, but we may not be able to use it when the need arises (Like a Medical Emergency, Children’s Education, Marriage, Retirement etc., which more often than not require substantial cash ) there by betraying the fundamental reason of accumulation of wealth.

We have to commit Huge sums - We can not buy 1 square yard, 2 square yards etc., depending on our income level and buying Real Estate, more often than not, involves, taking a Big Loan as well.

A Big Loan means a very long term commitment. The issues with this are,

• Loan needs to be paid compulsorily and most of our jobs are not guaranteed for such a long term (15-20 years).

• It may give rise to Stress and may affect our decision making while choosing jobs (Example: With Big loan weighing on our mind, we may have to go for a job option which gives us reasonable job security but compromises our professional growth, rather than going for a job opportunity which gives us a chance to learn as well as grow our income potential in the longer run)

• We may have to compromise in our life-style and may have to lead a sub-standard life style (affects the overall quality of our lives).

• It may not allow us accumulate the much needed cash to satisfy our genuine needs like a medical emergency, children’s education, marriage, Retirement etc.,

• The Real Estate asset we bought may not generate any income at all (If it is a plot) / may generate little income (If it is a flat or building- compared to the investment) but, there may be substantial out-go of interest.

There is no credible data which gives the true picture of appreciation of capital in case of land across markets.No data means, no logical basis for taking decisions.

This coupled with our own partisan attitude, i.e. remembering only the most successful bets in land, we have, more often than not, been Speculating (doing things based on hope and greed) in land.Speculation can not be a sound way of creating wealth or planning our finances.

Tax in-efficient- When we sell Real Estate to satisfy a need, we have to pay capital gains tax. In case of Equity - no tax is payable for long term capital gains.

The other Dis-advantages are,

• We may lose lucrative opportunities else-where, even if we know of their existence.Most of our real estate investments have a size of around Rs.30,00,000/-. That is not a small sum and that is all what we have in most cases.

• A best example would be, in late 2008 and early 2009, there was a huge fall in equity markets.Data says, any big fall in equity markets is a certain opportunity to make money over the longer run.Even if we know this fact, it is impossible to sell the Real Estate asset and invest the money in equities quickly, for Two reasons- Illiquid and Black Money involved.

• There will be assets, but they will be of little use when it comes to practicalities of life and in enjoying life to the maximum.We can not use Black Money generated from real estate for financing children’s education abroad, a foreign trip, buying a car of our choice etc., because of Tax implications.Once in land, in all probability, forever in land.

Those transactions of Real Estate which take place in cheques(generally flats) are not worth thinking about in terms of capital appreciation.

Average Equity returns are far superior and more predictable than average Real Estate returns in the longer run.

People became Rich and billionaires by investing in Businesses(Equity) and not in Land.

Happy Investing.

"The Most Important thing" by Howard Marks

Hi Friend,

We have been working hard to get rid of the traditional way of thinking to shape ourselves in to better investors.

But, our inability to "stop looking around for confidence" has been a major stumbling block in our growth to be a "better investor".

“The Most Important thing” by Howard Marks (Columbia Business school Publishing) is a great book that helps us get over this hurdle and encourages us to be efficient thinkers. 

He divides thinkers into two categories

• First Level thinkers
• Second Level thinkers

First level thinking is simplistic and superficial and just about everyone can do it. All the first level thinker needs is an opinion about the future, "As in the outlook for the company is favorable, the stock will go up".

The second level thinking is deep, complex and convoluted”.

“First level thinkers look for simple formulas and easy answers. Second level thinkers know that success in investing is the antithesis of simple”.

“Different and better: that is a pretty good description of second-level thinking”.

“Those who consider investment process simple generally aren’t aware of the need for – or even the existence of – second-level thinking. 

Thus, many people are misled into believing that everyone can be a successful investor. Not everyone can. 

But the good news is that the prevalence of first-level thinkers increases the returns available to second-level thinkers. 

To consistently achieve superior investment returns, you must be one of them”.

“All investors can’t beat the market since, collectively, they are the market”.

To summarize, our lack of confidence in ourselves, to take advantage of an opportunity that lay there right in front of us begging for our attention, Mr.Howard Marks uses the following example,

==========================================
A professor takes a walk with a student.

“Isn’t that a $10 bill that is lying on the ground?” asks the student.

“No,it can’t be a $10 bill”, answers the professor. ”If it were, someone would have picked it up by now”.

The professor walks away and the student picks it up and has a beer.

==========================================

Buy and read the book for our own good.

Happy Investing.

What makes Buffet succeed where most of us fail i.e. in Equity investment ?

Hi Friend,  

If we want to learn something we would do well learning it from the best. 

As far as Equity investments are concerned there is no one better than Mr.Buffet. 

It is not his Billions that made him great, but his character and his thought process that are instrumental in making those Billions. 

Here is how he overcomes what fails most investors, in his own words.

• Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.

• We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

• A public-opinion poll is no substitute for thought.

• Wide diversification is only required when investors do not understand what they are doing.

• Risk comes from not knowing what you’re doing.

• The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.

• There seems to be some perverse human characteristic that likes to make easy things difficult.

• It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.

• You only have to do a very few things right in your life so long as you don’t do too many things wrong.

• Chains of habit are too light to be felt until they are too heavy to be broken.

• It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.

Check whether we are practicing any of these and if not ask yourself this question, "Am I eligible to be rich"?

Happy Investing.

The Three mistakes to avoid for getting good results in Equity and why land is not that safe?

Hi Friend,

How many times have we encountered our own “Homegrown Pundits” (that often happens to be - our “well wishers”, relatives, colleagues and even passer byes etc.,) who vouch for the “huge risk” in Equity? 

How many times have we heard these very “homegrown pundits” vouch for the “Safety in Real Estate”? Countless, isn’t it? 

The feelings about these asset classes are so closely linked that even the mention of the word “Equity” forces us to think about the “Sweet memories / Safety” of Real Estate.

Obviously, if even the thought of Equity as an investment, forces  us  to invest in land, then Equity should have given us or  at least a majority of  people who invest in Equity,  a  bad experience. 

Let us look into the three main reasons due to which most investors failed to get good returns in Equity investments.
  

Any failure in Equity investments should have any one or a combination of the following ingredients.

Doing it oneself:

• It is hard to believe but often each individual is his / her own best enemy as far as investments is concerned.

• The reason is we don’t ask ourselves “Whether I have the required expertise to do investments myself ?”

• It especially holds true in Equity investment ( which obviously is much more complex than many people think it is and requires specialized knowledge than many people think it requires).

• If we don’t do it right, how would we get good results?

• How can we avoid this pitfall? Mutual Funds give us an option to invest in Equity by hiring a Fund Manager who is good at his job or at least better than ourselves in handling Equity investments.

Investing in Equity when every other person on the street is comfortable with Equity (by the way this generally happens at market peaks):

• Investing in Equity is more about temperament of our own selves than it is about intelligence.

• Let us look into what Mr. Warren Buffet has to say about handling one's own temperament in equity investment. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.

• The above quote also answers the question of "when is the best time to invest in equity?". We have to “look around ourselves and ask 'how many people are willing to invest in equity at that particular point in time?'. If a majority is not willing to invest, it might be a good time to invest. 

• That is how Buffet made his billions, by investing in equity when no one else is doing so.

• But, my uncle / aunt / brother / sister / friend.. Says……Yeah, got it. 

• Here is what Mr.Buffet has to say “A public-opinion poll is no substitute for thought”.

• What he means by that is “don’t wait for consensus that often happens at market peaks with disastrous results for you. If you have conviction, go ahead and invest”.

• Obviously one needs conviction to invest in Equity when no one else is doing so, isn’t it?

• Don’t forget “your uncle / aunt / brother / sister / friend…” may not be the best advisers on earth. They certainly are not better than Mr.Buffet (in accumulation of both knowledge and consequently wealth). 

• Instead of giving you a bit of clarity they may confuse you even more by multiplying your confusion with their own confusion.

Investing in Equity for short term say 3 Years are below: 

• This sin can not be forgiven and hence the losses that people incur in Equity investments. When you say “Equity” it should mean “10 years or more”, the longer it is the better it is.

One might ask, “why should I invest in equities with these hellish conditions- have to wait for 10 years, have to have courage, have to have patience etc. I have land to invest  which is far safer…….”

Hold on; hold on, if you want to be financially safe without compromising the quality of your life and want to be rich, Equity is the only option in the longer run. 

Land may not as safe as you are thinking it to be. 

Let me explain this to you.

Concentration risk in Land: 

• By nature investments in land requires a huge amount of capital to be invested in a single location or may be  in a limited number of locations (generally 2 to 3 where you live or where you have relatives to take care of these investments), meaning almost all your investment is concentrated.

• If there is an economic down turn in these limited locations, obviously your entire investment in land is locked up (anyway land itself is illiquid and such down turns multiply the risk) and it may not be useful to satisfy your needs.

• Mutual Funds help you diversify your investments across many locations (obviously companies in a Mutual Fund portfolio operate across the length and breadth  of the country- so there is no single location concentration) and across industries as well.

• Each Mutual Fund invests in 30-40 companies and by having 3 to 4 funds in your portfolio you may be owning around 60 to 100 or even more unique companies that have fantastic track record and operate in a wide range of industries and geographies. Can land beat this kind of diversification?  

Legal risk in Land: 

• How many times have we heard about “Double Registrations in Land”? “Legal issues due to encroachment in Land etc.,”? Not very rare, Isn't it?

• These issues are mainly due to land being un-regulated / laws being not so clear in Land. 

• The value of investment in land may become “Zero” if there are legal issues. 

• No such issues exist in Mutual Funds which are highly regulated. You can have peace of mind in Mutual Funds as no one can “occupy/double register” them. You can have good returns too if you invest for the long term.

Finally, you can live without touching / feeling one of those pieces of land that you own regularly, but you can’t live without Equity / businesses, not even for a single second (the clothes that we wear, TVs, Computers etc., are all manufactured by businesses after all). 

Mutual Fund units are as “Physical” as any piece of land. We may not see the businesses underlying in those Mutual Fund units. But, we can feel the products of those businesses each minute, every day.

Happy Investing.