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There are two ways to look at investor behavior in the context of markets. Although, there can be many more perspectives for investor behavior if we can include various markets and different types of investors, but broadly these two perspectives stand out in the open:

1. From the perspective of an Individual Investor

2. From the overall Market perspective

From the point of view of an individual investor, many try to exceed the market return by trying to time the market runs or taking additional risk. In fact, even the fund manager performance is assessed according to Alpha (Additional return over the expected market return) generated by the portfolio manager. While, professional portfolio managers managing large investment portfolios and backed by an infrastructure to analyze market movements, far more efficiently than any individual investor, may beat the opportunities and benefit from anomalies, for small individual investors it is equally difficult.

Therefore, from the point of view of an individual investor, the objective can be to generate returns equal to the market return, portfolio managers may be forced to generate additional returns so as to provide for infrastructure and other expenses. For an individual investor this will be an impossible task to perform as there is only enough time and money to create a small basket of securities.

Because of this limitation individual investor only apply very few strategies to safeguard themselves against market risks. Buy and hold, systematic investments etc. are a few such strategies. These strategies alone are usually not enough to protect the value in the times of crisis. Awareness and financial maturity play major influencing factors in decision making especially in the time of crisis.

Awareness

Awareness is not limited to the market, stock and economic information. It also includes awareness of objectives, goals own behavioral patterns and factors that may influence your financial decisions. As an investor you may ask yourself if the decision you are making is not influenced by any of the following common behavioral patterns:

1. Biases: It’s an influence which causes a tilted or one sided view of the situation or decision.

2. Herd Behaviour: Herd behaviour is better known in Hindi as ‘Bhedchaal’; i.e. one tends to do what everyone in the group is doing.

3. Active/Passive Investment Style: The style of investment of an investor can significantly affect the income generated on the investment, while passive style requires less involvement. It also requires the investor to have a long investment horizon, while active investor must spend lot of time in the market adjusting the trade.

What Went Wrong When Markets Crash?

Each of these crashes was followed by three behavioral phenomenons:

I. Overconfidence

II. Herd Behaviour

III. Panic

Lack of awareness leads to herd behaviours, and afterwards overconfidence and when market starts to disappoint the new and the old investors panic to get out of the loop. As discussed earlier awareness encompasses awareness of macro-economic factors as well as factors affecting the own situation of the investor.

Since it’ll be really difficult for an individual investor to spend time and effort on completely understanding the intricacies of the market, best way is to understand their own risk profile and behavioral choices. This awareness will ensure that the investment decisions are not biased, not based on incomplete information or at least not fully exposed to the inherent market risk.

How to become aware of Self Position?

This question has been addressed time and again by financial advisors, planners and senior investors, who suggest that your purpose of investing should be clear. In a way you should know in the beginning (before starting to invest) following facts:

1. The purpose of investing: The asset choice depends on this purpose and important goal must be achieved through safer means, and so if you save your retirement funds in equity market in final few years of your retirement, more likely you are to panic in case of an adverse movement. Thus, as the wealth managers say, ‘define your goals smartly and prioritize before starting to invest.’

One example: Higher education of younger son is five years away, and marriage another three after that. Education requires Rs. 500,000 each year for three years but marriage is a Rs. 10 lakh onetime expense. Considering education loan is also available for education expenses with tax benefit on repayment, saving for marriage is going to be more meaningful and important as there is not cheap alternative to it.

2. How much you know about the asset: Know about the asset behavior and risk profile. For example: If your aim is to achieve results within five years equity may not be a good place to park your money, but if your aim is 10 years it may be. Similarly all other asset classes have their own risk profile and behavior.

3. Know Thyself: This is a very famous teaching of many of the religious texts that one should know himself, and be aware of the decisions he/she makes. Knowing yourself will start from personality definition and go on to include family, dependents, own aspirations etc.

How does this Awareness help?

The clear awareness and knowledge of your objectives, needs and goals allows you to make decisions which will ensure that you remain unaffected from market driven panic situations and are able to meet your obligations timely. Panic and wrong decision making strikes only when there is some lack of clarity over goals and purpose of investment. In summary it can be said that following learning can be made out from past market crashes:

1. Always define your financial goals with amount, time and importance.

2. Know your risk appetite; i.e. comfort level with temporary paper losses.

3. Understand the economic behavior of investment asset; i.e. economic cycle of the market.

With this awareness sometimes even taking a tactical benefit from the market may rewarding and not difficult.

Post the chaos faced by the virtue of Demonetisation, the Aam Aadmi of India was hopeful of a liberal budget. And the budget did stand up to the expectations of the Common Man to some extent. The Budget 2017 has brought some good news for the common man. Following are some key highlights of the budget which a Common Man should know:

Tax: Individual Taxation has witnessed a number of welcome changes in this budget,

The biggest announcement made for the Common Man is the slashing of tax rate by 5% for individuals falling in the Rs 2.5 Lakh – Rs 5 Lakh Slab. This is a big relief for the taxpayers. There is a tax rebate of Rs 2,500 for individuals having an income of less than Rs 3.5 Lacs. This means if the income is Rs 3 Lacs, there will be zero tax liability, if the income is Rs 3.5 Lacs, then the tax payable will be Rs 2,500 only and if the limit of Rs 1.5 lakh under Section 80C is fully used, then the tax liability would again be zero for people with an income of Rs 4.5 lakh. For individuals falling in the subsequent slabs, there is a benefit of Rs 12,500 in total for them too.

The tax filing process has also been simplified by introducing a one pager return for individuals having a taxable income of upto Rs 5 Lakh.

However, the rich taxpayers falling in the slab of Rs 50 lakh to Rs 1 cr will have to pay an additional surcharge of 10%, while those whose income exceeds Rs 1 cr will have to pay a surcharge of 15%.

The budget has also put to an end to the RGESS scheme, under which the first time equity investors could claim for a deduction of upto Rs 25,000 for three years under section 80CCG.

Real Estate The budget has brought reasons to cheer for home buyers.

The unit size calculation under the scheme for profit-linked income tax deduction for promotion of affordable housing has been changed from “built up” to “carpet area”, thereby increasing the size of the unit by around 30%.

For calculation of Long Term Capital Gains for immovable property, the holding period has been reduced to 2 years from 3 years.

Further, for those whose land is being pooled in for the creation of Andhra Pradesh’s state capital, they will be exempt from Capital Gains for holding such land as on 2 June 2014.

For those living on rent and not claiming a deduction in respect of rent paid under any other Section of the Income Tax Act, you can now claim a deduction of up to Rs 60,000, up from the previous Rs 24,000 under Section 80GG.

The base year for indexation has been shifted from 1981 to 2001 now. So, for those holding property since ages, it is a good news. Since the cost of acquisition will be inflated while calculating Long Term Capital Gains.

Traveling: The budget was travel friendly.

There wasn’t any announcement on increase in the railway fares. And the icing on the cake is you do not have to pay any service tax for railway tickets booked through the irctc website.

You will get clean coaches as an sms based ‘Clean My Coach’ service has also been started.

A new facility ‘Coach Mitra’ has also been announced which will provide a single window interface to register all coach related complaints and requirements.

Students

An e-learning platform called SWAYAM to be launched with 350 online courses, to enable students acquire knowledge virtually taught by the best faculty. And the best part is it comes for free. It is an effort towards providing the best education to all, including the most vulnerable.

Two new AIIMS for medical Students to be set up, one in Gujarat and another in Jharkhand.

Others: In addition to the above,

The banks have targeted additional 10 lakh new POS terminals by March 2017 and encouraged to introduce 20 lakh Aadhar based POS by Sep 2017. So, if you do not have a debit card or credit card or other modes of cashless banking, Aadhar based Sale Terminals will come to your rescue.

For senior citizens, Aadhar based smart cards, containing their health details will be introduced. This is a vital step taken to provide affordable healthcare and a good quality life to senior citizens.

As kids we would have read the famous story of Alice in wonderland. In the story, she once reaches a crossroads and was not sure which road to take. A passing cat asked her where she wanted to go to which Alice replied

“I don’t know!”. The cat then smilingly replied “Then it doesn’t matter which road you take”.

The classic moment in the story is true to each of us in our daily lives. In our lives too we are often at crossroads like Alice and unknowingly we choose our roads without knowing where we want to reach in our life. When it comes to investments, this is in fact the reality for most of us. Since we don’t know what we want to achieve from our investments, any investment decision helps us achieve it.

The need for setting goals can never be undermined, be it business, personal life or your personal finance. Every wise investor would know the purpose or objective behind his/her investments and more often than not, the same would be geared towards achievement of some goal in life. The goal can be any personal or financial goal like retirement or a fixed amount at any time in future, with the condition that it can be monetised or spoken in terms of money.

Advantage of setting goals:
The following are some of the benefits of setting financial goals in your life…

• Goals make you think & prioritise: When you actually start planning for your goals, you are forced to evaluate the need, intensity and priority for each of your goal in life. This gives you a lot of clarity on which goals to pursue and in what priority. Often important goals which are not on the top of your mind, crop up and make you think.
• Goals make you take action: After identifying goals, one becomes more inclined to take actions for achieving the goals. We often neglect or delay the action because the goals are not very clear in our minds. Defining goals would help you realise the urgency for taking appropriate actions
• Goals tells you where you: Unless the goals are defined, we would not be able to comprehend our current situation with regards to the future. Defining goals also clarify their feasibility and practicality for achievement and accordingly, depending of our current situation, we may either change the maturity period or the returns expectations or the targets of the goals.
• Goals helps you to keep focus: Understanding your goals would help us keep focus on achieving them. This helps us on a daily basis and you may start making a choice between making small expenditures or saving for the goals. Also, we would be more discipled and regular in making our investments and at the same time, not withdrawing from the kitty saved towards the goal.
• Goals lead to success: With goals in mind, you will make optimum use of your financial resources when while planning for them. You would eliminate wastefull expenditure, invest in productive asset classes and tend to maintain discipline in your investments. All these factors ensure that you are much closer to your goals then they mature.

Risks of not setting goals: 
Just like we discussed the benefits of goal-setting, there are similarly down-side risks to not setting and planning for goals.

• Compromise on goals: Not identifying or delaying planning for your goals for too long would ultimately lead to situations wherein you would need to either compromise on your goals, in terms of value or by pushing our goals into future. However, more often than not, goals like child marriage, education, retirement, cannot be postponed and it is best left unsaid as to how you would plan when they actually arise. You may even loose out on smaller goals & moments of happiness like say vacations, which would be very much possible if you are planning in advance for them.
• Failure to make optimum use of finances: Not setting goals and planning for same will lead to misdirected investments and spendings. Chances are that there would be unwarranted spending which would had been invested had planning been done. There is also high chances that you would save in asset classes or product which are not in line with your goals. For e.g., While planning for retirement after say 15-20 years, you will probably identify equity as ideal asset class for you to invest. However, in absence of same, you may avoid equity investing as a risky asset since your goal & time horizon is not clear.
• Compromising on Long-term financial well-being: In long term, better management of your resources would enable you to achieve same while also creating and protecting your wealth at the same time. Needless to say, you are more likely to be credit-free, while having appropriate wealth at disposal for a better life, especially post retirement. By avoiding goal setting & planning, you may well be inviting financial in-stability or insecurity in long-run since you may be forced to take credit or dilute your unplanned investments when your goals mature.

Setting financial goals is something that we are not completely unaware of. It is like basic common-sense. We all know its importance but rarely do we plan and act accordingly. We have discussed in detail the benefits and risks of not setting your goals and planning for them. Very clearly, they have potentially very far-reaching & defining consequences to your financial well-being in future. Those who are wise would understand its criticality and start taking appropriate actions towards it in immediate future. And for those who fail to do would leave matters increasingly to luck and chance for as long as they continue delaying same.

This was during the year 2009 – 2010. Mr. Shankar, Amit’s father retired few weeks back and he was enjoying his retired life. After retirement he got a hefty sum from his savings as PPF & Gratuity. One day, Amit & his father, Shankar was having a conversation –

Amit – Dad, I am very happy to see you enjoying your retired life. But I wonder if you could tell me about your savings. What have you done with it?

Shankar – Hey Champ, I have kept this money in three different banks as Fixed Deposit for 3 years. I would be getting average 10% interest per annum which would suffice mine and your mother’s expenses.

Amit – Ohh.. that’s great.. Good plan Dad..

As per plan, every month’s income was sufficient though the bank was deducting the Tax (TDS) on the interest offered. But Shankar was comfortable as this amount was enough to fulfil the monthly expenses. Days, weeks, months and years passed and in the year 2013, Shankar received a call from the bank. The banker told him that the Fixed Deposit that he has made would be matured next week. He also requested Mr. Shankar to come to a bank and renew the instrument. Shankar immediately visited bank where he learnt two things –

• Due to every month withdrawal, his base amount has not appreciated. It was the same amount which he had invested.
• Earlier the interest rate was 10 % but now the interest rate would be 9.00%

Shankar was bit worried when he understood that the amount that he will be getting every month will be less than the amount which he was getting earlier. But he had no option as he was not ready to take risk on the only savings that he had. So he decided to renew the Fixed Deposit for another 5 years. That day evening, while having dinner, he shared this with Amit –

Shankar – Amit, I visited a bank to renew my Fixed Deposits.

Amit – So, What happened?

Shankar – But I am nervous as the interest rates have gone down. I will be getting only 9% interest on my investment. This amount will be on the border line of my requirements. So at times you may will have to support me financially.

Amit – Don’t worry Dad… Surely..

Now Shankar had to spend money very carefully as the income from interest on FD was as same as to his expenses. Days.. weeks.. months.. Time was flying at its own pace…. And the day came (2016) when Shankar received another call from the Bank to renew his FD. But this time the interest rate was only 7.75 %. This was a very bad news for Shankar. Now he had no option but either to depend on his son for few of his day to day life expenses or work somewhere again. For whole of his life he worked very hard but that didn’t help him to live happy retired life.

Dear Friend, The jist of the story is, FD interest rates are coming down and on the other hand inflation is rising. If we keep our money in FD, then after few years, value of our money will depreciate and the gap between our expenses and our income will be widened.

If we wish to secure our retired life, we have one solution and i.e. “BALANCE FUND”. Now if we compare FD and Balance Fund, surely there is a minimal risk in Balance Fund but we look at the average returns for the last few years, this risk is nullified. If we keep our money in FD and use interest for expenses, our Capital does not appreciate, but if we invest the same amount in Balance Fund and if we opt for SWP (Systematic Withdrawal Plan), then we get fix monthly income as well as our capital also appreciate over a period of time. This happens because some portion of your fund is invested in Equity Markets and some portion in Debt Market. Another advantage of investing in Balance fund is the monthly income which I get is totally Tax Free. All Mutual Fund AMCs have various Balance Fund schemes. So you need to consult an experienced financial advisor to select a right balance fund from the exhaustive list of schemes. You need to change the mindset as per time and situation. Think Different and be Smart.

“Set your goals high and don’t stop till you get there” ~ Bo Jackson

There is a strong correlation between your investments and your goals. To make life simple, every goal must have an investment attached to it. To justify its presence, the investment must qualify in two tests viz. it must mature at the time of attainment of the goal and the maturity value of the investment must be adequate to meet the goal.

We have spoken a lot about the investment options that are available and how they can be customised according to your goals. Today we would talk about the latter, i.e. the basis of investments “your goals”.

Most people do not invest because of lack of excitement to achieve or lack of knowledge. “Plan for your retirement” may not excite you, but “Having Rs. 5 crore at the time you retire” or “Getting Rs 50,000 a month even after retirement” would definitely excite you. It’s just a matter of choosing the right set of words. You have to make your goals simple and exciting and your financial advisor will take care of the need for knowledge.

Personal finance, saving and investments are terms which might scare you off, but a little modification in your perception and presentation of these terms can make things smoother to understand and apply. As a part of the simplification process, you must make your goals exciting, as the thrill will motivate you to invest for them and work to achieve them. Following are a few key points which can help you make your goals exciting:

Pen down your goals: We do remember what is important for us, what do we want to achieve at the back of our minds, yet it is prudent to write down your goals along with the target date. Writing down your goals will remind you constantly that you have to work hard to achieve them, you can go on check-marking the ones you’ve accomplished. You can review the list to track your status and edit them as per your requirements. So, whatever short and long term goals you have set for yourself, just write them down irrespective of how and when you’ll achieve them.

“Written goals have a way of transforming wishes into wants; cant’s into cans; dreams into plans; and plans into reality” ~ Michael Korda

Step by step: If you are the one who is averse to investments, try your luck with investing for one short term goal. Start with a thrill, you may go for a one year debt mutual fund to actualise your dream of going for a vacation with your wife, the one which you have been postponing for dearth of money. After one year, when you come back from the vacation, you will not be the hesitant investor anymore, but an investment fanatic. The contentment of achieving one goal will help you in setting and working for the next goal. The joy which you will imbibe from this vacation will motivate you to invest for your next goal, and this motivation will set you on track.

Challenge yourself: If you feel you may not be able to conserve money from your income, to provide for your investments, “Challenge Yourself”. Your income is limited and you have a lavish lifestyle. Due to maintenance of your standard of living, you have not been able to own a house and it is your dream to have your own house. However, you feel setting a goal to buy a house is of no point since you will not be able to achieve it. It is only you who can help yourself at this point. Provoke yourself, start with a short period, say a month, develop a conviction that you will not waste money in parties, fine dines and shopping, and for this month you will limit your expenses to necessities only. After a month, when you see the extra money, you’ll realize that your dream can be actualized. And at that point, the goal of buying a house occupies a place in your mission list.

Process driven: Make a list of short and long term goals. Break down your longer term goals into short term goals. Let’s say you want to leave certain assets for your kids to inherit. This is a very long term goal. But before that you must provide for their education, marriage etc, these are relatively shorter goals which also in a way form a part of the former. Or you may want to be debt free five years down the line, paying off your credit card debt is a short term goal and is a part of your long term goal. Achieving your short term goals one by one will set you on the path to reach your long term objectives.

Achievable: The goals that you set for yourself must be exciting but attainable, else they will loose their charm. If today, you are hardly able to make both ends meet, you have other important objectives to fulfill, like your children’s education, owing a house and you set a goal of owning a BMW after five years. You are most likely not achieving this goal. So, by exciting we mean goals which are thrilling and realizable.

Now, keeping these points in mind, once you are through with setting your goals, approach your financial advisor, who will help you in prioritizing your goals, allocating budgets and developing a portfolio to help you achieve your goals.

We have all made mistakes in past and most likely would also make mistakes in future. Making mistakes is not crime but is something human in nature.However, we must learn from past mistakes and failure to do so is most undesirable. When it comes to personal finance decisions, the best way of learning is by analysing the opportunity cost for our bad decisions.

Opportunity Cost:
But before we start, let us first understand what is ‘opportunity cost’. The opportunity cost can be understood as

• the cost of doing any action measured in value terms of the best alternative that is not chosen or is foregone.
• a sacrifice value of the second best choice available to someone who has picked among multiple choices

Opportunity cost is a key concept in economics, and is used in decision making where there are scare resources to be optimally utilised. The concept can be applied beyond financial costs: you may apply it for lost time, pleasure or any other resource that provides some benefit. Thus, opportunity cost can not only help us in evaluating investment decisions but also can be universally applied to any decision that we take.

Analysing Wrong Decisions:
Let us now attempt to analyse our decision using opportunity cost and a few case studies. The case studies are random examples of what most of us usually are or have ended up doing in past.

Case Actual / Inaction taken Without proper Financial Planning The Right Alternative Without proper Financial Planning Opportunity Cost Action (1) Result Action (2) Result 1 Age 35 yrs to Retire at 60. Life exp. 90 years. Montly Expense Rs.25,000/- Retirement Planning to be done. Kitty needed: After 25 years Rs.2.36 Cr. Delayed by 5 years . Asset Class: Equity SIP Need: Rs.17,783/- Total paid: ~ Rs.42.68L Started at age 35 Asset Class: Equity SIP Need: Rs.8,561/- Total paid: ~ Rs.25.68L Additional amount paid for same result = Rs.17 lacs Started on time. Asset class: Debt Monthly Need: Rs.18,984/- Total paid: ~ Rs.56.95L Additional amount paid for same result = Rs.31.27 lacs 2 Monthly savings of Rs.10,000 for a Goal after 15 years (Child Marriage / Education / 2nd Home, etc.) Asset class: Debt End value: Rs. 40.16Lacs Asset Class: Equity End value: Rs. 61.64 Lacs Shortfall in wealth: Rs.21.47 Lacs for wrong asset class 3 Age: 50. Retirement 60. SIP of Rs. 25,000 to be done for remaining earning life (10 years) SIP delayed for just ‘3’ months End value Rs. 62.75 Lacs SIP started immediately End value Rs. 65.75 Lacs Shortfall in wealth: Rs. 3 Lacs for missing 3 SIPs 4 Additional monthly Savings possibility of Rs.2,000/- Possibility ignored No wealth created Identified & Eq. SIP 15 yrs done End value: Rs. 61.64 Lacs Additional wealth creation foregone: Rs.12.33 Lacs 5 A amount of Rs.250,00 for 6 months in Current A/c. Ignored No returns Invested in MF Cash schemes Returns: Rs.8,600/- Returns foregone: Rs.8,600/- 6 An individual meets accident / illness Inaction to take any Policy All costs on self Health Policy is taken Costs on Insurer All costs paid in absence of cover 7 Earning member plans to take life insurance (LI) LI on own assessment Inadequate life cover Proper LI need assessment Sufficient cover taken Insufficient money (goals / expense)

Above is for illustrative purpose only. Assumptions: MF Equity returns: 15%. Debt returns: 10%. MF Cash: 7%. Inflation 6%. Post Retirement Inflation 4%. Returns on Kitty: 8%. Some figures are rounded off.

Including the above instances, we can short-list the following very common types of action / inaction that have lost opportunity costs attached to it…

• Planning for financial goals: Here the opportunity cost is often in nature of inability to meet the targeted value fully if we either delay savings for goal or invest in wrong asset class.
• Retirement planning: This is highlighted here since it has huge impact involved which are not very apparent to us and is often ignored. There can be huge opportunity costs in terms of the required savings to be done and the retirement kitty created if we delay or invest in wrong asset class. The biggest risk is that the kitty becomes insufficient to meet our expenses during retirement.
• Ignoring Insurance: Ignoring, delaying or taking inadequate insurance is very common. Lack or inadequate life insurance is something very scary since the idea of our loved ones left without any money in itself is unimaginable. Still most of us take inadequate cover without finding out actual cover required and instead directly start looking at products. The opportunity cost in absence of medical insurance is something which would now be very obvious.
• Idle money not invested: Due to financial indiscipline, we often ignore investing less substantial money on time in appropriate avenues and money is often left idle in form of hard cash or current / savings account balance. We must invest idle money, beyond that required for emergency, running expenses, etc., into liquid MF or similar schemes / products for the small durations of time available. A regular practice of doing so actively can help you good returns on idle money which is not visible to us now.
• Common investment related bad decisions.: If we can summarise, there would largely be 3 types of bad decisions w.r.t. investments:
  • Investing in wrong asset class as per investment horizon
  • Delay in starting investments or SIP
  • Investing inadequate amount
• Other bad decisions: Apart from above we also have many other common instances of bad decisions like…
  • Investing in ‘Ponzi’, ‘Get Rich Quick’ or ‘Chain Marketing’ schemes with hopes of making huge money!
  • Taking personal loans for avoidable reasons
  • Making cash withdrawals from credit cards
  • Not paying credit card dues on time inviting very high interest costs
  • Making delayed payments of utility bills, etc. attracting additional money for every instance

The famous and the most successful investor – Warren Buffet has said that “you only have to do a very few things right in your life so long as you don’t do too many things wrong” to be successful. Indeed, many small things ignored add up and become significant enough to impact our lives. And bad investment / financial decisions are no different.

The following are the suggested ways that will help us go a long way in improving our financial situation over long term.

• Always remember that every financial action or inaction has some opportunity costs
• Procrastination or laziness is a big enemy for wealth creation
• Small things make big impact over time. Discipline, awareness and active decision making are the right habits to adopt
• Prepare comprehensive financial plan at the earliest. Do not shy away from seeking advice on small financial matters.

The idea behind this article is to make you aware that every financial decision has costs attached to it and that proper planning, discipline and timely action in our financial matters can help us ensure that we keep the wrong things to the minimum in our lives. A few wrong things are enough to overshadow the benefits from many rights things that we may have taken.

Warren Buffet, one of the greatest investors of the world, the Chairman and CEO of Berkshire Hathaway, in his annual letter to the shareholders, presents investment insights, which are eagerly awaited by investors all over the globe. The annual letter to Berkshire Hathaway’s shareholders 2016, was recently released. It encompasses Berkshire’s performance, it’s operating units, the American economy and the most looked forward to, pearls of wisdom from the investment guru. Out of the 28 pager annual letter, we have brought to you the key elements, which are particularly relevant in the Indian Investing context:

He says

“We’ve experienced both outcomes: As is the case in marriage, business acquisitions often deliver surprises after the “I do’s.” I’ve made some dumb purchases, paying far too much for the economic goodwill of companies we acquired. That later led to goodwill write-offs and to consequent reductions in Berkshire’s book value.”

Our view

When you buy stocks of companies, you pay for its fundamentals, it’s past performance, it’s future outlook, and for its brand value or Goodwill. The goodwill increases the PE multiple of the stock, which means you are paying a higher price for a given level of earnings. Purchasing a stock at a higher PE is not wrong as it may be high because it has good growth prospects, but it may be inflated because of higher goodwill. Hence you must be very cautious as this goodwill may fade away with time, bringing down the value of the stock. So, when you take a decision, don’t just look at the name, rather focus on the fundamentals and the future prospects of the stock.

He says

Charlie Munger, Berkshire’s Vice Chairman and my partner, and I expect Berkshire’s

normalized earning power per share to increase every year. Actual earnings, of course, will sometimes decline because of periodic weakness in the U.S. economy. In addition, insurance mega-catastrophes or other industry-specific events may occasionally reduce earnings at Berkshire, even when most American businesses are doing well.

Our View

Be positive and have conviction in your investment. Your investment might sway due to periodic macro economic factors like the economics of the country or turbulence in the industry, but in the long term you’ll have a positive average annual growth rate.

He says

Charlie and I have no magic plan to add earnings except to dream big and to be prepared mentally and financially to act fast when opportunities present themselves. Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do.

Our view

Buy Low and Sell High is the simple formula for profiting. But the tendency of the investors is the other way round. They invest when the markets are bullish and panic and sell when the markets start falling. So, eventually they are buying high and selling low = Loss. Wise are those who see a fall in the markets as an opportunity, you get to invest in good companies at lower prices. Investors should invest in market downturn because when the market starts accelerating, and your investment takes the upturn, your gains would be soaring.

He says

You need not be an economist to understand how well our system has worked. Just look around you.

See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.

Our view

Believe in your country. India is the fastest growing economy in the world. Just look around, see the tall buildings, the flyovers, the new cars on the roads, the airplanes flying in the Indian sky, look at your own house, how you grew from a 2bhk to a 3bhk, from a Bajaj Super to a Swift Dzire. We are growing each day, it is an opportunity that we are living in a growing country, so it makes sense to invest when the graph is moving upwards, help the country grow further and relish the rewards from its advancement.

He says

Moreover, the years ahead will occasionally deliver major market declines – even panics –

that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.………. During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.

Our View

The markets have historically declined and risen again, and the only certainty is they will fall again and rise again. But no one can tell you when. The news analysts will advise you to sell your stocks during a slump, there will be panic. During such times, be calm. When there is panic around, consider it as an opportunity. When others sell, you get to buy at cheaper prices, and you’ll be the one benefiting amid all the tension. If you panic, you’ll be essentially contributing to your loss and an intelligent investor’s gain.

So, the above were the important ideas, among many, extracted from Warren Buffet’s Annual Letter 2016. Let’s consider these insights as pious sermons of investing and incorporate them in our investing demeanor. Happy Investing!

Sometimes it is good to have some mental laws framed in our minds. These laws when practiced in our lives has the power to influence our life and make it better. Strong personalities always abide by some rules/laws of their own. Living life without personal laws does not sound exciting and it indicates that you do not have a strong character, dreams or strong beliefs. Here are a few laws which you can think of adopting in your own lives:

[1] Law of Failure: By failing to plan, you plan to fail. Having no plans or goals in life means having a life devoid of achievements and successes.Plans can be made for every aspect in your life, be it studies, career, relationships, life events/goals or financial well being – no matter how big or small they are. Make it a law to plan for everything in life from life goals/events to monthly budgets.

[2] Law of Belief: Whatever you believe, becomes your reality. Your actions, feelings and intuitions will be guided by your beliefs. It is said that mountains can be moved if you truly believe and there was a man who actually did that. Make it a law to believe in yourself and the things which you dream of today, will be yours sometime in the future.

[3] Law of Sowing & Reaping: As you sow, so shall you reap. This is true for relationships, businesses and even investments. The quality of your life, relationships or financial well-being at any given moment, is a result of what you have done in the past. Make it a law to sow only good deeds and make only good decisions in life for a better future.

[4] Law of Accumulation: Every single thing you do, positive or negative, accumulates. Everything that you do, you tend to repeat, and things that are repeated over time will become your habits, and it is habits that influence and shape your life. Make a law to do and accumulate good actions and avoid the bad ones.

[5] Law of Attraction: You will always get attracted to people and circumstances that are in harmony with your dominant thoughts, whether positive or negative. Whatever you think about, you imbibe into your life. Make it a law to think about only positive aspects, people and outcomes in your life.

[6] Law of Cause & Effect: Everything that happens in life has a cause behind it. Every success or failure is the Effect of a cause. Success & failures do not happen by accident. Make it a law to set good causes/action into motion.

[7] Law of Creativity: You are limited only by your imagination. All positive changes and progress in your life begins with new ideas. The supply of ideas and innovation guides your potential. Once you have unlimited -ow of ideas, your potential too becomes unlimited. A big part of your happiness, success, relationships and future depends on the quality and quantity of the ideas that you have. Make it a law to generate quality ideas.

[8] Law of Control: You feel positive about yourself to the extent you feel you are in control of your own life. If you do not hold the strings of your life, you tend to become weak. Make it a law to get your entire life in your control.

[9] Law of Emotion: Every human decision is likely to be based on an emotion. Stronger emotions tend to dominate the weaker ones, which in turn will determine your decisions and actions, more than rationale. Make it a law to keep your emotions in check and not let any particular emotion dominate while taking a decision.

[10] Law of Luck: The more you work hard, the more lucky you become. There is no pure luck or chance worth waiting for in life. Once we are focused, committed and work hard, luck shines upon us. Make it a law to do more hard work to be lucky.

[11] Law of Destiny: When you truly work towards achieving something, the whole world conspires to help you get it. If you are dedicated to a single cause so much so as to make it your only passion, your life, then there is nothing in this world, that can stop you. You will find that slowly everything will start falling in place. Make it a law to have your own future and destiny decided to act whole-heartedly towards it.

[12] Law of Memory: If you do not repeat soon what you have learnt you will easily forget. But if you practice, do what you have learnt, you will remember it for long. This is true for any knowledge or skill that you learn in life. Make it a law to repeat and to practice what you have learnt.

[13] Law of Use: Whatever talent, ability, or gift you possess becomes stronger and better with exercise. If you don’t use it, you lose it. This is the reason why most gifts and skills which we had as children tend to disappear with time. Make it a law to use your gifts and skills often and to not lose them with time.

[14] Law of Reaction: For an action, there would be a reaction. Every action of yours, be it good/positive or bad/negative will tend to have a similar reaction. Even if the reaction is not visible, there will be an impression made which will be hard to erase in life. Make it a law to take actions which brighten your’s and others’ lives.

[15] Law of Time: Each one of us has the same number of minutes and hours. But the actions and work done varies from person to person. The idea is to manage time and work effectively, in a way that there is little spare or idle time left. This will make sure the time needed to do a particular task keeps reducing, while the number of tasks done keeps increasing.

[16] Law of Company: You become the company you keep. You tend to think, act, behave and even dream similar to your company. Having an intelligent, aspirational and motivating company will inspire you to grow yourself into a better person. Make it a law to have a company of people similar to what you aspire to become.

[17] Law of Compensation: You are always compensated in more than equal measure for what you do. The more you give, the more you get. As long as you are doing good for other people, others will do good for you.

[18] Law of Expectations: What you expect is what you get. You do not get what you want or desire but what you expect. Expectations though have to be grounded on reality. If your expectations are just and well placed, you will get what you deserve and you will not be disappointed. Make it a law to have realistic expectations in life.

[19] Law of Karma: Keep doing good deeds without expecting fruits. Your hard work and good deeds will eventually pay o and you will enjoy the true fruits of labour. However, doing something while keeping results in mind might obstruct your vision. Make it is a law to do good without worrying about fruits.

[20] Law of Forgiveness: Bad experiences, pains, grievances and complaints are only burdens that you tend to carry unknowingly. You are mentally healthy to the degree to which you can forgive and forget. Your willingness to forgive others and to let go of the past grievances is the single most important determinant of whether or not you are free of burdens to act optimally with utmost freedom. Make it a law to not carry any burdens in life.

[21] Law of Habit: Your actions repeated over time become your habits and your habits in turn de fine your character. Your character ultimately shapes your destiny. In the absence of a specifi c decision on your part to change an aspect of your life, the natural tendency will be to go on the same way inde finitely. Make it a law to make good habits in life to transform your life over time.

[22] Law of Subconscious Mind: The subconscious mind is a powerful tool and when used properly can do wonders. It goes to work immediately on whatever you plant in your mind to bring it into reality. The subconscious mind makes all words and actions t in a pattern consistent with your self-concept and your dominant goals in life. Whether positive or negative, good or bad, if you hold an image continuously, make it emotional, and visualize it in your conscious mind, it will begin to organize everything around you to make it come true. Make it a law to create and shape yourself in your subconscious mind.

“It’s July already, I am in the midst of the year. I’d rather start investing from the next year. New Year, New Beginnings”

That auspicious new year will never come

“I am young in my career, I am earning Rs 20,000 a month, which is just enough to meet my expenses. I’ll start investing when I start earning at least Rs 30,000 a month”.

And then you’ll say the same thing to yourself when you reach the 30,000 mark.

“This year, I am planning for a vacation to Dubai, so I need to spare some money for that. I will start from next year.”

Vacations will come and go, your Investments will stand by you in all facets of your life.

“I am waiting for the right time to invest, like when I’ll have some extra money”

Money can never be extra, you have to carve out for your investment from the money you have.

“The markets are high, Investing now will be a costly affair”

No one can predict the direction of the markets, it may never come back.

These are the excuses you give to yourself and to others. You should get over the lazy attitude and start investing now. Because the cost you’ll pay for delaying investment can be very high.

Why do we say, you shouldn’t delay investing? Why should you start investing in the early stages of your life?

What are you losing?

Power of Compounding: Ramesh and Suresh are two friends, both of them are 25 years old and working in the same company. Ramesh is a smart guy, he decides to start an SIP of Rs 5,000 for 10 years. While Suresh picks up two of the above mentioned excuses and he procrastinates his investing. Now Suresh realizes the need to invest after 5 years and he too starts an SIP of Rs 5,000 a month in the same mutual fund as Ramesh’s.

Their Investment comparison is as follows:

	Ramesh	Suresh
Investment Date	01/01/17	01/01/22
SIP Ammount (pm)	5,000	5,000
Investment Ammount (Rs.)	6,00,000	3,00,000
Diffrence in Investment (Rs.)	3,00,000
Maturity Date	01/01/27	01/01/27
Maturity Value	17,21,555	4,93,520
Diffrence in Maturity Value (Rs.)	12,28,035

* Assuming a CAGR of 20% for the overall investment period

Conclusion: Suresh, who started investing 5 years after Ramesh, invested Rs 3 Lacs less than the latter but the difference in their investment’s maturity value is huge i.e., Rs 12,28,035. This huge difference is because of the Power of Compounding, which has taken Ramesh many steps ahead of Suresh in just 5 years. This huge difference has resulted when the SIP was of just Rs 5,000 a month and the difference in duration was 5 years. So, imagine the cost you are bearing by procrastinating your Investing for decades now.

Failure to meet goals: When you delay investing, you are dragging yourself away from your life goals. It may not be easy to collect a huge corpus in a very short period of time. Consider the above example, Ramesh has Rs 17.21 lakhs at the age of 35, so he can use this money for making a downpayment for his dream home. But Suresh, who is also 35, may not be able to do this with Rs 4.93 Lakhs. So procrastinating his Investment has taken him away from fulfilling his goal of owning a house, he will need some more years for accumulating the money required for making the downpayment.

Tax Benefits: Many investments carry the dual benefit of Yielding Returns plus Saving Taxes. So, if you are the one who has not yet started investing for saving taxes also, then you are practically committing a financial crime. Let’s say, Harish falls under the 20% tax bracket, but he is too lazy to invest for tax. He shakes off the load from his shoulders by explaining to himself that “I live in India, I am paying taxes, because it’s my responsibility to contribute towards the economic development of the country”. He omits to tell his conscience that he is also paying VAT on everything he consumes, he pays road tax to drive on the roads, he pays water tax to drink water, he pays service tax on the movies he watches, etc., and all these taxes are also contributing towards the economic development of the country. Hence he must save paying Income Tax as much as he can. If Harish would have invested in a tax saving instrument, like PPF, which is giving a nominal return of 8%, his effective return is 8% plus the 20% tax he is saving, i.e. a cumulative return of 28%. (For simplicity sake, we have ignored the time value of money). It doesn’t make sense to lose out a return of 28% p.a. just because Harish is procrastinating investing. We have taken the example of PPF, if we replace it by a high return generating option like ELSS, then your money would know no bounds.

These were the three basic costs you are paying by procrastinating your Investments, there are many more that you actually bearing. The excuses are endless, but the time is not. So, stop procrastinating and Start Investing Now.

Date : 28 April 2017

Whenever the subject of discussion is planning for your future, the hot topics are “Buying a car in the next five years or upgrading the car in 3 years”,”Buying a house in the next 10 years”, “Funding for kids’ education after 15 years”, “Planning for Retirement after 25 years”, etc. And then we save and invest for each goal. The agenda is to organize your finances by following the plan, and live a peaceful life. Our investment planning revolve around these long term goals. And that is what Financial Planning all about.

But then while planning for your goals in the “years to come”, what is often ignored is the “months to come”. We seldom plan for the near term goals. We are so organized with our child’s higher education expenses, that we somehow forget about his quarterly school fee. We care for upgrading our car four years down the line but forget about the annual insurance of our car which is due six months hence. And then when these expenses suddenly arise, you strain your brain, you drain your accounts, you look for money kept at home, at times go to the length of even asking a friend, and after all this physical and mental labour, you pay off the dues.

And after all this exercise, when your energy is completely sucked out of your body, two days later, your wife comes to you and says, “Our anniversary is coming, Kahin ghumne chalte hain”. You just can’t control your temper and the RDX comes out, “Pura budget bigad gya hai” “Monu ki fee bhi deni thi, upar se chacha ji ke bete ki shadi ka kharcha, aur tumko anniversary manani hai”. Your wife goes away without saying a word. This is “Toofan ke pehle ki shanti”, and you know your wife well. So, now you have two more expenses coming up: One, the cost of taking your wife for dinner that very night, or else you are not getting dinner for time immemorial. And Two, the anniversary trip expense.

The purpose of this fable was not to scare you off, “Beware of your wife”, rather it’s about don’t leave the short term expenses to luck. At times, near term expenses all bump in together, and sums up to a huge amount, which can disturb your finances and peace.

So how to plan for short term expenses?
Planning for short term expenses is also an important part of your overall financial planning. Many near term expenses are known, like you know you have your anniversary coming, and many of them are unexpected, like you may not know at the start of the year that your kid has to go for an educational trip next month for which you’ll need an extra 10k.

1. Provide for the expected: Look at the brighter side, you know beforehand that you will need an X amount of money on an X date. So, you can set aside the required amount for these expenses. After all, celebrating birthdays and anniversaries are also a part and parcel of life, they give you the small doses of happiness which, may be unknowingly, but keep you going.

2. Provide for the unexpected: Like you plan for long term emergencies, be prepared for the short term urgencies as well. Keep aside a small amount for these expenses, so that whenever something pops up, you can close it by paying the requisite amount from your short term piggy bank, without turning your happy life topsy-turvy.

3. Don’t stretch your investments to the extent that you cannot afford to buy milk: We do advise you to save and invest. Yes you do need to stretch a bit and invest to have a secure financial future, but don’t stretch to the extent that you break your bones. If your monthly income is Rs 30,000 and your fixed expenses are Rs 15,000, so you cannot afford to invest the entire remaining Rs 15,000 for your long term goals. You need to keep a buffer to meet your upcoming near term non-discretionary as well as discretionary expenses.

4. Invest in Liquid Funds for Liquid Expenses: Do not invest in bank fixed deposits or PPF for short term expenses, because you may not be able to access the money, when you need it, or even if you do, you may incur a penalty on withdrawal. Do not keep your money at home or in your bank saving account either, as they will give you zero or meagre returns which will not even cover the cost of inflation. Invest these funds in Liquid Funds, so that you can withdraw the money whenever you need plus you get the benefit of yielding higher returns as compared with the above mentioned options.

5. Do not take Risk for short term goals: When it is about short term goals, it is advisable to stay away from volatile asset classes. For short term goals, the factors to consider are Liquidity, Safety of principal and Taxation. So there are two options which can provide you liquidity, safety and returns that are better than the traditional bank saving deposits. One is Liquid Fund in the Debt category and the other one is Arbitrage Fund in the Equity category. Arbitrage Funds, though are Equity funds, but they are least volatile and their returns are comparable with Liquid Funds, and they may offer certain tax benefits. The choice between Arbitrage funds and Liquid Funds should be made depending on your income profile after consulting with your financial advisor.

So, the bottomline is, Financial Planning is very important to keep your finances organized and lead a peaceful life. But peace can come only when you plan for both short and long term term. Planning only for the long term and ignoring the short term can break the constant of your life every now and then.