Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Concepts & Tutorials

Three Rookie Investing Tips For Making Truckloads of Money

When you read that headline, you’re thinking – Damn, Even Deepak’s into headline bait. Maybe I am. Maybe I’m not. But bear with me, this gets better.

I write about markets and money. I celebrate short term trading. I talk about interest rates and inflation and recessions and the RBI. I explain futures, naked options, yield curves, married currencies, straddles, ULips and all sorts of things that sound like they belong in a racy Sidney Sheldon novel.

And perhaps because of that, I get a lot of questions. Many of these are detailed, thought through and excellently organized. They remain the minority.

My analysis from the majority:

a) Investors don’t have any time. They’ve figured out they need to invest, and they need to do it now. While they understand they should research more, even that will take time, which brings us to point a) back again. They just want someone to tell them what to do, or even better, do it for them.

(Also read: Thoughts of a Corporate Consultant)

This is why I also get follow up questions like: I bought this ULIP/Stock, how much will it be in 10 years time. (Dude, if I knew, and it could make me money, I wouldn’t be telling you.)

It really isn’t like I don’t care to say it. I just get frustrated because I don’t know where to begin. Should I start with – what were you thinking? Or should I explain, painstakingly, that the future isn’t possible to predict and what you should be doing is to make considered choices, and then you shouldn’t really ask me because even if I did tell you, for free, what are the chances I’d not be picking a number from the air, etc. Or should I brush him off with “Do you have six months of expenses in your emergency savings account yet?”.

No matter what I say, the answer’s going to be – forget all that, takes too much time.Where will this stock be in 10 years?

My answer is the fourth one – the [delete] button. You only fight the battles you care enough about. But no matter what I say, the point hits home – you say anything that takes more than a second to digest, it will be ignored.

b) Investors don’t have the inclination. I love the world of money. I care deeply enough to decode structured products. But, and perhaps this makes the world a better place, everyone does not. Largely, investors remain clueless because they are not interested. They don’t care because they don’t want to care. Like you wouldn’t care about how to do the rueda if you’re not interested in dancing.

Because investors don’t want to know, even moderately complex products will confuse them. Anything beyond “Pay this much, Get back this much, in this much time” is too complex.

Some investors are fooled by the appeal to intelligence. If it sounds complex, it must be good. That agent is a rocket scientist, he just knows. That guy gave me this tip and he made so much money from his last tip that I ignored. These are all signs of insecurity about a field that we all believe should be darn simple – after all, 6th graders can pick stocks –  but requires significant effort to understand.

Note that I say they don’t have the inclination – not that they don’t have the skill. Like in the movie Trading Places, I believe there is no “talent” required in the world of money – just enough effort.

c) Everyone is different. Look, I know there’s a formula for investing. It’s just that it’s different for everyone, and even that will change over time. There is no “strategy for 35 year olds with two kids”. Because the first 20 such people you will meet will have very strange but frustratingly different choices. one will have massive debt from a hospital bill after a two-month premature delivery. Another will have been in Infosys since the stock price was measured in paisa, and owns his house, his neighbours house and pretty much all of the street. A third will be trying to deal with a pending divorce settlement, a fourth will be starting up, and a fifth will have enough investments from his past “agent” friends that needs massive rework.

What are you going to say to them? Standard formula = put 80 minus your age into equity? Standard formula = SIP every month?

But what’s the Standard Formula?

There is no standard formula. Anyone who claims it, for the mass investing public, is bullshitting himself. But the only way to achieve any layer of scale, for an advisor or a mass agency like a bank, is to tell people the same thing – with minor vertical segregations like age, or gender or strategy.

Evolving a personal financial strategy involves three basic things – Insurance, Equity and Debt. As you grow, you’ll find other options – real estate, angel investing, partially convertible debentures and if you’re a banker, extortion. These are all valid choices, and I really shouldn’t attempt to say what’s right for you.

Given that there is no standard formula, I’m going to give you a standard formula. Here’s the deal:

Three Tips to Make Truckloads of Money

1) There are really three goals you want to focus on: Emergency, Retirement and Gratification. Emergency is your six month expense in a bank FD, or in Gold or something. Retirement is about what you build for the future you don’t want to think about. And in the end, you need to have fun, get married, buy a car or a house, go on a holiday, give your kids an expensive education or whatever – Gratification. Whatever you do, put stuff into one of the above three brackets; you’ll find it easier to understand how much risk you want to take.

2) Learn about investing, or take a risk. There’s no way to know what works and what does not, even if you’re a genius investor. Everyone takes risks. Investing in anything – a career, a house, a stock, a mutual fund – all carry risk that you can either attempt to learn more about, or decide that you’ll take the risk anyhow. You can only research that much.

But don’t listen to other people as gospel. They have motivations and incentives you do not. They don’t largely care about your making money. If you are going to invest, it’s your decision, don’t blame it on others. Yes, it’s unfair your bank manager sold you insurance instead of a fixed deposit. But it was you that signed it. Remember this: They’re all bastards. Don’t trust anyone.

When you hire a financial advisor, you have no choice but to trust him. That goes for doctors or lawyers too. However, when your plumber insists on gold plated taps, you’re likely to get a little suspicious; given the larger motivations of financial players, you have to do your own homework as well.  If you don’t understand (and don’t want to), don’t invest. Investment products are complex. Stocks are complex. Don’t even get me started on bonds. Buying Gold also has risks. If this scares you, or if you can’t deal with the volatility, or if you simply don’t know the math that makes the return clear – say no.

Just buy a fixed deposit and keep renewing it every year. And hope we aren’t Cyprus.

3) Diversify. I don’t tell this to people who know enough about investing; but it makes sense to just put eggs into different baskets when you don’t have time or the enthu. But a little bit of gold, have a few fixed deposits, buy a few stocks. Spread it around.

The problem with this approach is that it can be useless in some cases. Is buying four equity mutual funds diversification? What if they all invested in the same underlying stocks? Do you even have the time to find out?</p >

But apart from that diversification is a busy man’s friend. You don’t worry because you have money stored in different areas – a fall in one will, hopefully, be countered by a rise in another.

Eventually, you’ll make money – and you’ll remember the awesome ones. But to win, you have to play – not watch from the sidelines.

Do not listen to any of this if you’re a seasoned investor. Because, when there is no standard formula…

Wait a minute!

How does any of this make you truckloads of money? Let me explain in a way only a finance guy can.

If I didn’t tell you all this, you would have been suckered into some random investment product that would have eaten your money away in commissions and sub-standard returns. You would have LOST truckloads of money.

By virtue of the above three points, you have not lost that money. In effect, like fund managers “outperform” the index that lost 10% when they lost only 5%, you have GAINED a truckload of money by not losing it. Hence proved, QED and all that.

Okay, it *was* headline bait.

(end rant)

I’m sorry if I sound arrogant in the above post. It started off meaning to be funny, but somewhere I went on the needlessly offensive. I’ve made my mistakes and I’ll still do them and all of the ‘”advice” is probably meant for me, not you. Thanks for reading anyways.

  • Amit M says:

    Not arrogant at all man, this is precisely the sort of post every new retail investor needs to read as soon as s/he starts earning enough money to start thinking about investing. If you don’t understand it/can’t spare the time to try and understand it, don’t invest in it. If only more people would subscribe to that.

  • Nitin says:

    Fantastic post Deepak. Personally I don’t (have not made the effort to) understand most of the financial instruments so I’ve stayed away. Not necessarily a wise thing, maybe I’m missing earning or loosing truckloads 🙂 Once again a great perspective @nitinmisra

    • Thanks Nitin, and thanks for the tweet as well. Good to know you aren’t losing truckloads 🙂 The other problem is this industry is crooked, so if you evince any level of interest, they’ll first find ways to con you 🙂

  • Mustansir says:

    Awesome post Deepak. Your articles are always fun to read and very informative. Totally agree and can relate to your style of writing and the thoughts that you portray. Keep writing, Keep ranting. Love it!

  • Vishal says:

    “In effect, like fund managers “outperform” the index that lost 10% when they lost only 5%”
    I surrendered my ULIP last week, after 3 years, and that is exactly what I was told! I told him I rather invest in mutual funds then give them a yearly 4-5% admin/mortality/stupidity charges and the ‘advisor’ said that I will lose 1% as entry load in mutual funds too. Mathematics genius he was not.
    After a lot of trying and trying to mis-sell the product again he failed and eventually threw up his hands and said “It’s your money. You can do what you want with it” and left. Fool me once, shame on you. Fool me twice….

    • Amit M says:

      These guys really try to hard sell ULIPS. Some time ago, one joker was invited by our company HR to give us a talk on ‘personal finance’. He started extolling the virtues of ULIPS over MFs. One person in the audience started asking him questions, it was obvious that she did not even know about ULIPS but was just asking about the supposed benefits over MFs. The guy actually starts to get angry when asked some basic questions about the returns of ULIPS and gets really defensive about ULIPS vs MFs!
      Fortunately, his manner put all of us off his sales-pitch. He even had the gall to call me later to sell! I told him precisely why I wasn’t interested!

  • Deepen says:

    Hi Deepak,
    I have been following your blog since more than 2 years now. Appreciate your articles/opinions.
    It would be very helpful if you could post your strategy in Evaluating the company (rather stock of a company).
    i) What kind of Qualitative/Quantitative details do you evaluate, study , compare before arriving at a conclusion to buy it ?
    ii) What to look for in Balance Sheet / PnL / Financials and Annual Report of a company ?
    I believe most of your blog’s TG would be interested in learning about that. And on side note, it might help reduce some emails like Will this scrip rise 10 times in 2 years? 🙂
    Thanks & Regards,

  • Dhananjay Redkar says:

    Neat …. Guess you should add one more point … learn from your mistakes … buying ULIP once you may have been suckered in by the lure, but buying it again ????

  • Vivek says:

    Emergency, Retirement and Gratification.you just simplified financial planning!
    This post is like bitter medicine for new investor’s. I think some investment knowledge must be added in our education system..like in 11th or 12th there should be one compulsory subject on general finance only then the new breed of financial Literates will rise.

  • lohit says:

    One more thing, if you are investing in a mutual fund then invest through the direct option. Will save you about 0.5-0.7% a year in equity funds.
    The problem with the average investor (IMHO) is a lack of patience. Everyone wants their returns in 2-3 years. The average SIP in India (I read somewhere) lasts only about 18 months. Markets on the other hand work in cycles of 8-10 years or more. For example – From 1964 to 1981 the Dow went from 874 to 875. The Sensex went nowhere for 10 years in the 1990s and now has gone nowhere for 5+ years this time.
    How many investors have this kind of patience? The finance industry knows this all too well and profits from inducing investors to churn their portfolios constantly.
    Another obsession is with capital gains – nowhere seen more prominently than in Real estate. Even the property shows on CNBC only talk about increase in prices. I have watched it a couple of times and not once do the hosts mention rental yields nor do the callers ask. Historically, most bubbles are characterized exactly by such behaviour (from the South sea bubble of the 1700s to the US housin bubble). When (and not if) mean reversion hits us, it might be ugly.

  • Raja says:

    Lovely post Deepak – I have been following your blogs for the past few months and I have found it very useful. I have written a book called ” How to get rich and retire early” (http://bit.ly/10x56GB) and I have a FB page for the book – I intend to share this post to my readers of the book through FB. Hope that is Ok with you

  • Anup Pai says:

    Nice post, Deepak. All those questions on “how to guarantee profits through investing” seem to have finally caused a reaction.

    • Heh – no, I am very happy to tell friends anything, because I at least have some idea of the situation. But I get random mails from the ether from people I’ve never even heard of sometimes, demanding to know what share will be at what price in 10 years; that is what draws the frustration 🙂

  • ABC says:

    “The common man is not interested in bull or bear market, he wants you to tell him what kind of action to buy or sell. He wants to get something without giving anything. He does not want to work, he does not even want to think.” – Livermore

  • Krish says:

    Indeed a head turner article. Been following your blog for the last 2 years and I even invested considerable sum based on your article on debt ultra short term MF.
    I must admit that it gave me truck loads of money. The debt MF gave above normal returns but by virtue of parking funds in the liquid fund, an opportunity opened up for NRIs which I could use to my advantage. FD rates for NRE deposits made at par with resident Indians as part of Govt measures to arrest the INR slide and substantial sums that I have been parking in liquid funds were diverted to NRE FDs (tax free) during peak interest rate cycle last year and locked for longer tenure.
    Personal finance requires continuous learning and it is all about being watchful and patient to grab the opportunity which may trhow up once in a while. Most importantly one should have cash or resourceful at those critical times. I too made early investing mistakes through ULIPs and Real Estate but never looked back after I committed to educate myself. Infact it became my passion.Somuch so that Bank RMs are scared to talk to me about investing in any product.

    • Thanks Krish, much appreciate it! Glad to know I’ve been able to help in some way. I’m proud that I was able to, and very glad to hear you’re aware enough to not be conned! I hope there are a lot more people like you – even if our banks don’t like it!
      It’s a tough ask to tell busy people to devote time to understanding money, but people like you prove that it’s possible.

  • feltra says:

    Deepak ji,
    Your posts are becoming quite un-comfortable for finance professionals! 🙂 I mean, surely some secrets must be kept and the victims… aka “customer” shouldn’t know about them?!!
    The entire finance sector “as it appears to the public” IMHO is about smoke and mirrors. Start with the so-called “credit card”. In the non-finance world, that word credit is a +ve thing – like better credit == higher scores etc. But out in the finance world, it means taking on a loan – thats no credit. In fact, the end-customers would be far better off if it was called a “loan card” because thats exactly what it is. And a debit card should be called a “cheque card” because its in lieu of a check. Just these 2 changes (ie. just calling these 2 cards by the names most meaningful to the end user and NOT the banker), will bring about a sea change in the attitudes of people using these cards.
    These things should be taught in high school – instead we have useless stuff like which king built which wall in which temple etc!
    What you are saying about no interest on part of people to learn is very true. We do engineering and PhDs etc and think finance is very complex!! Most people, especially the brilliant ones shy away from it on the assumption that its too complex. I once was at my wits end in filing tax, and sat down and decided to learn all the income tax rules for Salary. I could neatly draw up a table – and it was an aha! moment when I found there was nothing more to it! Pretty soon, I became the “expert” in my office circle! 🙂 And several of my colleagues were easily better than me in the brain dept – and could have easily learned it – but kept thinking its too complex!
    Thanks for another great article…. Yes, and your thoughts about “modern portfolio theory” are on the dot… I came to that conclusion myself long ago – its still a good ballpark figure – and a guide – but a guide only….
    Best Regards,
    -feltra

    • Thanks Feltra-ji. I love your idea of a “loan” card and a “cheque” card!
      Finance like you said is not complex. It’s like building a puzzle. It sounds complex, but you start by finding the corner pieces and then going inwards…eventually it becomes very simple!
      The good thing is that we’re getting more and more “aware” people now and hopefully we won’t get to layers of misselling!

  • Venkatesh says:

    I have been following your blog from a long time and during the process, you have educated me. Thank you.
    This is one of your best posts. I like this paragraph “By virtue of the above three points, you have not lost that money. In effect, like fund managers “outperform” the index that lost 10% when they lost only 5%, you have GAINED a truckload of money by not losing it. Hence proved, QED and all that.”
    I live in USA and have a financial advisor who follows value investing approach. I don’t recommend him to any of our Indian friend’s because they think that making money in the stock market is easy. These are highly qualified professionals. I am not software professional and received my Ph. D., in Environmental Science from a US university.
    When I attend Indian social gatherings, one software professional was saying that there was no need of an investment advisor, he buys and sells stocks based on some financial web site/newsletter recommendation, and he was making money in each trade. I was thinking to my-self even Warren Buffett doesn’t have that track record- making profit in each trade.
    My father had an excellent principle that he taught me-“hire a good cook to do cooking, hire a carpenter to make furniture, and you focus on your job.” In Karnataka, we have a saying “ Kasige Thakkante Kajjaya.” If you want good service, you have to pay.
    I have observed especially among NRI’s here that the mentality is they could do everything. They don’t mind paying $200 for a bottle of wine. But, they don’t want to pay annual fee to a good investment advisor.
    I really appreciate your excellent unbiased analysis over the years. I never miss reading your blog. During the process, you have educated lot of people like me about various topics. With best wishes, Venkatesh

  • Murty says:

    “”If the unrealised gain is higher than the annualised return required to achieve the investment objective, sell investments to capture only the excess returns!””
    Consultants are very interesting sometimes! Where is a place for consultants, if laymen understand the meaning of such statements?

  • Bhaskar says:

    One more point (or replacement for learning about investments) for lay investors could be indexing. Both time and price wise in a good liquid ETF.

  • Bharat Desai says:

    Deepak excellent article it rally save tons of money if not earned. This is first post I have rea, really good I think caution investor is better than advising for investment. I think any new or small investor should invest 70% in FD, 10% in mutual fund, 10% in gold and 10% in reputed large cap equity may be MNC or FMCG or Pharma