Invest in shares

I am sticking my neck out here.
I do not invest in equity - at least not directly.
So it is kind of stupid to give advice on share markets.
But here goes anyways ...

1) I believe that the world economy will recover, sooner or later. It has to.
2) The share market will also, therefore, climb.
3) If you are young, have some money to spare, and have the risk appetite buy shares in sectors that was doing well before the financial meltdown and is now performing poorly only because of financial meltdown. In other words, if the financial meltdown hadn't happened, would you expect these sectors to continue doing well? If yes, this is the sector you should go for.
4) Most people look to make quick money from share market. For what my understanding is worth, I do not think so. You may hit a jack pot once in a while, but most shares give good returns only in about 3-5 years time.

What do you say? Do you agree with me?

Plan your death

Just read an interesting piece of news. The Apollo 11 heroes had planned their death. Identifying that their journey to moon was hazardous, aware that the government compensation would be meager and since no insurance company was willing to insure them, they worked out a sort of 'family-pension' plan. Read more here.

My advise: take this lesson to heart. Plan for your death, even if you are not planning to go to moon any time soon. You have a family to look after. Look after them even after your death.

Before you take a home loan

In my post yesterday, I talked about reducing your debt. This post is focused totally on reducing your debt created by your home loan. Having a roof over your head is a middle-class dream (actually everybody's dream - who wants to shuttle from one house to another every 11 months).

Here are a few aspects that you need to consider before you take a home loan:

1) Do not take loan from the first bank you approaches you. Talk to as many banks as you wish to. And let the banks know that you are talking to many banks.

2) It is not necessary to take loan from the same bank as your friend did.

3) Negotiate, negotiate, negotiate. Every aspect is negotiable.

4) If you tell one bank that the other bank is giving you the loan at a lower Equated Monthly Installments (EMI), the first bank will reduce its EMI to match. (Hint: Ask the first bank to better the offer; not just match.)

5) Floating interest rates are always better than the fixed loans. Remember that the fixed loan is not really fixed for life. If there is a huge upward difference between what was offered and what it is now, banks are within their right to hike your interest rate upwards. They will never reduce it downwards though.

6) Don't bother about interest rate. Instead find out what will be your EMI. There are many EMI calculators available online. Check out your EMI from that calculator and compare with what the banker has to say.

7) Always go for loans where you can make advance payments - in part or in full - without penalty. If all the banks offer pre-closure of loans with penalty, find out the penalty amount. Get this in writing.

8) Your insurance company, such as LIC of India, may also offer loans that also covers your death or disability. This is a good option, if you are already not covered adequately. There is a huge advantage in this. In case of your untimely death - God/Nature forbid - your dependents will no longer have to repay the loan.

9) Most of the time, you will be talking to an agent of the bank. The agent will promise you the earth. The bank may not follow it up. Maintain a note book and note down what each agent has promised you. When the bank gives you the loan letter check if all that was promised is included in the letter.

10) Do not burden yourself with the maximum offered home loan. Take on as less as possible. See Reduce your debt

Do you have some tips that I missed out?
Please leave a comment.

I will cover the "after" part of the home loan in my next post. Till then take care of your investments and your family.

Features to die for

That new cell phone has a fantastic feature that you are ready to die for. This credit card gives you facilities that you wish your existing credit card had. Your car is getting old. The new ones give you a great advantage in mileage AND has a fantastic pick up. Your house could do with a ionizer. What about that latest infrared burglar detector alarm?

The marketing people are geared to entice you. The advertisements are meant to attract. But do you really require that extra feature? Splurge by all means. But does it dig into your principal or are you buying it from the fruits of your investment? And 2 months down the line, will you really use that feature in the latest cell phone?

Reduce that debt

Coming from a middle class background, I was always wary of debt. My parents were never in debt. They postponed acquiring luxury items, but never borrowed money to buy that refrigerator and the colour TV (both purchased from a matured insurance). Besides, those days, India had not yet seen the consumer boom. Credit was not easily available.

Then things changed. Banks now call and ask if you need loan at easy (easy?) installments. You could buy anything on credit card and pay only 10% of the outstanding (never mind the HUGE interest you pay). Instant gratification is the name of the game.

But, hold on. Is debt such a bad thing?> I could not have purchased a house or my dream car (not every one dreams of a Ferrari or a BMW; some of us dream of Scorpio too) with borrowing from banks. Besides, many companies have debt ("a healthy debt to equity ratio").

So why it is that I have against debt. And it is not just my background. I don't think so. To be get onto debt if and only if you have an investment that is paying you more than you are paying for the debt.

Let me take an example. For most Indians, buying a house is beyond our means. We need to borrow money from the bank. The house will be yours for Rs. 32,00,000. Let's assume you have the paying capacity to borrow Rs. 22,00,000 @ 9% interest. You could have paid Rs 12,00,000 from your pocket but since bank is ready to pay that much amount, you put in Rs. 10,00,000. My question to you is: what would you do with the Rs. 2,00,000 left with you. Are you keeping it for some contingency? Or are you going to invest it in an instrument which returns you more than 9%? If you are saving it for some unknown contingency, you have not been reading my blog. Get an insurance, man!
If the Rs. 2,00,000 is not yielding you (after tax) more than 9%, you are just wasting that money. You are better off, taking Rs. 20,00,000 from the bank.

Explore other avenues. Do your parents have some money to spare. Perhaps they can lend you some money. They might have a fixed deposit that is paying them at 6.5%. Take that money and pay them at the rate of 7% (they may refuse to take money from you; but you should insist). Does your company offer loans at low interest. Take that. Reduce that debt.

Put it this way: Given a choice I would like to buy that centrally located house or that spanking car from the fruits of my investment. Ideal. Failing that I would reduce my debt as much as possible

Velocity of circulation

It can only be called a pipe dream. It has always been my desire to invest a sum of money and once I get sufficient returns, and take out the initial investment before it is too late. The returns will continue to earn money while I invest that amount in another fund. And then when the second fund starts giving good returns, I again take out my initial investment and allow the returns to continue earning for me, while I invest the original sum in yet another fund ... you get the idea; the faster I circulate my original money from one fund to another, the quicker I become rich.

This would be ideal. But I have never been able to do so. Perhaps I lack the discipline to follow it up.

Escape from the clutches of credit card

In my last post I talked about impulsive purchases and breaking barriers of reluctance. Credit cards are instruments that help you spend unnecessarily and spend more. Since you do not see your net worth reducing, you get psychologically inured to overspending.

One way to escape this is to avoid the temptation to increase the credit limit of your credit card. I deliberately ignore mails from my bank to increase the credit limit. In one case, the bank increased the credit limit on their own because I am their valued customer. Yeah sure! I also carry just one credit card. I have surrendered all others I had.

I just read something called the ice glass method for reducing credit card spending. The following extract is from Predictably Irrational by Dan Ariely.

[The Ice Glass Method] is a home remedy for impulsive spending. You put your credit card into a glass of water and put the glass in the freezer. Then, when you impulsively decide to make a purchase, you must first wait for the ice to thaw before extracting the card. By then, your compulsion to purchase has subsided. (You can't just put the card in the microwave, of course, because then you'd destroy the magnetic strip.)

Go figure.

The magic of interest compounded

There is just one golden rule when it comes to becoming rich. And that is ...

You should earn money even when you are not present.

So that rules out jobs.
Or even business where you need to be present all times.

Building a business where you employ clever employees is definitely a very big yes.
Investments in property, shares, mutual funds are a yes.
And surprise, surprise, monetized blogs (such as this one) are also a yes. At least for some (No! Not me! Not yet!)

The trick is to start early.
Reason: You have sufficient time to recover from setbacks - there will be setbacks, guaranteed. Youth is not risk averse. So that helps.

More importantly, the real benefit of compound interest kicks in.

How much do you think you get if you invest merely Rs. 2000 per year for 25 years that returns you 10% compounded annually. It is Rs. 2,16,363 ( more than 4 times)

You are risk averse?
You would like to put the money in a recurring deposit bank scheme that gives you just 5% returns compounded. In 25 years your money will become Rs. 1,00,227 (a shade over double)

But you should have 25 years with you. So don't start at 40. Start when you are 25 years old.

Insure you way to wealth

To become rich, get insured. 'You must be joking," you say.
Insurance has the lowest Return On Investment.
So I must be out of my mind when I propose that one of the ways to become rich, you need to get insured.
Hear me out please.

Contrary to popular belief, insurance is not just for your future. Yes, you pay a premium to offset any future eventuality.

So, for instance, if you are hospitalized and you have a medical insurance, the insurance will cover your expenses.
If you are disabled and you are covered by insurance, you get an amount that will take care of your loss of capability to earn.

If you die, your family will get a sum of money that will hopefully take the place of the earning member - you - who is no longer there.

But this is only part of the story.
Insurance allows you to take risks in the present.
This is not recognised easily.
If you are insured for the future for a small premium, you do not have to bother to save a huge amount of money for any eventuality.

You can take a part of your present income and start investing without fear of a failure.
And investing, though fraught with risks, is the only game in town that can make you rich.

Lesson: Cover yourself adequately for the future. Get insured. And then invest boldly in the present.

First steps

Late eighties.
My cousin is a year elder to me and he had then just moved to Bangalore.
I went to see him.
I saw some share applications in his room.
I knew people become rich by investing in shares.
I picked up one - Usha Rectifier.
My cousin said he was not going to apply for this company and that I could apply if I wanted to.
I should have asked him why he doesn't want to apply.
The share whose face value was Rs. 10 was in the market for Rs. 50.
Another colleague of mine who understood this a little better that I asked me to find out more about this company.
I looked it up in a finance newspaper.
It was being traded at Rs 170.
That was the only information I needed.
Wow! At Rs 50 this was a bargain!
I started dreaming how much I will earn in a few days.
The day I applied, the share value fell to Rs 110.
With a few months it fell below Rs 50.
And then it disappeared.
This share - renamed Usha India - is no longer traded.

My first attempt to become rich was a miserable failure. I went back to my shell. This way is not for me.
That was a serious mistake.
Instead of learning from my mistake and instead of learning the way share market works, I stopped at the first sign of failure.

And what was my chance of succeeding?
Nil.
I had no knowledge of the share market.
It was entirely an instinctive decision driven by dreams of becoming rich the easy way.
Doesn't work.

In all other endeavours I have always pushed hard against failure., If I slip, I push back harder.
My humble growth in my job could be attributed to my determination to do better.
But I did not transfer my resilience from one domain to another.

Making wealth was a new domain for me. I started by diving into the deep end. That was fine.
But I failed to learn from my failure.
That was a huge mistake.

Lessons:
1. It is natural to get excited when you take your first steps. Do not have high expectation. The first steps are likely to fail.

2. Be mentally prepared for the first failures. You are likely to succeed subsequently.

Years later I dabbled in shares again. But that is another story.