Diversify or Concentrate

 One of the biggest hurdle which a young investor faces is whether to concentrate or diversify your investment.

This persists over your life time of investment and in particular when you read one story that small and midcap has done 40-50% return or sometimes you see that small and midcap has collapsed. Thus at times, in particularly hindsight, you feel you should diversify or concentrate.

My personal take is as follows, Though I respect each individuals risk taking and risk losing ability.

If you are a person looking for a steady growth over a period of time and not bothered about 40-50% some one made or is making, then go for DIVERSIFICATION. That is out of 100 Rs, you put some in index fund, some in large cap, some in midcap, some in small cap and some in gold.

On the other hand if you are a person who likes to take risk and does not mind losing a large chunk of money (like a lottery), you may go the risky funds way. Like if you have 100 Rs, invest 50 in small cap and 50 in mid caps. It may or may not give you the returns you want.

Finally, if you have reached your goals of having sufficient money by following diversification at a certain point of life, you can take a chance and risk some in IPOs, small caps or midcaps or direct equity.

Thus Diversification on Concentration is a state of mind play as well as the backup funds you have. 

As a note of caution, while diversification is good, too much diversification will also not help. Thus 100 rs is invested in 50 stocks. A gain of 1 re in some will not generate wealth. Maximum recommended is 10-15 stocks or 5-6 mutual funds. This helps you to concentrate your understanding on these rather than getting lost in too many stocks.

Lemmings

 Lemmings are small rodents and not fish as some wrongly assume. Lemmings term is used when a crowd blindly follows something which it does not know. Just because some one is running on a fear or rumour, it also runs.

Investments are also something like Lemming. People flock to that particular investment just because returns are higher and the fear of FOMO is there and just flock to it. This can have negative effect and investment should not be on the basis of Lemmings.

To generate wealth over long term, requires steady, constant investment that grows 10-15 or even 20% beating the inflation. It's not like a dip into the sea when tide is low and come out when tide is high. It may work once or twice, but invariably people get caught in high tide and when low tide comes they are left without any clothes.

There are many examples in the last few years like the Real Estate, Sectors like Chemicals, Pharma, Banks, FMCG where people have put in investments at PE of as high as 50 and above and suddenly get disheartened when the stock crashes. This creates a negative mindset on investment and poor returns over long term.

Many people when they see some investors (over a long term) has made money in stock market, think that is the best place to invest and jump into it, losing a lot of wealth. People should realize that wealth is created over a long period of time layer by layer and not a quick dip.

Earn-Keep aside for investment-Spend should be the mantra for youngsters just about tipping their toes in the field of investment. This will help in generating long term wealth. As nations people become rich, investments will generate more companies to innovate and bring products creating a market and this cycle goes on.

Begin early investment to have a wealthy portfolio at the end of the twilight years.

 

Health Insurance

 While we are young, we eat all the junk foods as it is tasty and full of high sodium by way of salt and high fat by way of oil.

While some do exercise and eat moderately, for most of us it becomes difficult to burn off the excesses and over a period of time it leads to an unhealthy body.

Most of us are covered by medical insurance by the company when young (at least partly), but once a serious issue comes it can lead to a financial disaster.

As a prudent practice, it is always wiser to have a medical insurance apart from the Company provided to a) build a history of no claims and b) to gain confidence of the insurance company that you are taking care of health and easier to cover up pre existing as well as insurance above 60 years which are difficult to come by.

So, what are the medical insurance policies key things to be kept in mind

First, is one should take a Base policy. This can be, say, (in year 2023) INR 10 lakhs

Second one should take a TOP UP or SUPER TOP UP policy of , say,  INR 90 lakhs.

The second one is to cover any unforseen exigencies and is generally much cheaper than 1st one.

Other key points to note when taking Medical Insurance

a) Buy a Comprehensive Medical policy

b) ENSURE No Room Limit (This is critical as your claim is based on that)

c) No Sub limit on various disease (The ins. cpy puts a max on certain claims like diabetes etc.

d) Unlimited No of restore (This is to ensure if you, by chance, get hospitalized again to cover it)

e) MOST CRITICAL Life long renew-ability (Some ins. companies after 70 years do not renew the policy and you could be stuck) 

f) Maximum 2 years for pre-existing disease (DISCLOSE ALL YOUR DISEASE FULLY-EVEN IF AGENT SAYS NO. One of the reason claim gets rejected)

g) Buy the policy at the earliest ( 30 years to 50 years maximum). The older you get fresh policy comes at a higher cost

h) Senior Citizen policy is after 60 years.

Cost for Husband Wife less than 65 is around 30-50K /year

Cost for Husband Wife > 65 is around 50 K plus

For family (till kid is 18 years) buy a floater policy

Contact ditto - a company that helps with insurance without commissions.

As Rajaji said to R.Venkatraman, ex president when he went for condolences of one of the son in law, that it  was not a great thing to live a great age, "One has to bear the sorrows of the next generation".

 

 

Catching a falling Knife

 Recently one of our friend gave us a Ceramic knife as a gift. It was unopened for long and I started using it. As I was cutting at the edge of the platform, it slipped and fell and as is usual if anything falls you try to catch it. As I did that it gave me a small cut and fell down.

Reason for bringing this up is in Investment parlance, one is always in a dilemma of catching a falling knife. It means a stock is falling down steeply. Do you average the price as it goes down or do you let it fall thinking it will drop dead. Examples can be given of Yes bank, Vodafone India, Punj LLoyd, SREI finance, ILFS and the list goes on. Some recover, while some end up as DUDS.

The general investment philosophy of "catching a falling knife" is if the underlying business is good, then it can be caught, but if underlying business either due to regulation (Vodafone India) or bad luck (Punj Lloyd got caught in Iraq, Libya wars and civil insurgencies) or fraud by management (as in Yes bank) is bad - DO NOT TOUCH IT. If and only if the market has "temporarily" given it a thumbs down due to some issues (eg Nestle and Maggi) and is expected to get over it, you can then average it.

One more buying is by Pyramiding (as in opposite of Rupee cost averaging) is if business is good and started moving from an All Time High of 3-4 years, it may interest people to buy the stock.

Passion and Profession

 One of the oft repeated dialogues of modern generation is "Uncle I am following my passion" when asked, what do you plan to study after 12th or whatever school leaving exams.

In olden days Passion and Profession were two different entities. You could follow passion once you achieved Profession.

Let me put in perspective the distinction. Passion is doing what you feel like doing the best in an area of your liking. Profession is doing what gets you your daily bread and keeps the money flow to make your living comfortable. In olden days, Engineering, Medicine and finance used to be the profession that gets  you a good job and money. People followed those setting aside their passion as putting food on plate was more important than following the passion. Playing music, drawing, writing,  photography or any other artistic works involving passion was subset of the Profession. Javagal Srinath, Ashwin, Sivasri Skandaprasad and many others did Engineering (Profession) before following their Passion. My classmate the famous TN musician- Ramani Bharadwaj did his CA before becoming a top ranked musician in Tamil film Industry. It was always a backup in case the passion did not earn enough money or you got tired of it or you were not in the best of the league.

Rare were the cases where passion and profession met together.

Today, thanks to the Profession taken by earlier generation and having created a certain wealth level, it has given the freedom for the next gen to follow the passion on the back of a fall back wealth. In a way that is good, but my belief is that if you follow a passion that at some point of time does not make it a Profession (i.e money flows in- like say in IPL), the focus should move to the Profession. Passion can be a time pass, but focus on creating wealth.

This is the core of investing as without money, investing cannot be done and without investing wealth cannot be created.

 

Psychology of investment

One of the least discussed, in terms of tweets and SM platform which are flooded with recommendations and analysis of various investments, is the psychology of investment. No doubt there are various popular books that discuss these, but less talked about in Social medias.

Why is this important in our investment journey. Humans generally tend to be conservative. If they bought 10 apples, they will eat 1 or 2 and then keep it for next few days. This practice arises from the fear that they may not be able to get it later and thus enjoy over a period of time. Some economists also call this Marginal Utility.

Coming back to the psychology of investment, Investors generally tend to see what is Value At Risk. This means how much am I able to bear to lose in a worst case scenario. This acts as a security chain which prevents moving freely. 

Imagine  you are on top of huge cliff and there is a river flowing below. Would you dare jump. Some do and do it without fear, while others hesitate. This principle also follows in the investment world. A person with 50,000 Rs balance may take a giant leap and invest 49,000 Rs, while a person with 10 lakhs may consider investing 10,000 Rs. When the market jumps 100%, the 49,000 makes a total of 98,000 Rs (including investment), while the other guy makes 20,000 Rs (including investment). Thus for 1st guy VAR is 49,000, while for 2nd guy VAR is 10,000.

As I mentioned in my earlier post position (no of shares) as well as VAR are two critical factors in making money in the investment world and how good you are at it is the key.

To do the above, conviction on the shares you buy (which includes a lot of research) has to be there. It is always possible that you could also lose heavily like if market had crashed, the 1st guy will lose 49,000, while 2nd one will lose only 10,000.

One of the steps to mitigate the VAR is to build a portfolio over a period of 10-15 years. It is possible some of the items in the portfolio will be duds, but overall it will give you a good return.

Thus if you jump into the investment world, a certain risk has to be taken. Otherwise do not invest. If you expect to get 15-20% return without risk when the risk free return in govt. bonds/FD's is 6-7%, then you may as well forget about investment.

Having said above, it is also critical to save in safe investments that will at least allow you to pay rent and food, but may not get you high returns. While you save from salary building your positions, bonuses or any windfalls are key to invest more or hold cash without spending for the market to fall and take advantage.

This brings another aspect of Psychology. Holding Cash. This is a critical element in investment. When the going is really great that is some of your portfolio elements have you given you 50+% gains, you may want to cash part of it. What do you do with the cash you got. This is where smart people hold the cash. There is always the urge when you have large cash on hand to spend or invest ( without fear ) invariably without doing a research. This is where lot of people lose money and when the right opportunity comes, they find themselves without cash. Thus Holding Cash for long ( put in liquid funds or FD with a low return - 2-3%) is also a psychological factor for good investment.

Imagine someone had sufficient cash just before covid and when the market crashed or the 2008 financial crises when market crashed and bought some well known companies at a low price and keeping VAR and position in mind, he/she would be a big millionaire by now.

Thus psychology plays a big role in the way you invest apart from the fundamental/technical research that one does.

Some people invest when market crashes in a long and steady dividend paying company. This ensures a good yield of 7-8% and helps in keeping a regular income to pay for rent and food, while other funds can explore VAR.

 

 

 

Implementing a system

 One of the fundamental requirement of Implementing a system ( be it a process or a ERP system) is understanding how the operation works. Many of the consultants read some books and implement systems which are not aligned in with the operations, but are considered to be best practices.

Any system implementation requires a person (preferably from the company) to be in charge and who has a the full knowledge of the operations as well as the accounting behind it. Most experts are of a single domain (operations or finance) and merging the two requires a lot of skills in implementing.

Implementing a system requires, a) Process to be clearly identified b) understanding of what reports are needed to analyse the business c) discussing with the working staff to see what issues are there that are faced in practical terms d) leaving many blank cells in the Input format which can be later utilized to add data and finally e) Critical in those inputs formats or elsewhere are an edit or comment portion that has text field where comments are added and cannot be deleted. Only further comments with dates can be added to see a trail/history of why that was done. This is a preferable option in all the input formats to understand some unique situation that come up later and a solution is found.(Gives the support reasons why the process was changed at a later date. 

Lets take one by one - Processes.

These are to be defined clearly sitting with the operatives and their managers and seeing what is the best way to achieve the processes. Experts or  best practices can be studied and drawn up.

One pitfall that is to be avoided is that many managers and operatives come from places/companies, having worked elsewhere, and require the same set up to ease their work. This is the most trickiest and expensive portion of implementation as one has to study the out of box software (costs a standard fare) and making changes to the out of box software (very expensive for modification). The implementer has to understand and see that there is minimal disruption to the out of box software and see only whether key inputs that are not available in Out of box software is to be modified. Randomly acceding to the different category of people's requirement  will make it a very expensive and non ending situation of software implementation.

Reports

 At the end of the implementation of the system if the reports required for analysis are not available, then the system is a waste. If it is noted that required inputs were not captured for reports and no such provision exists, the implementation of system is a waster. Thus the reporting requirement is to be also tackled along with processes. This will give an indication of what inputs are to be captured which can then be incorporated in the report.

 

DISCUSSING WITH WORKING STAFF/OPERATION MANAGERS

 As mentioned earlier, working staff and operation managers come from varied background and having worked in different systems are not easy to adapt to new system easily. They are used to seeing a particular SETUP in their old company or in the current company itself and would not like to see a change in process or input. If you agree to everything what they say, then the project will be a multi year long drawn process with the company providing software and the implementer both getting tired. The Project manager has to take into account the views which impacts the processes and not fancy changes to looks on inputs forms.

 The implementer has to be stern but at the same time understanding. Just because a manager or operative has been used to seeing the date on right side and this system puts it on left is not a valid reason for modifying the system. KEY IS TO LOOK IF REQUIRED INPUT  IS CAPTURED.

Leaving Blanks in input form

One of the factors I found in the implementation is that sometimes the fields in input are set and later after say 6 months, you want to add a field, it becomes difficult as the tables in the database are set and linked and it will cost a lot of time and money and possible NO from the software provider.

It is always better at the time of implementation to add some fields that can have alpha numeric inputs, fields that can take in text comments and other boolean or any other character. This will greatly ease at a latter date if you want to capture some additional data for your input. Eg, if a customer data is captured in the data field and if a driver comes later to service the equipment, if a free field exists, his name can be added to later retrieve who come to deliver and pick up the equipment.

While implementing a large system with different business units and that has trading, construction, process industry, etc is a huge task, the above basic needs that can be kept in mind will ease the implementation process.