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Learning from Warren Buffet Series – Part 4

This time, I have combined the key takeaways from 3 letters. Because, while Warren Buffet writes these letters with a gap of one year, we are trying to bring up these articles every month. So we need to avoid being repetitive. But, most of the knowledge imparted by him is so timeless and relevant, that we are forced to write about them again and again.

Berkshire Hathway Shareholder letter – 1980-82

Key learning from the letters (in no particular order)

Learning 1

Buy right and sit tight – If your purchase price is sensible, some long-term market recognition of the accumulation of retained earnings almost certainly will occur. If you are confident about your investment, you need to wait patiently. Pascal’s observation seems apt: “It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room.” If there is ever a chart which can speak, I believe the below chart of BSE Sensex would just say “shut up and remain invested”.

Sensex journey and growth

Learning 2

Forecasting folly – Forecasts are useless especially in stock markets. Investors need to avoid falling for forecasts at any costs.   “Forecasts”, said Sam Goldwyn, “are dangerous, particularly those about the future.” Read why here.

Learning 3

Invest when there is blood on street – Investors need to be patient and invest when there is fear in the market, because it is during these market corrections that you will get handsome opportunities.

Learning 4

Avoid business in industries producing un-differentiated products – Businesses in industries with both substantial over-capacity and a “commodity” product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. Investors need to be wary of businesses in industries where there is no difference in products like sugar, textile, paper etc.

PayPal founder, Peter Thiel in his ground breaking book “Zero to One” says “All failed companies are the same: they failed to escape competition.”, and it is very difficult to escape competition if the product you are producing is undifferentiated.

Learn more from Warren Buffet through previous parts of our series:

Part 1 | Part 2 | Part 3

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Aditi’s Money Story: I Was Always Conditioned To Save First

Aditi's money story

Aditi is one of my earliest female clients. And the reason I chose to write about her money story today, is because she inspires me.

A couple of months back, a common friend gave me her contact and we decided to meet at her place. She was newly married and I had almost barged into one of her lazy, cozy weekend. She greeted me well and waited till Karan, her husband, joined us. The agenda was to discuss their finances.

After having a brief discussion about their respective backgrounds, she quickly told me how she had been investing in equity mutual funds since she first started working. And how Karan had been risk averse, so to say. Now that they were married, she wanted to make sure that they have the right asset allocation and hence adequate equity exposure. She wanted an early financial independence for the couple. Meanwhile, I could sense Karan’s limited participation – may be because he was uneasy about equity, I thought.

A couple of weeks back, when I decided to venture into the domain of helping women understand and manage their own finances better, I reached out to Aditi to get her views on the subject. Remembering her as someone who took the lead in discussing family finances, she was one of the very few names that came to my mind.

A transcript of our recent conversation is given below:

Me: How do you feel about the fact that you take decisions around your finances / family finances?

Aditi: Ever since I was a child, my father used to encourage me and my sister to save whatever little earning we used to have. So we have always been conditioned to think of savings as an important aspect. The fact that I started investing since my first job has really helped me continue the practice. And today when I think about it, I realize it is a great feeling to be self – dependent. The ability to take care of my own needs gives me a lot of confidence.

Me: What made you go against the conventional practice of letting the man of the family decide?

Aditi: When we were young, a mass prevailing notion was that women are first the father’s responsibility and then the husband’s. I often questioned myself, why is that? In fact, when I was a kid, I heard someone asking my mom to have a third child, otherwise who would take care of them when they grow older (we are two sisters). It kind of impacted me deeply. I have always wanted my parents to think of me as an asset and not as a liability. I knew for sure that I wanted to change the norm that daughters cannot take care of them when they grow older.

Also, Karan and I both have our respective strengths. Knowing that managing finances is my strength, Karan has proactively taken a step back and is happy to let me handle the key financial decisions. So, for me it was not about going against the conventional practice.

Me: That is a very interesting thing to note Aditi. Because in a lot of families (including the ones where the wife is a home-maker), I notice that the men consider it to be their fundamental duty to take all financial decisions. If only, every couple could mutually agree on the mechanics that works best for them, the family finances could be managed jointly and more amicably.

Aditi: Absolutely. I think I have been lucky in this respect. But a lot of women are not.

Me: And now I understand why Karan wasn’t an active participant when we first met. So tell me, what comes to your mind when you think about “Financial Independence”?

Aditi: Financial Independence is extremely important to me. It is my confidence to live my life my way. I want to go to work because I love my job and not because I have to pay the bills. I want to stay married because I am in love and want to grow old with him and not because I have to as I cannot support myself financially. I want to achieve financial independence to have the freedom to do things I love to do, to live life the way I want to. And when I say “I”, I mean “us”.

Me: What has been your experience with me and CAGRfunds on a whole?

Aditi: I got to know about you and CAGRfunds through a common friend and I am always inspired by people who choose passion over 9-5 jobs. So when my friend told me that some of his friends had started this financial planning company, I was quite kicked about meeting you. Despite the fact that I had already met a few other investment firms before I met you.

The first meeting that we had at my place was something that made me very comfortable with you. It was casual yet relevant. There was a certain structure to the discussion we had, and logic to whatever you said. We resonated in lot of ways and it was that warmth to which I got sold which was missing in the other older firms.

What I like best about working with you is that you are extremely reachable. I know that I can talk to you if I want to. And more importantly, I trust you with the guidance that you give to me. Your intent when you talk to clients is not to sell. It is to educate them. You bring so much credibility on the table that the sale eventually just happens!

Me: Wow Aditi. Thanks for so many kind words. As you know, I am venturing into this domain where I want to help women step into main stream financial planning. What do you think about this initiative?

Aditi: I think it is a brilliant initiative. I don’t see a lot of women who are as lucky as I have been. And one of the major reason is that they are not comfortable about disclosing their level of unawareness. I mean, a lot of women would rather not speak than be judged as stupid for not knowing what equity means. So the good thing about this initiative is that as a woman, you will understand them better, not be judgmental, and help them see things from a different perspective.

Me: Thanks Aditi. That’s the intent. And I really hope that I am able to make a tangible difference to a lot of women.

Aditi: Of course you will. It has been great working with you so far and I am sure others will feel the same. All the best!

CAGR-For-Her: It is an initiative to help women to get better control over their finances. It is about making women aware of the importance of being fully involved in financial decision making. It is an attempt to drive one more woman towards her financial independence.

For embarking on your journey of financial independence, write to me directly on shruti.agrawal@cagrfunds.com

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How are the rich millennials planning for misery?

Last month I met a friend who was visiting Delhi for a mid – month break. Molly (name changed) was into sales of carbonated drinks and work brought her to Delhi on a Friday. So she stayed back and decided to spend some time off with her cousins and friends.

We went to this cosy little Italian place in GK 1 and promised each other to pen down 5 stars on Zomato for the heavy doses of heavenly pasta that we had. We quibbled a little on who should pay the bill and then we dropped both our cards on to the bill tray. Swipe. Up went an eye brow and five fine lines cuddled up into a frown on her forehead. I knew what was wrong. It was 20th of the month and her bank balance was into a low 4-digit number. No, credit card was not her solution. She was just unable to save what she wanted to save every month. And as result, she had been deferring her much coveted Euro trip for over a year now. Because she never had enough surplus to fund her desires, sorry – foreign vacation desires.

Molly was a quintessential corporate working girl. She was realistically ambitious, driven to deliver more than expected, eager to learn and extremely proactive. However, with over 3 years of work experience now, she was still far from financial independence.

That evening I went back and thought – why a good part of our generation (Read: Millennials) is so professionally accomplished yet financially poor. At this age, our parents were probably running a family of five. And we struggle to scrape through a month. A lot of this has a very deep connection to our habits and behaviours. Let me list down what comes to my mind.

We don’t want to grow up

No adulting

Credits: thevanguardusa.com

The spending priorities of our generation are extremely different from that of our parents. With the luxury to spend only on ourselves, we experience negligible levels of financial responsibility. And our inexperience at “adulting” reflects in how we manage our money.

We fail to delay gratification

Spend today, Save later

Credits: theawkwardyeti.com

Our generation is more here and now. We want quick replies to emails and hate to wait for the next sale in H&M. We also always want the latest in town. Since we don’t have much responsibilities (Refer the first point), we have this innate urge to gratify ourselves immediately. We believe in living now than living long. Even if that means possessing three credit cards.

Likewise, we want to get rich quick

Everyone wants to double their money within a year. Everyone also wants to step out richer from a casino. Neither of this happens to everyone and every time. If we want to stay rich for a long period of time, we need to deploy our money carefully, rationally and patiently. There are no shortcuts to securing a good life for one’s own self.

We misunderstand saving for our future

Bank deposits cannot beat inflation

Credits: Matt from the Daily Telegraph

We get a misplaced sense of security when we put a certain amount of surplus in our banks. We also feel proud of ourselves since we took a stab at “Saving”. But sadly, the world has move past the era when savings were enough for livelihood. Our ever increasing standard of living coupled with rising costs is a double whammy. And savings can do nothing but give us a false sense of security and sufficiency. Investing is the new saving.

About the author:

Shruti is a financial planning enthusiast and spends substantial amount of her free time in helping out her friends and relatives sorting out their finances. Currently working with Mahindra & Mahindra, she is one of our esteemed guest writers. She is an MBA from MDI Gurgaon and a CFA (CFA Institute, USA). 

About CAGRfunds:

We are a bunch of financial experts who help people manage and grow their wealth. We focus on making our clients financially independent by educating them and guiding them throughout their financial journey. If you think you need help with your money, reach out to us on +91 97693 56440.

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Have you been taking hasty investment decisions?

Hasty investment decisions

Investing in equity is a little like marital courtships. The market rallies are like the butterflies in your tummy when you are courting your partner. Only till you realize that all is not hunky dory!

The recent market volatility has shaken up a lot many investors. Those who jumped on to the equity bandwagon are left wondering if they took the right bets. And those who didn’t are still contemplating if they really did miss the bus. Many amongst them are those who are convinced that they took hasty investment decisions which they now regret.

In this article, we break the myths which lead to these hasty investment decisions.

  1. If your insurance premiums are being returned to you, do the maths again.

Almost every family has those policies which promise to return back your insurance premiums. What a joy it is to get insurance cover and also get all your premiums back! Fact check – the actual premium that goes towards your insurance cost is probably just a small fraction of the total premium you pay. The rest of your premium gets invested and you are passed a small fraction of the returns generated (which actually may not even beat inflation). Basically, you get a small insurance coverage, pay a high premium and get meagre or no returns. Never mix insurance with investment!

  1. You cannot earn double digit returns in 2-3 years and that too consistently.

Over the past few years, investors have witnessed 20+ returns within a year or two of starting their investments. But that does not always happen. In some years equities will give you high double digit returns and in some years they will go negative. Volatility is common and a part of your wealth creation journey. Keep your expectations realistic.

  1. You don’t sell your house when property prices drop. Why do you panic sell equity?

This is one area where the liquidity of equity is used to its disadvantage. People tend to panic at the slightest of negative returns in their equity portfolio. The panic results in selling out and incurring a loss. And thus equity becomes the untouchable for generations thereafter! The only thing you need to ensure during negative returns is if you are invested in a good enough fund. Equities are meant for the long term and you have to survive through the noise about all the negative returns.

  1. Guaranteed returns will never help you grow your wealth.

We are inherently curious about our future. No wonder the Godmen have a whole industry to themselves. However, if someone is being able to guarantee you a return, it is natural that he will keep a margin of safety and guarantee only what he can certainly earn and accordingly pass on to you. The guarantee is almost always close to inflation or sometimes even lower than that. So your fixed and recurring deposits can at best help you protect your capital, not meet your future financial goals. You need to put your money to work with some calculated risks so that you can grow your wealth.

  1. Just because you want the highest returns, doesn’t mean you should put all your money on that one instrument.

We often get clients who want to invest in the “best” mutual fund and the “best” stock. The reality of life is that the experts can only have views around what could be the best. What turns out to be the best is a fact you get to know only in the hindsight. So the “best” strategy is to not put all your eggs in the same basket. Diversify adequately.

  1. Technology has enabled you to see your investment value on a daily basis. But that doesn’t mean you should.

When did you last check the current valuation of the house you purchased? For some of you the answer would be never. Exactly our point. Just like property needs time to appreciate, so does equity. If you feel too restless about watching your portfolio every day, you need to stop doing that right away.

At CAGRfunds, we strive to help you grow your wealth. And thus we ensure that we tell you the right thing at the right moment. If you are currently worried about your portfolio, we are just a call away! Feel free to reach out to us on +91 9769356440.