Simple Ideas on Wealth Creation, the Subramoney Way – Part 3

Vishal: What are the 2-3 big mistakes that have characterized your investment life? What lessons did you learn from the same?

Subra: Funnily, all my mistakes are one – trusting people who are not trustworthy. I will not call them fraudsters. I will call them incompetent. And I thought they were competent because they were known people, and friends.

For example, I got close to bankruptcy when I was 32 years of age, because my broker defaulted. And I remember one employee of the brokerage firm saying, “Subra, you never take risks. But you took this biggest risk of all!” Like I will never do an F&O, or a badla, or things like these. And I was taking a risk on my broker, and my broker defaulted.

I used all kind of support, from police to political, but that guy didn’t just pay. But I paid up for my clients. So that was horrible mistake which was all about trusting the wrong person.

Anyways, these mistakes of trusting wrong people helped me in a good way – I did not get carried away by any of these booms, like the tech boom, and the real estate boom.

One example to give is that of DLF. When DLF was at Rs 1,200, one broker told me that the stock was worth buying. I had no clue whether it was worth buying, but I knew it was Delhi based company so the negative bias was already there.

I was already anti-real estate. I never liked real estate even during my audit days, because you never knew whether what the management was saying was true or false. So whether it was a construction or real estate company, I never trusted the balance sheets.

At that time, I talked to one young analyst who was tracking DLF and asked his view. He said that a digit was extra in the stock’s price. It was worthy of buying not at Rs 1,200 but at Rs 200. I asked why, and he directed me to the company’s notes to accounts in the annual report.

I read them and instantly realized that there was too much that was not being revealed. In real estate, you can just pay an advance to somebody and claim that is your land. You only realize this somewhere hidden in the notes that the possession has not yet come. But you have to read so much in the notes that I just thought of avoiding them.

And Satyam I avoided because it was referred to me by a broker who I did not trust.

Vishal: So what you are saying is that it is important to avoid the wrong kind of people then to go about selecting the right ones. Is that right?

Subra: Yes. You look at Rahul Dravid. He did not play any great cricket strokes. You will never remember him for the rest of his life for his cover drives or hooks or pulls. But you’d remember him for one thing. He knew where his off-stump was.

So, if you know how to manage risk, you’ll make money. Let’s accept it. Warren Buffett is a function of compounding, keeping risk away. So you keep risk away and let compounding work. Even at 12-14%, you’ll create wealth. You don’t need 26%. If ‘n’ (the duration) is long enough, you create wealth.

Tatas and Birlas are all a function of huge amount of money and huge amount of ‘n’, which is what long term compounding is all about.

Vishal: True. Now moving on from investing onto life, you are an avid runner and a cyclist. What parallels do you draw between investing and endurance sports?

Subra: They are similar. Endurance sports are like investing. You will do short spurts. Like at the end, when you have just 500 metres to cover, you will do spurts. But you cannot spurt for 42 km, which is a marathon. You cannot spurt for 21 km.

You build endurance and you build strength over the long term.

So, when you see a road going down, you should be very happy that it requires less energy. But at the same time, your super ego will tell you that you have to turn and come back to the same place.

In fact, I like cooking, running, and investing, and I believe all three are the same things. You have to get the basic ingredients right. And it is about maintaining your health.

What compounding will you get if you start at 25 and die at 45?

Everybody talks of Buffett but nobody talks of the fact that a large part of his wealth was created after his age of 50. So, he’s getting the benefits of compounding because he’s 80+. Yes he has created wealth, there is no doubt about it. But see how much of it is because of ‘n’ and how much of it is because of ‘r’ (rate of return).

‘N’ is a very important thing and for ‘n’ to be important, you need to have good health. You must be alive to benefit from compounding. Maybe your kids will benefit from your compounding, but for you to benefit from your compounding, you must have the ability to see your money grow and spend it in the future. It comes only if your health is good enough.

At 70, if you want to spend and your body won’t listen to you, what’s the use of money? You are then only going to see your grand children blow it away! So looking after your health is very important.

Now, I believe that in any of these – running, cycling, investing, and even cooking – you must have an interest if you want to do it well. For example, let’s assume that you are the head of pharmaceutical research at a company and these numbers don’t interest you, or you don’t want to pick stocks or do any such thing. Then, you are fine and better off being in an index fund.

But if you are interested and you enjoy doing this – like you enjoy reading annual reports etc. – then you should do it. So, if you are interested, learn and then start investing.

You have to enjoy it. You have to completely enjoy it, which is true for anything you do. Otherwise why will you do it for so long?

I am sure Sachin Tendulkar played cricket for so long because he was enjoying it, and not because of the money he made. He made money long ago, but he still continued for a long time.

Vishal: He was enjoying the process.

Subra: Yeah, it’s all about enjoying the process. For example, it’s easy for me to pay someone money to drop me in a helicopter on the top of Mt. Everest. I can take a photograph of mine with the Indian flag, and tell the whole world about it.

But in my heart I know that I did not do anything! The effort of going through the training and the climb is not there. It takes 3 years of rigorous training to be able to climb the Himalayas.

So you need to keep going through the grind, and keep your body in good shape to be able to do that. If you don’t enjoy this process, then don’t do it. What are you trying to prove?

Vishal: Would you train to climb the Everest some day?

Subra: I don’t have time on my side. Thirty-five is a good age to start preparing for it, not fifty-five.

Vishal: When did you start running etc. on a regular basis?

Subra: Around eight years ago. I started as a complete novice. I did not know what clothes to wear, or any of the keywords like hydration etc. I would just fill up the form for the Mumbai marathon and just go there. I would have been happier if my application would have got rejected also. To me, it didn’t matter. But that time it was not so crowded so anybody could go. So I registered and went. That was the only day of the year I ran 21 km, and without any practice.

I thought it was a major achievement in life that I could complete 21 km in about three hours.

About 4-5 years ago, we formed a group that now has around 1,500 members, and even you are a part of that group. Here, we have people across all age groups. The oldest I believe is 70 years of age, and he does a half marathon in about 2 hours. So he’s an inspiration to most of us. For many people, he is slightly older than their fathers.

Running in this motley group of people across ages has helped me improve as a runner. When somebody is running slightly faster than you, you are inspired by that person’s speed. The best thing is that here you are not talking about the P/E ratio etc., which you are doing throughout the day. So this is a very refreshing kind of a group.

Now, when others are running with you, you are not looking at your watch or phone to check your pace. You just see the other guy running faster than you, and thus you want to also run faster. So there’s a slight element of competition and guilt. You just wish you had started running earlier. That combination propels you to run faster and better.

Like over the past four years, I have cut down my time from 2 hours 30 minutes to complete a half marathon (21 km) to 2 hours 5 minutes. The improvement going further can’t be so good in absolute terms, but I’m sure I’m only going to improve.

So it gives you a pleasure, not because you are improving vis-a-vis others, but you are improving vis-a-vis your own performance of the previous years.

Vishal: That also matters in investing, right?

Subra: Yes. It gives you a pleasure when you press the accelerator and the car moves. You are putting an action and you are seeing the result. When you see that, you feel happy because you believe your strategy and execution have both been right. This is true in investing.

Vishal: What was the best piece of investment advice you ever received?

Subra: This is something very difficult for an old person like me to think of because too many people have got into my head.

So, now if I hear someone say something, I tell myself, “Oh, I have read this before.”

But still, if I can share the best piece of advice I ever received, it was about keeping things simple. You don’t need to do very complicated things.

Now, keeping things simple is not easy, because activity looks more attractive. Buying in the morning, selling by evening, earning a few percentage points and cashing out etc. looks far more attractive. But being able to sit is very-very important.

I guess, for me, it’s also been due to getting a very good broker at a very young age. I was just 17 and whatever my broker said I would listen to him. Now it is a great relationship built over the last 35 years. He was never greedy and thus I spent a lot of time just sitting on the shares I had bought. I think that helped me tremendously.

Overall, a lot of conversations with him have helped. Then of course, reading Buffett, reading Burton Malkiel (A Random Walk Down Wall Street), Taleb, etc. have helped me a lot.

I think the most important thing is knowing you cannot predict. For example, you find a mother telling her child that he/she must take an umbrella because it rained a lot the previous day. Now, if it rained yesterday does not mean it will rain today as well.

But then we would continue to go by the immediate past, and predict the future. Knowing that this does not work has helped me a lot.

Vishal: What was the worst piece of investment advice you ever received?

Subra: I don’t get this as a personal advice, but whenever I do my investment awareness programs, I find that people largely treat equity as a temporary thing. They would say, “You go to equity, make money, and then come back to real assets like gold and real estate.”

To me, real estate is not an investment. To me, gold is not an investment. You need a house, you buy a house. Like you need a shirt and but a shirt, but it’s not an investment. A car is not an investment. You need to use it and you buy it.

So such an advice like real estate and gold will give better returns than equities is what I find bad. Luckily for me, these have never come as an advice because I never took it.

I guess you get good returns with your brain. I have seen people making money in all asset classes, not because of the asset class but because of the brain then have. The asset is just a tool.

To be continued…