Investing Behaviour

How to Teach Kids the Value of Money

Warren Buffett is undoubtedly a famous man. And he is not just famous for his riches, but also for his rejection of the trappings of wealth. As we all know, he lives in the same house he had bought in 1958 for US$ 31,500, and his annual salary of US$ 100,000 is far less than what most CEOs (including many in India) earn.

But there’s one aspect of Buffett that many people don’t know much about. And that is about how he has brought up his kids when it comes to the subject of money.

Over the years, several interviews with his kids have revealed how Buffett’s message to them on money was loud and clear as they were growing up. And it was that money wasn’t what mattered in life. Instead, it was finding something you loved to do and then doing it.

In his book, “Life Is What You Make Of It,” Peter Buffett, a musician and the youngest son of senior Buffett writes about the values he absorbed growing up as the son of Warren Buffett and his late mother, Susan Buffett, and the path he has pursued to identify and pursue his passions in life.

He also writes about things like requiring children to do chores and letting them solve problems on their own instead of bailing them out. But he warns that children will pick up on their parents’ true beliefs about money – no matter what a parent says about money.

10-Point Action Plan for a Young Earner

Noted Irish playwright and philosopher George Bernard Shaw opined, “Youth is wasted on the young.”

What he possibly meant was that many young people have everything going for them physically; they’re in the best health they will ever be in, and their minds are sharp and clear.

However, they lack patience, understanding, and wisdom which results in so much wasted efforts.

The energy that can be directed towards building a solid thought process and action plan for the future is spent on short-lived pleasures.

Shaw’s words are especially applicable to those young adults who are starting a career and wondering if they should start saving and investing for their future or spend the next few years living life kingsize.

How to Generate Stock Ideas: An Unusual Lesson from a 1939 Book

One of the best books I read before starting on my journey of building Safal Niveshak was James Webb Young’s A Technique for Producing Ideas, originally published in 1939. After all, I was trying to build my idea bank for things I wanted to do in life then.

In this book, Young lays out with brilliant simplicity the five essential steps for a productive creative process. Explaining how the production of ideas is largely a result of process than talent, he writes –

The production of ideas is just as definite a process as the production of Fords; that the production of ideas, too, runs on an assembly line; that in this production the mind follows an operative technique which can be learned and controlled; and that its effective use is just as much a matter of practice in the technique as is the effective use of any tool.

My limited experience in investing suggests that what is most valuable to know about idea generation is not just where to look for a particular idea, but how to train the brain in the method by which all ideas are produced and how to grasp the principles which are at the source of all ideas.

How to Survive the Next Stock Market Crisis

Note: I am not predicting a stock market crisis in the near term. But what follows below is a discussion on how an investor can survive a crisis that will certainly happen at some time in the future. That’s the nature of financial markets, you see.

“Hey Vishal, how are you doing today?” asked my friend Ravi as we met for lunch last weekend.

“I’m good, Ravi. How have you been?”

“Super, and more excited than ever!” he replied.

“Glad to know that,” I said. “You got a promotion at the job?”

“No, I’m excited for another reason.”

“Bull market?” I asked, almost knowing what was coming next.

“Yeah, yeah, you guessed it right this time!” Ravi exclaimed. His joy seemed to know no bounds.

“I just sold a five-bagger from my portfolio,” he said with great pride, “And three more stocks are almost hitting that level.”

“Great to know that Ravi. The last time I saw you this happy was in 2007.”

“Oh, don’t be a sadist Vishal,” Ravi said. “Don’t remind me of what happened then.”

Reasonable Expectations

“You’ve got to be careful if you don’t know where you’re going, ’cause you might not get there.” ~ Yogi Berra

At the heart of Ben Graham’s teachings lies his advice that the intelligent investor must never forecast the future exclusively by extrapolating the past.

Unfortunately, that’s exactly the mistake that stock market experts and investors have made innumerable times in the past. Some go even further. Since stocks had “always” beaten bonds over any period of at least 30 years, stocks must be less risky than bonds or even cash in the bank. And if you can eliminate all the risk of owning stocks simply by hanging on to them long enough, then why quibble over how much you pay for them in the first place?

In India, it’s easy to find a forecaster who argues that stocks have returned an annual average of around 18% over the past 30 years and thus that’s what investors can easily expect in the future. But what if I tell you that the average annual return for the BSE-Sensex has been just around 10% over the past 25 years (since the peak of Harshad Mehta bull run)?

Of course, this is just one number and you may accuse me of being selective in my choice to prove a point. But that’s what I am up to – prove a point, that when you do not pay heed to the price you are paying for stocks because you have unreasonable expectations for the future, you are bound to get disappointed.

The Curse of a Bull Market

“Vishal, since the market is up so much over the past 3-4 years, and especially after the surge over the last few months, I’m looking for cheap stocks and sectors that have been left behind, even if they are average businesses,” a value investor friend Ravi told me this as we met for lunch last weekend.

“Why?” I asked.

“Because it’s almost impossible to find value among good quality companies…your so-called moat businesses. And I am a true blue ‘value’ investor you see.”

“Oh no,” I told Ravi. “That is a dangerous thing to do.”

I understood what Ravi was hoping to do. It also sounded logical i.e., to identify and buy stocks that remain cheap in a market where most businesses are quoting at high valuations.

But sensible investing doesn’t work that way.

“There is a big difference between ‘cheapness’ and ‘value’, Ravi.”

“Why do you say that, Vishal?”

Oh, My Impatient Generation!

Impatience I met a guy yesterday who spent the past ten years of his life – and he’s just 32 years of age – destroying his body with alcohol, excessive food, and a sedentary lifestyle.

“I have resolved to be fit, lean and healthy in the next six months,” he told me with great confidence.

Well, not surprisingly, he got irritated when I told him that it might take a little longer than six months to achieve what he wanted.

His reaction wasn’t much different from a cousin of mine, who recently told me how she wanted to become a life coach and was ready to do whatever it took to get there in one year.

When I asked her, “What if it takes you ten years to get there, instead of one?” she had no answer.

Clearly, she hadn’t considered the possibility that years of learning, experience and skill development could be one of the necessary success ingredients in becoming a good life guru. But she wanted the results without all this work…or by investing the necessary time.

Notes from Howard Marks’ Lecture: 48 Most Important Things I Learned on Investing

“If you were to read just five books in your life to become a sensible investor,” I often suggest people seeking my view, “…they have to be Warren Buffett’s letters, Poor Charlie’s Almanack, Peter Lynch’s One Up on Wall Street, Ben Graham’s The Intelligent Investor, and Howard Marks’ memos.”

Well, if you don’t know who Howard Marks is, let me tell you he is the CEO of Oaktree Capital and is one of the most famous investors who manages to keep a low profile, despite managing almost US$ 100 billion. Marks is also the author of an amazing book – The Most Important Thing: Uncommon Sense for the Thoughtful Investor. In its ultimate praise, Warren Buffett writes, “This is that rarity, a useful book”.

I have been reading and re-reading Marks’ memos for a few years now, so was very fortunate to attend a lecture he gave in Mumbai yesterday titled – The Truth About Investing.

It was an enlightening session, just to be in the presence of this legend and hear him out live.

I made some notes from Marks’ lecture, which I present below (most of these are direct quotes from Marks). He calls these lessons as the “brutal truths” of investing. As you would realize while reading the notes, these indeed are brutal truths – stuff that is easier said than done.

Investing is Simple, but Not Easy

“Life is really simple, but we insist on making it complicated.” ~ Confucius

“Simplicity is a great virtue but it requires hard work to achieve it and education to appreciate it. And to make matters worse: complexity sells better.” ~ Edsger W. Dijkstra

It’s a sad fact of life that great people rarely divulge deep insights into how they achieved their greatness. And the sadder fact of life is that when a few of the greats do divulge the secrets of their greatness, we ignore them because the secrets often are too simple, too pedestrian, for us to appreciate.

“Huh! That’s it? It can’t be so simple!” we would say when we hear a great shelling out simple advice to achieve greatness.

Like, if you are learning martial arts and you hear Bruce Lee speak out the secret to his greatness – “Absorb what is useful, discard what is not, add what is uniquely your own” – you say, “Great thought, but is that it? It cannot be so simple!”

Consider investing. When we read Warren Buffett revealing that the only two rules of successful investing are – Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1 – our brain protests, “Great thought, but is that it? It cannot be so simple!”

Investing is simple, like Buffett also says, but not easy. Take a simple idea, Charlie Munger suggests, but take it seriously.

One Idea That Could Change Your Life (and How You Invest)

“Good morning, Sir,” I called out to a man walking just ahead of me during my morning walk yesterday. Like me, he was a regular at the walking track and we often crossed each other exchanging smiles and wishes. I had heard good things about him from others, and so I thought of engaging him in an interaction.

“How are you doing today?” I asked him.

“Great, as always!” he replied with a smile of a ten-year old. He, by the way, looked ninety years of age but healthy enough to be walking at quick pace.

“I have been observing you for the past many days,” I said, “And you always wear a nice smile on your face and look so healthy. It seems you are living a great life.”

“Yeah, it’s always been wonderful,” he replied, “No regrets at all.”

“That’s wonderful!” I said, “But you’ve been lucky,” I murmured, which he could hear, “Else life is so full of adversities and regrets.”

“Yeah, that’s true,” he replied. “It’s adversity all the way, but that’s what life is supposed to be, isn’t it?”

“Maybe, but then that’s not a life you seem to have lived, right?” I asked. “I can see that you are happy and healthy at ninety years of age, and I know that you are financially free. In other words, you seem to have everything that is missing for most of us going through mid-life.”