The first thing to learn when investing

When a person starts their investment journey, what is the first thing they should learn? 

It is not asset classes or financial goals. Nor cashflow requirements. 

It is their risk appetite. 

The only nervous investor in the stock market is an investor who invests differently from their risk appetite. To a high-risk investor, 3-5% range bound market is a nightmare. To a risk averse investor, that scenario is heaven. 

When the market tanks, if stocks are a higher %age of your portfolio than your risk appetite allows, you will lose sleep. But if the percentage of stocks is such that you can wait it out, or even lose a little, that is fine. 

So, as a new investor starting out your personal wealth journey, understand the personal risk appetite and plan investments. 

On the USD

The world went from "The sun never sets on the British Empire" to "The sun never sets on the American dollar".

It has been evident for some time now that:
1. The strength of the dollar is not based on the strength of the American economy, but on its stranglehold on international trade.
2. As countries start to declare independence from the currency, it will lead to macroeconomic shifts and some numbers changing.

The US is, and has been for some time now, a net importer of goods and services. This works very well when you have a strong currency. But if your currency drops, and you suddenly realise that you do not have production capabilities in-house, then the house of cards tumbles, and how! 

As a society also, the US is not a welfare state. It is a highly individualistic society. This means that any state of scarcity will not lead to Ubuntu or collaboration as the first response. The first response is likely to be competition for the same scarce resources. (We saw a sample in early 2020). 

After a few months, everyone will realise that it makes sense to work together. Then, of course, given that, like every country, it has some great brains - America will bounce back stronger. 

But until then, as the march of the colonies continues, we do expect to see some social and political turmoil in the US. 

Individual Investor in the Stock Market

 Yesterday, I crossed an important milestone. 

This year, I set self a target - to make 8% on my equity investments. 

Yesterday, I achieved that goal. 

With the Feb dividends, one might even close at 9 - 10%. 

What makes this super special is that this includes only the cash profit that I have made and is in the pocket - dividends and trade profit. Not the notional increase in the value of the stocks, which varies from day to day and is currently at 1.1%). 

(Today, the market fell and I bought a lot, bringing the portfolio return value to just under 8%, but that's ok) 

************ 

It's not phenomenal. It's something fund managers do all the time. But for an individual investor who has never seen equity as a wealth generator, this was HUGE. 

So, I took time to reflect on the things that went well. This post is a retrospective for me to refer later. 

What I look for in a stock 

1. Trend in NET PROFIT, not revenue. If overall trend is positive, then one invests. Growth is not necessary. The company should have been able to defend its margins and work well. Even when everyone was laughing at REC, i looked at their numbers and they made a lot of sense. So, I bought. REC gave 45% annualised return. Same thing for BHEL and SAIL. 

2. Asset heavy - I have always preferred companies that are asset rich. Capital assets preferred over stock in trade or current assets. Land preferred over machinery. This is the main reason that GAIL and OIL are heavy in the portfolio. Average annualised return for GAIL: 47%. OIL: 44%. 

3. Good management - This is a deal breaker. The management team is very important because my investment period in each company is over 5 years and consistent growth matters. This is the reason that Dabur is a permanent fixture. Same for Ashok Leyland. Tata Steel was Jubilant were added this year to the portfolio. Of these, Jubilant I went through a fair bit of due diligence on management. 

4. Debt - Equity Ratio trend and current debt profile - Debt -Equity ratio of <.5 is ideal, <1 is necessary. Likewise, Capital Adequacy and the trend of debt. If the operating income is negative, it's a sell. If debt is being used for day-to-day operations, that is a sell immediately. Debt is the cancer of a company. In all my 20 years of investing, only 3 companies have gone belly up. Two of them were Jet and Kingfisher - both in aviation and both to debt. Every single company in the portfolio today as a debt - equity ratio <0.5 

5. Ethical Business - I am old fashioned and believe that if you give money to a murderer, the blood is on your hands too. This is why I have made no money from Big Pharma, Diamonds, and other businesses where we knew the dealings are not ethical. 

When to buy, and when to sell 

1. I consider the annual inflation rate to be 6%. So, to be profitable in real terms, the sale must be at >6% annualised profit. At less than that, hold. Some stocks have taken years to bloom, some remain depressed. That's fine. Kotak was bought at 1316 in 2018 and sold at 1830 this year. HUL, bought in October 2021 during a slump gave 8% annualised when sold this year. 

2. When buying, if a stock is failing, I use one of the two strategies - either buy small units every day of the fall, OR, wait for the day the stock rises a little bit. On that day, even if it is a little more expensive than the previous day, buy. Usually, value stocks rise after that. Have used this to accumulate Kotak Mahindra Bank in the past and Asian Paints, Reliance, and Bata this year. 

3. For high dividend stocks, look at the dividend pattern and decide whether the trading profit will be more than the dividend value. For instance, most PSUs give dividends in Feb, so from December onwards, I accumulated them, but also sold if the trade profit was more than 4% of the market value, because dividend rarely goes beyond 2.5-3% of the market value. 

4. Don't be emotionally attached to the stock. If it is high today, just sell. Don't look at the opportunity loss from selling at a lower price when the stock continues to rise. I didn't sell Dabur at 610, thinking it will go up again. But next day, it was at 604, at which point i sold immediately. So, no one can time the market. Take your modest profit in pocket and relax. 

5. Do consider replacement buy for value stocks. Put a GtDt order immediately if you don't trust your memory. For my portfolio, these staple stocks are OIL, IOCL, SAIL, BHEL, and some other PSUs that I truly value. 

6. I maintain a separate excel sheet where I record all my trades. When selling, i do a mental calculation of which lot I am selling, and do the accounting in my excel sheet. Brokers tend to record the most expensive lot of shares first, so that your tax liability is lowest. But you are doing your lot trading. It evens out, because eventually, the securities account and I both agree on the total figure - capital appreciation + trading profit. 

What I did differently this year 

Honestly, only these things - 

One, I fixed a tangible target to meet. 

Two, even if the markets were moving only in a band and for months the stocks gave nothing but dividend, I did not stop going to the market every day and monitoring buy and sell opportunities. Some day, it would come. And they did. 

Three, I raised the band of individual trades. A wealth planner volunteered to manage my equities this year and made 4 large trades. Two of them tanked (and are still in the portfolio, costing a neat amount), but he said - Mam, bada socho - think big and trade big. So, my risk appetite increased a little bit. 

Four, I read a LOT MORE about how big investors choose their stocks, what they look for, what are the common things in their portfolio and mine. Bought Moneycontrol Pro (waste of money). As usual, I completely disregarded the research houses and their recommendations. Traders are not investors. Their money comes from keeping capital flowing in the market. Investor's money comes from stability. So, I read only those reports where the investor speaks about how they choose, when they decide to buy and sell, and learnt from that.  

Five, understood that PSUs may not be a popular sector, but they are the sector that I know best, and therefore, this year, I did a lot of investing and trading in the sector I knew instead of looking for good high earning stocks. My son invests only in blue chips so I followed his lead and made some decent moneys on that too. Evey month, he invests 10,000. I would wait for him to choose his stocks and immediately put money in the same ones. Basically, he has been ok with choosing good bluechips and I have been ok with PSUs and I shamelessly used both. BUT, i stopped the Hunt for More stocks and stopped doubting myself. Just plodded on. 

And what I always did: 

One, NO SIPs. SIPs are lazy investing. If a fund manager or stock wants my money every month, let them be worthy of that money every month. The only person who is helped by a SIP is the fund manager - because irrespective of how the SIP performs, he will get his cash inflow to invest. He does not have to worry about making money grow to invest next month. Also, MF as an asset class does not work for me because even in low value stocks like PSUs i find that there is more money in stocks directly than in the MFs. 

Two, NO Tips. No talking to traders to understand which stock is going to rise in the short term. Even the high value stocks that are stuck in the portfolio are robust companies, so am not too worried. 

Other than that, it was my 20 years of knowing the stock market, the stocks I am comfortable with, and knowing that even if it looks rock bottom, if the company is good, buy. It will go up. I have now lived through at least two stock market crashes, bought GAIL at 497 and at 97, and all that collective experience really helps stabilise the mind. 

Did You Know...

 

Be grateful for the rocks

I will bet that you have read at least 100 posts that tell you how to bring happiness in your life. This is the 101st, or perhaps the 1001st. So go for it, or not. 

There is that story about the rocks, pebbles, sand, and water. (If you haven't read it, it's in the PS below). 

What is remarkable about the world is this: 

It is fashionable to crib about the rocks in life all the time - Jobs suck (TGIF), Mom life sucks, Parents are horrid, Husband jokes, wife jokes, fidelity is too much work, honesty is outdated. 

We coat the rocks with 2-inch-thick negativity and coat the sand particles with gratitude and forced positivity - Today, Life Loves You. Today, i am grateful for you, dear friends, BUT if-you-oppose-my-political-opinion-on-social-media-I-will-rip-you-apart-and-throw-the-flesh-to-the-trolls.  

How does this work, exactly? (Hint: It doesn't) 

Contrast this with: 

Shopkeepers who pray to their shutter before opening it and performers who touch the stage with reverence before stepping on it. It's not a job-that-sucks. Its rozi-Roti. 

Husbands who call their wives "Bhagyawan" (the one who brings luck). 

Parents who are grateful to be parents, not scornful. 

So, the message is: 

Be grateful for your rocks, or don't have them in your jar. 

Marriage is fun. Being single is fun. Choose what gives you joy. Then be happy with that decision. 

If you don't like your job, don't do that work. If you get your money from that job, and you get the rest of your life from that money, be grateful for it. Don't live a TGIF life. 

If you don't enjoy being around children, don't become a parent. This is your life. Live it in the way that you like. 

But, like your life. Be grateful about the rocks. You put them there. 

********************* 

PS: 

A philosophy professor once stood up before his class with a large empty glass jar. He filled the jar to the top with large rocks and asked his students if the jar was full. The students said that yes, the jar was indeed full. He then added small pebbles to the jar, and gave the jar a bit of a shake so the pebbles could disperse themselves among the larger rocks. Then he asked again, “Is the jar full now?” The students agreed that the jar was still full. The professor then poured sand into the jar to fill up any remaining empty space. The students then agreed that the jar was completely full.

He then added water to the jar. The water tricked through the sand and the pebbles, taking no extra space.

The professor went on to explain that the jar represents life.

The rocks are the really important things - family, work, health...

The pebbles are the less important things (whatever that may be to you)

The sand is the stuff that exists only to fill in the empty spaces.

What is important is the order in which we fill the jar (divide our time) 

If we put the sand and pebbles in first, there will be no space for the large rocks. 

Likewise, if we plan our day around the Instagram reels and the social media likes, there will be little time left for health, cooking, talking to real friends, being there for people in a way that matters to them. 

And so on. But for this post, the only important metaphor is what rocks, pebbles, and sand stand for. 

Team Building Innovative Introductions: The Activity of the Three Circles

Objective

The objective of this activity is to allow people to get to know each other and for the facilitator to understand the group dynamics, identify who needs help, and which groups, if any, need to mingle more outside the group. 

Who is it for 

Ideal for mid to senior level management, groups of 8-15. This needs to be done as the FIRST introduction activity in a team building. 

Setup 

While the activity can be done both indoors and outdoors, outdoors is preferred in winter and indoors in summer. Physical comfort is important for this activity. 

In the beginning, the team stands together. Around them are three circles - one each to the side, and one directly in front. The circles can be made with rope, chalk, or any other material. 

Brief

All of you are in one group. Now, it is time for us to get to know each other, so lets do introductions. 

BUT, our introductions are with a twist. You will not introduce yourself. You will introduce anyone else from the group. 

The introduction should be about who they are, their department, how many years with the company etc. , but it MUST also include ONE personal detail at least. It can be that they belong to Allahbad, or that they have two daughters, or that they write poetry in their free time, or the name of their spouse- anything. But one personal detail. 

Once you have made the introduction, you move to the left circle. The person whom you have introduced moves to the right circle. 

The objective of the game, however, is for everyone to move to the front circle. How do we do that? 

Once you have BEEN INTRODUCED and MADE an introduction, you can move to the front circle. i.e., if you are in the left circle, you move to the front circle when someone introduces you. If you are in the right circle, you can introduce someone and move to the front circle. 

The order in which you move to the front circle does not matter. But the speed at which the entire group moves to the front circle does. So, lets get this ball rolling and start talking! 

Anyone can speak at any time. There is no order and no rule. The moderators will only nominate someone if no one is volunteering. 

You CAN make more than one introduction and you can be introduced by more than one person. No constraint! 

Trainer's Note

Use this activity to make notes about interesting things about people that you can use subsequently to draw them out. 

But as facilitator, pay special attention to subgroups within the group, the shy ones, and the ones who tend to bulldoze the group. This is an identification of network dynamics activity. 

Debrief 

There is no debrief except clapping for the entire group and announcing the time it took for the group to reach the front circle. 

Materials Needed 

Chalk Powder (1 kg, for outdoors) OR 15 meters of rope.  (5 meters * 3 rope segments) 

Chocolates - 10 - 15 nos. 

Designing Rewards and Recognition - A Case Study

 #DesigningRewardsAndRecognition

One of our clients was trying to implement a rewards and recognition framework for almost two years.

When we were called in, the mood in the room was not optimistic.

We took the project and did design to rollout in 40 calendar days.

Step One: Brainstorm and Design

Sharing with you the interview guide we used to help the client clarify their thoughts.

1. What do you want to reward.

2. Why do you want to reward it.

3. At what frequency.

4. What is the budget.

5. What are the keywords associated with this award. A person who wins this will be ____.

6. This will be valued by employees because __.

7. Who will decide the winner and on what criteria.

The thing with RnR is, that for every winner in a universe of N people, there are N-1 losers. So, every reward's criteria have to be 100% transparent to establish the credibility of the process.

Keeping this in mind, we worked with the client at every stage, asking supporting questions until the process was absolutely clear.

Step Two: Rationalise and Prepare for Rollout

The next step was to rationalise the list and arrive at a schedule of implementation. 

Obviously, through brainstorming, we would have arrived at a list that is at least 2x the intended number of awards being planned. 

So, the awards were rationalised and the list pruned. 

The most challenging aspect at this stage was reminding the client that the budget of the award is not just the trophy/cash component but also the cost of administration, selection, communication. 

We also needed to connect the process to other HR portfolio items like career planning, Upskilling, Performance Management, Payroll, etc. at the design stage itself, so that the rollout is seamless. 

#WordOfCaution

Even if the leadership is very enthusiastic, creating awards that exceed a sustainable budget means that someone will find a valid spanner and succeed in reducing or removing at least a few awards - but taking away the trust on the entire mechanism. So, we had to tell the client to stick within the budget, even when they were ok to "go above and beyond a little bit." 

Step Three: Communication and Rollout 

The next step was to plan the communication preceding and during the rollout for each recognition. 

Once this was done, the rollout of the selected RnR elements was done on a single day. 

During the rollout, the entire focus was on the recipients - what would they be like, how might this help them in their learning/career journey. The entire speech was about the employees and their growth. 

The rollout was a success. 

*Some elements of the process have been disguised/modified to ensure client confidentiality.