Who moved my cheese?

Traditional business are losing money, they are not as profitable as they used to be. I’m from a family of traders in automobile spare parts. This used to be a very profitable business. In our community marriages happened based on the goodwill of the business of the family. However, gradually these traditional businesses have been on a steeply sliding slope. The situation is the same in textile business or in electronic trading business. The traditional business model is no longer working as it used to work in the past.

What happened? I remember reading a book “Who moved my cheese?” by Spencer Johnson about 12 years ago. The book tells the story of a rat who would go to a fixed place where he would get cheese every day. Gradually the cheese started dwindling and they would complain “Who moved my cheese?” instead of going elsewhere to find the cheese.

Business has become too dynamic; the pace of change has increased multi-fold. What used to work earlier, no longer applies.

Tomorrow if the Income tax rules become friendly and audit of private companies is made optional, many of my fraternity will complain, “Who Moved my Cheese!”

My best investment

People often ask me what has been my best investment and how did I make it happen. I have made many financial investments-most of them have contributed towards my financial freedom. I acknowledge these investments with a deep sense of gratitude.However, none of them will count as my best investment.

My best investment has been in myself. I have invested a lot of time in developing the biggest asset that gives me the biggest joy and security- myself. I have been a voracious reader and the time spent in reading books on various subjects has contributed immensely in developing this asset. It is an investment on which I have greatest control.I cannot control the events happening in my life; but I can definitely control how I respond to these events.

I was introduced to the concept of “Managing Yourself” very early in life in a book by Jadgish Parikh. Very Few MBAs too are aware of this basic management principle. Then the concept of R.O.T.I (Return on Time Invested) that I learnt from Mr. Uday Kotak, in a talk organized by Bombay Management Association also greatly contributed in how I invested my time. The concept of ROTI taught me make the most effective use of my time, and to a great extent I managed to apply this principle.

The most important manner in which I made this investment was by reading various authors on diverse topics. I keep reading books even today as I believe that this conversation with great minds contributes a great deal in shining my intellectual faculties. This has made me multi-faceted, made my life interesting & made me interesting to my clients & other people with whom I interact.

My wife always wanted a husband who could be an inspiration for her children. I had to work hard to fulfil this dream of hers! Actually, it was not at all hard work. It was all about making the choices. I had Rs.1000 which I could blow away by eating an unhealthy meal at a restaurant. I chose to invest that Rs.1000 in buying good books. I had the choice to spend my time watching meaningless T.V. programs. I chose to invest my time reading books and having conversations with great minds. This investment in myself has paid rich dividends and also resulted in great “appreciation” in the value of the asset.

Finally, my favorite question that I keep asking myself about this investment – Is it one’s right or his/her duty? Can one say that I have the right, the choice not to make this investment to continuously improve and upgrade myself? The way this is practiced in real life makes one feel that this is one’s right. However, in my value system, this investment is not a right, but an obligation. We have a duty to continuously invest in ourselves and keep on improving upon this gift of life.

What is your best investment? Leave your comments below.

Diversification or Focus

I have often heard Investment advisers saying that you must diversify your portfolio. The logic is very simple- don’t put all your eggs in one basket. If you have invested in say real estate, gold, shares and art, if one category fared badly, another would fare well and thus your risk is mitigated. Your average returns will be healthy; this is what they say.

Well for an average investor who does not do much research before investing, probably this might be good advice. Such an investor only invests money while investing; he does not invest time. I have seen investors in stock market who own more than 100 scrips; their logic is diversification. In fact, they are the guys who should not be buying stocks directly because they do not understand the market. They feel that they can cover their risk by blindly investing in all the stocks that are recommended by different experts. At least some of them will click and give them the satisfaction of a winner. The question is what about the losers? Well, they believe that they have not suffered a loss until they have sold their shares. So they will proudly tell stories about their winners and the losers are not losers – they are investments for the long term! Dude, who are you trying to fool?

Diversification, most of the times, is an excuse for not doing enough research about the long term prospects. Diversification turns into diworsification in such cases. If one studies the really successful investors in history, they are the guys who have focused on specific sectors. They have invested time to understand certain opportunities and based on years of very close observation, they have honed their skills and developed insights into specific sectors. Having gained insights, they have focused their investment in these areas and have earned huge returns. Yes, they can go wrong also. So they will follow certain hedging tactics based on certain carefully researched methodology, not a blind spreading of their investment based on fear.

Mutual fund concept by itself is a diversified portfolio. I have seen “investors” investing in equity schemes of 20 different mutual funds based on the logic of diversification. I have never seen such “investors” making money because they don’t invest to win. Their prime motive is to avoid defeat; hence they never win in the game of investment.

So what should you do when you are starting your journey on the road of Investment?

My first advice, before investing your money, invests your time to learn more about various investment avenues. In the meanwhile consolidate your investments/ savings by investing in a few Mutual Funds (a balanced fund is advisable – maximum 3 to 5 folios). I am a great believer in consolidation. One must be able to count his investments on his fingertips (thumbs excluded!). So maximum 8 avenues at any point of time is a general advice I will give to all investors. If you want to violate this rule, then 9 is fine- the “Navaratnas” in your life must be enough diversification in your portfolio. If you exceed this limit, then maybe you are not confident about your investments-you need to do more homework!

So are you investing time (remember ROTI) to become a better Investor? Please share your stories.

Investment and your temperament

Certain investments do not suit your temperament. I would be very uncomfortable investing in a painting worth a million dollars and leave it hanging on my wall. What if my grandson took fancy and scrubbed something on that painting. I don’t understand why somebody will pay be more than a million dollars for the painting for me to make profit out of it. If I don’t understand it, the solution is very simple – I must stay away from it.

I have a client, a top film star who had invested a significant amount in an I.T. startup during the dot com boom when valuation depended upon eye balls and not revenue. The markets had tanked and it was a rare opportunity to buy real blue- chips at a heavy discount due to the bad market sentiment. I was explaining to her my logic of why she should invest in shares and how and why the price will move up. After an hour or so she said “Sukhbir, even if you sit here the full day talking about this gibberish, it will not make sense to me”. So I asked her one question “Will you be able to sleep peacefully at night after investing in the stock market?” She said “No”. The solution is very simple in this case- she must stay away from stock market. Eventually I advised her to invest in real estate and today she is happy with the advice.

There was a time where I had huge exposure to the stock market. Almost 100% of my liquid net worth was invested in the market. Not 100% but may be 90%! As a result one part of my mind was always on the markets. Everyday my portfolio value would swing by Rs 5 to 10 Lakhs. So one day I would make a profit of Rs 10 Lakhs and I would be very happy. Next day I would be down 8 Lakhs and would feel sad. This emotional roller coaster ride was distracting me from my work. Even during working hours I would be looking at the share prices on the computer. I realized that my temperament was not suited for this kind of market any more. The solution was very simple. I sold off all my shares when Sensex was 7,000 (in 2005) and invested in commercial real estate. Today (in 2013) the cumulative rent collected from that property exceeds my original investment and still the property is worth more than the Sensex. So I have no regrets.

I am not saying that investing in the stock exchange is bad. I am just saying that it does not suit my temperament as I am a conservative investor. Moreover, the way it operates today does not give me a feeling of being in control. So I have a very simple solution – I stay away from it.

The best avenue for investment is something that you understand. Then you will believe in it. This conviction will help you tide over difficult times. So invest time in trying to understand your investment avenues and your temperament.

Would you like to share your stories on temperament?