Key to Stock Market Success

Key to success in Share Market

Life & Share market are both impossible to forecast. It is inevitable that when a number of variables interact among themselves – to varying degrees – affecting outcomes & getting affected in return – then ‘uncertainty’ is the only certainty. In this state of unstable equilibrium, each change causes stock market to chart a new pattern or at best rhyme with that from the past but may not exactly repeat. In such a scenario, one has to be cognizant of all that is known, not known & cannot be known about the investment. The probabilities of success improve significantly if one sticks to the known & the knowable & risks of the unknown & the unknowable are not exacerbated by guesswork.

Adam Smith once observed, ‘The market will so compose itself as to dispossess the maximum number of people of the maximum amount of money.’ A herd of deer bets its life every time it comes to pond to drink water, feeling safe in presence of so many of its kind. It is a huge risk for small reward. A crocodile, on the other hand, waits for its big meal all alone & patient.  Where there is a herd to be hunted, there will be a predator to hunt. In stock market jungle, speculators & short-term traders are deer to the long-term investor ‘crocodile’. This transfer of wealth happens all the time because real money can only be made in minority.

The ‘transfer of wealth’ truism also implies that maximum wealth gets created or destroyed, when stock market valuations get extreme – on the way up or down. An investment is most profitable when the maximum amount of stock becomes available at the minimum, unbelievable price – at the times of market crash. On the other hand, wealth gets destroyed when markets crash after valuations have reached unsustainable levels. Such market capitulation happens when most participants have bought to the maximum, convinced of further rise ahead. Since it is impossible to exactly forecast the time of boom & bust, the key to making money is to survive the markets, not predict them.

The principle most at work in our markets is the tendency toward long term averages. It is inevitable that competition &/or mass investor behavior would prevent any positive or negative development to go on forever & abnormal profits and valuation would get pushed back to the average. This “regression to the mean can be a powerful investment tool to select cheap portfolios & avoid expensive ones.

It is best not to try too hard’. Over-thinking proves counter-productive when essentials get sacrificed at the altar of analysis. Odds against forecasting are so great that it may not be the game worth playing. Analysis of data in public domain is unlikely to produce knowledge that the market has not already factored in. Also, wrong assumptions (credit ratings) & weak correlations (between past growth & future growth) would produce results of suspect quality. All such analytical effort for small insights may not be as important to the outcome, as much as we like to think it is.

Simplicity of approach & consistency in execution could be the most under-rated factors responsible for the market success. When too many objectives are aimed for or unknown & unknowable market factors are incorporated in the model, probability of mistakes shoot up. A simple approach naturally limits the downside to the known weaknesses in the model. In addition, asymmetric upside of equity investment does not get sacrificed & is reaped to its full potential. Let riches come to you when winds are blowing in your favor & don’t be so sharp that you cut yourself.

The biggest challenge for investors is that it’s not easy to mitigate risk. Risk is just not the probability of adverse event but also degree of its impact. A low probability event but with possible catastrophic outcome, is as important for investment strategy as a high probability negative event. Don’t depend on averages, trends or historical data to deal with a potentially uncontrollable event. It could have life-changing / life-destroying effect before statistics decide to correct the course.

It is possible for corporates to recover from most mistakes over time, but capital impairments, bankruptcies & fundamental restructurings are mistakes that result in permanent damage. Direct investment in equity demands financial intelligence regarding selection, pricing, valuation & risk assessment of corporate & economic fundamentals. If one is not equipped to manage all these aspects then mutual funds present better prospects for risk-adjusted return, given its resources, structure & flexibility.

Superior returns on account of real economic growth & compounding of such superior return is key to wealth creation as long as one can contain the losses when they come.

Insights – Equity Asset Class

Insights into the Equity World

Price & Value

At its core, equity investment is nothing but buying an appropriate share at an appropriate price. The determinant of both selection & pricing is the value resident in the asset.

Value is what the product pays to the customer. It is the worth of a good/service for a customer. Such utility or worth could be embedded in the asset (e.g., Gold) or be on account of its cash flow generation (e.g., dividend & capital gains from share, rent from property, etc.). Valuation of a business is mostly about its’ ability to generate free cash flows but would also take into account quality of cash flows, ability to scale up, corporate governance standards, brand recognition etc. 

Price is nothing but amount paid for acquiring the perceived value. Greater the value, greater should be the price. If price paid is less than intrinsic value of asset, then difference between the two becomes margin of safety for the investor.

Determination of value of a business entity is a combination of science & art. There is often difference of opinion among market participants regarding the valuation because of the dynamic nature of economy, business, fund flows etc. When value demonstrated by business is more than the general consensus, share price moves up. The reverse happens when price overshoots the intrinsic value.

The P/E multiple assigned to every rupee earned by the business, is taken as indicator of value. Market rewards value creation by assigning a higher P/E multiple to business & thereby pushing up the share price. On the other hand, P/E multiples get pushed downwards signifying value destruction when fundamentals of business weaken.

Risk-Reward Ratio

Risk-Reward ratio gauges the level of risk in investment as compared to expected returns. Successful investing demands that, over long term, potential for reward should significantly outweigh the risk of loss given the probability of future not panning out as expected.

Before an investment is initiated, the targets on the upside as well as downside are drawn based on the investment framework. It is important that the targets are based on realistic assumptions & risk assumed to capture reward is within investor’s risk tolerance level. In case of mismatch, either the downward target is pushed upwards to reduce potential for loss or an investment with better upside at same risk, is searched for. 

Regression to Mean

Regression to mean is a mathematical tendency of extreme events being followed by those closer to average – whenever variables are not perfectly correlated. Randomness & luck are key features of stock market & investing. So, whenever markets move too far away from the long-term averages, regression to mean can reasonably be expected to happen.

Behavioral tendencies of investors make sure that regression to mean happens. It all starts with stealth phase, when smart money accumulates quantity of shares in small price range. It is followed by awareness phase, when institutional money jumps in a big way to push up valuation multiples. Thereafter, media spotlight feeds the greed of retail investor participation for quick profits, to provide momentum to rising valuations during this mania phase. Valuation shoots up to the extremes & fundamentals no longer remain in sync. It is at these levels that statistic kicks in to make market realize that thesis justifying extreme valuations is, in fact weak. Capitulation marks the blow-off phase that follows, when fear of huge loss makes everybody rush to the exit gate at the same time. Valuations get destroyed & dip far below the long-term average. This extreme low valuation sets the stage for value buying. Regression to mean happens & prices again come up to long term trend line. 

Indisputable truth of Equity Investment

  • Higher priced asset will produce a lower return than a lower-priced one. The price to be paid for chasing gravity defying valuations is ‘lower 10-year return’ from the peak.
  • Strongest investment opportunities emerge in periods where favorable market internals combine with significant retreat in valuations.
  • Hostile investment environment is when ‘extreme valuations over extended period’ combine with deterioration in market fundamentals.

Circa 2021 – food for thought

  • In major economies of the world, interest rates have trekked down to zero in last 40-years.
  • Investors are being forced to chase risk assets in search of yield.
  • Longevity & depth of credit market bubble in major economies have pushed all asset classes to price extremes.
  • Sensitivity levels of the market are significantly up. Even a small rise in interest rates would be a high % on such low base & reaction to that will not be linear.
  • Risk is totally mis-priced.

Mean Reversion Levels seem to be at all-time high. In movie lingo, let’s just say, something’s gotta give!

Circa 2022 – food for thought

  • Inflation genie is finally out of the bottle. Every major economy is experiencing decadal high inflation.
  • Central Banks are being pushed into a corner. Pushing inflation down to acceptable levels has become greater policy imperative than growth. Primary lending interest rate has been raised by almost every central bank & is expected to be raised 2-3 times over the next year.
  • US & Euro economies may be pushed into recession, in the bid to curb inflation expectation from getting entrenched.
  • Value contraction (or destruction) may be pre-dominant post-effect of the new interest regime. Management quality & stability of earnings may once again return as the primary investing touchpoint.
  • Mean Reversion is all set to happen. Even an outlier economy cannot be expected to remain unaffected by the turmoil.
  • With many long-term trends inflation, interest (& hence, valuation of equity & real-estate financing), index investing, dollar as reserve currency, globalization etc. all set to change, the coming Epochal Change would demand a reset to long held assumptions of investment strategy. As Buffett observed, the tide is now turning & all those swimming naked (& the crypto guys) better be prepared.  

Stock Market Index

Stock Market Indices

Stock Market Index is a composition of multiple equity shares, that is representative of the stock market or a segment of it. The most tracked broader market indices of India are Nifty 50 of National stock Exchange & S&P BSE Sensex of Bombay Stock Exchange. The purpose of an index is to denote all the companies listed on the exchange (or a subset of it), by a single numerical figure. It allows for comparison of value of the listed companies (read businesses), as well as investing sentiment of whole mass of people participating on the exchange.

Nifty 50 Index is composed of 50 of the 1600 companies traded on the NSE. The base date of the index is November 3, 1995 (1st anniversary of the NSE) & the Base Value is 1000 with a Base Capital of Rs 2.06 trillion. The level of the Index reflects the total market value of all the stocks in the Index relative to the base period November 3, 1995.

  • Index Value = (Current Market Value / Base Market Capital) * Base Index Value

The index started trading in April 1996. From 2009, the index was created using the float-adjusted market capitalization-weighted method. The measure of shares that are freely available for trading out of total shares is called IWF.

  • Market Capitalization = Shares Outstanding * Price
  • Free Float Market Capitalization = Market Capitalization X IWF

Stocks with highest free-float market cap carry highest weight in index. Approximately, 65% of the weightage in Nifty 50 Index is that of top 10 stocks.

S&P BSE Sensex is a free-float market-weighted index of 30 companies listed on Bombay Stock Exchange.

Making sense of Market Valuations

The judgement calls on market valuation – whether the companies on composite basis are expensive or cheap – may have different perspectives but the top-down fundamental approach would be as follows:


  1. Long-term valuation of a steady market should be at Nominal GDP Growth% – if Real GDP Growth is 7%, Inflation is 5% then Nominal GDP Growth% = 12%
  2. At steady state equilibrium, corporate profits as % of GDP stays same. Additional Return due to efficiency of companies in Nifty 50 Index is 3%
  3. Corporate Earnings Growth = 7% + 5% + 3% = 15%
  4. Stock markets are forward looking – say, factors in  next 3 years of earnings.
  5. Trailing PE ratio of Nifty 50 Index = 32

Judging Market Valuations:

One perspective on judging market valuations is that market is forward looking & valuation of the market incorporates whatever earnings growth it is expecting from corporate sector, in the near future. Comparing expectations built in against the actuals would give a fresh direction to the market.   

  1. Nifty 50 Index PE = Nifty Price / Nifty Earnings = 32 times trailing earnings
  2. Rs. 100 of current corporate earnings (last four quarters) is available at Rs. 3,200 (Nifty PE * Nifty EPS = 32 * 100).
  3. For current valuations of Nifty 50 Index to hold, Corporate Earnings should be  = Valuations / Earning Growth% = 3,200/15 = 213
  4. Thus, Corporate Earnings should grow = (213 -100) / 100 = 113%
  5. So, Current Nifty 50 Index is factoring in growth in Nifty 50 EPS @ CAGR% (compounded annual growth) = 113% over 3 years = 28.64%.

A more conservative approach would be making a realistic projection regarding the corporate earnings expected to grow in, say next 3 years. Based on such projection, market valuations could be arrived at that best justifies the state of health, corporate sector is in.

  1. Assuming conservative estimate of corporate earnings growth for 3 years ahead at 12%.
  2. Corporate Earnings should grow from 100 to 140 in 3 years.
  3. Taking long term average of Nifty 50 Index PE of 20 as reference point.
  4. Nifty 50 Index valuation should be 20 * 140 = 2,800 (at forward outlook of 3 years) against the current valuation of 3200.
  5. Say, Nifty 50 Index is currently at 15,750, for a conservative investor, valuation should be (2,800 / 3,200 * 15,750) = 13,781. So, possible fall in the market could be (15,750 – 13,781) / 15,750 = 12.5%.

Equity – Valuation & Strategy

Stock Markets have created exceptional wealth over last 40 years but for a vast majority, the potential of equity investment has failed to translate itself into their bank accounts. This ‘failure of success’ has been due to structural inefficiencies in the trading mechanism as well as speculative behavior on the part of investor.

A whole lot of structural issues, like stock exchange management, information dissemination etc. got resolved with establishment of National Stock Exchange (NSE) digital trading platform but the question of financial education has yet to completely answered. The exposure of Indian households to equity assets in their financial balance sheet is among the lowest in the world at 14%, says the 2020 report by Motilal Oswal Securities.     

Valuing an Equity Share

Stock market is by itself neither rational nor irrational, it is the action of some of the participants that may be irrational at times. There are two aspects to equity investment – selection of the company & timing of purchase & sale of equity share transactions. Before an investment is initiated, it is important to gauge fair value of the underlying asset. Different methods to value an equity share are –

  • Asset Method – Book value of a share or its Q-ratio (market value of a company divided by its assets’ replacement cost). The equivalent for other assets would be the replacement cost analysis.
  • Income MethodAn equity share would be worth its earnings i.e. present value of the future benefits of ownership. In other words, P/E (price earnings ratio) or CAPE (cyclically adjusted price earnings) ratio. Its real estate equivalent would be gross rent multiplier
  • Greater Fool MethodThis measure of valuation assumes that an asset is deserving of a price at which it is traded because efficiency of market would not allow otherwise. However, this assumption psychologically detaches the price from asset being valued & then, it is the price that starts getting traded instead of the asset. An asset is bought only on the expectation that there is a greater fool out there, who would be willing to pay a higher price.

Approaches to Equity Investment

Equity Investment could be approached by analyzing fundamental strengths, trading technical or a combination of both.

Fundamental Analysis is a valuation of intrinsic worth of a company & of all factors that could influence its future price. There could be top-down or bottom-up approach to fundamental analysis. Top-down approach takes a macro view of the economy, analyzing capital flows, interest rate cycles, currencies, commodities, indices, world geography etc. It then proceeds to narrow down the search by analyzing the industry & companies in that sector. Thereafter, it identifies competitive strength of the shortlisted companies, with special emphasis on to its financial statements. Conversely, bottom-up approach starts with company with best financials & widens the analysis to various factors that could potentially affect the profitability or its competitive strength.   

Technical Analysis is a methodology of forecasting direction of future prices, through study of historical data of price & volume. It is premised on the theory that price movement of a security is just a matter of statistical analysis as all publicly available information has already been factored into the market price. Another underlying assumption is that all price movements follow a certain pattern or trend, which tend to repeat over time. The attempt is to understand the market sentiment or mass psychology & forecast the future price.

Combining the two – Equity market is a dynamic market place with a socio-economic weather, that seems to get affected by everything & anything. A combination of both approaches is sometimes used to have a rounded view of this very complex, dynamic environment. Fundamentals guide the selection of equity share & its’ fair value, while timing of purchase & sale may be driven by technical in their short-term context.  

Investment Strategies

There are any number of ways to make money in the stock market – buy & hold high quality stocks; timing cyclical stocks / business turnarounds; stock discovery-based P/E expansion; macro-based themes; sectoral themes and many more. Based on the financial goals, risk tolerance & time horizon, an investor needs to have a set of principles that would guide his investment process.

Such a formulation could be managed either actively or passively. The choice between the two depends on the perception on how much outperformance over average market return is possible through investor intervention. Proponents of passive investment (e.g., index fund) feel that the higher expense of active management & additional risk due to it, is not adequately compensated by the returns. Active investment management would be the preferred option if it is backed by in-depth knowledge & research and goal is to significantly outperform the average return. The two fundamental strategies are

Growth Strategy – Growth strategy is a stock buying approach which prefers companies that have grown at an above average rate in top-line &/or bottom-line and that are expected to continue to do so. Growth stocks are designated as such, based on historical & future earnings growth; profit margins; returns on equity (ROE); & share price performance. Growth investors expect to gain through capital appreciation, as opposed to dividends payouts. Higher growth rates are expected to push up share price at much faster pace as long as above average growth rates are maintained & company gains more & more competitive strength.

Value Strategy – Value strategy is a stock buying approach which prefers shares that appear to be trading below their intrinsic value. The historical evidence suggests that share market overreacts to good as well as bad news & share price can move away from company’s long-term fundamentals in a big way. Value investing seeks to buy stocks that are available at discounted prices, in the belief that gains would emerge when things get back on even kneel – either stock market reverts to fundamentals or cyclical problem goes away.

 Historical stock market performance has shown that:

  • Growth stocks perform better when interest rates are falling & corporate earnings are rising. However, they go down equally fast when the economy starts cooling.
  • Value stocks do well early in an economic recovery but typically lag in a sustained bull market.
  • A combination of growth & value stocks has the potential of high returns with less risk. It becomes possible to gain through different economic cycles – favoring either growth or value investment style – thereby, smoothing returns over time.

Introduction to Equity

Key Features of an Equity Share

Equity is stock representing ownership interest in a company.

  • Democratic claim to Earnings – A shareholder has a proportionate ownership claim to the company. The benefits of ownership, such as dividends, rights, bonus etc. is same for all the shareholders, except that the majority shareholders get to manage the business as well. No shareholder, however can be asked to pay for the losses incurred by company.
  • Transferability of ownership interest – Price discovery is on stock exchange platform via interplay of demand & supply forces.
  • Liquidity – Low barriers to trading on stock exchange & financial leverage combine to make this asset highly liquid.
  • Volatility Stock Market is a proxy for economy’s health. Different opinions with respect to economy & fair value of businesses, makes price discovery quite volatile. Mass psychology, behavioral biases of investor & instruments of financial leverage in trading further add to this volatility.
  • Means to Wealth Creation – Efficiently run business are able to pass inflation onto its clients & generate return in excess of cost of capital. Compounding effect of such high returns translates into faster growth in valuation of business & its share price. Equity investment is a great vehicle for wealth creation.

Facets of Equity Investment    

  • Return ExpectationAt macro level, return expectation of equity asset is equal to nominal growth of economy. Broader stock market should give return equal to real growth of economy plus the inflation rate. Efficiency of business (competitive advantage, moat etc.) improves upon such expected return.
  • Asymmetric Payoff An asymmetric payoff is where the upside potential is greater than the downside risk. The maximum downside in any stock is 100%, however, there is no limit to how high a stock can go. At single stock level the risk of loss is very high but at the portfolio level, it becomes possible to reduce risks without sacrificing the unlimited upside potential. The payoff as result can be huge.
  • Relationship with Debt – GOI Bond Yield (risk free return) has a direct bearing on determining the attractiveness of equity as an investment destination. A case for equity asset class is only made out if it earns Risk Premium in addition to the Bond Yield & its Earnings Yield (EPS/Price) exceeds Bond Yield. At micro level too, lowering of bond yield leads to reduced cost of capital for business, thereby improving profitability & valuation of equity shares. Thus, flows into & out of equity asset class are heavily influenced by interest rate movement.
  • Volatility vs. RiskRisk implies uncertainty of a return & potential for permanent financial loss. Volatility is measure of uncertainty related to size of potential change in security’s value. It is a reflection of price action. It is this short-term volatility, that is perceived as risk. Such perceived risk of loss can be prevented from converting into an actual loss, through asset allocation & goal-based investment.

Debt Trap

How to free yourself of the Debt Trap?

Debt Trap is a situation in which a debt is difficult or impossible to repay, typically because high interest payments prevent repayment of the principal.

It is absolutely critical to define the debt problem correctly, if one has to slay this monster once & for all. Looking at the debt trap through the finance prism alone, would be only as effective as treating the symptom, not the disease itself. If the root cause of debt remains unaddressed, the debt problem would re-emerge again & again, no matter how often it gets paid off.

  • Core Issue – Every financial problem is just an accumulation of many small mistakes made on the daily basis. It is a natural consequence of one’s financial habits & attitudes. Likewise, permanent solution to a financial problem is possible, only when default response of an investor prevents such mistakes from recurring. Financial mindset of a person is at the core of debt problem as well as its’ solution.
  • Own Responsibility – It matters little if debt is not of one’s own making or had low probability of occurring. Once it occurs it has to be dealt with. Probability of medical emergency, layoff, divorce, lawsuit, identity theft or some other misfortune, may be small in itself but when viewed over lifetime, nearly everybody is touched by one or more of these events at some point in time. So, one has to take responsibility for preventing or mitigating such eventuality.

Traits that lead to Debt Trap are

  • Financial Intelligence – Not understanding the functioning of financial universe & looking at money, only as means to consumption.
  • No Wealth Plan – No financial plan in place. Managing finance by responding to whatever is the immediate pressing requirement.
  • Instant Gratification – Consumerist attitude fast-tracks the slide to debt trap.
  • Extrinsic values – Seeking approval of others through symbols of wealth rather associating self-worth with one’s intrinsic values.
  • Victimhood – Justifying your situation as being victim of a financial situation as opposed to claiming responsibility in proactively dealing with it.


How to get out of Debt Trap?


Identifying the cause of debt overhang is more important than the financial superficiality of interest rate etc. The root cause of the problem lies in the daily habits of a person & his attitude to money.

  • Which habits led to the debt in the first place?
  • What specific situations have contributed to the current debt problem?
  • Why did the debt did not get paid off & kept on accumulating?
  • What has specifically stopped me from solving this problem?

CureBig Picture

The only cure to the debt disease is getting the financial life into positive cash flow mode. Simply put, there is no other way around than to spending less than what one earns. No matter how slow the initial progress is – pick a ‘debt producing’ habit & work on it till it turns into its’ ‘wealth producing’ alternative. Then move to the next habit & so on. It is the long-term commitment to habits geared towards wealth creation that will solve the debt problem.

The ‘Wealth Plus’ financial mindset is

  • Increase Income – Overtime, seasonal / freelance work, converting hobby into income etc.
  • Credit cards – an exception & not a rule Spending real cash connects one to the cost of things & reduces overspending. Credit cards give false sense of purchasing power. Keep them for real emergencies.
  • Limits the expensesCategorize all expenses of prior year. Shave off unnecessary expenses till planned spending is less than the income.
  • Track expense to remain within limit – Every expense should be examined for being value for money & whether it serves ultimate debt free goal.
  • No emotional spending Prepare a shopping list, so as not to overbuy & remain within budget.
  • Proper Insurance Risks (even if low probability) that could entail huge cost & debt should be insured. Also maintain reserve funds for emergency.
  • Cooling period for unplanned expenseForce yourself to wait 24-48 hours to know, if it is really needed.
  • Accountability – Acknowledge actual state of affairs to friends & family so that habit change becomes a commitment.

Medicine for Cure – Managing Debt

Have a clear path to eliminating the debt pile. The steps are

  • Organize the total debt in a manner that minimizes the monthly interest cost. Check out which of the options among debt consolidation or refinance works best, so that fresh terms be negotiated.  Any saving in interest, penalties or fees is welcome.
  • Sell any stuff that can de-clutter your life – jewellery, car, expensive watch – to reduce debt & accelerate the payoff process.
  • Structure debts – As soon as the first debt is paid off, the freed-up payment amount should be used to pay down the next debt even faster. There are 2 approaches to paying off. Debt Avalanche Approach is sorting the debts on the basis of interest rate, highest down to lowest. Paying off the most expensive debt first will lower the total interest cost. Payoff the rest of the debt will get faster. Debt Snowball Approach is sorting on the basis of outstanding amount, lowest balance to largest balance. Paying off the lowest amount & seeing immediate results is emotionally appealing. It helps one stay the course.

Formula of Wealth Creation

Wealth Creation needs no luck, no genius & is amazingly simple to achieve. Four separate yet interconnected ideas need to come together to make it possible.

WEALTH   =  (Cash Flows)  *   (Financial Habits)  *  (Consistency)  *  (Time)

Positive Cash Flows

Making more than you spend creates positive cash flows. Investment of such positive cash flow leading to virtuous cycle of additional cash flow & investment, fulfils the essential condition of wealth creation. The twin themes of earning more & spending less are not mutually exclusive but need very different mindsets.

Spend lessKeep a check on expenses by combining frugality with smart choices. Life should remain pleasurable because too much sacrifice is difficult to sustain in the long run A philosophical distinction has to be made between needs & wants because allowing expenses to rise with rise in income, prevents the expansion of savings pool. A check on expenses could be some or all of the following:  

  1. ‘No loan for lifestyle upgrade’ rule controls expenses, as well as additional interest cost
  2. Track expenses to ensure accountability
  3. Check waste on food, transportation & unused services
  4. AMCs, warranties, repair (not replace) increase asset lifecycle
  5. Sell unused stuff before buying new ones

Earn More – Earning side is not limiting in nature & has better chance of success with a pro-active approach. Business presents better earnings prospect than service, but carries certain risks as well. Individual circumstance & passion should dictate the choice. Core earnings can be topped up through following initiatives –  

  1. Education & Training improve compensation potential
  2. Increase job skills to move up the hierarchy.
  3. Change jobs to fast-track progress
  4. Do part-time, freelance, work overtime, if job prospects are limited
  5. Convert hobby into income

Invest with careOne need not be an expert but a working knowledge of finance would certainly help navigate the challenges in investing environment. Financial intelligence is not only key to better returns but also helps prevent financial blunders, that could prove life-altering.  It is important to keep the investment philosophy simple & follow time tested tenets of asset allocation, tax efficiency, inflation targeting, risk management & periodical review.

Habits for Wealth

Financial freedom is a very desirable goal, the knowhow of which is very much in public domain. Yet, very few achieve success because means to this goal become an overwhelming chore over time & hence, difficult to pursue. Success demands that what needs to be done, be a natural response to you – a habit.  

A habit breaks down a grandiose project into small bits that are easy enough to execute. It is these small financial actions’ done over long periods’ that compound into wealth large enough to make a person financially free. A good start would be to just pick up an element that either improves income or reduces expense, practice it till it becomes your default response. With each good habit, financial freedom becomes an easier goal.

Few good financial habits are as follows:

  • Invest at the start of month so that spending options get limited to amount left
  • Practice time management & multi-tasking to upskill yourself
  • Think of every new purchase in ‘need vs. want’ framework
  • Prepay small amount on long term loans
  • Review all expense heads to explore eliminating or reducing any wastage
  • Exercise & healthy habits (no smoking / drinking) have positive financial effects


Wealth management is a lifelong project & needs consistency in execution to support it. The mathematical wonders of compounding become possible only on account of consistency. A financial plan – appropriate but erratically applied – would struggle to make gains that are large enough to make a difference. Also, both income & expense need financial discipline because compounding on the expense side destroys wealth as furiously as returns create it.


Time & Wealth Creation have a multi-faceted relation. It is the time element in magic of compounding that metamorphizes small actions into huge results.

  • Time determines the ease with which a goal can be met – because – need for savings rises at an increasing rate, with decline in time availability for the goal.
  • Procrastination (delaying necessary action to later) is said to be wealth suicide in instalments – because – the lost time makes the climb that much steeper.
  • It is however, possible to expand the time. Leveraging other people’s time allows one to move beyond 24 hours a day, get more work done & then, sky is the limit for income.

Golden Rules of Investment

Financial Intelligence

Economies & markets are always in state of instable equilibrium. Each factor not only affects other elements, but also gets affected back in return. Such constant evolution in in the socio-economic weather of the financial world, keeps presenting investors with new set of challenges. Each investment mistake costs money & accumulated losses over time may get too big to recover from. Thus, lack of knowledge may prove to be dangerously life altering.

The only way to minimize investment mistakes & to accelerate the progress towards financial freedom is to educate yourself.  Financial education shortens the learning curve as one gets to learn from mistakes & experiences of others, without having to commit the time. Finances are just too important to be left to chance & investing in financial education certainly pays dividend over lifetime.

Asset Allocation

Asset allocation aims to apportion a portfolio into the main asset classes – equities, debt, gold & real estate – in a ratio that best serves the financial objectives of the investor. Each asset class is different in its’ risk-return profile & how it behaves over time.

Research indicates that at least 90% of the variance in a diversified portfolio’s returns is attributable to asset allocation. So, the decision regarding the combination of asset classes that is the best fit to the jig saw puzzle of various financial goals, different time horizons & risk profile, becomes an extremely important one.

The golden rule of investing is to primarily focus on finding the most suitable asset allocation because micro managing individual investments in different asset classes is an effort aimed at improving the remaining 10% contribution to return.

Return Expectation

Successful investors focus on the factors that are in their control so that profitable outcome is achieved irrespective of the circumstances. All investment, business, & life decisions are a bet on an unknowable future & outcome is always going to be uncertain.

Expectancy Analysis is the scientific way of managing the risk of unknown. Mathematical expectation of any financial decision is the difference of the gains of correct decisions & the losses of incorrect decisions, multiplied by the frequency of correct decisions. In other words, it is probability multiplied by payoff.

In all the uncertainty, it is the payoff dimension of mathematical expectation, that investor has most control over. This ‘risk of unknown’ can be converted into an opportunity if negative payoffs (losses) are controlled tightly & gains from winning decisions are maximized. The relative size of losses & gains matters more than the number of losses or gains. It is this tilting of payoff portion in favor of investor, that produces reliable profits in an uncertain environment, even if number of incorrect decisions are far more than the correct ones.

The golden rule of investment is to focus on the payoff portion of expectancy with persistence & discipline. As sample size of transaction grows, success becomes inevitable. The expectancy equation determines the compounded rate of return & hence, the pace of wealth creation.

Risk Management

Risk management refers to the process of identifying potential for loss, quantifying it & taking precautionary steps to reduce such risk. It is the guardrail of investment process & its’ primary purpose is to ensure that loss is contained within acceptable limits. This process of reducing odds for losses, is essential to achieving consistent profits in different market conditions.

Risk Management entails cost that drags down the returns during good times but when investment environment turns hostile, it could prove crucial in preventing a life changing loss. The golden rule is to acknowledge that risks, including extreme event risks are a possibility & need to be managed.

The various strategies to manage risks are

  • Diversification insource of return’ – Speculating on interest rate movement in debt segment & on equity prices, has same source of return even if debt & equity have inverse correlation as asset classes. It is the inverse correlation between ‘sources of return’ that prevents extreme negative volatility at portfolio level.
  • Before an investment is initiated, its’ divestment should also be planned for.
  • Anything that hinders investment liquidation should be considered a risk, including outlier circumstances. Thinly traded stock is as risky as junk bond as far illiquidity as a risk, is concerned.
  • Rebalancing of portfolio by switching from
  • High volatility, high beta investments to lower volatility ones.
  • Expensive valuation to better quality investment with reasonable valuation.
  • Use of money market debt & cash, when investment options do not fall within the guardrails of investment process.

Goal Based Approach

Goal based investment is a framework where a portfolio is built to achieve a particular financial objective, as against focussing on maximising total portfolio return. This approach firmly puts achievement of life goals as the core objective of the investment activity, rather than the management of volatility & return. Commitment to financial goal reduces impulsive decision making & keeps financial planning aligned to real-life constraints.

Goal based process involves listing out specific, time bound, practical & measurable goals. It forces an investor to prioritize various goals, leading to better allocation of financial resources, based on necessity & time horizon. It may also force the investor to face up to life choices, that are more aspirational than high priority. This process includes periodical evaluation of the progress towards the goal & make changes, if required.

Goal based approach is the key to successful investing because the focus on a single purpose & data-based improvements, aligns the investment activity with core values of the investor.

Investment Plan

An investment plan outlines the purpose, mode & time duration of the investment activity, so that the financial objectives are met smoothly. There is nothing like a documented investment plan to bring vision & purpose to a wide range of vague expectations. To move beyond the realm of gambling (tips, stories, future predictions) to assured gains, it is essential that this plan of positive mathematical expectation be implemented with discipline.

Process of selection, return expectation & valuation of an investment are key factors that shape the entire journey.

  • Fundamentals of the business, quality of management & competitive advantage are key factors for selecting an investment.
  • The investment plan should take into account that historical long term stock returns may not get replicated as investing environment could be far removed from the average circumstance or outlier data may be skewing the average data point.
  • Quality investment at low valuations is key to super profits. Investment should be valued on the basis of assets &/or income. An investment is attractive only if it is available below its’ fair valuation. An asset bought only in the expectation of some greater fool paying higher price down the road, is not an investment but a gamble. 
  • Key to returns is the valuation at which an asset is purchased. ‘Holding period return’ for equity is inversely correlated to valuations at the beginning of the holding period. So, if investment is made at above average valuation, then expected return over next 7 to 15 years is going to be lower than average, as inevitable reversion to mean takes place.
  • Being aware of biases of decision making prevents a lot of expensive mistakes.

Financial Freedom

Financial freedom is the 

  • freedom to be who you are & to do what you want in life,
  • freedom achieved on the basis of wealth that is more than sufficient to support the desired lifestyle,
  • freedom to map out one’s growth (work / social) without being limited by monetary considerations.

A plan for financial freedom projects

  • Minimum Corpus that would make it possible for one to live the desired lifestyle without the compulsion of having to work for a living &
  • Minimum Savings that could accumulate into the desired wealth size – subject to assumed post-tax return on investment of such savings.

Financial Freedom – Why?

Happiness is the central purpose of life & a goal in itself.

  • It comes from following one’s heart & maximizing experiences that make living special. Money is pre-requisite for such a life. Right?
  • There is little correlation between money & happiness. Right?

These two apparently opposing facts of life get reconciled, only when one appreciates the distinction between trappings of wealth’ & power of wealth. Key to freedom is in knowing ‘why’ wealth is being pursued. Is it to own expensive things or is it to avail choices that only wealth permits? Happiness is made possible by a productive life & is not a natural outcome of owning money. Such awareness limits the scope of one’s pursuit of wealth.

Financial freedom – When?

True freedom is not in accumulating assets & living off them because then, one is always in race against inflation, market fluctuations & time. These investment challenges could over time become so potent that they challenge the veneer of financial freedom & then it may be too late to course correct! It is akin to looking over your shoulders all the time.

The core wealth should remain unexposed to elements of investment climate for the financial freedom to remain secure. So, when lifestyle expenses are more than adequately met through returns on assets, does one achieve true freedom.

Financial Freedom – How?

The strategic course to achieving financial freedom depends heavily on the circumstances & personality of the investor. However, the main reason why the majority finds this goal elusive, is the fact often some key element remains missing from their effort, making it a lost cause from the start itself. Even if you have the God of luck smiling on you, financial freedom would be an impossible dream without the following –

COMMITMENT – Stephen Covey has so truly observed that To know and not do, is to not know at all Translating knowledge into actionable rules, leading to wealth creation & financial freedom, is the easy part. Actually, living such rules presents the toughest challenge. Financial freedom is a lifelong project & only a compelling personal commitment can generate the motivation to acquire necessary skills to create wealth, take appropriate risks & overcome challenges of wealth management. A half-hearted approach would derail the project very quickly.

LIFESTYLE CHOICES – Relationship with money & lifestyle expectations form a crucial psychological element in the pursuit of financial freedom.

  1. Is such a state possible with an indulgent lifestyle, wherein every temptation is catered to? Or
  2. Is extreme frugality, wherein all desires are crushed at the altar of some financial perfection, the only possible recourse?

The answer lies somewhere between the two extremes. Habits & Attitudes of the wealthy hold the key to this ultimate goal since principles of success do not change. It is amazing how similar are the traits of the truly wealthy, even if they differ on counts of age, geography or source of wealth.

BUILDING BLOCKS – Financial Freedom needs a certain support structure to become achievable.

  • Career & lifestyle need to be so planned out that the progress towards financial freedom can be made with least effort & maximum persistence. 
  • Wealth is a function of financial intelligence. The longer one waits to learn prudent investing, more is the cost in form of missed opportunities, given that compounding grows wealth geometrically. Mistakes made with big investment decisions later in life, can’t then be offset by normal savings.
  • Leverage makes key difference to the momentum of progress towards financial freedom. Leveraging of knowledge, time & technology accelerates the compensation exponentially, thereby shortening the time required to achieve this goal.

WEALTH MANAGEMENT – A reality check of desired net worth at regular intervals, would reveal where one stands & what milestones need to be crossed, to achieve financial freedom. It needs a Wealth Plan uniquely designed to fit your skills, resources & financial needs to prevent a lot of wasted effort & inefficient resource use. When daily actions are strategically arranged for a particular financial outcome, the risk of failure over years is drastically reduced.

A Wealth Plan details processes for

  • Wealth Creationefficiency in processes for income, expense & debt
  • Wealth Conversion – income into assets & compounding of values
  • Wealth Growthrisk management, tax efficiency, asset allocation, asset class rebalancing, inflation targeting, positive cash flows.