Friday, June 11, 2021

A personal finance manifesto

What is the objective of investing in shares? Or, for that matter, any asset?

The objective, IMHO, is to reach a place where it is no longer necessary to work for a  living. Let us define that a bit further. 

The best definition of wealth is: Wealth is the number of days (or years) you can live on your current Assets, if you stop working.

In case you can stop working right now and continue to live the rest of your life in comfort from the income that your assets generate, that is true wealth.

For someone, that number may be just 2 crores, for someone it may be 20.

"Income" in this case is not the accounting definition of income, it includes income, capital appreciation, and dividends of all kinds that your assets generate.

This beats other definitions of wealth, since it excludes assets like your house, on which you are not generating any income. 

As someone who has subscribed to my stock newsletter, I am sure that is your objective too.  To make enough on stocks to grow your capital base, so that you can afford to stop working. Or, to put it differently, you need FU money; enough money so that you can tell your boss to go take a walk if he becomes too unreasonable.

So, how much is that?

Let us assume your monthly expenses are 1 lakh. You need to make enough from your assets to cover this one lakh and future inflation. Your 1 lakh of spend today, at 5 percent inflation, will become 2 lakhs, to maintain the same lifestyle, in 14 years. And 4 lakhs in 28 years. 

Let us call your monthly expense today as X. As a broad thumb-rule you need 400 times of X, excluding your primary house (the house in which you stay, since that does not generate any income, and nor is capital appreciation useful if you cannot sell it), in order to quit the rat race.  This does not include any expenses for children's higher education - if you dream of sending your children to Harvard for their undergrad studies, please budget for that separately. If your children, on the other hand, are not so smart as to get admission to Harvard or to aspire for it, thank your lucky stars.

That calculation obviously assumes a particular rate of inflation and a particular rate of return on your investments. If you assume an inflation of 5 percent per annum (let us keep that constant): 

If you assume a "return (net of tax)" on your investments of 6% (quite conservative), then your money will last for 42 years.

If you assume a return of 7% on your investments (net of tax), your money will last for 59 years. If you assume 8%, however, your money will last for ever and the corpus will keep growing! 

The first sheet in the attached spreadsheet is a "retirement calculator" - the whole spreadsheet, which has other things relating to personal finance apart from this calculator, is the outcome of the years of personal finance sessions which I used to conduct along with my good friend and erstwhile colleague at Fidelity, Srivatsa Rangaswamy. Play around with the numbers in the Retirement Calculator, and you will realise what a one percent differential in interest rates can do in the long term.

Personally, I would be ecstatic if I can maintain a 12% per annum return consistently over several years. Now, how to go about getting that kind of return?

First, minimise the tax outgo. Invest in debt mutual funds (growth option) rather then Bank FD's; invest in Real Estate; invest in shares, either directly or through Mutual Funds.

Second, invest for generating higher return.  What I am trying to do in my suggestions for stock investments is to generate at least 12 percent per annum, and targeting for 15 percent per annum.  That is the statement of intent. Whether it works out that way, only time will tell. So far, we have been doing well. I started this whole process somewhere around Diwali of 2020, and I started tracking it meticulously only from Feb 1st, 2021. From Feb 2021 till date, we have made nine recommendations and the performance has been as follows:

Which is not too bad. It is too early to say anything, we have to give it at least a couple of years, and a couple of market cycles, including downswings, before we can conclude for certain whether we are doing well.  But the start has been promising and gives me enough confidence that at least the process seems to have got something right.

Some of you have been on this list for a few months, and some of you are more recent subscribers. Hopefully, you have been following my recommendations so far, or investing in a few of those; I do hope you find it useful.

Just to summarise the purpose of this investment newsletter: 

We are aiming for a 15 percent per annum return, or at the least 12 percent per annum return, through investing judiciously in select stocks. 

I shall be sending out a recommendation once every fortnight. Any shares that have been recommended earlier but not figuring in the list are on "HOLD" , not "SELL".  I shall be alerting you when I think it is time to sell any particular scrip.

A note of caution and a disclaimer: Stock investment is an inherently risky game; do not put all your eggs in this basket. Also, spread out your investments, do not invest very big lump-sums at one go. 

Do write back to me at any time giving your thoughts, or feedback or suggestions. 

The spreadsheet is attached.

Happy Investing!

Dinesh Gopalan
mob: 9845257313; blog:

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