Mind your head
Issue #22
Fool here:
It’s 2021. Humanity has come a long way. We’ve made some profound innovations. We’ve managed to shrink the size of underwear and socks yet charge more. Torn jeans today cost more than untorn ones.
Along the way, there have been some mediocre innovations too. We went from dying of COVID-19 to a vaccine based on new technology in about a year. Computers are writing investment reports. We’ll soon have robots as our managers. We’re researching Artificial Intelligence to build robots that will murder us in our sleep.
Despite all this genius, here I am writing a post about being mindful of what you read. It’s a bit embarrassing, but I can empathise too. So here goes.
What a time to be an investor
There’s never been a better time to be an investor and never a worse time either. Everything you need to know about anything today is freely accessible. From astrophysics to how to waste time on the internet, you can learn anything for free. It’s the same with investing and personal finance too. Pretty much everything you need to know about managing your personal finances and investing is free. But weirdly, it’s the intent to learn that’s costly.
When it comes to investing, you can build a globally diversified portfolio of Nifty 100 and S&P 500 for ~0.4-0.5% today. With this portfolio, you get exposure to the 100 biggest stocks in India and 500 in the US. Again, this is a hypothetical portfolio, not a recommendation! If you’re one of the gifted few who can build a good stock portfolio, you can invest in direct equities for free.
If you went back in time to say 2005, you would’ve paid about 2.25% as an entry load and ~2.5% in expense ratio for investing in an MF. Direct plans were only introduced in 2013. There were no discount brokers until 2010. If you bought stocks directly, you would end up paying up to 1% as brokerage 😲
The siren song of doing dumb shit
Despite how far humanity has come, despite the free wisdom and low costs, we’re somehow managaing to do more silly things than before. A couple of weeks ago, when I tweeted this post about GameStop, Shyam tweeted the story of Ulysses. There is no story that captures the plight of today’s investors better than this.
Ulysses is the hero of Homer’s poem The Odyssey. The poem describes the journey of Ulysses back home from the Trojan War. In his journey, Ulysses had to brave numerous obstacles and survive them. In one part of this journey, Ulysses had to pass through an island with Sirens - monsters disguised as beautiful women with enchanting voices. Their voices were so bewitching that if sailors heard them, they would crash in the islands or die in the sea chasing the voices:
The term refers to the pact that Ulysses made with his men as they approached the Sirens. Ulysses wanted to hear the Sirens' song although he knew that doing so would render him incapable of rational thought. He put wax in his men's ears so that they could not hear and had them tie him to the mast so that he could not jump into the sea. He ordered them not to change course under any circumstances and to keep their swords upon him and to attack him if he should break free of his bonds.
Upon hearing the Sirens' song, Ulysses was driven temporarily insane and struggled with all of his might to break free so that he might join the Sirens, which would have meant his death. - Wikipedia
This pretty much sums up managing your finances today. All the information that you need to get your personal finances in order is free. Investing, insurance, financial advice (fee-only) has never been cheaper. Despite all this, a vast majority of investors end up losing money, including me. Why? It’s a question worth exploring. I don’t think it’s just that investors are stupid. That’s part of a reason but not the entire reason.
Here’s a another super interesting take on the story of Ulysses from Anish:
Odysseus was the ultimate systems investor. He was warned by Circe that on the way back to Ithaca, he would encounter the sirens. They were known to lure sailors with their melodious singing and cause ships to crash on the rocks close to the shore.
A few days ago, Cliff Asness said in an interview “A huge part of our job is building a great investment process that will make money over the long term, but a fair amount of our job is sticking to it like grim death during the tougher times.”
So what does Odysseus have in common with Cliff Asness. They both know that they have to tie themselves to the post (in case of Asness it is his rules based investment process). As seductive as the siren’s singing may sound and however tempted Asness may be to over ride his investment process, because of the current narrative in the market and media, he knows that in order to survive and get through the journey, he will have to not untie him self from the proverbial post. Asness knows a bit or two about that.
Before we go any further, I confess to having a pretty huge list of personal finance mistakes, including ones I’m yet to fix. This newsletter is as much me sharing things as I figure them out as much as my rants.
I might be overthinking this, but here’s how I think about this.
Jo dikhta hai wo bikta hai
Pretty much all investors, including yours truly go through the “investing is easy” phase. Watching CNBC TV18 for advice, WhatsApp jackpot stocks picks, broker research reports, I’m sure we’ve all done these stupid things and lost money. And I keep seeing the same thing among many people including my friends.
Many people who start investing think that it’s easy and look for shortcuts like tips, following gurus, and other stupid things. If you look at Indian Fintwit, the most popular tweets of all time tend to be tweets with stock tips and lists. You tell people to read a book about investing, you’ll look like an absolute fucking idiot. But if you give stock tips, people will put your name in their Twitter bio as their guru.
As Jonathan Klement writes in this piece, more people rely on random WhatsApp groups, Telegram channels and Twitter handles for advice than ever.
Obviously, none of this is new, but what strikes me is that the influence of the media seems to have become larger over time. Today, we may no longer rely predominantly on the Financial Times or CNBC, but on a whole ecosystem like “Finance Twitter”, i.e. a host of influential accounts on Twitter and other social media sites that promote snap analysis and insights on financial markets.
Just so we’re clear, that’s a bit like asking those quack doctors who put up roadside tents for health advice. You’ll get it, but you’ll end up with kidney failure.
Unfortunately for investors, the most accessive financial information tends to be the loudest and the most dangerous. On TV, it’s CNBC, ET Now etc. among social media platforms, YouTube is the most dangerous of all. It’s a cesspool of terrible advice. The algorithms on YouTube are built to amplify the most sensational bullshit👇
Access to advice
While some people lose money by following asinine advice on TV and social media, other investors lose money because it’s the only advice they have access to. In all our talk about investing, financial literacy, mutual fund SIPs, #AdviceZarooriHe etc., we conveniently forget that a vast majority of Indians don’t have access to quality education alone financial education. Financial literacy education is far less effective than people assume. But that’s an argument for another day.
For 80% of India, investing by a wide margin means LIC policies, gold, chit funds, bank FDs or real estate. This includes people like my mom who has all her life savings in chit funds and real estate. The first time she heard of a mutual fund was from me at the age of 60.
For many people who discover the markets, the first point of accessible information often is these disgusting business news channels. Let’s assume that these people wanted quality financial advice instead of CNBC, they can’t get it easily today. There are just about 15,000-20,000 mutual fund distributors, 2000 CFPs, and 100 odd RIAs who offer holistic advice. There are probably 100X the number of unregistered illegal tipsters, advisory and portfolio services than this. For context, India has 2.15 crore unique mutual fund investors.
What makes things worse is that pretty much all financial services business including AMCs only care about people in the top 30 cities. Nobody wants to or has an incentive to reach people in the rural heartlands because they don’t have a lot of money.
I’ve been ranting like a lunatic against this % of AUM fee that AMCs, distributors, advisers charge. It’s precisely because of this reason. The model isn’t attractive when people don’t have a lot of money to invest. The other big complication is that India is a multilingual country. Even though a lot of quality financial content is available, it’s mostly in English.
For 80% plus Indians, CNBC, Zee Biz, LIC Agents, bank managers, and shady traders are the only source of advice. So, when you hear stories of people losing money in the markets, and we go, “investors are stupid,” greed isn’t the only reason. There are real information barriers at play.
But solving access to good financial advice is a complicated problem. I don’t think I can solve that with this newsletter😓
Mind your head!
The other big issue today is that with so much information being easily accessible, figuring out what’s good and what’s dangerous is tough. Just like you can’t eat junk food and hope to get six packs, you can’t rely on shitty financial information and make good personal finance decisions. Garbage in, garbage out.
It’s a paradox of choice. The more the choices, the harder it is to pick something. Being mindful about what financial information you consume and from who pays. With pretty much everything about finance, investing, and personal finance being readily accessible, a good information diet is all the more important.
This is just like physical fitness. You spend time on diet and exercise to reduce the odds of you dropping dead. The same goes for your financial information diet too. If you rely on garbage, you’ll most likely live under a flyover wearing garbage covers.
Here’s how I try to mind my head👇
Much of the mainstream financial news has become entertainment. It’s a race for views and clicks. Quantity, hyperbole, and salaciousness always trump quality and substance. Nobody wants to watch or read something about how to pick stocks or mutual funds. They just want the 10 best stocks and mutual funds. The kind of news these guys air and publish would be the equivalent of eating pizzas, candy bars and drinking Pepsi and Coke 3 times a day. You’ll drop dead of a heart attack.
I’ve pretty much stopped reading from mainstream outlets except for the occasional pieces or breaking news alerts. Everything else is just plain horseshit. I even created a site to share the good things I read and come across.
Please, I’m begging you to stop relying on advice from these TV channels, newspapers, random Twitter accounts videos and even this newsletter. Sit your ass down, close Netflix and spend 30 mins a week learning how to manage your personal finances. Don’t forget to close those incognito tabs too.
When you initially start learning about money, a part of your soul will die. You’ll feel like killing yourself. But you learn so that you have a secure retirement and don’t have to sleep under a flyover.
Move your mental ass a little
You know what amazes me? People spend hours shopping for the right underwear but take shortcuts when it comes to their personal finances.
The intellectual couch potatoes
And these lazy investors are annoying. I love answering genuine questions from investors who are figuring things out if I can. But once in a while, I get DMs from people who ask me ridiculously silly things like some best fund recommendations or the expense ratio of a fund🤦♀️ Some of these people spend hours tweeting about some stupid political issues but finding the expense ratio of a mutual fund is complicated?😡
People have all the time in the world to watch Bombay Begums, but deciding what index fund to invest in is apparently hard labour🤷♀️And this laziness among smart people who have the time and ability to figure things out costs them dearly.
I'm not going to tell you investing is easy, personal finance is easy, keep it simple or such nonsense. Every single goddamn thing about personal finance is hard. But it isn't as hard as finding the meaning of life. With enough work, you can figure things out, like everything else in life.
Context is king
Today for a lot of people, personal finance = investing. This is absolutely stupid! In the grand scheme of things, what funds you invest in isn’t all that important.
There are far more important things like figuring out your career, figuring out solutions for tricky familial issues, taking care of your health, having adequate insurance, making sure you & your parents have a will, having nice experiences and so on.
In fact, investing is the least bloody important thing in the whole of personal finance. Investing is hard but nearly hard enough compared to the other things. Let’s take an example. Again, With a hypothetical portfolio of Nifty 50 & Nifty Next 50 for example, you are getting exposure to the top 100 companies in India. These companies combined make up about 77% of the total free-float market capitalization on NSE. It’s pretty much like buying the entire market. Then add a safe debt fund and you have a decent portfolio ready.
Depending on how well you understand the trade-offs of diversification, some international exposure like the S&P 500, for example, maybe a bit of gold, and you have a solid portfolio. If you aren’t happy with just market returns in index funds, you can try your hand at picking some active fund managers or stocks. It probably won’t work well, but you could try with a small slice of your portfolio.
Or you could allocate a portion of your portfolio to rules-based factor strategies like momentum, value and quality for that additional returns kicker. This is only assuming that you understand the risks and trade-offs. These rules-based factor strategies or smart-beta strategies are way better than discretionary active managers on any given day.
This portfolio will probably outperform 70%+ of all the active fund managers and investors? And for building your portfolio, just using an easy to understand and live with core and satellite framework works too. I’m just using this as an example. In reality, a portfolio will depend on a lot of complicated things.
What more do you want? Off late, a lot of my conversations go like this.
People: Where should I invest?
Me: Mutual funds
People: Which mutual fund?
Me: Index funds
People: Which index fund?
Me: Check out all the options and choose based on your situation
People: What do you think about Nifty Next 50, Nasdaq 100, S&P 500?
Me: Look at the data and see if it fits your risk profile
People: Thanks for nothing
As a starting point, just visualizing the drawdown of these funds would’ve given them enough context to start with. But people be too lazy 😥
I've had a few near-death experiences in my life. I almost went under a lorry one time, almost drowned twice, and have had several near-miss accidents. But compared to those things, I almost wet my pants when people ask me, “what fund should I invest in” and “what do you think about this fund”.
People have unique circumstances and risk-taking abilities. Without enough context, it would be reckless and illegal even of me to answer those questions. These are real-life questions with real money on the line. It amazes me that people are callous enough to rely on the advice of some random fucking idiot like me on Twitter.
This is why I hate those talking heads who go on these personal finance or mutual fund shows on TVs and answer specific questions from callers. These people give out advice about funds without a care in the world. That’s not just wrong but morally reprehensible.
These geniuses freely dish out financial advice like it’s no big deal. Who’s responsible if something goes wrong? Just writing about index funds on this newsletter sometimes gives me sleepless nights.
Take a simple example. If a person has credit card debt at say 40% interest but want’s to invest, how stupid do you have to be to recommend some mutual funds? Isn’t it the right advice to ask that fellow to pay his credit card dues first? This is just a small example. This is why I get scared he people ask me specific questions about funds because it’s wrong to answer them.
Where do I start?
Having given all this possibly pointless Gyan, it would be stupid of me not to share some answers. The best advice anyone could possibly give you in life is to figure it out. Check out these two tweets before we go any further.
Here are some resources for you to start learning about personal finance, investing, insurance and more. Next time, don’t ask people about what’s the best fund. Figure it out yourself.
Personal finance
Free E-Books by Venkatesh Jayaraman
Personal finance module on Zerodha Varsity
McGill Personal Finance Essentials - a free course on personal finance
13 Free Classes to Help You Manage Your Personal Finances.
Investing
Stockviz blog and Stockviz newsletter
Insurance
Simple portfolio ideas
I hate sharing these links because people will blindly invest in them. Just so we are clear, the right way to interpret these portfolios is to use them as ideas to build your own based on your needs.
Combine Nifty & Nifty Next 50 funds to create large, mid cap index portfolios
But…
All these amazing people have spent countless hours on these resources and people don’t care. Me just sharing these links still won’t mean a damn thing. The thing about personal finance is that it takes decades for things to play out. Most often than not, we only realize the true cost of our mistakes when it’s already too late.
And it’s precisely for this reason, a vast majority of people don’t care about getting their affairs in order. From my limited experience, people only care about these things when they experience tragedies or fear tragedies. In the grand scheme of things, everything else is just white noise like this post.
I wish this newsletter was still alive. Would happily pay to subscribe. Just to hear the same message over and over again: to keep things simple
Good read. Though I find it a little lengthy to hold on to concentration. I also find you to be Anti under wear person