30 Oct 2024

Small cogs in a big engine

Balaji is a taxi driver. He drives a taxi at night. Most of his customers after 11pm go to the airport. He stays awake till well into the morning taking people to wherever they need to go.

Does Balaji contribute to making the world a better place?

On the surface, no. He is not inventing medicines to cure diseases. He is not inventing technology to ease people’s lives. He is not counselling families to stop their quarrels. All Balaji does is taking people to where they want to go.

If we use the same lens, most people’s work doesn’t contribute to making the world a better or an easier place to live in. Yet, the world has constantly been becoming a better and easier place.

What was the world like in 2014? Are our lives easier now? Of course! What was the world like in 2004? Are our lives easier now? Definitely!

One way to explain this would be to give the entire credits to specific inventions that have made our lives better. We’ll maybe find hundreds or thousands of people to cite as the reason for the improvements. Did those thousands of people accomplish all this all by themselves? No, they did not.

Taxi drivers like Balaji help scientists (and businesspersons and social workers and …) go where they need to go. Progress is faster because we have easy transportation thanks to taxi drivers. Let me repeat this in different words. In a society where there are no taxi drivers and everyone needs to manage transportation on their own, progress would be slower.

This is not just about taxi drivers, though. Everyone out there today, doing all kinds of work, is helping the society move forward. Maybe they are small cogs in a big engine, but everyone is a small cog in the humongous machine that is our society. All these small cogs come together to make the engine do wonderful things.

When you take a taxi ride next time, or when you have a plumber repair your water lines, or when you have a delivery person bring you things, or when you have a restaurant cook a meal for you—remember that they are also a reason you’re able to excel in your day job.

27 Oct 2024

Does diversification reduce risk?

Some people have the misconception that diversification reduces risk. Strictly speaking, it doesn’t.

Diversification is systemically exposing our portfolio to more kinds of risk while simultaneously capping the negative impact from any one kind of risk. The latter is the goal; the former is an unavoidable side effect.

  • Undiversified portfolio: Safe and well most of the time, but one occasional “bad event” can possibly take down the entire portfolio.
  • Diversified portfolio: Frequently impacted by “bad events”, but survives most (if not all) of them.

Diversification does not reduce risk, but rather, it manages risk by intentionally spreading the bets. Diversification sacrifices extreme highs to avoid extreme lows. (See also: Diversification shields you from extremes.)

Image designed by Freepik

This applies to diversifying across asset classes, e.g. holding equity, bonds, real estate, etc within a portfolio. This also applies to diversifying within an asset class, e.g. investing in equity from multiple countries instead of just one country, or investing in a diversified mutual fund instead of holding a few securities directly.

But don’t bring this up while advising beginners!

This “Diversification does not reduce risk” narrative is technically correct, but it’s annoyingly pedantic. Similar to claiming that mutual funds have no compounding. These narratives may be technically correct, but they both miss the point.

Practically speaking, many investors are better off investing early rather than investing late. Many investors are better off with a diversified portfolio than a concentrated portfolio. Citing these narratives—that compounding doesn’t really apply or diversification exposes you to more risk—to refute investment advice is more nuisance than it is helpful.

24 Oct 2024

What does ‘Investing for the Long Term’ mean?

The lifetime of a typical investment corpus is many decades long. Our investment corpuses often outlast our own lives. Decisions that optimise short term gains while ignoring the long term effects can end up causing a net loss.

1. Don’t invest in active strategies (such as active mutual funds, PMS funds, Smallcase, etc) if you don’t absolutely trust the firm running the fund/strategy. The fund manager will be gone in a few years, or at best a few decades. The market dynamics will change in a few decades. Will this strategy still be a winning strategy? Do you have a plan for managing the situation when the tables turn?

1a — Corollary: If you have an active strategy that you can execute on your own, and you can execute it without much hassle for decades, you can definitely follow it. But barely anyone knows such a strategy and have the conviction to bet large sums of money on that strategy.

2. Don’t get into half-baked strategies like Coffee Can Investing. Don’t enter the equity market like an Abhimanyu. You need to know when to exit and how to exit. It is not wise to assume that great companies of today will remain great investments forever.

3. Don’t invest in sectoral or thematic funds that are expected to do well in the next few years. They will see a slump after those few years. What will you do then?

3a. Don’t buy overnight sensations (such as the Nvidias/Teslas or Quant AMC funds or crypto assets) in the hope of making quick money. Yes, you may make quick money in the next few years. Can you hold onto those investments for the next 40 or 50 years? (Remember that a typical retirement corpus has a lifetime of 70 years or so.)

Both sectoral/thematic bets and overnight sensations require you to know when to exit. Unless you time the exit precisely, you may lose quite a bit of money. The vast majority of retail investors cannot exit on time. Hence, it’s better to simply swallow the FOMO (fear of missing out) and stay away from these temptations.

4. Don’t add portfolio clutter that is hard to manage. Either you will be dead and your family will have to declutter your messy portfolio. Or you will get old and won’t have the vigour to manage a cluttered portfolio. (See also: A cluttered portfolio is not a problem—it’s a symptom)

5. Don’t be afraid to correct your mistakes even if it is costly in the short term. It’s better to pay capital gain taxes today and exit a bad fund/strategy than to put your portfolio under unnecessary risk for many more years.

HDFC Bank is the largest Indian bank for a reason

I used to be an HDFC Bank customer from 2011 through 2019. I didn’t need much from my bank account, and I was reasonably happy. A few bad experiences with the branch staff in 2019 made me resolve that I’d never be an HDFC Bank customer again.

We had an either-or-survivor (EoS) account with Lakshmi Vilas Bank (LVB). When DBS Bank took over LVB, they absolutely messed up the EoS operation mode of our account. They revoked online access of the joint holders without even telling us! We ended up going back to HDFC Bank for this EoS account because there weren’t any other good option in our town.

A year or so later, I opened a salary account with HDFC Bank since they had some very good offers for Google employees. I also got their top-of-the line Infinia credit card, which allowed me to simplify my credit card portfolio significantly.

Photo of an HDFC Bank branch

In the recent months, I have observed that HDFC Bank has built an attractive bundle of solutions to serve its customers.

  • They have credit cards that most people in the country find attractive. (Competition from Axis Magnus fizzled away quickly primarily because of Axis Bank’s hurried reversal of all benefits.)
  • SmartPay for bill payments is amazing. I have added all my bills—utility bills, credit card bills, everything—and SmartPay automatically pays the bills on time. I think the factors that make SmartPay different are: (i) the ability to pay even credit card bills not integrated with Bharat Bill Pay and (ii) the ability to pay using any of your payment instrument, be it bank account or credit card or debit card.
  • SmartBuy and PayZapp aggregate and organise all discount offers in one place. Every bank has partners that give discounts, but the SmartBuy portal makes utilising those offers a lot easier. This is HDFC Bank going the extra mile to make sure that everyone in the ecosystem—the bank itself, the customers, and the bank’s partners—actually benefit from the offers.
  • Features and offers tailored to specific demographics. The bank finds out what different subsets of their customer base may need and they build effective solutions for them.
    • Google employees get Alphabet shares as RSUs (restricted stock units). We sell those shares and bring the money to India. HDFC Bank offers an incredible forex conversion rate for such remittances. (This rate is even better than what Wise gives. That should tell you how good this offer is.)
    • Their credit cards for non-salaried businesspeople, (e.g. BizPower) gives rewards for paying GST. Paying GST through a credit card means the customer gets interest-free credit for over a month and they also earn rewards for it!

HDFC Bank is not the flashiest. Some of their processes are old school because they have been in this for decades. But the solution suite that they have built is compelling. They are the largest bank in India, and that’s not by accident. They have earned this place by serving the real needs of their customers.

2 Oct 2024

US capital assets are a very avoidable risk

I keep warning people against accumulating US assets due to the challenges a deceased person’s family needs to overcome before they can get access to the deceased person’s US assets.

It was all theoretical until a few days ago.

Some context before I proceed: I work at a US company, and almost everyone in my company receives RSUs as a part of the compensation package.

A colleague shared with me a few days ago that another coworker unfortunately passed away during the Covid second wave. That deceased coworker’s family still doesn’t have access to their vested RSUs, even after 3 years!

A mouse stuck in a mouse trap
Image credit: EinarStorsul from needpix.com

It’s easy for us to accumulate US stocks in our investment portfolios. The “dual engine growth” of stock growth + USD/INR appreciation is lucrative. But the prudent thing to do is to reduce the “US exposure” risk on an ongoing basis.

This is secondhand knowledge, but I have read somewhere that investing is more a game of risk management rather than maximising returns. US domiciled assets are like a time bomb. We are better off keeping them away from our portfolios.

PS: This post is advice to others, but it’s also advice to myself. A big chunk of my portfolio is still my employer’s RSUs. All my net worth calculations and “how far along am I to financial freedom” calculations include the full value of these RSUs. If I were to die tomorrow, my family will see a big financial setback due to the “US asset” risk. The sooner I reduce that risk the safer my family will be.