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Face your Tiger: Build wealth in 2016

Jan 1, 2016

In this issue:
» Volatile FII activity in last 15 years
» Cash rich PSUs come to government's aid once again?
» ....and more!
00.00
Tanushree Banerjee, Co-Head of Research

At the outset, here's wishing you a very happy New Year!

You may not be a fan of New Year resolutions.

But that should not stop you from taking some bold steps today to make your life richer and better.

It is never too late to secure your family's financial future. So if you have always hesitated to address your financial worries, the time to let go of your fears is now!

This really inspiring essay by our colleague Anisa Virji, the Managing Editor at Common Sense Living, tells you exactly how to overcome that fear.

We are sure you will find her ideas helping you make a brilliant start to 2016.

Best,
Tanushree Banerjee
Co-Head of Research
Equitymaster

*************************************************************

Anisa Virji

The tiger eyed the goat across the enclosure...any moment now the goat would turn to flee in terror, and the big cat wouldn't lose a heartbeat trapping it beneath him, ready for dinner...

Moments later, however, the zoo officials found the goat and tiger playing with each other. Now, they are inseparable buddies, sleeping together, head-butting each other playfully...

I know this sounds like a scene from a Disney movie, but it's a true story from an animal sanctuary in Russia.

How on God's Earth do a tiger and his supposedly hapless prey become friends? The caretaker described the friendship as a miracle.

Apparently, as he was let loose in the enclosure, the goat sauntered in as though he owned the place, completely unafraid of the tiger.

Isn't the fear of a menacing carnivorous beast part of the goat's genetic conditioning? Maybe it isn't. Maybe fear is a learned reaction. The goat had simply never been taught to be afraid of a tiger, probably had never met one before...

These two are best buds!

And maybe all fear is like that. Just conditioning...

Before we learn to be scared, we are fearlessly tumbling all over the place - sticking our little fingers in electric sockets, climbing on dangerously high furniture, trying to swallow dangerous bits of plastic, and stuffing marbles up our noses...

Have you ever seen a parent with a toddler...every third word seems to be a shouted NO! Which is fair enough, of course. If we died of electrocution, we would never grow up at all...

By the time we learn the good sense to be afraid, it's like a switch is flipped, and suddenly we are afraid of everything...

As we get older, it just gets worse...every third word from our own mouths starts to read 'no'.

No, I'm too old for this.

Start a business, I say. 'No, I'm too old,' you say. 'I can't take that kind of stress.'

Invest in equities; it's the thing to do. 'No, I'm too old, beta, I need to play it safe.'

Write a book, why don't you? 'Writing is for you young English speakers. I don't know how to write.'

Uff. Why not learn how to dance? 'Because, you see, I'm too old to make a fool of myself.'

See, you think you're living in a cage with a big scary tiger who is going to eat you for making one false move.

But if you do make a false move, or a big mistake, or take a foolish step, maybe this tiger won't eat you, because you were fearless.

Your life rolls on, and, not to be cynical, but you're not going to live forever.

As the Buddha said, 'Trouble is, you think you have time.'

You should certainly do the usual sensible finance-y things...

  • Rebalance your investment portfolio
  • Plan your taxes
  • Budget for your major expenses
  • Check you have enough liquid emergency funds
  • Make sure your insurance policies are in place, etc...

The simple, normal wealth-building steps that any financially savvy person takes regularly.

This year, how about taking that big leap? Stare your fear of losing money in the face. Step into the tiger's territory...

Our wealth coach Mark Ford says, 'The most important secret of wealth preservation is to make peace with your fear of becoming poor.

By learning to let go of your attachment to your wealth, you will be able to do more with it, take chances with it...

The same goes for your time. If you don't worry so much about wasting your time doing something that might end in failure, you will end up doing bigger things.

So this year, take a risk with your money and your time. Use it to start a business, or invest in someone else's. Use it to learn a new skill, and then sell that skill. Use it to try a new wealth-building strategy - something you've only heard of, but always thought too risky, or childish, or too late for you.

Pull out one of your dreams from under your bed and dust it off. Imagine that dream a reality. Imagine how it would impact your life, how you would feel about yourself, how your family would feel about you if you succeeded.

Now plan for any obstacles that might inhibit your success. Having an 'if-then' plan gives you the reassurance to take action. Identifying all the scenarios also helps keep your imagination in check. It shows you that, even if you fail, things can only go so bad. Outlining responses to these situations can show you that there is always a way out. Whether the way out is to cut your losses and sell your shares, or redesign your business plan and relaunch.

Now, armed with a great big risk-taking idea, the image of a wonderfully positive outcome, an if-then plan, and the enormous motivation that the start of a fresh new year can infuse, take that step to change your life and wealth.

If you are at a loss for ideas for your new big plan, that's what we are here for...

Our goal at Common Sense Living is to make you wealthier every year. Over the years that we have existed, we have figured out and shared ideas that are extremely useful to anybody with a wealth-building goal. And we mean anyone - people looking for jobs, or those who want to work for themselves...people looking for a new career, or to revitalise an old one...people looking for a dream, or to polish one up off the back shelves...people who are retired, or looking to retire...

If you are having trouble stepping in the direction of your dreams...if a path is what you're looking for, we lay one out for you.

Do anything except sit back and think, 'I'll take action later.'

'Time passes quickly, and it accelerates as you age. Before you know it, another year will have passed. And then another. I don't want you to be rereading this essay several years from now and thinking, "Why didn't I take action sooner?"' - Mark Ford.

Make 2016 the year you brought the change you have always craved in your life. Make it the year that you grew, you overcame... Make it the Year of the Tiger.

Have you made any financial resolutions for 2016? Let us know your comments or share your views in the Equitymaster Club.

3.50 Chart of the day

The Indian indices offered negative returns in the year gone by. The benchmark BSE-Sensex closed lower by 5% YoY during 2015. As we know, the Indian stock markets are strongly influenced by foreign institutional investor (FII) flows. While FIIs have boosted the Indian stock markets, they have also added to the volatility in the markets and made them highly risky. Today's chart of the day outlines the net inflows by foreign investors in the last 15 years.

The money coming from this group is widely known as hot money for being unstable. The FII activity remained quite lukewarm during 2015. Both domestic and macro factors have played equal role for the FII money getting sucked out and leading to collapse in the markets

With global economic instability and changes in US Fed rates, FIIs may continue to play truant in 2016 as well. However, according to us that should not worry long term investors. As far as economic reforms and structural tailwinds benefit Indian companies, the earnings growth will be rewarded with premium valuations, over time.

FII inflows over past 15 years

4.10

The government's massive divestment program seems to be nowhere close to raising the desired funds. And once again the government is devising new ways to get more aid from the cash rich PSUs.

As per the reported data in the Economic Times, the 2015-16 budget targeted a total of Rs 695 bn from stake sales in state-run firms. Of this Rs 285 bn was expected to come from selling stakes in the state run firms. But in last nine months of the current fiscal, it has not even raised half of the budgeted amount. The sum raised so far is only Rs 127 bn, through four offers for sale (OFS) of shares in Rural Electrification Corporation, Power Finance Corporation, Dredging Corporation and Indian Oil Corporation (IOC).

Further, the hopes of meeting the budgeted number look quite bleak given poor performance of most of the commodity stocks in the year gone by. The government has substantial holding in various commodity stocks which it proposed to divest its stake.

Consequently, the government is looking for options to bridge this fiscal gap. One such option is to ask the cash rich PSUs to the buy majority stakes in their peer companies where government wants to hive off its stake. However given dull market environment, these PSUs may not show keen interest to invest in the government firms. This could also mean these PSUs might have to postpone their investment and capex plans in order to meet the government's fiscal targets And once again this is a clear sign of the government compromising the interest of minority shareholders of the cash rich PSUs.

4.45

After opening on a weak note, the Indian markets are hovering around the dotted line. At the time of writing, BSE Sensex was trading higher by about 37 points. Barring stocks from software sector, all the major indices are trading in green. Both mid cap and small cap indices are in demand too, with each trading higher by around 0.9%.

4.50 Investing mantra

"I do know that when I am 60, I should be attempting to achieve different personal goals than those which had priority at age 20." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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