The Role of Capability, Liquidity, Equanimity and Serendipity in the Making of a Stock Market Genius

Talking about the stock market, have you ever wondered what makes someone an ordinary investor but someone else a market genius?

Of course, we do know very well that those who put their money in the stock market mostly end up as ordinary investors with ordinary returns (in the range of 5% to 12%, on CAGR basis).

Only a few, just a very very few, end up as market geniuses with super returns (more than 16% and going upto 20%-25%, again on a CAGR basis).

The 12%-16% returns zone is like the no man land's and its hard to label such investors as either ordinary or genius. Such investors might be better than the ordinary investors but they are by no means geniuses.

So what separates the men from the boys, the geniuses from the rest?

In this context, it is useful to look at the role played by four "ity"s - Capability, Liquidity, Equanimity and Serendipity - in the making of a stock market genius.

As an aside, the ordinary investors are perhaps influenced by the fifth and the most dangerous "ity" - Stupidity!

Coming back to the four "ity"s, let us analyze how they can play an important role in the making of a stock market genius.

Capability

• Understanding the financials of the company behind the stock is a core skill. Knowing how to read the annual and quarterly reports is a part of this core skill
• Knowing how to crunch, slice and dice financial data is another core skill that is a part of stock-picking capability of an investor
• Understanding the macro-level economic and business factors that affect the entire stock market or specific sectors as well as the micro-level factors influencing a specific stock helps avoid gross mistakes in selecting which stocks to purchase, when and for long hold onto it and equally importantly which ones to avoid

Liquidity

• Being able to withstand when the market is down with no compulsion to sell gives a lot of holding power to an investor 
• In fact, being able to purchase even more stocks when the market is down adds to the firing power of an investor
• Making sure one has enough free cash to spend without resorting to selling stocks to pay for the routine and emergency expenses goes a long way in making an investor firm-footed

Equanimity

• Being psychologically strong to not react to any bad news in panic and any good news in elation is a core skill that makes an ordinary investor into a genius
• It is easy to see that those who have managed the "Liquidity" part very well are in a much better position to act with equanimity
• One's temperament and disposition has a deep impact on how one would react to any given situation in the stock market
• Being able to control one's urges and not relying on just the first order thinking but taking a pause and spending some more time to exercise the second order thinking is of paramount importance

Serendipity

• This simply means having the good blessings of lady luck. Since no one knows what the future holds all investment decisions are projection of the future state based on analysis of past information and certain assumptions
• If things change drastically in the future, analysis of past information may at times not only not be useful but also may be misleading. History may tend to repeat itself but it's hard to guess where exactly it will repeat itself
• Projection of the future state based on certain assumptions happening exactly as was thought is itself an assumption. If the assumptions made are not correct or complete or important assumptions get missed out, things can go haywire with consequences that are hard to imagine
• There is nor formula or magic behind finding a stock at the right price, holding it for the right time and exiting from it at the right time. Genius investors tend to experience this more often than the ordinary investors and more than their skill, serendipity may be at work!

Clearly the four "ity"s - Capability, Liquidity, Equanimity and Serendipity - indeed play an important role in the making of a stock market genius.

So do you have the four "ity"s? Are you still an ordinary investor? Or are you now a stock market genius? 

The 100+100 Principle - Live to 100 Years and Earn 100 Million Dollars

The 100+100 principle is essentially reaching the magic number of 100 in the two most important dimensions of your life - health and wealth.

If you can manage to live to 100 years, it will easily provide you more than enough time and opportunities to have a great life.

If you want to live to 100, you have to get the following things right:

• Eat healthy food and avoid junk food
• Drink lot of water and eat lot of fibres
• Maintain a balanced diet by eating a variety of food
• Eat nuts and dry fruits
• Consume as less medicines as possible
• Keep your immunity strong and not fall sick, especially during change in seasons
• Take extreme care in protecting yourself from the vagaries of changing weather
• Do some physical exercises and yoga
• Take care of yourself so as not to have any life-threatening critical diseases like diabetes, hypertension, lung and kidney infections
• Do some mental relaxation exercises and meditation
• Develop equanimity and remain calm and composed at all times
• Learn to let go of things and don't carry any bad baggage in your mind

In a similar vein, if you can manage to earn 100 million dollars, it will easily allow you to afford to live a great life with all essential stuff you would ever need.

If you want to earn 100 million dollars, you have to get the following things right:

• Earn enough so that you can save something after buying the essential stuff
• Save a good part of what you earn
• Save more of what you earn in successive years
• Build an emergency fund for the rainy and the miserable days
• Invest your money in the right manner
• Diversify your investments adequately (never keep all eggs in one basket)
• Don't over diversify by learning about risks and rewards in various types of investments
• Re-invest the earnings from your investments
• Learn about compound interest and use it to your advantage
• Avoid compound interest working against you (full credit card debt not paid every single month)
• Never ever take debt, if possible
• Never invest using leverage
• Starting early and going slow and steady with your investments is the approach to follow (Rome was not built in a day)

You don't need too much stuff - bigger house, fancier car, fashionable clothes and exotic food - for a happy life. You need the essential stuff only.

The idea behind the above is to have a simple yet content and purposeful life. 

Remember, being wealthy is the most important way to ensure you have the essential stuff. Every day.

Also remember, being healthy is much more important than having a lot of stuff. Any day.

In summary, you have to be wealthy enough to have the money needed to buy the stuff. And you have to be healthy enough to be around to enjoy the stuff you buy with your money!

Why Looking at P/E Ratio to Buy a Stock is Not a Good Idea?

The P/E ratio is highly revered by investors.

It has acquired almost a cult-like status among the pantheon of financial metrics and ratios that are commonly used.

However, looking at P/E ratio to buy a stock may not be a very good idea.

The P in the P/E ratio refers to the stock price.

And as we know stock price fluctuates throughout the trading hours and across the trading days, at times showing extreme volatility.

So which price should ideally be taken as P?

Using value of P based on any consideration is not appropriate. P/E ratio can be made to swing wildly depending on what value of P is chosen!

The E in the P/E ratio refers to EPS (Earning Per Share).

Again EPS can be calculated in various ways.

EPS can be based on latest quarter, latest year, average of last "n" quarters, average of last "n" years or some arbitrarily chosen time period.

The above is not very helpful.

An alternative approach would be to take quarter-wise EPS for the last 3 years (basically last 12 quarters) and calculate exponentially weighted average EPS.

Let is call this EW-12Qtr-Avg-EPS.

In case EPS for any quarter is less than zero, it should ring the alarm bell very noisily. In such a case buying a stock may not be a very good idea. Even  EPS should not be computed.

Assuming non-zero EPS in the last 12 quarters, the EW-12Qtr-Avg-EPS can be calculated.

To be on the safer side the minimum of EPS in the last 12 quarters can be taken.

Let us call this Min-12Qtr-EPS.

Now, suppose the goal is to earn a certain percentage return, say R%.

In that case, the stock price which will allow R% returns to be made can be calculated as:

P <= (EW-12Qtr-Avg-EPS) / R

or P <= (Min-12Qtr-EPS) / R

The second equation is more conservative and hence will provide higher margin of safety.

The side effect will be that many more stocks will fall outside the "buy-able" zone as compared to the case when first equation is applied!

P in the above two equations is the maximum price that can be paid to purchase the stock so that returns are >=R%

Let us take an example.

Suppose EW-12Qtr-Avg-EPS for company A is USD 10. Also suppose the investor wants to earn 10% return (over the long-term horizon).

In such a case, the stock purchase price should be less than USD 100.

The higher the price above the above amount, the lower the returns will be.

Note - Inverse of P/E is also called as Earnings Yield (E/P). A simple look at E/P ratio can easily show that as P goes up earnings yield goes down!

Why Its Important to Reach that Stage in Life Fast Where You Can Bluntly Tell "F**k You" When Someone Says "You are Fired" or Pisses You Off?

You and your current standard of living is loosely connected together by a very uncertain, thin and fragile thread.

Can you guess what this thread is?

It's called a job.

This would be true if you are like most of the people. People who lack the f**k you money!

Why its important to reach that stage in life fast where you can bluntly tell "F**k You" when someone says "You are Fired" or pisses you off.

The answer is simple and pretty obvious.

No one should tolerate non-sense.

But you have to if you have no choice but to tolerate it. And why you need to tolerate?

You will need to tolerate non-sense because you haven't built the fortress of f**k you money. If you have one, you can tell any assh**e to f**k you!

As simple as that.

Building your own fortress of f**k you money should be your number one priority in life till you have it.

A fortress that is solid, secure and stuffed with cash is what gives you enough strength to fight the battle of life, and to easily dismiss non-sense people who come into your life.

A fortress that is solid, secure and stuffed with cash also allows you the luxury to do only those things you want to.

It gives you the choice to work because you want to not because you need to!

Imagine how confident you would be knowing fully well that you own a fortress that is solid, secure and stuffed with cash

So have you got started on your journey to reach that stage in life fast where you can bluntly tell "F**k You" when someone says "You are Fired" or pisses you off?

If not, don't wait to get started. Start now. Start immediately.

Start right now.

Why Attain Financial Freedom? How Can Minimalism Help Attain Financial Freedom?

What is the meaning of attaining financial freedom?

Attaining financial freedom means you have reached a state in your life where you have earned enough money so that you can stop working if you wish to.

It can help you gain a new-found confidence about yourself.

It can help you live a life full of candor.

You can do things to your liking.

Attaining financial freedom can help in following ways as well:

• You can avoid people who piss you off
• You can choose whether to work or not
• You can choose whom to work for
• You can live a comfortable life
• You can buy the stuff you need

Combining financial freedom with minimalism is a very powerful way to live life.

Minimalism can help you attain financial freedom much faster.

Minimalism removes you away from buying needless stuff which directly goes to augment your pool of money and hence it can grow much faster than otherwise.

Minimalism also sharpens the focus on living simple life, eating simple food and enjoying life experiences over accumulating more and more stuff.

The above can help you spend less on stuff and also be more healthy. All this helps grow the pool of money faster.

Most importantly, combining financial freedom and minimalism can increase your happiness manifold. It can make you feel better and lighter about yourself.

Key Financial Terms and Ratios that are Useful for Evaluating Stocks - Part 2

Read Part 1 here:
Key Financial Terms and Ratios that are Useful for Evaluating Stocks - Part 1

Here are some more financial terms and ratios that can be further analyzed to determine the long-term prospects of the stock:

• ROS (Return On Sales) - is the earnings of the company as against the sales/revenues done by the company.
• ATO (Asset Turn Over) - is the sales/revenue generated by the company as against the assets it has. Higher ATO means an efficient business model where assets are effectively utilized to generate higher sales/revenues.
• OCF (Operating Cash Flow) - is the cash generated from the operations. It is important that the company's cash comes from operations and not "other sources".
• CAPEX (Capital Expenditure) - is the cash invested to create new assets or replace old and obsolete assets. Assets are utilized by the company to conduct its business operations that generate revenues and profits.
• FCF (Free Cash Flow) - is the hard cash that is generated by the company. This is derived from the Cash Flow Statement and is calculated as OCF minus CAPEX.
• TDB (Total Debt Burden) - is a measure of the total debt on the company and includes both interest and principal component. Too much of debt is a risky proposition for any company. In bad times, too much debt can result in bankruptcy and the company eventually going out of business. 
• TIB (Total Interest Burden) - is a measure of the total interest on debt on the company. Not being in a position to pay even the interest on debt is a serious issue for any company and indicates that the company is on its way to bankruptcy.
• DBR (Debt Burden Ratio) - is a measure of whether the company is earning enough to repay its loans. It is calculated as the ratio of  TDB to the FCF. This number indicates whether enough hard cash is being generated for repaying the interest and principal component that are due for payment.
• DSCR (Debt Service Coverage Ratio) - is a measure of whether the company is generating enough profit to be in a position to take care of its debt liabilities. Debt here means both interest and principal component. It is calculated as the ratio of TDB and NPM.
• ISCR (Interest Service Coverage Ratio) - is a measure of whether the company is generating enough profit to be in a position to take care of its interest on debt liabilities. It is calculated as the ratio of TIB and NPM.

How to Retire Really Quick? And How Quick is Really Quick?

Retiring really quick is worth it, whichever way one looks at it. So how quick is really quick?

Assuming you start earning at the age of 22, in that case how fast can you manage to retire? By age 50? Or 40? Or 30? Or still better, 27?

There are many people who have managed to attain financial freedom which means they have accumulated enough capital to last more than a life-time and that has essentially given them the golden choice to retire should they want to.

They now live life from the level of f**k you!

One of the inspirational stories for anyone wanting to become financially independent is the story of Jacob.

Here's what the "About me" page on his blog (http://earlyretirementextreme.com/about) says:

"Current networth (2016) : 117 years worth of annual expenses.

My name is Jacob. My greatest claim to fame and overall impact on the world is probably this blog and the concept of ERE.

Before that I used to be a nuclear astrophysicist, but in reality I’ve done many other different and (to me) interesting things and my aim is to continue this way of life for the rest of my life. Never getting bored.

ERE is much much more than just “retiring extremely early” by “sacrificing travel and expensive restaurants”. It is effectively a philosophy of life." 

Read the above again, more carefully this time - this guy has managed to accumulate 117 years worth of annual expenses.

That's phenomenal, especially given most of the working folks are barely able to survive and are living paycheck to paycheck to paycheck.

Living paycheck to paycheck to paycheck is like playing musical chairs where you are in trouble when the music stops and you don't get to sit on one of the chairs.

You are out.

Elsewhere in the blog, Jacob also talks about how he manged to become financially independent in 5 years. That's nothing short of pure magic. 5 years is unimaginable.

Lot of people who have worked for 10-15 years are still not in a position to  become financially independent in next 5 years. They need another 10-15 years or maybe more.

This story is truly inspirational.

For understanding how this was done and learning from this real experience, read this amazing story at: http://earlyretirementextreme.com/how-i-became-financially-independent-in-5-years-part-i.html.

Here's what the above blog post says:

"My journey towards financial independence was not always with financial independence in mind per se.

Had that been my sole goal all a long I would have done things differently and probably faster e.g. 3-4 years instead of 5.

If I had a six figure income, which I never had, I would be able to do it in 2 or 3 years."

Read that again, it says it is possible to attain financial freedom in 2 or 3 years.

That means if you start working when you are 22, you are done when you become 25.

That's seemingly crazy but certainly possible as it looks like, provided you understand and follow the ERE principles.

Why Educating Kids in India is Economically a Bad Idea and How is it Ruining their Parent's Retirement Plan?

India is a poor country.

The GNI (Gross National Income) per capita using Atlas method (used by the World Bank to estimate the size of economies) in terms of current US$ in 2014 for India was USD 1570.

(Source: http://data.worldbank.org/indicator/NY.GNP.PCAP.CD/countries/IN-8S-XN?display=graph)

That roughly translates to INR 102050 (assuming 1 USD = 65 INR at current rates).

Note - the above numbers haven't been adjusted for the same time period and for this post that is not really that relevant.

So an average Indian family of 4 members will be having an annual income of INR 408200. Ignoring the taxes altogether, this would mean the monthly income comes to around INR 34017.

Is that good enough to educate your kids and then be in a position where you will still have enough left to spend money on the essential stuff?

Looking at the abnormal school fees, the above would be a herculean task.

How much money is needed to educate a kid in a school in India in a city like Delhi and Gurgaon?

Assuming an average monthly fee of INR 10000 (which includes fees, annual charges, books, stationary, uniform, charges for events like annual day, school bus) for two kids the yearly expenses will come to be INR 240000. Or around 59% of yearly income!

Which mean for the 15 years of school education (Play Group, LKG, UKG and then from class I to class XII) the total cost for one kid would come to an astounding amount of  INR 18 lacs.

So how will the family eat? how will they pay home rent or home loan EMI or both, in some cases? how will they pay water and electricity bills? how will they pay for doctor's fees and medicine? how will they pay bus and auto fares?

The list of even the essential stuff is really too long. And the costs would be much higher than what a comfortable number should like.

This shows something is clearly wrong. When 59% of an average Indian family's income is needed for kid's education it has a drastically adverse on their overall standard of living.

The other problem is as severe as the one above. This has a direct, negative impact on the parent's retirement plan also.

Given the lack of social security in India, the problem gets compounded many times for  an average Indian parent. They find life tough now and will find it perhaps even tougher in the future!

Where is the money to save and invest for retirement?

Saving and investing for retirement is slowly becoming a dream that may alas remain a dream for many of the parents in India.

There was a song in movie which had the following lines:

Where is the time to hate, when there is so little time to love
Come on let' s sing sing sing
Come on let' s dance dance dance
Come on have fun fun fun 

(Source - http://www.hindilyrics.net/lyrics/of-Where%20Is%20The%20Time%20To%20Hate.html)

For parents in India this could be written as:

Where is the money for retirement, when there is so little money for living now
Come on let' s cry cry cry (what else is there to do?)
Come on let' s pray pray pray (to God, who else?)
Come on have fun fun fun (this part shouldn't change!)

May the force be with the parents in India. May they get more money. May they be in a position to save some for retirement as well.

Key Financial Terms and Ratios that are Useful for Evaluating Stocks - Part 1

For analyzing the stocks that look promising and then selecting the ones in which you can invest your hard-earned money it is helpful to be aware of and clearly understand some of the key financial terms and ratios.

Here are some such key financial terms and ratios that are useful for evaluating stocks:

• CMP or P (Current Market Price) - as the name also suggests, is the price at which the stock is currently trading. P keeps on fluctuating from one second to another (when the stock market is open, of course!).
• BV or B (Book Value) - is the value of the assets held by the company and indicates the cash that will get freed up in case the company goes bankrupt and its assets are liquidated.
• EPS or E (Earning Per Share) - is the net income post-tax the company has earned and indicates the cash generating power of the stock.
• DPS or D (Dividend Per Share) - is the dividend earned by the shareholder for every share held and can be viewed as regular cash inflow from stock investment.
• P/E (Price to Earnings ratio) - indicates the premium or discount at which the stock is trading. P/E should be less than 20 (which implies a 5% rate of return on capital invested by you to buy the stock).
• P/B (Price to Book ratio) - indicates how much you are paying for the stock as against the value of its assets in the books. P/B should be less than 5 (which implies if you buy a stock at Rs. 100/- and the company goes bankrupt you can expect to get Rs. 20/- back). 
• ROCE (Return On Capital Employed) - is the cash generating ability of the capital employed by the company in the form of both equity and debt. ROCE should be more than 10%.
• ROE / RONW (Return On Equity or Return On Net Worth) - is the cash generating ability of company for its owners or shareholders. It indicates  the return that can be expected by the owners for assuming the investment risk. ROE should be more than 15%.
• D/E (Debt to Equity ratio) - is the composition of the capital employed by the company and indicates its financial leverage position. Higher leverage would generally translate into higher risk for the business. D/E ratio should be less than 2 (which implies if the capital of a company is Rs. 100/-, debt should not be more than Rs. 66.67)
• DY (Dividend Yield) - is the dividend paid by the stock as against its market price. It indicates the return from the stock in the form of dividends. It indicates how much "hard" cash is shared by the company with its shareholders. DY should be more than 2%.
• DPR (Dividend Payout Ratio) -  indicates the ratio of earnings the company distributes to its shareholders as dividend (or DPS/EPS). DPR should be within 20% to 40%.
• NPM (Net Profit Margin) - is the profit post-tax or the net earnings generated by the company. Annualized growth in NPM during the last 5 years should be more than 10%.
• OPM (Operating Profit Margin) - is the NPM from business operations. It is the net earnings from operations and not from the management of the company's finances. Average OPM during the last 5 years should not be negative.

Read Part 2 here:
Key Financial Terms and Ratios that are Useful for Evaluating Stocks - Part 2

Why Investing is an Extremely Hard Game to Play?

Think about any game.

In most of the games following aspects will generally hold good:

• Past records are known and are a good predictor of future performance.
• Rules of game are well defined.
• Skill is more important than luck (other than in some cases like chance-based card games).
• Rules of game do not change all of a sudden due to any unexpected event occurring suddenly.
• Every player knows how many players and who all are playing the game.
• Duration for which a game is played is known.
• Played in open so what any player does is visible immediately or after a short time lag to all the other players.
• Kind of homework and preparation that needs to be done is known to all players.
• Involves use of both physical and mental faculties (degree of usage varies).
• Uncertainty about future does not have a large bearing on the final outcome of the game.
• Risks that may materialize are limited in number and mostly known to all players.

Investing can also be viewed as a game!

So what does the game of investing involve? Here are some key aspects:

• Past records are known but are not a good predictor of future performance and can only be used to make hypothesized projection of the future performance.
• Rules of game are well defined only in terms of the transactions that need to be made and not the strategy that gets deployed (there are legal considerations as well which need to be adhered to otherwise the penalty incurred may wipe out the entire gains).
• Skill is more important than luck but role of luck is also huge in terms of the uncertainty about the future. Skill is used to analyze past performance and hypothesized projection of the future performance to arrive at an investment decision but a "black swan" event in the future can tilt the final outcome in either direction. Luck or the lack of it can play the role of an angel or a devil respectively.
• Rules of game do not change all of a sudden due to any unexpected event occurring suddenly but since they do not apply to the strategy part of the investing process, the way many of these rules get applied by a player can have a significant material impact on the other players.
• The choice of investment portfolios and the investments within each any player can hold is infinite. The players playing the game of investing would not know how many and who all are playing the game. Not only that, players may be independently playing a game of their own individual choice with multiple intersections though with games being played by the other players simultaneously.
• The duration and the time to enter and exit an investment is not specified and, in fact, forms a crucial part of the strategy to improve the final investment outcome (a player can actually enter and exit multiple number of times).
• Played mostly privately (the first few critical moves are always private) so what any player does is either not visible at all or only after a long time lag to all the other players.
• Kind of homework and preparation that needs to be done is known to all players but is very wide ranging from subjects such as Economic History, Macro Economics, Micro Economics, Behavioral Economics, World History, Politics, Finance & Accounting, Capital Markets, Human Psychology, Mathematics, Statistics. With such a wide range of subjects a player ought to understand, the homework and preparation required is indeed a tough one and since things are ever evolving it always remains in a work in progress state.
• Involves use of mental faculties primarily (analysis and due deliberation performed at times are very comprehensive and highly complex).
• Uncertainty about future has a large bearing on the final outcome of the game (both on the negative as well as the positive side).
• Risks that may materialize are large in number (including geo-political and macro-economic factors across the world) and not known to all players in equal measure and at the same time.

So it is evident that investing is like any other game.

However, investing, is unlike other games in many ways. The nature, scope and complexity of the game of investing makes it extremely hard.

I Want To Become Rich And I Don't Want To Do Any Bloody Job

That's what you might think at times.

"I Want To Become Rich And I Don't Want To Do Any Bloody Job"

There's really nothing wrong if you think this way.

When you are rich you are not a wage slave. You get to live life from the level of f**k you.

If someone pisses you off, you don't need to explain anything. You can just say f**k you!

Here are more things that happen then:

• If you meet someone who is incompetent, you can just say f**k you!
• If you meet someone who is an ass with a stinky hole, you can just say f**k you!
• If you meet someone who is short but carries a big ego, you can just say f**k you!

Why I Don't Want to be a Worker Anymore?

Have you ever had this thought cross your mind?

I don't want to be a worker anymore.

And it shouldn't be this way because you are lazy, or you are not competent, or you want an easy life. No. Not really.

The answer should actually lie somewhere else.

In the modern society the key to having a good life is money, having enough of it.

Of course, it is not just money, but money is the primary and the first ingredient for a good life.

Money in current system is controlled and moved by those who own it.

Who are these people?

They are the capitalists (this term, broadly speaking, includes investors too). They own money and hence own the system in some sense.

Everybody else is a worker.

And if you are not a capitalist then you are a worker.

Why Investors Shouldn't be Fooled by The Success Mantras of Super-Investors?

One of the inferences that can be drawn from the the book "Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets" by Nassim Nicholas Taleb is this:

If there are N investors who put their money in the market at a given period in time, n1 of them (n1 = x1 * N, where x1 is very close to 0) would end up as great investors in that period.

Also n2 of n1 (n2 = x2 * n1, where x2 is ever further closer to 0 as compared to x1) would end up as great investors across multiple periods and hence turn out to be super-investors eventually.

The n1 who end up as great investors and the n2 who turn out to be super-investors eventually may be as a result of not merely their skill but probably in equal measure as a result of the law of probability.

The above would mean that there has to be some people who will eventually become a Warren Buffet or a Philip Fisher or a Peter Lynch or a Bill Ackman.

The success of above people shouldn't be seen as anything unusual and surprising. Some n2 people had to turn out to be super-investors eventually and the above happens to be their names.

Once names are attached to those who are part of the n2, then their success is dissected and analyzed and codified into success mantras - rules, theories and concepts - that supposedly helped these investors turn out to be super-investors.

However, the success mantras of the n2 super-investors will probably be different from one another.

Not only that the success mantra of a super-investor will also perhaps be different across multiple time periods.

What that would mean is that there is no single success mantra that worked for all super-investors through all periods with same level of success consistently.

And hence, the success mantras that have worked in the past may not necessarily work even in the next period with 100% certainty.

Forget about the period next to that and the one after that!

Here's something worth taking a closer look at:

"This year's top-performing mutual funds aren't necessarily going to be next year's best performers.

It’s not uncommon for a fund to have better-than-average performance one year and mediocre or below-average performance the following year.

That's why the SEC requires funds to tell investors that a fund's past performance does not necessarily predict future results."

(Source: https://www.sec.gov/answers/mperf.htm)

The statement "past performance does not necessarily predict future results" or something similar is a common but very important statement which is often used as a legal disclaimer by investment firms and yet generally ignored by most who invest money with such firms.

What applies to mutual funds and investment firms applies equally well to the n2 and even the n1 investors - past performance does not necessarily predict future results.

So for any investor it is important not to be fooled by the success mantras of the super-investors (as also the great investors) and hence not to try to directly emulate them.

It is certainly a good idea to study and analyze the various success mantras that have worked in the past but not be blinded by them.

It is definitely very useful to learn key lessons from all this study and analysis.

In the end, however, every investor has to find her own success mantra.

If an investor follows her tried and tested success mantras and turns out to be a super-investor it would be great.

However, it should not be forgotten that this could again be a result of not merely the skill but probably in equal measure as a result of the law of probability.

It is easy to be fooled by randomness and ignore the hidden role of chance in life and in the market!

I Was Not Born Rich But I Would Want To Die Rich For Sure

The world is inevitably moving towards a state where your economic well-being and status is increasingly going to decide how your life experience is going to be like - from the time you are born till you die.

You can't choose to be born rich. When you are born is the first instance, and perhaps the most significant of them all, when lady luck can play a make or break role in how you would live your life.

If your are lucky, you would be born as the son and daughter of a wealthy parents. You would be as they say born with the proverbial "silver spoon in the mouth".

You are guaranteed a comfortable and secure childhood in most likelihood. You would have access to most of the basic necessities and some more.

You would get an opportunity to go to a decent school, get educated, maintain reasonable health and may be inherit some wealth.

In case you are born in a poor family, the dice is loaded against you right from the start.

Playing the game of cards after you have been dealt "not so good" set of cards can be a tough act for even the best of the players.

The worst thing about being poor is that you may not even get the opportunity to go to a decent school, get educated, maintain reasonable health (things which are taken for granted by most of us).

So what you are born as - rich or poor - is a matter of luck!

However, once you grow up into an independent and mature adult, what happens in you life would start depending more on your abilities and how things play out in your life.

At this point in your life, you and others like you would be at par in a certain sense. What happens from this point onward would bear upon whether you die rich or not.

It is important for every person to strive to become rich and wealthy in their life-time in case they were not born rich.

As is accepted as a universal truth, in life you must strive only for three things - character, health and wealth.

Among these three wealth takes the third place in the order of importance and rightly so.

So as long as you take care of the first two - character and health, you are set for life.

Then focus on wealth.

When it comes to wealth, you should strive to accumulate as much as is possible without becoming sick or killing yourself through work stress.

Also stay totally away from using unfair and unethical means, which, at times, can lead you to spend the last part of your life in prison - think of Enron and Bernie Madoff!

For a happy and successful life, being wealthy certainly helps.

Hence, you should always think of the following and strive to become rich:

"I was not born rich but would want to die rich for sure"

Quitting Your Job to Become a Full-time Investor and Then a Successful Investor

Quitting your job to become a full-time investor may look like a great and romantically appealing idea to many people.

The key assumption that is generally made is that once you become a full-time investor you would then eventually and surely become a successful investor.

This is a dangerous assumption.

Quitting your job under the above assumption is a risky proposition, to say the least.

It seems Warren Buffet's success as an investor has a lot to do with investing being viewed as a surefire way of becoming not only rich but super rich.

Stories glorifying investment successes of Warren Buffet and others of his ilk have been portrayed by the media in quite an adoring and compelling manner.

However, these stories are under the effect of survivor bias and hence leave out the scary side of full-time investing.

An important realization is that the journey from having a job to quitting it to become a full-time investor is indeed a tough one but the journey from being a full-time investor to a successful investor is much tougher.

It is a commonly accepted fact that it is hard to distinguish between the role of luck versus skill as far as investing goes.

In addition, even the high and mighty go through peaks and troughs which necessitates equanimity as a key trait of a successful investor.

And lastly, it is useful to always remember the importance of making mistakes and learning from them.

This is explained so beautifully well in the Letter to Shareholders by William A. Ackman (Bill Ackman) in the 2015 Annual Report of Pershing Square Holding:

"I have always believed that experience is best defined as making mistakes and learning from them. 

I have made many investment mistakes over the last nearly 25 years managing investments, but the overall result has been quite satisfactory.

I believe that this is principally because we have used errors of judgment, execution, or analysis as important opportunities for study, learning, and introspection.

We intend to do so here.

Now that we have begun to stabilize our investment in Valeant, we will begin to consider the significant lessons that we can learn from this experience.

One important lesson from the past is that while we normally use our active investment approach to create value in a new situation, it can also serve in a defensive role, when a business we own encounters severe challenges."

Book Review - The Richest Man in Babylon by George S. Clason

This book is a highly recommended reading in the area of personal finance. It's a great book that goes deeper into the way some very basic and simple principles of personal finance can be used to become financially free.

The book basically dwells upon what it calls as "Seven Cures for a Lean Purse" and then suggest ways to turn a lean purse into a fat purse. Acquiring fat purse in this context means becoming rich.

Here are some excellent paragraphs from the book that also summarize the purpose and some of the key lessons for its readers.



The First Cure - Start thy purse to fattening

For every ten coins thou places within thy purse take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul.

This, my students, was the first cure I did discover for my lean purse: For each ten coins I put in, to spend but nine.

The Second Cure - Control thy expenditures

Therefore, engrave upon the clay each thing for which thou desireth to spend. Select those that are necessary and others that are possible through the expenditure of nine-tenths of thy income, Cross out the rest and consider them but a part of that great multitude of desires that must go unsatisfied and regret them not. 

This, then, is the second cure for a lean purse. Budget thy expenses that thou mayest have coins to pay for thy necessities, to pay for the enjoyments and to gratify thy worthwhile desires without spending more than nine-tenths of thy earnings.

The Third Cure - Make thy gold multiply

Gold in the purse is gratifying to own and satisfieth a miserly soul but earns nothing. The gold we may retain from our earnings is but the start. The earnings it will make shall build our fortunes. I tell you, my students, a man's wealth is not in the coins he carries in his purse; it is the income he buildeth, the golden stream that continually floweth into his purse and keepeth it always bulging. That is what every man desireth. That is what thou, each one of thee desireth; an income that continueth to come whether thou work or travel.

This then is the third cure for a lean purse: to put each coin to laboring that it may reproduce its kind even as the flocks of the field and help bring to thee income, a stream of wealth that shall flow constantly into thy purse.

The Fourth Cure - Guard thy treasures from loss

Misfortune loves a shining mark. Gold in a man's purse must be guarded with firmness, else it be lost. Thus it is wise that we must secure a small amount and learn to protect them before the Gods entrust us with larger. 

This, then, is the fourth cure for a lean purse, and of great importance if it prevent thy purse from being emptied once it become well filled. Guard thy treasure from loss by investing only where thy principal is safe, where it may be reclaimed if desirable, and where thou will not fail to collect a fair rental. Consult with the wise men. Secure the advice of those experienced in the profitable holding of gold. Let their wisdom protect thy treasure from unsafe investments.

The Fifth Cure - Make of thy dwelling a profitable investment

Then will thy heart be glad because thou wilt own in thy own right a valuable property and thy only cost will be the king's taxes. Thus come many blessings to the man who owneth his own house. And greatly will it reduce his cost of living, making available more of his earnings for pleasures and the gratification of his desires.

This, then, is the fifth cure of the lean purse: Own thy own home.

The Sixth Cure - Insure a future income

Therefore do I say that it behooves a man to make preparation for a suitable income in the days to come, when he is no longer young, and to make preparations for his family should he be no longer with them to comfort and support them. He should plan certain investments or provision that may endure safety for many years, yet will be available when the time arrives which he so wisely anticipated.

This, then, is the sixth cure for a lean purse. Provide in advance for the needs of thy growing age and the protection of thy family.

The Seventh Cure - Increase thy ability to earn

In learning to secure his one definite small desire, he hath trained himself to secure a larger one. This is the process by which wealth is accumulated: first in small sums, then in larger ones as a man learns and becomes more capable. As a man perfecteth himself in his calling even so doth his ability to earn increase.

Thus the seventh and last remedy for a lean purse is to cultivate thy powers, to study and become wiser, to become more skillful, to so act as to respect thyself. Thereby shalt thou acquire confidence in thy self to achieve thy carefully considered desires.

10 Quick Rules to Become Financially Free Fast

What is financial freedom? How to become financially free?

How to attain financial freedom?

How to break free from financial worries?

What are the ways to achieve financial freedom?

What are the steps to reach financial freedom?

These are some of the questions that often get asked by someone who is looking to quit the rat race.

Being in a position to be able to quit the rat race without impacting the standard of living you are used to is a strong reason why you (and in fact most people) would want to become financially free.

Financial freedom, in addition, is also thought to lead the way to a better quality of life, more time at your disposal, ability to choose whether or not to work and a full stop to living in the constant fear of loosing your monthly paycheck.

About paycheck Nassim Nicholas Taleb so rightly said, “The three most harmful addictions are heroin, carbohydrates, and a monthly salary.”

While it is certainly important to become financially free, it is, however, many times more important to become financially free fast.

What's the point in becoming financially free when you become 80 or 90 years old.

Ideally, the goal should be reach financial freedom by the age of 40 to 45.

Here are 10 quick rules not just to become financially free but also to become financially free fast.

Rule 10. Adopt minimalism and cut down needs

From this very moment onward in your life, stop buying anything.

And anything means anything.

If you only want it, you can actually live without it and hence do not need to buy it.

You should actually need it before you buy it.

So buy something only if you really need it.

Also see if you can cut down your needs too.

The lesser needs you have the better placed you are to become financially free fast.

Rule 9. Cut expenses on needs to bare minimum

This is slightly different from the above as it refers to buying what you need but at the lowest cost you are able to get it.

However ensure whatever you buy is usable.

Throwing away something that is not of good enough quality would eventually lead to loosing money.

Rule 8. Protect the accumulated capital

Guard your capital from losses and erosion.

Making less profit is always better than loosing capital in the quest for higher returns.

Diversification can help in this matter greatly.

It is useful to remember that a bird in the hand is worth more than two birds in the bush.

Slow and steady wins the race is as true today as it ever was.

Rule 7. Remain physically and mentally fit

Physical and mental health would allow you to not only cut down unnecessary expenses on doctors and medicines but also the time saved can be used to increase your earnings.

The opportunity cost of physical and mental health can make a huge difference to your net worth over several years time-frame.

In addition, it is always better to enjoy the wealth you accumulate for as long as you can and good health will allow you to do that.

Rule 6. Spend only the returns from your investment

Never spend the money you earned first time.

Invest it to earn some returns and spend only the returns.

For example, if you buy a stock and get some dividend, spend only the dividend and not the invested capital.

You should let the capital grow gradually to give increasingly higher returns.

However, do keep in mind Rule 8 always.

Rule 5. Save part of the returns from your investment

While Rule 6 says spend only the returns, Rule 5 says don't spend all the return, save some.

The retained earnings should be invested to augment the invested capital.

This also ensures the gap between what you earn and what you spend keeps on widening over time.

And hence in case of a situation where your earning from some sources stops, you would continue to be financially free and would never be forced to return to rejoin the rat race.

Rule 4. Become philosophical about money

You should reduce your craving for more and more money and adopt a philosophical outlook about money.

It is true that "the more money you have the less it seems" which means there is no end to how rich any person can become.

The purpose of money is to make sure you can spend it on things you need to.

Money by itself cannot be consumed directly.

Rule 3. Stop comparing with others

Focus only on your needs and never get swayed by how much money others have and what their needs are.

What is a need and want for one person may be different from what is a need and want for another person.

So stop comparing and focus on what your needs are and how much money you need to fulfill those needs.

Rule 2. Live as simple a life as possible

If you live a simple life you would anyway need less money.

No expensive holidays, no costly hotels, no fancy dresses, no swanky cars is just a beginning of how you can start living a simple life.

Remember, however, if you want to splurge and spoil yourself at times (though not too frequently) the money has to come from what you get from Rule 6.

Rule 1. Track where your money comes from and goes out

Maintain detailed records of where money comes from and goes out.

You should know how much money would come to you every month minus your job earnings.

Your monthly expenses, accumulated capital, remaining life (in number of months) and likely interest rate can be easily used to derive whether you are financially free or not.

You should track this number very closely to calculate how many more months you need to suffer before you can quit the rat race, hopefully forever.

Rule 0. Build the seed capital fast and start early

And, last but not the least, there is this hidden rule, Rule 0, that should never be forgotten.

Money begets money so you should focus on building the seed capital first.

You aim would be to build a big corpus gradually and eventually but the starting point is the seed capital.

In addition, time and interest rates are the two biggest friends of any investor as both drive the compounding effect.

Interest rates are driven by market but you can choose to drive the time factor by starting early the game of investing.

That will allow you to play the investing game over a really long-term which will certainly provide you an edge and undoubtedly work to your advantage in the end.

And as you do this never forget Rule 8!

Book Review - Cash Flow Quadrant : Guide to Financial Freedom By Robert Kiyosaki

This book is a highly recommended reading in the area of personal finance. It's a great book that goes deeper into the way the world economy operates and how people can be classified in the 4 quadrants - E, S, B and I.

The four quadrants are based on how the cash flows through them and have been labelled as E, S, B and I where,
E  = employee
S  = small business or self-employed
B  = big business
I  = investor

Unfortunately and sadly, many people don't even realize this during their entire life. This book attempts to teach the wonderful concept of ESBI. A good understanding of this concept can surely lead the way to financial freedom.

Here are some excellent paragraphs from the book that also summarize the purpose and some of the key lessons for its readers.

"This CASHFLOW Quadrant book is important because it is about finding your path in life. As you know, most people are programmed early in life to “Go to school and get a job.” School is about finding a job in the E or S quadrant. It is not about finding your life’s path."

"Are you financially free? If your life has come to a financial fork in  the road, Rich Dad’s CASHFLOW Quadrant was written for you. If you want to take control of what you do today in order to change your financial destiny, this book will help you chart your course."

"This book is written for people who are ready to change quadrants, especially for individuals who are currently in the E and S categories and are contemplating moving to the B or I category. This book is for people who are ready to move beyond job security and begin to achieve financial security. It’s not an easy life path, but the prize at the end of the road, financial freedom, is worth the journey."

"The driving force, however, that wouldn’t allow me to stay on the left side of the Quadrant was what happened to my highly educated but poor dad at the peak of his career." 

"To be successful, you need to learn to overcome your fear of  being rejected and to stop worrying about what other people say and think about you. So many times I’ve met people who hold themselves back simply because of what their friends might  say if they did something different."

"One of the things I told myself over and over was, What you think of me is none of my business. What is most important is what I think about myself."

How Much Money Do You Need Every Month Till Your Death?

Suppose you are X years of age today and also suppose you will live forever. In that case how much money do you need every month till your death at infinity?

A very simple financial formula provides the answer to this important question. Here are the steps that can be followed.

Suppose you want to get M amount every month to live a good life. The M should include both essential and discretionary expenses to take care of all minor and major needs and with an adequate buffer. The key here is that the definition of "good" will depend upon your perspective in life. What is good for you and someone else may vary a lot.

Assume that you will get R% return (on an annual basis), post-tax from your investments. The R% should ideally consider the appropriate tax slab and some effect of inflation. However as explained in Why Claims Of Inflation Being So Important In Financial Planning Are All Bogus? inflation is not really that critical as it is made out to be.

So how much money you need to have as the capital amount C? The amount you need to have to get M assuming R% return can be calculated using the following formula.

C = M / (R% / 12)

Yes, that's it. It's so simple a  formula one would wonder whether it is really right. It actually is. This is a case of "Perpetuity" where if you have C amount with you with return at R% you will receive M amount every month.

Or, alternatively if you have C amount as capital, at R% rate of return you can get an amount of M every month.

Where, M = C * (R% / 12)

And lo and behold, when you die at infinity, the capital C would remain intact. Of course, as many will argue that due to inflation the value of C when you die will be much lesser than  the value of C today.

If you want to be safe from inflation and also want to make sure you are in a position to make any big-ticket and major contingency expenses throughout your life having a buffer would help.

So if you have 2C amount with you and you maintain the same lifestyle pattern, you can live forever very very comfortably. And you will be financially free and a rich man in some sense.

Why Managing Cash Flow Is So Critical? And How To Do It?

Managing cash flow is the primary tool for achieving financial freedom. The day cash flowing in beats the cash flowing out by a good margin is the day you would become financially free.

The path to financial freedom goes through good management of cash flow. Keeping tight control on cash flowing out and investing the surplus to enhance cash flowing in gradually paves the way for capital formation.

Accumulation of adequate amount of capital is needed for cash flowing in without one needing to work. Its like money working for you to earn more money.

That's how the rich keep on getting richer. Hence managing cash flow is so very critical.

The following chart explains and illustrates how to manage cash flow with the aim of eventually achieving financial freedom. It clearly shows the linkage between cash flow and capital formation.