Wishing all the Dads – “A Very Happy Father’s Day”
On the occasion of Father’s Day, the title may sound blasphemous. But let me clarify, like many of you, even my father is my hero and I am indebted to him for his priceless guidance, teachings, upbringing and unconditional affection.
Post my MBA, when I started working and getting my paychecks, he tried to indoctrinate me into believing his 4 hallowed cardinal principles of investing which are outlined below. In my role of Investment Advisor, I have interacted with several millennials whose parents also broadly swear by my Dad’s financial principles.
Advice No 1 – Don’t Invest in Stocks; It’s too Risky
Dad: “Don’t invest in stocks; it’s too risky. Individual retail investors cannot make handsome profits in stock markets. None of my friends and relatives have created wealth from stock market. ”
I: “Dad, I understand you lost a lot of your hard-earned money during the Harshad Mehta scam of 1992 but you bought stocks at that time without ever having read the company’s annual report, balance sheet, or sometimes not even knowing what products/ services the company was selling. Frankly, you and your friends treated the stock markets like a gambling den and acted on tips from people who were equally unaware of the fundamentals of the companies and had a very short term approach.
There are several individuals who have made a fortune by investing in stock markets provided they have done their due diligence well before investing in a company. Being a doctor, your core competence lies in medical profession; you should have sought professional advice to invest in stocks.”
Fast forward to 2012 – Some skeletons emerged from my father’s investing closet – He had sold good quality companies like HDFC bank, Colgate, etc long back (which would have been worth crores now) while I was amused to see physical share certificates of some dubious companies which no longer existed or are currently delisted.
Thanks to my education at Jamnalal Bajaj and the right mentorship, I managed to save a sizeable portion of my salary which was invested directly in stocks backed by robust research. The outcome was that at a relatively young age, I had quiet decent savings which gave me the leeway to quit my job, pursue my passion and become an entrepreneur – An Investment Advisor. Since the last couple of years, my father’s stock portfolio has also grown handsomely and he now believes that a stock-specific approach can be highly rewarding.
Advice No 2 – Invest in Fixed Deposits
Dad: “My dearest, you should invest your money in fixed deposits; they give you stable fixed returns.”
I: “ In the current environment, the favourite traditional no-brainer investment option of Bank FDs are yielding a meagre 6.8% which when adjusted for taxes and inflation could probably be yielding nothing! Moderate inflation, huge flow of domestic money into the banking system due to demonetization and the huge flow of foreign money in India’s stock and bond markets will ensure that interest rates in India remain subdued. There are more lucrative options in the fixed returns category – Company fixed deposits, non convertible debentures (NCDs) and Debt Mutual Funds which could yield around 8%+”
Again, while scanning through my Dad’s historical investments, I discovered that he had been mis-sold several endowment plans yielding a pittance 6% & ULIPs which were low on returns.
Since last couple of years, as Bank FD yields lowered, and I informed him of better alternatives, he happily invested in AAA rated companies Hawkins Cookers FD yielding 11.75%, Mahindra NCD yielding 9% with the icing on the cake of achieving some 5% capital gains too in that NCD. His love for Bank FDs has now massively nosedived.
Advice No 3 – Invest in Gold; The Yellow Metal is a Safe Investment
Dad: “Invest in Gold; It’s a safe and growing investment. Your Mother’s Rs. 20 lacs gold is now worth a stupendous Rs. 2 crores.”
I: “ Dad, Gold has historically been a store of value and used by people as reserve currency. Such is the nature of gold that it maintains its value against inflation. Thus, long term returns from gold will reflect the inflation rate of your economy. Over the past twenty years, gold has delivered 12% CAGR, reflecting India’s inflation rate. Mom’s gold worth has grown from Rs. 20 lacs to Rs. 2 crores over 20 years which implies a 20% CAGR, nothing outstanding there! While this is better than FD and protects you against inflation, it cannot be treated as a “growth option”. Next few years, India will have 4% to 6% inflation rate. Thus, it wouldn’t be prudent to assume higher returns from gold. One should not have more than 5% to 10% of ones networth in gold.”
Despite being a woman, I must confess that I am not overly enamoured by jewellery. So, back in 2016 when I was about to get married, I begged my Dad to give me only 10% of the marriage gift in form of gold/ gold jewellery and remaining in cash so that I could deploy it in stock markets! My parents were aghast at my suggestion, they instantly dismissed my idea thanks to our deep-rooted cultural tradition! I realized the harsh truth that playing the youngest and only daughter card doesn’t win all battles with my Dad!!
Advice No 4 – Buy a Home; Property Prices always Appreciate
Dad: “You should try to buy a home as soon as you start earning. Property gives fantastic returns. My first home worth Rs. 20 lacs is now worth a stellar Rs. 2.3 crores.”
I: “Pappa, broadly, the inflationary expectations in real estate are almost dead for a few years! The demonetization, Real Estate Regulatory Act and the huge unsold inventory in all major cities will ensure that property prices may remain stagnant for a few years. Also, with your first home’s market value has appreciated only at 13% CAGR over 20 years! If I buy a house on loan before I can really afford it, just at the start of my career and –
If the house prices don’t rise, I am fighting against compound interest
With huge EMIs, I would have no surplus to invest in anything, let alone stocks
With the burden of non-appreciating asset (property) and huge EMIs, I would have no risk-appetite left to take major career decisions. With a liability of home loan, I don’t think I could have quit a comfortable banking job and taken the risk of becoming an entrepreneur. With the new advances in technology, we millennials no longer enjoy the job security that your generation did.
My excel tells me I am better off to rent a house in my initial career years than to own one
So, I am okay to not have the proverbial “pride of settling down in life” by owning a home!”
Although I disagree with my father on his investing principles, I am grateful to him for having taught me about savings and delayed gratification.
Make Wise Decisions Early in Your Career! Decisions Have a Compounding Impact on Your Wealth! Stock Specific Approach is Highly Rewarding!
PS – CAGR is Compounded Annual Growth Rate
- Don’t shy away from seeking Professional Advice for Your Investments
My Dad’s a Radiologist (doctor) so I blindly follow his advice for medical related stuff but when it comes to money matters, I am cognizant of the fact that despite having passed out from one of the best medical colleges in India, he is not an expert on investments. I have seen so many of my peers who are MBAs in Finance from premier B Schools making extremely sub-optimal decisions when it comes to managing their personal wealth. I would urge the millennials to seek professional help for their finances too, as their core competence may not be in the field of investments.
- Invest in Stocks for Wealth Creation
In India, we have a cultural predilection towards physical assets (gold and real estate) but as highlighted in the first point of the article, direct stock investing over long term backed by strong research can lead to real wealth creation.
Feel free to reach out to us in case you wish to know more about stock investing or financial planning.
SEBI Registered Investment Advisor
GreenEdge Wealth Services