14 Sep 2016

Summary of Kalpen Parekh's Talk on Investing

Kalpen Parekh visited the Google office in May 2016, and gave a talk on investing, with many insights, even for people who know a lot about investing. Here's a summary:

- We all think we are better than average, whether at driving or investing or other things.
- Sometimes just being in the market matters, like 2003 - 2008, when the market went up from 3,000 to 20,000. It didn't matter what you invested in; you made a huge return. In this period, luck matters more than skill.
- The market goes through different phases: bull runs and corrections. The latter, where you lose money, is a good learning experience.
- Forums like this today let you learn the lesson without losing money.
- Debt funds are not risk-free. You can lose capital.
- Fundamental rule: buy cheap. What's cheap? Less than the intrinsic value, measured in P/E. P/E in India ranges from 10 to 25. Near 10 is cheap, near 25 is costly.
- Today, they are around 18, in the middle. Neither cheap nor expensive.
- Everything is cyclical. The markets are cyclical. Asset classes are cyclical.
- Gold, for example, is cyclical. Over 40 years, it has given less return than a savings account. In the last 10 years, it has gone up 4-5 times. In those 10 years, we start believing that gold is the best asset class.
- In the last 20 years, real estate has given 9% return, if you take key markets like Delhi, Bombay and Bangalore. In the last 10 years, real estate has given 20% return.
- Equity has cycles as well. It has given 15% return over 35-40 years. But if you invested at the peak of the market in 1992 (Harshad Mehta), the return till today would have been 8-9%.
- Rule of thumb: If everyone is buying, pause and ask.
- Infosys has been one of the best IT companies. They grew profits at 50-100% every year, and the stock price went up too. From 2000 - 2008, the profits went up by 50% every year, but this time the stock price went nowhere.
- In 2000, Infosys was valued at 100 P/E. That means it will take you 100 years to recover your investment (at the current growth rate).
- P/E is a good rule of thumb. Doesn't work every time, but works over cycles.

- You have to invest to beat inflation.
- "Live long" becomes a curse if you don't have enough money in retirement. Indians don't invest right.
- Starting early is important. You guys are lucky. Warren Buffett started investing at 11, and he regrets he was 11 years too late.
- Return = P (1 + R) ^ T. The most important part of this equation is T, because it's exponential. P is merely multiplicative. Even if you earn a lower R, it's okay if you earn it for a longer T.
- Don't let extra money remain in your account for a single day. The bank is paying you only 4% and lending it to Mallya type people at high interest rates. Instead invest it in the right place. Invest it immediately after you get your salary.
- The biggest mistake I made, and others make, is chasing R. R comes from the markets. That's not in your control. Don't chase what's not in your control. Chase what's in your control — P (how much you save) and T (for how long).
- Instead of a savings account, at least put the money in a liquid fund — pays you 7.5% without much extra risk compared to a savings account. You get the money after one day, rather than instantly.
- If you choose a debt fund that invests in long-term bonds, you earn an additional 0.5% - 1%.
- Mutual funds are practically tax-free after three years.
- The inflation we encounter is 7-11%. Educational inflation is 12-15%.
- If you invest ₹100 in a debt fund that increases to ₹125 after 3 years, and inflation is 6%, of your capital gain of ₹25, ₹19 is lost to inflation, so you pay capital gains on only the remaining ₹6. The rate is also lower at 20%, rather than 30.9%, so you're paying ₹1.2. Whereas the same investment in an FD means that you pay ₹6 as tax.
- Invest in equity only with a decade or longer time horizon.
- Not many people know of arbitrage funds — they pay 6%. They have the taxation of equity, but the safety of debt.
- In developed countries, there's no preferential tax treatment to equity.
- Don't mix insurance and investments.
- Young Indians have more options to spend. Technology makes it harder to save. You click a button and you spend your money. Investing is not as easy. The industry is working on making it easier.

- Less than 0.3% of people in the world have assets of 50 lac or more.
- Some people who can be in the 0.3% over-spend and fall into the 99.7%.
- Money is an emotional game. If you can control your emotions, you will be successful.
- Indian investors' portfolios have historically generally grown slower than inflation on a post-tax basis. A lot of money is in gold and FDs.
-  Be greedy when others are fearful, and fearful when others are greedy. This is behavior opposite to what millions of years of evolution has taught us. Going against your natural wiring is hard.

Two lessons:
- This too shall pass.
- Look what others around you are doing who are not making money, and do the opposite.

- People spend randomly. People who don't earn a lot buy a new mobile every 6 months. Nobody can control your destiny except you.
- Investment is all about delayed gratification.
- It's all about discipline. In all fields, success comes from discipline. Money is no different.
- With financial advisors, as with everything else, there's a power law. Only a few of them are good.
- You are great in your domain (software). It will be behaviourally hard for you be a good investor. Take the help of a professional.
- The benefit of the advice is multiple times that of the cost of the advice.
- Investing is hard: there are thousands of funds, they are not properly defined or packaged, there are lot of mismatches, styles change, disciplines change.
- How do I know who's a good advisor? Can come through references, but you should ask some questions, like How do you invest your money?
- Spend time knowing a good advisor, rather finding a good fund. Returns are transient.
- News is to your mind what sugar is to your body. People who read less news make more returns.

- In seven years, I haven't looked at the stocks page of the Economic Times. I look at page 3. There are good photographs, and life is better that way.

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