Simplicity is the key

I wrote the following as part of my half yearly letter to subscribers. Hope you find it useful

When I started investing, I thought there is some magic formulae to grow your capital. After 10 years of search, I realized that the answer was staring me in the face.

The key to wealth creation was very simple – Save aggressively and invest patiently

I had always done the first,  but was doing it wrong with the second part of the equation. Like most young, hot blooded guys, my focus was to make the highest possible return in the shortest time possible. After a decade of doing that, I realized that the stress and effort was not worth it.

In addition to the lost sleep, I was reluctant to invest most of my capital to my own stock selection. Most likely, it must have been the risk of my approach which made me cautious

Key decisions

Around the start the advisory I made a few key decisions based on my past experience

• All of my Liquid networth in India (excluding my real estate and some smaller stuff like LIC) would go into stocks (my own picks)
• I would invest my family’s capital in the same manner
• I will not shoot for the moon and my focus would be on preservation of capital above everything else

These decisions led to the following actions

• No investments in derivatives, margin trading, IPO or any high risk situation
• No reaching for yield in debt. Keep most of my capital in stocks and the rest in FD
• No short term trading

In other words, the sleep test. Can I sleep well in the night with my current portfolio ?

The decision to  focus all my investments in one bucket – A diversified portfolio of stocks lead to a simpler portfolio, lower risk and a high allocation. There is no point making 40% CAGR if you allocate only 10% of your networth to it. A 20% CAGR with 80% allocation will lead to better results is a better option

I carried the same approach into the advisory as we have always believed in eating our cooking . Outside of a few experiments which if successful, make it to the recommended list, all my investments in India are the same as the Model portfolio. It has kept my life simple and the absolute returns are good enough for me

I am now thinking on how I can simplify my financial life further. A few thoughts

• Identify a few stocks which have the benefit of a long term trend. Once you are invested, be patient, till the trend is valid
• Eliminate all debt including contingent ones. An example of contingent debt is money for your kid’s education or for your own healthcare in the long run
• Have a proper will in place so that your family doesn’t suffer if you get hit by a bus (hopefully never)
• When in doubt, reduce risk. Investing is not a T20 match. You can always bat the next day