Expense Ratios, Exit Loads and Miscellaneous Stuff

Even though most people may understand this very well, let us define some terms at the outset so that there is no confusion.

Expense Ratio

This is charged by the fund house (AMC) to the scheme (investors money). Investors want this to be the lowest. (Conversely AMCs “may” want these to be the highest)

Entry / Exit Load Type 1

Although there is no financial term like Type 1, this is my own creation for simplicity sake. In this type, the entry and exit load (fees) go to the AMCs or Distributors. This is in addition to the expense ratio above. Obviously investors hate them.

These type of loads have been ELIMINATED in India. This elimination was not without its own share of controversies. More on this later. Continue reading

Mistakes Happen…

Source: Calvin & Hobbes Comic Strip

Source: Calvin & Hobbes Comic Strip

The most fascinating thing about the equity market is our ability to make mistakes, lose money, feel the sting of that loss & learn where we went wrong. Mistakes are an inevitable part of investing. They are a motivation to learn & also the best source of knowledge about ourself. The author Kathryn Schulz writes in her interesting book, Being Wrong – How does it feel when we are being wrong? It feels like we are being right up until that moment when we realize that we have made a mistake. With such a powerful mental block for identifying mistakes how can we protect ourselves from such errors of judgement?
Be Aware
The first & the most important thing we must do to protect ourselves from errors is to accept that we are prone to making errors. There is an ocean of research on behavioural finance which can equip us into understanding where & how we can go wrong. Once the realization of being prone to errors sets in, we can move on to the next step.
Be Careful & Fastidious
When we research new investing ideas, we can develop a process which will allow us to follow some basic steps in researching businesses & industries. We can use simple starting points like Annual Reports & then back it up by using scuttlebutt or doing our own investigative work on the business. We can force ourselves to use tools like excel with great care by checking & re-checking our assumptions.
Learn & Learn & Learn
Investing is all about constant learning. We can develop this habit by exposing ourselves to as many learning resources as possible. This will enable us to be informed & help us build opinions about the businesses we are studying. Like Charlie Munger says – “Work, work, work & hope to have a few insights”.
Use Portfolio theory without the mumbo jumbo
Modern portfolio theory is an interesting part of financial literature which can instantly help you to sleep if you try to read it from a finance text book. Instead we can learn to use the same principles by actually investing our money & tracking our portfolio of investments. Over a period of time, we will have a decent enough data about our own ability to take risks, track the number of stocks in our portfolio & know how much loss we can tolerate. We will also learn intuitively how much of our money we would want to invest in a single stock & learn how circumstances in different industries affect the stocks in our portfolio. We can avoid getting bored by the finance theory & yet use this simple principle to manage our portfolio better.
Use filters
Investment analysts, fund managers, etc are a good source for stock ideas. But instead of using them as a source we can use them as a filter to see how our assumptions stack up against these professional investor’s assumptions. We can be extremely positive about a particular company, but the entire investing community might be against that idea. We can use such an opportunity to test our assumptions & work our way backwards to our errors. This can also present a unique contrarian investing opportunity if we are right & the entire investing community is wrong. (it is possible).
Automate & Restrain
The entire process of habit formation relies around automation. How can we develop a habit to consistently avoid making the same mistakes? We can use tools like checklists which can have actions that we need to take before we invest into any stock. We can tweak the checklist as we become more experienced with our ability to understand our own behaviour. Checklists prove to be very effective in controlling & restraining our excitement when we come across any new investment ideas. It provides a good shield against our weak psychological defences & can protect us from our own mistakes.
Read the extensively researched & very interesting book by Charles Duhigg called The Power of Habit to learn more about how habits are formed & how they drive us.
To understand the importance of checklists, read the brilliantly written book called The Checklist Manifesto by Dr. Atul Gawande.
Mistakes happen & despite following these steps we will find new ways to amaze ourselves by making new errors. They will only make us wiser if we learn from them rather than just accepting we were wrong & ignoring them as a bad experience.
Watch this interesting TED talk by Kathryn Schulz on Being Wrong.

by Raunak Onkar

Is stock investing destroying the feeling of ownership?

Buying & Selling stocks has become very easy if you have the right pieces of paper attesting who you are & where you live. You can buy a stock in the morning & sell it off the same day without feeling anything about having bought or having sold it. It would be a long forgotten transaction a week from then. With trading stocks so easily, is it possible that it has eroded our sense of entitlement or ownership in these stocks?

When we buy a stock in any company, it is not just a piece of paper or bits on the screen. It is a part ownership in the business whose market value is represented by that one share. It also represents something else. It represents a right to vote & a right to exercise our opinion to the extent of our ownership. So in short, it doesn’t matter if you own a single share or if you own a lac shares. You have the same right to be represented as any other shareholder of that business.

The sense of ownership in any business can come through many ways. One is to actually start the business. When you start a business, there is an automatic responsibility to make the business a success. You find ways to make sure that the business does what it has set out to do. You hire more people & bring them into your vision to expand the scope of your small idea. Eventually the idea either grows or perishes. But at least you have that sense of ownership & ‘control’ over the outcome of that business.

Investing for Beginners & Finding our own Investing Style

When a lot of people first start to read & learn about investing they invariably end up reading about Warren Buffett in their first few weeks of reading. From there onwards begins this fairy tale dream ride into the idea that someday they can also invest like Warren Buffett. The next automatic step that people tend to take is to read what any other fund manager worth their salt has to say about Warren Buffett. To remind you, at this point there is not a single rupee invested by this person, ever in his life (apart from may be the automated Fixed Deposit certificates & PPF investments).

After having read & being enamoured with Warren B’s performance & his dazzlingly simple explanations of how he analyses businesses, people start with the notion that investing is an easy affair. By this time, the activity of really sitting through an entire market cycle not being able to find great investment opportunities or even spending huge amounts of time & effort in researching industries & their managers has never happened to them.

The problem with a beginner learning to invest is that we tend to immediately get sucked into the investing blog world. In this world, a lot of people are strikingly original in researching their own ideas while a lot are “me too” people who are constantly following what other smart fund managers are doing. Not enough effort is spent to understand why investing is important & what are their unique needs to invest. People rarely do any cash flow analysis of their own life & are massively unaware of their own patterns of spending & making money. People automatically assume (especially salaried people) that they will somehow have enough money by the end of the year to put into some tax saving mutual fund & not to forget the mammoth 8% “tax-free” compounder of public savings – The Public Provident Fund.

Any person who wishes to take charge of their investments & wants to compound their savings at a rate of at least 5% more than the fixed deposit rate has no other legal option but to invest in Stocks.

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Investing with Overconfidence

Over confidence is a peculiar feature in humans which has sometimes made us do phenomenal things and also allowed us to make colossal mistakes. It is true that in order to do something totally remarkable & unique we need to have a high level of overconfidence in our ability to achieve. This overconfidence comes from our optimism to do something. Overconfidence in this context is very useful which tends to motivate us & keep pushing till we succeed. It is like Thomas Edison whose optimism to tinker with the light bulb & his overconfidence in his abilities to actually make it, led to a remarkable invention.


The dark side of overconfidence comes into picture when our overconfidence hurts us by blinding us to very obvious errors in judgements. It is like watching a Superman cartoon & going on the rooftop to see if we can fly too. Generally the dark side of overconfidence becomes obvious only in hindsight. But we need not be suckers to overconfidence all the time. Becoming aware of where we tend to be overconfident can protect us from making a rash decision.


In this phenomenal book Mastermind – How to think like Sherlock Holmes written by Maria Konnikova she uses the great fictional detective’s ability to solve tough criminal cases to explain how we can train our brain to become as sharp as Sherlock’s. In one chapter she mentions how even someone as sharp & mindful like Sherlock Holmes can fall prey to the dark side of Overconfidence. She lists four major instances where overconfidence has been most prevalent.

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