Butterfly Effect

In 1961, when Edward Lorenz (Mathematician and Meteorologist) was working on atmospheric forecasts, he was amazed to find that a minute change from 6 decimals to 3 decimals in the historical data, generated a completely different forecast of the weather. Slight change in the input can cause a large variation in the output. He titled this phenomenon, “Does the Flap of a Butterfly’s Wings in Brazil Set off a Tornado in Texas?”

Before budget, many expected an increase in taxes in some form: either a “Covid Cess” or increase in Income tax or an increase in capital gains tax. However, the Finance Minister surprised with hardly any increase in taxes and taking a higher fiscal deficit target of 6.8% for FY22.

In simple words, one may have a question. ‘Why everyone is praising this budget when there is no tax benefits?”. The answer lies in ‘Butterfly Effect’. No one realized the effect of 1991’s budget on the very same day but it created strong ripples for long term growth. This year’s budget has similar effect which may not be visible today but has huge impact on future.

The intent is clear: the government is looking to spend on capital expenditure to accelerate economic growth. The non-occurrence as per expectation may seem like a marginal change overall, but it has a profound impact in changing the narrative. This is a very pro-investment narrative. The efforts to improve ease of doing business and the incentives provided to businesses have a significant impact on the business confidence in the economy.

The budget improves growth estimates and earnings visibility for many sectors and companies. These companies, sector and themes are likely to see their valuations rerated upwards. Investors, who are patient and have a long-term view will be the ones who gain from this Butterfly Effect.

Dear Patrons,

A story to start with,

The world has seen a swan as symbol of white for centuries. Until in 1697, Dutch sea captain Willem de Vlamingh explored west coast of Australia and during his expedition, he saw a black swan. Since then Black Swans became symbol of unbelievable.

A new term coined as “A Black Swan event” – It is an unthinkable event that massively affects our life. Career and country.”

There are both positive and negative events. Influence of Social media ten years ago and now, Invention of Penicillin, discovery of gold mines, somewhere are positive Black Swan events. Whereas falling of USSR, World Wars and latest one is Covid emergency are negative Black Swan events.

Investment in volatile market has become a daily activity for many investors. Sometimes it goes up and sometimes it goes down. But In general markets move around a stable mean. Our SIPs are ultimately to benefit from the stable mean.

Though we continue to plan for better future. Black Swan events are impossible to predict that destroys our best laid plans. Certain occurrences of events are unknown. We never predicted occurrence events like Covid a year back but it has affected entire human generation today.

How to thrive in Black Swan event?

• Stay out of Debt
• Invest your Savings with continuous eye on it
• Have a generalized standard of living
• Continue points 1,2,3 whether there is any emergency or not.

Dear Patrons,

Does having Rs. 5 crores make you feel rich?

A young enthusiastic young woman thought to have an early retirement. She thought a corpus of Rs. 5 crores would be sufficient for a good retired life. For her, not much is expected by way of inheritance. She has a residential house in which they live in.

She understood that only she has to manage her own earning and investments.

Her salary of Rs.50,000 either goes to monthly living, luxurious life style and EMIs. She has not saved a single paisa till now. She is 24 currently. Let us assume 7% inflation and what her expense will be later in life. (At 7% assumed inflation, Expense to double every 10 years)

At age of 54, her spending would be appx. Rs.4 Lac.

…But story does not end here.

Life expectancy in urban area has gone up. what will be the spending  scenario with same inflation?  (Yes, she is not compromising with her lifestyle)

 Rs.32 Lac per month…. Yes. She will need Rs.32 lacs per month in later years of her life.

That is how compounding of inflation shatters all plans.

So to dream to have Rs.5 Crores as a retirement corpus is sufficient?  Let us examine, how much she actually need at age of 54 to feel rich?

Staggering Rs.12 crores. That is what she should have. Much beyond her plan to have 5 crores.

 Infants, toddlers, kids, teenagers, youth are phase of life. Consider Retirement is phase of life. Take steps calculatedly to take care of uncertain future.

Dear Patrons,

During monsoon, have you heard often that cars and vehicles washed away in gushing flood water? During heavy rains, flood like situation arise. Local water streams and rivers start overflowing and sometimes starts flowing over the shallow parts of the roads. Authorities closes that part of the passage for time being and divert the traffic.

Now Illusion of Attention comes into play here.

We see in news and armature videos that each day cars drive past through it despite visible warning signs and rushing water. The drivers are so focused on their car’s navigation system that they don’t notice what is right in front of them.

Take example of Swissair or Kingfisher airlines of Jet airways, the management was so fixed on expansion that they literally overlooked possible worst market scenarios and eventually they went bankrupt. Similarly in 2007, everyone was so immersed in enjoying upward move of stock market that no one literally checked risks brewing on banks’ books.

In Mutual Funds, investors are very much fixed to the past performance of the schemes that they literally loss the vision for the future. How false would it be to think that a fund having best track record of last 10 years will continue to have the same greatness for next 10 years as well?!? We come across investor saying ‘I have done research on my own’. But is it really a research of past performance and connecting them randomly? Can this be called as research or just number crunching?

Instead, confront yourself with all possible and impossible scenarios. What expected can happen? Pay as much attention to silences as you may get away with noises. Check periphery and not just the center. Something unthinkable can be huge and disastrous. But when you already factor these unthinkable scenarios, their impact can be minimized.

Dear Patrons

‘Consider It Done’

A recently graduated MBA young man goes to an interview of an International firm. During the interview, he is asked that what would be his strategy to boost sales by 30 % while cutting 30 % of the costs. With powerful confidence, he replied ‘Consider it done’. Even tough his heart was trembling on how he would be able to do it.

Just to please the interviewers, He decently exaggerated the possibility of results without realizing actual actions to be put.

The term for such behavior is called ‘Strategic Misrepresentation’

Strategic Misrepresentation is primary power house of sales & marketing departments of large companies. Fairness cream advertisements are strategic Misrepresentation.  An advertisement depicts that having an expensive car makes you powerful person is Strategic Misrepresentation.

How is this related to investment products? Many times investor gets swayed away by obligation under relationship & fancy presentations.

‘Consider it done’ marketing representatives claim false promises to achieve their targets. investor tends to believe it due to their obligation or fancy brand name.

• Does investor need to check benefits & costs of similar investments?
• Should investor grill the sales manager with valid questions?

Misrepresentations will not work when individual information requirement is addressed with right information.

Hello Investor,

In 1966, Frank Blackmore of Transport Research Laboratory in UK designed modern traffic roundabout. Their design was highly accurate to decongest traffic considerably.

However, successfully implemented & operated in UK, It took another 30 years for US & Europe to widely accept & execute roundabouts in their traffic congested roads. In other words, it took 30 years of resistance & unwillingness for them to accept what others have discovered.

‘We are drunk of our own ideas’ which makes acceptance hard to new ideas.

We feel superior for our own ideas not matter how rational and meaningful other ideas are. To overcome, we have to step back & examine quality of our ideas to check whether own ideas in last 10-20 years were truly outstanding? Were we able to build riches from this ideas?

This applies with modern day equity investors. While having invested little time is studying past trends and performance they come up with ideas of their own specifics. However, that turns out to be their individual opinion and which may or may not come true. But with this, they become slaves of their own ill-researched philosophy which is hard to leave behind.

Hopping from Mutual Fund to Equity shares to PMS to alternate fund to commodities to precious metals, Investors think they are optimizing their returns but let me tell you that they are all same asset classes and equally volatile.

We have to learn from the past experience and put it for better use in future. We should remain adaptive to changing environment and act on it much before it is widely accepted.

Hello Investor,

Are we suffering from ‘Neomania’ or have we become ‘Neomaniacs’?

Neomania is a new term coined by well-known author Nicholas Taleb.
It is the mania for all things new and shiny.

When iPhone was launched in 2007, it was certainly a device all wanted to have. However, the craze of having a latest iPhone has become irrational race of show off. Same goes with buying a new, fancy and shiny car. Obsession to be among the first to buy new car take waiting period to months.

Hunger of more feeds and information, choosing get-rich-quick schemes, addiction to social media etc is sign of a ‘Neomaniac’.

Covid in 2020 has made lot of investors turn Neomaniac. Short term volatility has made lot of investors turn to other jazzy and hyped investments like precious metals, Self-help stock trading and crypto currency. Due to additional available time, investors try to fetch information just to get easy returns in short time.

A common man is locked in cage of own belief. The need of the hour is to understand that every asset class has its own performance cycle. There is no short cuts for making money. By hopping different asset classes to imitate others and chase returns, investor may lose lifelong savings.

Don’t be a Neomaniac. Stick to your principles.

It has been said that “Change is constant in life.” It is evident in our lifecycle. Life starts as an infant, to a school going kid, than to a college going teenager, to a family person and lastly to phase of retirement.

All phases comes with a change which we accept as human being.

When it comes to hard earned money, we question the rule of change. One must understand the importance of outperformance and underperformance. Let me explain the simple criteria considering current market situation.

Why Portfolio Reshuffling is important?

• Imagine a situation of index value at 100 before Covid situation.
• Due to Covid, Index falls from 100 to 80 (-20%)
• At the same time, a performing scheme is outperforming index and falls only -15%
• While an underperforming scheme is underperforming index and falls -25%
• In an hypothetical situation, Index recovers from 80 to 100 which is 25% growth.
• As the performing scheme fell less to 85 will become 106.
• And the underperforming scheme fell more to 75 will become 94.

Case here to prove is loss can be recovered by patience but underperformance cannot be recovered.

Mutual fund investors must review and reshuffle portfolios at different time horizons.

Bhagavad Gita: Chapter 2, Verse 2 and 3

श्रीभगवानुवाच |

कुतस्त्वा कश्मलमिदं विषमे समुपस्थितम् |

अनार्यजुष्टमस्वर्ग्यमकीर्तिकरमर्जुन || 2||

क्लैब्यं मा स्म गम: पार्थ नैतत्त्वय्युपपद्यते |

क्षुद्रं हृदयदौर्बल्यं त्यक्त्वोत्तिष्ठ परन्तप || 3||

Translation – “The Supreme Lord said: My dear Arjun, how has this delusion overcome you in this hour of peril? It is not befitting an honorable person. It leads not to the higher abodes, but to disgrace. O Parth, it does not befit you to yield to this unmanliness. Give up such petty weakness of heart and arise, O vanquisher of enemies.”. Lord Shree Krishna makes Arjun uncomfortable about his current state.

We all feel uncomfortable when we are confused because it is not the natural condition of the soul. That feeling of discontentment, if properly channeled, can become a powerful motivation to search for true knowledge. The suitable resolution of doubt helps a person acquire a deeper understanding than before.

Thus, God sometimes deliberately puts a person in turmoil, so that he or she may be forced to search for knowledge to remove the confusion. And when the doubt is finally resolved, that person reaches a higher level of understanding.

All equity investors are currently in this uncomfortable situation. Self-claimed Experts may portray apocalyptic scenario. But no one knew such drastic economic situation due to Corona in advance. All advices, suggesting, expert calls are post event. But primary medicine for all diseases is to make own self brave and confidant. Time heals deepest wounds. Let us not time the crisis but give time to crisis.

For most of us, End of Financial Year is the time for finalizing our books of personal and business accounts. What do we normally target while closing accounts for the Financial Year?

“How to save tax?”

Government gives enough deduction / exemption / rebate to reduce the tax burden by various means. We have covered all major deductions for individual in our February Newsletter on 4th page. It is our duty to remind that we do not forget following things before FY ending.

• LTCG Exemptions – Make sure that you don’t have to pay Long Term Capital Gain tax from Equity investment until ` 1 Lakh of capital gain.
• 80C Exemptions – Don’t forget to avail the deduction of ` 1.5 lakh by investing under section 80C.
• Indexation Eligibility – Any withdrawal from Debt Investment should be indexed as per Indexation value.
• FY 2020-21 Planning – You must start Taxation Planning from beginning of the year.

A Baya Weaver Bird prepares everything in early. It builds the nest before monsoon arrives. Similarly, a smart investor doesn’t wait till end of the Financial Year.