Path to Financial Independence by Ranjit Kulkarni

CONTENT
INTRODUCTION....................................................................13
P A R T O N E :
WHAT EVERY INDIVIDUAL INVESTOR
NEEDS TO KNOW ....................................................... 17
WHAT IS FINANCIAL INDEPENDENCE AND
WHAT FACTORS LEAD TO IT .......................................19
WHY COMPOUNDING IS THE BEST KEPT SECRET OF
INVESTING SUCCESS .....................................................22
SIMPLE STEPS TO FOLLOW FOR
FINANCIAL INDEPENDENCE .........................................25
WHY IS AGE-BASED ASSET ALLOCATION MOSTLY
WRONG .............................................................................30
HOW TO USE DIVERSIFICATION TO REDUCE
3 TYPES OF RISK ..............................................................33
WHAT ARE THE FINANCIAL AND PSYCHOLOGICAL
BENEFITS OF REBALANCING ........................................36

HOW TO DECIDE WHICH TYPE OF INVESTOR
YOU SHOULD BE ............................................................39
WHAT TO AND WHAT NOT TO LOOK FOR WHILE
SELECTING MUTUAL FUNDS ......................................42
IS DIRECT STOCK INVESTING WORTH IT OR SHOULD
MUTUAL FUNDS DO .....................................................46
IS YOUR HOUSE AN ASSET, A LIABILITY OR
AN INVESTMENT .............................................................49
HOW TO USE LOANS AND PREPAYMENT TO
YOUR ADVANTAGE........................................................53
WHY HAVING FIXED INCOME INVESTMENTS
IS IMPORTANT .................................................................57
IS GOLD REALLY AN INVESTMENT ...................................61
WHY INSURANCE IS NOT INVESTMENT .........................64
HOW SHOULD I SELECT WHICH
STOCKS TO INVEST IN ..................................................67
SHOULD I SELECT STOCKS BASED ON PAST
PERFORMANCE OR HOPES OF THE FUTURE............70
THE DEBATE ON MARKET EFFICIENCY:
DOES IT MAKE A DIFFERENCE TO
INDIVIDUAL INVESTORS ..............................................73
WHY LOOKING AT THE PRICE OF EVERYTHING
MAKES ONE UNDERSTAND THE VALUE OF
NOTHING..........................................................................77
P A R T 1 : KEY TAKEAWAYS..............................................81

P A R T T W O :
WHAT EVERY INVESTOR MUST REMEMBER
ABOUT TEMPERAMENT AND BEHAVIOUR .......... 85
WHY TEMPERAMENT AND BEHAVIOUR
MAKE A DIFFERENCE......................................................87
HOW TO HANDLE VOLATILITY BY CREATING
A MIND-SET.......................................................................89
ARE YOU LOSS AVERSE OR RISK AVERSE .......................91
WHY THE INVESTOR’S WORST ENEMY IS HIMSELF .....95
ARE SUNK COSTS AFFECTING YOUR INVESTING
BEHAVIOR ........................................................................99
Mj ds vkxs thr gS - WHY LONG TERM INVESTORS SHOULD
NOT FEAR MARKET CRASHES.................................... 102
WHAT RAHUL DRAVID CAN TEACH US ABOUT
INVESTING......................................................................106
WHY IT IS IMPORTANT TO TOLERATE BOREDOM
IN ‘RANGE-BOUND’ MARKETS....................................110
BREAKING NEWS: PRAY DURING MARKET FALLS! .......112
THE SIX HATS OF AN INVESTOR ......................................115
ARE YOU SUFFERING FROM ATTENTION
SURPLUS DISORDER .....................................................118
WHAT TO DO WHEN UNCERTAINTY IS CERTAIN
AND NOBODY KNOWS NOTHING ............................121
OF BARBERS AND BROKERS: WHY IT IS
IMPORTANT TO KNOW WHAT YOU WANT............124

WHY NO NEWS CAN OFTEN BE GOOD NEWS ............. 128
WHAT’S IN A NAME – WHY NAMES ARE
IRRELEVANT IN INVESTING .......................................131
WHAT DO ‘HORN OK PLEASE’ AND ‘MUTUAL
FUNDS ARE SUBJECT TO MARKET RISKS’
HAVE IN COMMON ...................................................... 135
NONSENSE GENERATOR: HOW TO BECOME
A MARKET EXPERT ........................................................138
LIQUID OXYGEN SYNDROME: A MODERN DAY
ILLNESS OF A HIGH PAYING JOB AND
A HIGHER EMI................................................................141
HE WHO PAYS THE PIPER CALLS THE TUNE:
THE IMPORTANCE OF STRUCTURE ..........................144
THE DILBERT ONE PAGE SUMMARY: ALL THAT
ONE REALLY NEEDS TO KNOW ..................................148
BEYOND OPINIONS: THE IMPORTANCE OF
DECIDING TO DECIDE .................................................151
ENTRY LOAD AND BUBBLY SODA: LOSING
THE FOREST FOR THE TREES......................................154
OF LIFE AND DEBT: SISYPHUS AND THE GREEK
TRAGEDY.........................................................................157
RUNNING TO STAY AT THE SAME PLACE:
TUM KISLIYE BHAAGTA HAI BHAI ........................... 161
BABA BENGALI AND NIGERIAN SCAMSTERS:
HOW BECOMING A FALSE POSITIVE HELPED!........164
FLIGHTLESS BIRDS, CHRONICLES OF DECCAN
AND OTHER FLIGHTS OF FANCY ............................. 168

THE BRAZENNESS OF BEING NSEL, AND
THE DOG THAT DIDN’T BARK ...................................172
RETAIL INVESTOR ANNOUNCES RETIREMENT
FROM STOCK MARKETS...............................................176
P A R T T H R E E :
COFFEE WITH JIGNESH BHAI AND SWAMI ......... 181
REFLECTIONS, HUMOUR AND A SLICE OF LIFE ...........183
THE GOOD, THE BAD AND THE UGLY:
OBSERVATIONS IN A WORLD OF DIVERGENT
AND OPPORTUNISTIC OPINIONS ..............................185
5 STAR RATED ADVICE: DECIPHERING
THE S&P US DOWNGRADE.........................................189
WHAT DOES THE US ECONOMY SUFFER FROM?
DIABETES OR HEART DISEASE................................... 193
A MATTER OF FAITH: THE ROLE OF REASON
AND BELIEF IN INVESTING .........................................197
NOT AN ORDINARY JOINT FAMILY: THE EUROPEAN
UNION AND THE CRUX OF ITS PROBLEMS.............200
A GAMBLER’S INSTINCT: THE KNACK FOR
TAKING CALCULATED RISKS AND
KNOWING WHEN TO TAKE THEM ............................204
ARE YOU WAITING FOR GODOT WHEN IT
COMES TO INVESTING................................................ 208
WHY BULLS, BEARS, PIGS AND THE BIG FISH
DON’T MATTER, AND COWS AND GOATS DO ..... 212

HAVE YOU DONE THE ANNUAL PERFORMANCE
APPRAISAL....................................................................... 216
SAVE ME SUPERMAN: WHY THE BAILOUT BUSINESS
DOESN’T MAKE SENSE .................................................220
TRAGEDY IN CLOSE-UP, COMEDY IN LONG-SHOT:
A MATTER OF PERSPECTIVE .......................................223
OF QUOTES AND LEARNING’S, FROM INVESTORS
AND HINDI MOVIES .....................................................226
CYPRUS, CHEAT FUNDS AND THE COST OF
IGNORANCE ...................................................................229
AVERAGE CHOICES FOR THE AVERAGE GUY ...............232
OF NOBEL PRIZES AND IGNOBLE DISGUISES ................236
OF SKILL, LUCK AND THE ABSOLUTE RELATIVE
PARADOX ........................................................................239
t+ksj dk >Vdk---/khjs ls yxs............................................................. 246
AN OPINION ON EVERYTHING, A COUNTRY OF
EXPERTS ...........................................................................250
A PLAN FOR EXPECTED SURPRISES ..................................255
A CASE FOR BOREDOM ......................................................259
BUSINESS OR PROFESSION, CUSTOMER OR
CLIENT: THE FAINT LINE OF TRUST .........................263
P A R T F O U R :
WHAT EVERY INVESTOR CAN LEARN FROM
INVESTING BOOKS AND GURUS ........................... 267
LEARNING FROM THE GURUS ......................................... 269

BOOK: THE INTELLIGENT INVESTOR............................. 271
BOOK: BENJAMIN GRAHAM, BUILDING
A PROFESSION................................................................275
BOOK: MARGIN OF SAFETY ...............................................279
BOOK: COMMON STOCKS AND UNCOMMON
PROFITS ...........................................................................283
BOOK: THE MILLIONAIRE NEXT DOOR .........................287
BOOK: THE BOGLEHEADS’ GUIDE TO INVESTING ......292
BOOK: THE LAZY PERSON’S GUIDE..................................297
BOOK: THE COFFEEHOUSE INVESTOR ...........................299
BOOK: THE DILBERT ONE PAGE SUMMARY ..................301
GURU: WALTER SCHLOSS, TRULY
CONSERVATIVE INVESTING ...................................... 304
GURU: TIMELESS WISDOM FROM
BENJAMIN GRAHAM .....................................................308
GURU: MORE EXCERPTS FROM
GRAHAM’S WRITINGS ..................................................312
GURU: FAMOUS QUOTES BY PETER LYNCH .................316
GURU: FAMOUS WARREN BUFFETT QUOTES ..............319
IN CONCLUSION .................................................................322
GLOSSARY OF TERMS .........................................................325

P A R T O N E
WHAT
EVERY
INDIVIDUAL
INVESTOR
NEEDS TO KNOW

WHAT IS FINANCIAL
INDEPENDENCE AND
WHAT FACTORS LEAD TO IT
So what is financial independence and why is it
important?
Most people are dependent on their active sources of
income for most of their lives. Active income essentially means
doing something to earn income to support various expenses
in life. In most cases, that means exchanging your time and
skills for money – which then determines your expenditure
and savings.
Most people find themselves in this rut for most of their
lives. And while their incomes might increase over time – either
fast or slow based on individual circumstances – somehow they
never find themselves in a position where they can leave their
main source of livelihood/active income.
Financial independence is essentially the quest towards
removing that dependence on active sources of income, and

20 :: PATH TO FINANCIAL INDEPENDENCE
hence, being able to support your expenses and lifestyle with
income generated from financial assets.
What are the factors that hinder financial independence?
Firstly, Savings is the single most important factor in
achieving financial independence. Financially, you are not what
you earn but you are what you save out of what you earn.
Saving = Earning minus Spending
Most people measure themselves by their Earnings – and
unfortunately forgetting that it is the saving that matters – for
long term financial security.
Secondly, Inflation is the second biggest hindrance.
Money loses value over time – the reason being inflation. The
slow poison or indirect tax – whatever you may call it – inflation
is the phenomenon of increasing prices leading to the creeping
depreciation in the money earned and saved.
Even if they may be saving, most people have no clear
sense of the impact that inflation has on their savings as our
brains are simply incapable of quantifying long term effects of
inflation unless we get there.
Thirdly, Education is the third biggest hindrance. While
one may appreciate the value of savings and the need to fight
inflation, most people don’t have any idea on what to do to put
their savings to work. Formal financial education is not included
in any of our educational courses – even management and
accountancy courses don’t have them, forget about other
professional or basic degree courses. I have been unable to find
the reason for it – but our education system is focused on

PATH TO FINANCIAL INDEPENDENCE :: 21
providing skills for earning, but not on imparting skills on how
to financially manage the earning.
Finally, Time and our ability to gauge the impact of time
is the last hindrance. The effect that the first three factors above
have over long periods of time is astounding any which way you
see it. So if you lack in savings, have no ability to fight inflation
and have no financial education, and you let these three combine
over 25 years, you will find yourself in a reasonably miserable
financial condition – without quite realising it – perhaps till
you get there.
And if you actually have the three factors working in your
favour – adequate savings, the ability to beat inflation and the
education on how to manage your earnings – and let these
combine over 25 years, I can assure you that you will be surprised
by the extent of positive results. It is an almost sure shot way of
achieving financial independence.
That brings me to the magical effects of compounding
and its critical role in financial independence.

WHY COMPOUNDING IS THE
BEST KEPT SECRET OF
INVESTING SUCCESS
There is a stark similarity between what I reckon to be
the driver of success in investing as well as superlative
achievement – the single magic phenomenon of compounding.
Everyone knows that Einstein called compound interest
the eighth wonder of the world.
There is also the story of the poor farmer who robbed
the rich king in less than three months, when his request for
a seemingly small gift of food grains starting with a single
grain on day 1, and just doubling the number of grains every
day was granted. So the farmer requested that the king add 1
grain today to the first square, 2 grains tomorrow to the next
square, 4 grains on the day after and so on, and thus
continuing that process to so that he fills all the 64 squares
of the chess board. The rich king, irritated by the apparent
frivolity of the gift, started the task only to realize by the time

he had reached the 32nd
square that the task was enormous.
That was because for the 32nd
square, he had to find 2*32
(2
to the power 32) grains which is ~4.2 Billion grains and
that number would double on the 33rd
square.
Eventually the king gave up on the possibility of trying
to fill on the 64 squares of the chess board, realizing he did
not have so many grains.
That is an example of the power of compounding, and
how our brain is incapable of imagining its impact.
Most people are taken by surprise when they are told
that 99.5% of the current net worth of the world’s richest man
Warren Buffett has been earned after the age of 50.
For compound interest to work, one needs to give it
sufficient runway, which means start early and start with whatever
is possible. Starting saving and starting it early are both
important. Secondly, for compounding to work, one needs a
good rate of return over long period of time. This is not possible,
unless one is wired with the right discipline and temperament
to go through inevitable ups and downs of the economy and
markets, and keep at it. And finally, the real effects of saving,
that start looking like investing genius - sometimes simply due
to the mathematical magic of compounding – will start showing
only when one keeps doing it for a long period of time.
So the key takeaway is that there are three drivers:
Start Saving Early, Increase your rates of return, and Keep
at it for long periods of time.

The sad reality is very few people have planned well enough
to meet all the three drivers perfectly. That is, perhaps, the reason
why we have so few super investors.
So what are the steps one needs to follow to achieve this
effect of compounding over long periods of time to achieve
financial independence?

SIMPLE STEPS
TO FOLLOW FOR
FINANCIAL INDEPENDENCE
Alot of individual investors are so interested in getting
answers to questions like which stocks to buy, at what price and
when to sell them that they do not realize that these are the
least important questions when it comes to building long term
wealth.
Perhaps the single most important decision that influences
long term returns has got to do with portfolio policy as it relates
to allocation ratio of different asset types.
That is – to put it simply - how much of my income after
expenses - i.e. savings - do I put in various types of assets across
stocks, fixed income, real estate, gold and cash? This is broadly
referred to as portfolio asset allocation in financial parlance -
and is the single most important decision that impacts long
term returns.

So why does one need to invest in so many assets? Well
the reason is simple – to get different rates of return at different
points of time – so that, as a whole, you get a decent rate of
return consistently.
How is that achieved - one may ask? Well, that has a
simple logic due to the nature of the assets. Fixed income (or
fixed deposits as most people know them) is essentially loans to
someone – a bank, a company or anyone else – with a guarantee
to return it with some interest. So it is more or less assured
return with little return. Simply because of the logic that whoever
is taking a loan from you has probably found some avenue to
invest it somewhere to get a better return – else why would he
take a loan?
That brings us to the second category of assets. Equity or
share in a company – which is essentially giving capital to
someone who has the enterprise to give you returns. Obviously
there is possibility of capital loss, so the expectation of return is
higher – else why would someone invest capital in a risky
proposition?
In between these two categories is real estate. This is sort
of an appreciating asset that also gives some return in the form
of rent for usage. Generally speaking with lesser risk than equity
but with higher return than fixed deposits – primarily because
the cost of constructing a new one increases with inflation. Not
an exact guarantee – but more or less.
And then finally, there is gold, which is sort of a dead
asset which neither guarantees any appreciation, nor provides
any return, but acts as a currency due to its short supply. Due to

historical reasons, it is a store of value – not necessarily a great
one to beat inflation – but an asset nevertheless.
So those are the four primary categories of assets which –
as a whole – promise appreciation in their value over time.
Everything else reduces in value and is either a clear cut expense
or an expense in the guise of an asset – it will not appreciate in
value. That includes cars, jewellery, art, electronics, clothes, food
and everything else.
Hence, for an investor to achieve the compounding
required for financial independence, it is essential to build a
portfolio of these four core assets – fixed income, equity, real
estate and gold – and find a way of beating inflation together.
That brings us to portfolio strategy and the steps.
For simplifying portfolio strategy, all the opinions and
advice can be essentially reduced to a set of few simple steps
that can be followed by an average individual investor.
1. DECIDEYOUR ASSET ALLOCATION BASED ON YOUR
LIFE CIRCUMSTANCES:
For an individual who does not intend to do investments
full time (i.e. has a job or business for his regular income), an
allocation of up to 60% in equity, 10% in gold and the remaining
30% in cash and fixed income might be the optimal allocation.
It may not give best returns, but is likely to be something if
followed over long term.

2. SELECTYOUR CORE AND PERIPHERAL ASSETSWITHIN
THE ALLOCATION:
For most individual investors, index funds or a collection
of actively managed equity funds are the best vehicles for equity
participation.
3. REVIEW ONCE A YEAR, AND REBALANCE WHEN
ALLOCATION RATIOS GO OUT OF WHACK:
That is, if equities have grown and now account for 70%
of assets, shift 10% into others by selling; similarly if cash/fixed
income or gold value has increased, shift proportionately into
equity.
4. SET UP A SYSTEM FOR THIS:
Avoid doing this manually, both contributions and
rebalancing, so that you do not have to take decisions frequently.
5. KEEP INCREASING ABSOLUTE AMOUNTS OR RELATIVE
ASSET ALLOCATION:
As your income levels increase or decrease, life
circumstances change or ability to take risk alters; make changes
to absolute amounts invested as well as relative asset allocation
ratios. Do not base them on market levels or projected market
direction.
This can serve as a framework for deducing a simple
investment portfolio strategy for most individual investors. Once

this is set up, the investor is likely to realize how unimportant the
question of which stock to buy and when to sell really is.
So that brings us to the question of how to implement
these steps – starting with the first decision of deciding your
core long term asset allocation.

P A R T 1
KEY TAKEAWAYS
1. Compounding the best kept secret in Investing. What
it means is start saving early and give your savings a
long time to compound.
2. In allocating your savings, your primary
consideration should be to beat inflation and
maintain purchasing power. Hence investing in
growth assets like equity is very important for the
long term.
3. Individual investors must decide an asset allocation
plan for themselves. I.e. how much percentage of
their savings must go into equity, fixed deposits or
debt funds, property and gold and stick to it.
4. Once a year, investors must rebalance their portfolio,

so that the percentages decided are maintained so as
to avoid unexpected risk to the portfolio.
5. This plan will not necessarily give best returns but it
will ensure that it can be followed, as temperament
is the most important aspect of long term investing
success
6. For the equity component of the portfolio, most
individual investors should rely on mutual funds
and refrain from direct stock investing
7. If an investor chooses to invest directly in stocks,
what kind of stocks to buy depends on whether the
investor chooses to be a defensive or an enterprising
investor
8. Defensive investors must only buy large established
companies using the projection method, while
enterprising investors may choose to buy smaller
companies using the protection method
9. It is important for investors to have fixed income in
their portfolio – both for steady returns and for
rebalancing from time to time.
10. Investors must remember that their house is not
investment. It may be an asset based on the price
you purchase at, the loan component and growth.
If not bought correctly, a house can be a liability.

11. Gold is not an investment. It is a store of value which
is useful only in bad economic conditions. It is useful
to have only as a hedge and must not exceed 10% of
a portfolio in general.
12. Insurance is not investment. Insurance is a need for
all investors to protect their dependent families from
unexpected loss of income, so that there is no loss
in lifestyle. Investors do not need anything other than
simple term insurance if they can follow discipline
for their investments.

P A R T T W O
WHAT EVERY
INVESTOR MUST
REMEMBER
ABOUT
TEMPERAMENT
AND BEHAVIOUR

WHY TEMPERAMENT
AND BEHAVIOUR
MAKE A DIFFERENCE
The first part of this book detailed out the steps required
for an investor to reach his or her goal of financial independence.
The steps were detailed out with insights and views on various
aspects of asset allocation, diversification and holding various
types of assets in a portfolio.
If investing for financial independence was so
straightforward, why is it that so few investors are able to
successfully achieve it? It is often said that markets give returns,
but investors don’t get them. Why does that happen?
The reason for that comes down to the investor’s own
temperament and behaviour.
The second part of the book is a collection of articles on
investor temperament and how the various psychological aspects
of the vagaries of markets and economy affects investor

behaviour, and eventually impacts returns.
As this is an area which is best managed by the investor
himself, this section is not in the form of step by step guide.
Rather it is a set of articles that contains reflections and insights
on the various aspects of investor temperament, reading which
investors can deduce their own inferences. This also contains
articles that are observations on actual events that have happened
over the course of the past few years and have temporarily
impacted Indian markets. These are meant to demonstrate the
value of a balanced temperament in investing.

HOW TO HANDLE VOLATILITY
BY CREATING A MIND-SET
If the fundamentals of investing were so easy, why is it
that one finds so few successful individual investors? The reason
is clearly temperament and behaviour. For an individual investor
whose goal is to achieve financial independence, the toughest
thing to deal with when it comes to achieving high rates of
return in equity is volatility. And by volatility - though it means
fluctuations on both sides, what is tough to deal with is basically
crashing stock prices.
Financial theories have often equated risk to volatility -
which may have some sense when you have a need to regularly
evaluate the value of your portfolio, but is perhaps otherwise
meaningless for an individual investor.
The all-encompassing mind-set of an individual investor
has to be that of preparation for crashes. While investing in the
stock markets, be it through mutual funds or directly, the
dominant mind-set needs to be that of being prepared for at

least a 30% cut at any point in time. That mind-set prepares you
better to deal with it when it comes.
The advantage of such a mind-set is to ensure some degree
of rational thinking when the crash happens, even though there
may be butterflies in the stomach. Inevitably that happens.
In such a scenario, I have found “the Ben Graham
corollary of thinking of the stock market as an emotional guy
called Mr Market whose moods keep fluctuating” to be most
valuable. This moody guy comes up every day and offers you a
price for your businesses. You are free to buy from him, or sell
to him at that price whenever you want; and best of all, you are
free to ignore him if you choose to. He will still come back
tomorrow.
Getting these two things into your mind-set - that of
expecting crashes, and thinking of stock markets as an emotional
guy called Mr Market - are the basic starting points in your
battle against volatility.
Let’s say you manage to do that - the toughest task of all.
After that, deciding what to do when stock markets crash
becomes easier. And that depends on largely whether you have
a plan on why you are in the markets in the first place.
If you have, then you are likely to do whatever makes
sense according to that plan. If you do not, then this crash
could be a good opportunity to make such a plan.
In both cases, you are likely to be in a better position to
then decide whether to buy from Mr Market, to sell to him or
to simply ignore him.

ARE YOU LOSS AVERSE OR
RISK AVERSE
Risk (or uncertainty) in equities is often measured by
the degree of volatility. While this is a measure that may have
some utility for portfolio management (especially if one has a
need to exit positions in case of price drops), for the individual
investor, risk in investing is best measured as the probability of
“It would appear, Hopkins, that your gut feel was only indigestion”

permanent loss of capital.
That is because, it is not risk or uncertainty that investors
really fear, but losses (notional or permanent) as measured by
decrease in capital value that they are afraid of. Any volatility in
market prices that does not result in notional losses does not
affect the investor emotionally precisely because of this tenet.
This is demonstrated aptly by the concept of ‘Loss
Aversion’ in behavioural finance - the field of study that analyses
the impact of emotions on investing behaviour.
The key tenet is that human reactions to the probability
of profits and losses are different. We become conservative when
faced with profit chances, and take undue risks when faced
with prospects of loss.
Consider this scenario - where you have Rs.10,000/- with
you, and have to make one of the two choices: (a) Choose a
guaranteed gain of Rs.5000/- OR (b) Choose to toss a coin - if
its heads, you gain Rs.10,000/- and if its tails, you gain nothing.
Which option will you choose?
Now Consider another scenario - where you have
Rs.20,000/- with you, and have to make one of the two choices:
(a) Choose a guaranteed loss of Rs.5000/- OR (b) Choose to
toss a coin - if its heads, you lose Rs.10,000/-, and if its tails,
you lose nothing. Which option will you choose?
It is likely for majority of people to choose option (a) in
the first scenario, and option (b) in the second scenario.
Why is it that in the first scenario, we are not willing to
take a chance on more profit, even though we lose nothing,

while in the second scenario, we are willing to take a chance to
reduce loss, even though we may lose more?
That is because, in the first scenario, we have guaranteed
profit, so the pleasure we get out of more profit is high, but not
as high as the pain we will suffer in case that profit goes away,
and we are not fine with the prospect of remaining at status
quo.
Whereas in the second scenario, we are faced with sure
losses, but we are willing to take the chance, even though those
losses could actually double, because of the possibility of not
having to lose anything. Again the pain of loss is so high, that
we take higher risk, just to get back to status quo, even though
we could possibly face even higher losses.
So in case one is unable to keep emotion out of investing,
and unable to handle market declines with a calm and rational
mind, this is a key emotional or behavioural takeaway that one
will do well to remember.
We like profits, but we hate losses even more. So when
faced with possible losses, we are prone to take higher risks to
avoid the possible loss, but when faced with possible gains, we
are prone to lock in our gains without taking risks.
Therefore, most investors will end up booking profits early
and riding their losses rather than the other way round. Selling
losers because the fundamentals have changed is one of the
most emotionally painful things for individual investors to do.
Well - if you genuinely believe in a company’s earnings prospects
and valuations and are able to keep your head, it is prudent to

hold and even buy more during falls, but one must be aware that
- that is the real reason for one’s actions, and not the loss aversion
tenet at play. For normal individual investors, it is almost
impossible to differentiate between the two.
So, in conclusion, are people risk-averse or loss-averse?
It is not that people do not like risk or uncertainty so much,
but it is pretty clear that they hate losses a lot, much more than
they love profits. Awareness of this tenet will perhaps help
investors to decide truthfully on the best way forward especially
during price declines when the stomach is churning and the heart
in fear, and use their head to take a rational rather than an
emotional decision.
It is easier said than done.

P A R T T H R E E
COFFEE
WITH
JIGNESH BHAI
AND SWAMI

THE GOOD, THE BAD AND THE
UGLY: OBSERVATIONS IN A
WORLD OF DIVERGENT AND
OPPORTUNISTIC OPINIONS
“Are you a vegetarian or non-vegetarian?” asked the
waiter at the hotel to my colleague Swami. This question always
confuses him. “I am a vegetarian mostly, but I can eat chicken,
except on Tuesday and Friday. So it depends on what everyone
else is ordering”, he replied. Such responses always confuse
waiters in hotels, who have a simple way of classifying people.
According to them, there are two types of people in the world –
vegetarian and non-vegetarian. Alas if only it was so simple –
my colleague Swami being a case in point.
“There are two kinds of people in the world, those with
loaded guns, and those who dig. You dig.” Clint Eastwood
made this dialogue immortal in the movie “The Good, The
Bad and The Ugly”.

It seems to me that there are two types of people in India,
or maybe the cricketing world, at least for now. Those who
think that MS Dhoni was right in calling Ian Bell back (in the
Trent Bridge test), and those who feel he was stupid to show
such generosity on the English team.
Among those who think he was right, again there are
two groups – those who think he was a true statesman of the
game, doing it to uphold the spirit of the game; and those who
think he was just a pragmatist, and hence did it to ensure that
the Indian cricket team’s brand value (and hence the money
they earn) does not go down.
And then there are those types of people (mostly media
commentators!) who change their views according to the
situation. Those who initially started justifying the morals of
“There are some other ‘two types of people’ in the world today too.”

how Dhoni was right in appealing for the run out, and how the
spirit of the game itself has changed in today’s world of cut-
throat professional cricket; and later changed to applauding
Dhoni for his generous act on realizing that Ian Bell was walking
out to bat again.
There are some other ‘two types of people’ in the world
today too.
Those that think Breivik, the person who fired at and
killed 70 odd people in Norway, was an example of emerging,
right-wing, ethnic extremism in Europe, and those who think it
was not that – that it was just the delirium of a madman.
Among those who feel he was an extremist, again there
are two groups – those who are shocked by the scale and brutality
of the murders irrespective of who did it, and those who are
shocked because the killer was not an Islamic terrorist, but a
Christian Westerner who hated the tolerance towards
multiculturalism.
And then, there are those types of people (mostly Western
politicians!) who change their views according to the situation.
Those who started condemning the killing as another example
of ‘acts of terror’, and then called it a madman’s act after realizing
that the killer was not an Islamic terrorist.
There are two types of people in the markets too.
Those who think long-term fundamentals-driven investing
is the right way of making money in the markets, and those
who think there is nothing like long-term, as all of us are dead
in the long-term – so short-term technical-driven trading is the

way to go. Those who are long term investors and those who are
short term traders.
And then there are those types of people (mostly Brokers
and people on business channels!) who change their views
according to the situation. Those who say investing is the way
initially, and then, when the markets go up tell us to become
traders. Or those who tell us to make money as traders initially,
and then, when the markets go down, ask us to become long-
term investors.
So it seems the world is made up of two types of people
with two sets of clear but divergent views. And then, there is
third types who change their views depending on what suits
them; but who somehow seem to matter and drive their worlds.
And finally, there is a fourth category. That is the type of
people who have no view as such, perhaps the majority, and,
depending on the arguments, between the first three types, form
an opinion. If you are neutral and have no view, your individual
view probably does not matter much, and is there for the taking
to be influenced. You are probably the common man with no
voice, and in the markets, you are probably the retail guy with
no choice. Like my friend Swami, you are dead meat even before
placing the order!

P A R T F O U R
WHAT EVERY
INVESTOR
CAN LEARN
FROM INVESTING
BOOKS
AND GURUS

BOOK:
THE INTELLIGENT INVESTOR
“The Intelligent Investor” by Benjamin Graham was
called the best investment book ever written by Warren Buffett.
After close to 60 years after it was first written, one continues to
be amazed by its depth and clarity and its relevance even
today.
It is almost like financial philosophy, akin to the
‘Bhagavad Gita’ of investing and finance for the individual
investor - whenever you pick it, you learn a new piece of
investment wisdom. If an individual investor must read only
one book on investing, ‘The Intelligent Investor’ is the one.
It is difficult to pick up the best parts from such a book -
it covers everything from definition of investment to specific
criteria for stock selection.
Here are some of the key takeaways from the book
Investment versus Speculation:

Investing means any operation that on thorough analysis
promises safety of principal and an adequate return.
1. BONDSVERSUS STOCKS IN ASSET ALLOCATION:
Graham presents a simplistic 50:50 formula of allocation
between fixed income bonds and stocks that works for most
investors - giving a leeway of 25% on either side. I.e. at no time
should the allocation of either stocks or bonds fall below 25%.
The guiding rule is to keep re-adjusting this allocation
when one component increases above a certain defined limit,
like 60%, by selling the additional 10% of the increased
component and buying the other. This does not guarantee the
highest returns - but is a mechanical program that is most likely
to work - simply because it advises selling and buying when it is
counter intuitive, and “chiefly because it gives the investor
something to do”.
2. DEFENSIVEVERSUS ENTERPRISING INVESTORS:
Graham makes a distinction between types of investors
not based on risk taking abilities or age but rather on the amount
of intelligent effort that is put into an investment operation.
The Defensive investor will place emphasis on avoidance
of serious mistakes and losses, and seeks freedom from effort,
annoyance and the need to make frequent decisions.
The Enterprising investor will be able and willing to put
in time and effort in the selection and tracking of securities that

may appear to be better valued than the general market from time
to time - which may help him achieve better returns than the
market over long periods of time.
Majority of investors would fall into the Defensive
category. To achieve satisfactory results available to the defensive
investor is easier than most people realize, to achieve superior
results sought by the enterprising investor is harder than it
looks.
3. THE FAMOUS MR MARKET:
This is perhaps the most valuable part of the book - on
how to approach the widely fluctuating markets that an investor
will face number of times in his investing life.
Treat the market as an obliging, emotional partner in
your businesses - i.e. the securities of which you own. Every day,
he tells you what he thinks of the value of the share of business
that you own, and offers to buy your share at a price or sell you
his share at a price. Sometimes his fears overtake him so he offers
you rock bottom prices to buy, while sometimes he is excited
about the future thus offering you great prices to sell.
The best part is he does not mind being neglected - he will
come back again tomorrow if you neglect him. Your best interests
are then served if you only transact with him if and when you
agree with his prices - the rest of the time, it is best for you to
neglect him and focus on the operations of your business.
In the book, Graham goes on to provide clear stock
selection criteria for defensive and enterprising investors - with

great examples to help stock evaluation practically.
But more than those, the clear framework based on the
above - definition of investment, asset allocation, the decision
on type of investor, and the attitude towards market fluctuations
- are most valuable for an individual investor to go about his
investment operations.
Graham’s advice and wisdom are unlikely to make anyone
rich in a hurry - perhaps only when one gets old. But the
principles are timeless and practical.

Path to Financial Independence by Ranjit Kulkarni

Path to Financial Independence by Ranjit Kulkarni

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