Lessons That Linger: 40. Investing In a Nutshell, 02 10 2025

Investing In a Nutshell, 02 10 2025

Heaven, for me is a place without money, for I have an aversion to stock markets and money matters. Despite being a finance professional having managed investments for a billion-dollar corporation, I don’t like spend my time on investment management. So, I have done the next best thing, which is to engage a trusted wealth manager and given them three broad guidelines for managing my investment. These three guidelines are what I learnt from my four decades work experience in dealing with money matters.  

1. Target returns: Target rate matters for it helps the wealth manager to pick investments. The choice is between an absolute rate which ignores the market returns and a relative return depending on what the market delivers.  Picking absolute rate can make you look foolish during bull runs when the markets boom, or you can be a hero earning positive return when the market crashes. Unfortunately, you have to pick your target return first before making the investments for it determines where you invest that decides the risk profile and liquidity of your investments.
2. Risk-return profile: Risk and return are directly co-related, higher the risk, higher the return. Higher return can be generated using any one or more of the four avenues:
   1. Equity over debt: Debt is a contract for fixed interest and return of capital. It is less risky compared to equity, which is a fluctuating and residual return. If successful, equity rewards handsomely, but when things go bad, your entire principle can be lost.
   2. Young Companies: Younger the firm higher the risk. Track record of a firm is a key indicator of risk. Younger firm have higher risk, but when successful rewards are worth it. This is why Venture Capitalists seek out new ventures to earn multi baggers, i.e. returns in excess of 100% p.a.
   3. Concentration: The popular saying ‘do not keep all eggs in one basket’ applies to investments too. More concentrated the investment, higher the risk, and if successful the payoffs are phenomenal and the contrary is true, for bad investment can wipe off the entire capital.
   • 4. Leverage: Leverage is to borrow money at lower rates and invest to get higher returns. Without leverage you can only lose your capital, but with leverage you can lose much more. But if your bets pay-off you earn significantly higher returns. An easier way to leverage is futures and options, that looks deceptively attractive as many Indian investors have now learnt.

Risk is a product of desired return, environment and competence. Lower target returns and stable environment translate to lower risk. But where higher return is targeted or the environment is in flux the risk increases. The only factor that can reduce risk is the competence of the decision-maker. Higher the competence lowers the risk.

iii. Liquidity: Higher liquidity translates to lower returns. With illiquid investments, the returns are higher but come with higher risks. Listing of instruments like shares and debentures in stock exchanges combines higher tenure for borrower with higher liquidity for the lender, but with some reduction in returns for the investor and higher cost for the company.

As a prudent investor, I target absolute annual returns of 10%+ over a three-year period, with take risk mainly of listed equity shares mitigated by competent wealth managers. This is not the mandate for maximizing returns. But my motive is peace of mind, insulated from stock market fluctuations.