This FISH can help you save money

Recently I have noticed a strange pattern. My impulse spends have started to increase dramatically.

Almost once, every three days, I order something from Swiggy at midnight (though I have had my dinner!). There are many things that I have bought from Amazon which I hardly use. My wardrobe is expanding perennially, thanks to no-reason sales which e-commerce companies dish out almost everyday. I have a constant itch to buy some new electronic gadget – amazon stick, one plus phone, amazon echo, wireless earphones, speakers etc.

Even if I don’t have the money, I don’t feel like postponing the purchase. The credit cards have slowly started to make me think “No worries, buy now and I will pay this off next month or put it in EMI”

If you step back and think about it, this is just the beginning.

I think “saving money” will become extremely difficult going forward led by a host of factors such as

  1. Social Media
    1. Given how easy it is to peek into our friends lives, we start comparing our lifestyle and spending habits to others via social media and end up spending money to “keep up with our peers and our increased aspirations
  2. Digital Money
    1. In a behavioral concept called “Pain of paying” though the amount is the same, it feels ‘less expensive’ and “less painful” to pay with the card or digital wallets compared to cash. More money tends to be spent due to the reduced pain of paying.
  3. Easier Loans + the new world of EMIs
    1. The credit card companies, banks, the Bajaj Finances of the world etc are all after us to provide us quick loans to buy anything ranging from cars, bikes, gadgets, clothes etc
  4. Marketers
    1. Marketing is designed to convince us that we’re deficient in some way, but that we can ‘fix’ ourselves if we purchase their product
    2. The marketers have now gone to the next level, where they have started to peep into our brains to study exactly why we buy and how to manipulate them. This emerging field is called neuro-marketing.
  5. Unbelievable convenience
    1. With the advent of delivery right at our doorsteps and one-click payments from our mobiles, its become extremely convenient for us to spend more.

If it is this difficult to save in 2018, what hope do we have for 2028?

While who we are up against is scary, we still need to put up a decent fight. And here is how I am going about with it..

My first blunder ..

When I started reading on how to solve this, the solution was simple:

Whatever can be measured, can be improved

So the initial idea was to actually track my spending so that I know where I spend. Once this is clear, I can improve on it.

Now to do it manually would be a tall ask.

Thankfully, I found an amazing app called “Walnut – Expense Tracker”. It automatically picked up my spending by reading the SMS sent by my bank.

While it worked like a charm and I diligently used it for three days, the whole process was extremely boring and I had zero motivation to do this daily.

My willpower soon gave up and I stopped using the app.

Mission failure.

If you are one amongst the elite few who are extremely disciplined and have great willpower this app will work for you. I am unfortunately a part of the “rest-of-us” category.

Learning: Any behavior which requires willpower to execute, each and every time is not a viable long term strategy

So this time, I decided that I needed a strategy which is completely automated and saves me from decision making each and every day on where to spend.

Introducing the “FISH” method of saving money..

Photo by David Clode on Unsplash

FISH simple stands for:

F – Fixed expenses every month
I – Investing for the long term
S – Short term savings
H – Happy to spend

Let me explain:

First your salary will come to your primary savings bank account. Then it will get split into the following buckets.

1) Fixed Expense:

All of us have certain fixed expenses every month, that we cannot avoid. For eg

  • House Rent
  • Electricity Bill
  • Fees
  • Gas
  • Grocery
  • Petrol
  • Internet Connection
  • Mobile Bill
  • DTH
  • Maid Salary etc

Approximately estimate the total fixed expenses. Add a 10% buffer. As there will inevitably be something which surprises you or you exceed in some categories.

This portion will continue to remain in your actual salary account.

2) Investing for the long term

This portion is for investing in your long term goals (early retirement, kid’s education etc). You can take the help of a simple online financial planner to estimate how much you will need to save.

If that sounds like too much work, a good thumb rule is to have atleast 20% of your monthly salary in Long Term Investments.

Set up an investment account in any of the platforms available and start an SIP (systematic investment plan) in few good equity funds.

You can refer here to see how I do this.

 3.Short term savings

This portion will cater to any reasonably large financial requirement (say >6 months salary) that you foresee in the next 5 years. You can take the help of a simple online financial planner to decide the amount to save every month.

Otherwise, a good thumb rule is to have atleast 10% of your monthly salary in Short Term Savings

This can be invested via an SIP in options such as

  1. Ultra Short Term or Short Term Funds
  2. Arbitrage Funds
  3. Equity Savings Funds

4. Happy to spend

The remaining amount is all yours to happily spend.

So just transfer this to your secondary bank account (open one if you don’t have) and start spending from this account.

Here is a pictorial snapshot of the entire process:

Do this segregation at the start of the month, once your salary is credited. Once you become comfortable, automate most of this process.

Since the fixed expenses cannot be completely automated, whenever you are spending on a fixed expense use the primary salary account debit card. For discretionary spends use the secondary savings account debit card

What if there is a sudden unplanned expense?

I usually maintain an emergency fund which is around 5-6 times my monthly expenses.

So if there is a short fall in my “Happy to spend” account, I will dip into my emergency fund and replace it later (mostly when I get a bonus).

And try not to use a credit card, as it defeats the whole strategy.

Why does this work?

1.Difficult to think about Opportunity Cost

Behavioral economist Dan Ariely has an interesting observation:
Money is all about opportunity cost.

In English, it means every time you order something in Swiggy for Rs 400, you are giving up Rs 400 which could be spent on something else.

In an ideal world, we should be asking ourselves all the time ‘Is this the best possible way to spend Rs 400?’

But let’s be honest. It is hard and impractical to think about each and every spending decision this way.

Instead of worrying about if we are spending right every time, the idea is to prioritize what is important to us (entrepreneurship, early retirement, kids education etc). In this method, by first allocating some part of our salary to this priority portion via long term investing and short term savings, we are eliminating the possibility of our impulse purchases affecting our important priorities in life.

2.Better Anchoring

Earlier when I used to manage money, I always saved whatever was left at the end of the month. So whenever I decide to spend, I always anchored to the entire salary amount which was sitting on my bank account. This meant for a lot of spending, I actually didn’t worry too much as the overall balance in the salary account was still large.

The moment I switched and started to first allocate to the fixed expenses, long term investing and short term savings, it let me anchor to a lesser value in the “Happy to Spend” account. So whenever I am about to spend, my reference point is not my entire salary but only 20% of my salary (or whatever is your % of salary that goes to “Happy to Spend” account).

This goes a long way in helping us make better spending decisions as the
“Happy to Spend” amount is all that we have, to spend for the entire month.

3. Lesser no of decisions

Eventually once you automate the whole process, your no of decisions are dramatically reduced.

Long Term Investments and Short Term Savings, once it is set, you don’t need to decide what to do each and every month

Further, analyzing your spends become a breeze as all you need is to check the primary savings account for fixed expenses and secondary savings account for your other spending.

No fancy apps required. Just your bank statement!

Final Thoughts

While this method is still in evolving stage, it has worked reasonably well for me in the last 6 months. Do not let the simplicity of the method undermine its usefulness.

If you are struggling to control your spending and saving, I request you to try this simple method and let me know how it works.

As always, happy investing or rather happy saving!

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This strange ritual of Japanese rail workers can help us evaluate equity markets

A 15 minute read..

Japanese rail workers and their strange ritual..

A sleek Japanese bullet train glides noiselessly into the station. Then the strange ritual begins.

During the brief stop, the train conductor in the last carriage suddenly jumps out and starts talking to himself. He points at different parts of the train, station and comments something loud.

See this for yourself..

What in the world is he doing?

The Japanese call this technique, Shisa Kanko, a Japanese phrase meaning point with finger and call’. This is an error-prevention drill that Japanese railway employees have been using for more than 100 years.

The basic problem which the Japanese railways faced was that most of the accidents were caused due to human lapse of concentration and negligence rather than lack of knowledge.

Now, when you ask the rail worker to physically point at things and then name them out loud, he is forced to engage different senses via the brain, the eye, the hand, the mouth and the ears.

This makes him more conscious, aware and alert, thereby significantly reducing the possibility of unintended errors.

Studies have shown that this technique reduces human error by as much as 85 percent.

But aren’t we a lot more smarter and attentive?

Where is the gorilla?

Answer the questions in this video before you move one (it will just take 2 minutes)

As seen in the video above, all of us have our blind spots depending on where we have our focus.

Inevitably in an information overload world, the media has a significant say on where they want us to focus our attention.

As investors, this is not great for us as we get carried away by the news, focus on the wrong things and lose the actual big picture, leading to flawed decision making.

Better decision making starts with frameworks

Now all of us are sure of one thing – this is a bull market.

And yet another thing we are sure of – it will inevitably end someday in the future.

Historically we usually get to see 1 or 2 bear markets every 10 years. This means another 3-6 bear markets in the next 30 years.

In other words, we don’t get too many opportunities to learn how to handle bull market peaks and the bear markets that follow.

While we may read a lot on how to identify bull market peaks and behave during a bear market, nothing beats actually experiencing it and learning from it.

The good part is, we will have this opportunity soon (how soon is anyone’s guess). So, the key for us is to not let go of this great learning opportunity!

Now I honestly haven’t seen a full fledged bear market before. So while theoretically I should be fine, I am really not sure how I will actually handle a bear market.

What do we do about this?

I have a suggestion. Let us develop a framework to evaluate the risk in markets. Something via which we would get a sense of when we need to go slow on equities and when we should go all in into equities.

Now this does two things for us:

If it works, great! We have a framework which we all can use and have a far better investing experience.

If it doesn’t work, first blame me and later we can can always go back and check as to what went wrong and improve our framework

Instead of going blind into the final phase of a bull market, let us be prepared with a framework which can be evolved based on feedback.

Now let me be clear on one thing – the idea of the framework is not about precision – it’s just a disciplined way to get an approximate sense of which part of the market cycle are we in.

I may be wrong. But the idea is to quickly learn, improve the framework, and share the learnings so that everyone can benefit.

So let us check out the framework

Equity market evaluation framework

To evaluate equity markets I use the below 7 factors

  1. Valuations
  2. Earnings Growth
  3. Cycle – Credit Growth, Capacity Utilisation
  4. Sentiment
  5. Interest Rates
  6. Other Dynamic Asset Allocation Models
  7. Momentum

To ensure that we do not miss out on any of these factors, we shall use the “point and call” Japanese concept for each and every one of the above 7 factors.

The basic starting point will be to have a rough expectation of the long returns i.e 5-7 year returns.

Returns from equity = Change in earnings + Change in PE valuations + Dividend Yield

So basically predicting equity returns boils down to answering these two questions

  1. What can be the earnings growth?
  2. Will the valuations move up (increasing returns) or move down (reducing returns) or stay flat (not contributing to returns)


For valuation I will stick to 3 metrics –

Primary metric

  • PE Ratio

 Secondary metric (will be used as a support to the primary metric)

  • PB Ratio

PE Ratio:

To understand how valuations impact overall returns you can refer here.

As seen above, the Sensex is currently at a PE ratio of around 23.3 times which is well above (around 30% above) the long term average.

You can also clearly see that Sensex valuations have usually moved between high and low valuations and eventually revert back to the average.

So if we have a 5-7 year time frame and we are getting in now, our returns will improve over and above the earnings growth if the valuations at which we exit is above today’s valuation i.e above 23 times. If it is lower, then our returns will be lower than the earnings growth.

So how do we know the exit valuations?

Back to data as always

This is an interesting chart and hence let us take some time to understand.

I have plotted the maximum PE ratio of Sensex for each and every 2 year period since 2000 till 2018.

In other words this was the best valuation multiple you got, to exit over a two year period.

The interesting part is historically, you always got a chance to exit at a PE multiple of above 17!

Now while there is nothing sacrosanct about this number and the future might be different, it gives us a good starting point to think of exit multiples based on history.

It simply means, if history holds true, I have a high possibility of exiting atleast at a PE multiple 17 times (and higher than that if I have luck by my side).

So we can have a rule that states,
Post the 5th year (assuming your goal is 7 years away), you exit the moment PE multiple is above 17 times.

This implies your exit valuation multiple in the worst case will be 17 times. In the current context, from our starting multiple of 23.3 it is a drag of 37% or 6.5% per year from earnings growth.

If you assume average of 18 times as your exit multiple then it implies a absolute drag of 30% or 5% per year from earnings growth.

Pointing and Calling on PE Valuation: PE ratio implies a possible drag of 5-6% from earnings growth

Let us also check what the other metrics indicate

Price to Book Value

When you look at it from a Price to Book point of view, then the valuations look reasonable as they are close to their long term average.

But why this deviation between PE and PB?

PB = PE * Return On Equity

As seen from the above equation, the culprit for this difference in signals from PE and PB valuations is because of ROE. The ROE for Indian equities is extremely low at this juncture.

Source: MOSL

ROE usually tends to mean revert over time. We need to keep this context in mind while evaluating PE valuations which look expensive

Pointing and Calling on PB Valuation: PB ratio is reasonable. Low ROE leading to expensive PE valuation.


Source: ICICI Pru Presentation

The current MCAP/GDP is close to historical average

Pointing and Calling on MCAP/GDP Valuation: MCAP/GDP indicates reasonable valuations

2.Earnings Growth

Anyone who has tracked analysts prediction for earnings growth in the last 5 years know one thing for sure – it is damn difficult to get it right.

So while I profess no superior powers to forecast, taking a longer time frame of say 5-7 years, provides us with a slightly better chance to project earnings growth. (Of course, this can be wrong. But hey, we need to start somewhere right!)

Just like we used mean reversion as our base case in valuations, we shall use mean reversion in Corporate Profits to GDP as our base case to project earnings growth for the next 5-7 years. A longer time frame means we are providing more time and hence a higher likelihood of mean reversion happening.

A lot of reports come up with corporate profits as a % of GDP. While different reports have different numbers, the overall number is very close to each other. I have taken CLSA’s data. (Source: Link)

The average corporate profits as a % of GDP since 2001 is 4.2%. Currently for FY19 it is expected to be 3.3%.

Now assuming mean reversion to around 3.5% to 4.5% and a nominal GDP growth of around 11% (6% real growth + 5% Inflation) we end up with a profit growth range of 12% to 18%.

Pointing and Calling on Earnings Growth: Profit Growth Expectation for the next 5 years: 12% to 18%

5 Year Equity Return Estimates

Applying these numbers to our original equation:

Returns from equity = Change in earnings + Change in PE valuations + Dividend Yield

Change in earnings = 12% to 18%

Change in PE valuations = -5%

Dividend Yield = 1% to 1.5%

Pointing and Calling on future equity return expectations: Approximate estimate of equity returns over the next 5 years: 8% to 14%.

Assuming an inflation of 5%, that is a real return of around 3% to 9% which is pretty decent!

3.Cycle – Credit Growth, Capacity Utilisation

Credit growth has started to pick up

Capacity Utilisation is increasing – early stages of a capex cycle

Source: ICICI Prudential Presentation

Pointing and Calling on Capacity Utilisation & Credit Growth: Earnings growth can receive support from: improving credit growth and capacity utilization (possibility of capex cycle picking up)

4. Sentiment

A good way to measure sentiment is use FII, DII and MF Flows into Indian equities.

FII Flows

Foreign investors have been structurally positive on India. So while there are short term instances where they took out money, they have always returned back. So whenever FII flows were negative, it was a great time to invest in Indian equities.

Now currently the FII flows for the last 12 months are negative!

Pointing and Calling on FII Flows: Negative FII flows usually indicate strong 2 year returns

DII Flows

DII flows have been very strong in the past few years which is also supporting the higher valuations. But a large chunk of the money came during 2017, which means for those investors the returns would be dismal (more dismal if it went to mid and small cap segment). So we need to monitor the DII flows very carefully.

It is currently supported by strong equity MF flows and SIP culture.

Source: Money Control

Pointing and Calling on DII Flows: Strong DII flows (primarily from MFs + SIP culture) were supporting higher equity valuations. However, early signs of fatigue visible. Needs to be monitored.

5.Interest Rate

  • Current Inflation
  • RBI Projection

Inflation is projected at 2.7-3.2 per cent in H2:2018-19 and 3.8-4.2 per cent in H1:2019-20, with risks tilted to the upside.

Source: RBI Monetary Policy date 05-Dec-2018

The good part is Inflation is expected to stay below 5% according to RBI. This implies lower interest rates.

Pointing and Calling on Interest Rates: Lower Inflation + Interest rates may lend support to equity valuations

6.Other Dynamic Asset Allocation Models

Pointing and Calling on other Asset Allocation Models: Majority of models indicate a not-so-positive stance on equities

7.Momentum & Trend

Absolute Momentum:
3M Return: 2%
6M Return: 0%
1Y Return : 6

50 Day Moving Average : 2%
100 Day Moving Average : -1%
200 Day Moving Average : : 2%

Pointing and Calling on Momentum & Trend: Momentum & Trend is Positive

Putting it all together:

Phew. Now let us put all this together and make some sense

  • Valuations: PE ratio implies a possible drag of 5-6% from earnings growth
  • Earnings Growth: Corporate Profits to GDP well below historical average. Possible Mean reversion indicates 12-18% earnings growth environment
  • 5Y Equity Return Expectation: 8% to 14%
  • 5Y Equity Real return Expectations: 3% to 9%
  • Cycle – Credit Growth, Capacity Utilisation: Earnings growth to be supported by: improving credit growth and increasing capacity utilization (possibility of capex cycle picking up)
  • Sentiment: Negative FII Flows indicate strong returns in the next 2 years. High valuations were supported by strong DII Flows (primarily from mutual funds and new SIP culture). But early signs of fatigue in DII flows – needs to be monitored
  • Interest Rates: Lower Inflation + Interest rates may lend support to equity valuations
  • Other Dynamic Asset Allocation Models: All models indicate a not-so-positive stance on equities (due to higher valuations)
  • Momentum & Trend: Both are positive

We can classify markets into 4 cycles: Bust, Best, Boom, Bubble (borrowed from this interview of ICICI Prudential Sankaran Naren’s framework here)

All these indicators put together, indicate that we are not in a bubble zone. The valuations indicate that we are neither in the Best zone. While mid and small caps have seen a partial bust, overall the markets in my opinion are still in the Boom zone as the earnings growth is yet to pick up and the start of earnings growth might lead to decent returns.

So for those who are investing now different combinations of Multicap funds and Dynamic Asset Allocation funds can be a good option to build portfolios.

Given the early signs of fatigue in DII flows, I am still a little worried on going for mid and small caps directly and rather would play them through multicap funds.

This is an evolving framework and I hope to update it every 6 months. Remember I can be wrong (most often I will be). The whole idea about documenting and sharing the framework is to create discipline, to stay humble and to take feedback both from you and markets to improve this framework.

If you feel there can be areas that can be improved, views that you don’t agree with or factors that can be added do let me know either via the comments or by mailing me at

Happy investing as always!

If you loved this post, do share it with your friends and don’t forget to subscribe to the blog via Email (1 article per week) or Twitter along with the 5000+ awesome people. Look out for some fresh, super interesting investment insights delivered straight to your inbox.

If in case you have any feedback or need any help regarding your investments or want me to write about something, feel free to get in touch at

You can also check out my other articles here

Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.