Seat Belts, Condoms and the Indian Equity Investor

The Seat Belt mystery

Image result for seat belts

In early 1970s, when the use of seat belts were made mandatory in the US to improve driver safety, something strange happened.

Instead of road accident deaths coming down they actually went up!

While the regulators were perplexed by this phenomenon, an economist by the name Sam Peltzman came up with a controversial answer.

Image result for seat belts + peltzman

He argued that though the drivers had lower risks due the additional safety that a seat belt provides,  many drivers actually compensated for the additional safety by driving more recklessly (driving faster, not paying as much attention, etc.) under the comfort of the added safety.

“The safer they make the cars, the more risks the driver is willing to take”

This meant that bystanders – pedestrians, bicyclists etc – would receive no safety benefit from the seat belts but would rather suffer as a result of increased recklessness.

He termed this effect “risk-compensation” but it is popularly known as the Peltzman effect.

Although the study has had its fair share of criticism, the Peltzman effect has been observed in a number of different settings.

Condoms and HIV prevention

Image result for condoms and hiv

In the late 1980s, Thailand and the Philippines had roughly the same number of HIV/ AIDS cases at 112 and 135 cases, respectively.

In the early 1990s, the Government of Thailand enforced the “100% Condom Use” program in its booming commercial sex industry while the Philippines was characterized by its very low rate of condom use and the firm opposition of church and government to condoms.

In 2003, almost fifteen years later, the number of HIV/ AIDS cases in Thailand had risen to 750,000 while the number in the Philippines remained low at 1,935 cases despite Philippines population growing to more than 30 per cent that of Thailand. Thailand ranks as the country with the highest HIV prevalence in Asia.

Source: Link

Mike Roland, editor of Rubber Chemistry and Technology states that wearing a condom reduces the risk of AIDS by a factor of 3 but simply choosing your partners wisely reduces the risk factor by 5,000.

While it is obvious that wearing condoms during promiscuous sexual activity reduces the risk of HIV, counter intuitively the lower risk of HIV can actually have the effect of tricking people into blindly engaging in more risky promiscuous sexual activity.

Its our peltzman effect at play 🙂

Titanic – The ship even god cannot sink

All of us know what happened to the Titanic. I would rather let the below picture do the talking.

Related image

Image result for titanic captain couldnt sink

Yep, its peltzman effect, yet again!

Olympic Boxing – Good bye Head Guards

boxing helmets banned

Did you know this – the Olympics ditched boxing headgear in 2016 for the first time since 1984!

The decision, according to the International Boxing Association, or AIBA came down to safety. 

Several studies, including one commissioned by the association, found that the number of acute brain injuries declined when head guards were not used.

The studies pointed out that

Headgear creates a false sense of safety and boxers take more risks.

By now, you know what is happening 🙂

Our behavior adapts to perception of risk

Now while all this goes against our intuition – the underlying point is that

When our perception of risk reduces, we usually adapt our behavior by taking higher risks

Indian Investor and the Peltzman effect

What does this have to do with the Indian investor?

Based on the Peltzman effect, if investor perception of risks in the equity market reduces, then it means that investors will respond by taking additional risks.

Let us evaluate the current investor perception of risk.

From a purist point of view – risk is the probability of permanent loss of capital.

However, when there is a market decline, most of us at that juncture do not know if it is permanent or temporary. (and unfortunately a lot of us give up and jump out at the bottom).

So for the purpose of this post, I will assume that investor perception of risk will depend on the intermittent declines in equity market that he/she has witnessed in recent times.


Here is an interesting chart which shows the intra-year declines which an investor in Indian equity markets would have witnessed in the last 27 years.

Nifty Intra Year Returns

An interesting thing to notice is that, the 20 year period from 1991 to 2011 has witnessed significant declines each year and 20% declines or more (indicated by the red bars) were a common occurrence.

So any investor who invested in equities during that period, eventually had to go through these significant but temporary declines year after year.

However, if you notice the recent 5-6 years, the declines have been significantly lower.

In fact the intra-year decline for 2017 is the lowest ever!

The other way to confirm this thesis is to look at the index which indicates volatility – Nifty VIX index (It measures the degree of volatility or fluctuation that active traders expect in the Nifty50 over the next 30 days).

INDIA VIX Stock Price  NSE Market Indices  INDIA VIX Price  Stock Performance   Comparison.png

The Nifty VIX index is also close to its all time lows!

Thus the first takeaway is:

Takeaway 1: Indian Equity Market fluctuation is extremely low in recent times           (leading to a perception of lower risks in equity markets)

Further the markets have also rallied since 2013.


Takeaway 2: Indian Equity Market Returns have been awesome in recent times

Further real estate returns have been poor in recent times and are showing initial signs of a decline (see here)

Gold returns have also been very dismal over the last few years.

Spot Gold

Bank FD rates and debt fund returns have also significantly dropped due to lower interest rates.

Takeaway 3: Real Estate, Gold, Bank FD – all fall down!!

Now if we combine the above three takeaways, it’s a deadly combination where equity returns are high, equity volatility is low (read as – perception that risk is also low) and none of the alternatives are performing.

Now if we apply the Peltzman effect, this means Indian investors will adjust their behavior to take on more risk!

Is this true? Let us see if Indian investors have increased their risk..

Equity Mutual Fund Industry – Unprecedented Flows!

Equity Flows.png

You read that right – In the last 2 years, the money that we Indians invested in Equity Mutual funds is more than the earlier 16 years put together!

If you further drill down, the largest amount of money came in the last year (more than previous 3 years put together)

CY Equity Flows.png

And here is the scary part – the flows for 2017 currently represent 1/4th of the entire equity AUM – and investors who have brought in this money have never witnessed true equity declines (20% and below which was the norm a few years back) as they have come at a point where the volatility is at its historical lows.

CY Equity Flows 2017.png

Balanced Funds are the new FD replacement – WTF?

In every bull market, there is always some product which is mis-sold.

This time it is the balanced funds – a category of funds where equity is around 70% of the portfolio and the remaining in debt instruments.

Unfortunately, this equity heavy product is being mis-sold as a 1% every month dividend product which will give you 12% tax-free returns every year and as a FD replacement.

This is clearly reflected in the staggering growth of inflows witnessed in 2017

Balanced Fund Flows 2017.png

Here is an interesting article which explores this further – Link

Equity Market Valuations have moved up significantly led by flows

Nifty PE chart.pngSource:

Small Cap funds & PMS signalling “Enough! We can’t take more”

Given the whopping out-performance of small and mid cap funds over large caps recent money has been chasing this segment leading to insane valuations for most of the companies in this segment.

Funds Monitor   Value Research Online.png

Source: Value Research

To the extent that certain funds have shut down their funds and returned their money back to investors.

DUZWJohVwAAQD34 (1).jpg

Source: ET, Read the entire article here

Some other funds which have restricted their funds for new money –  DSP BlackRock Micro Cap Fund, Reliance Small Cap, Mirae Asset Emerging Bluechip and SBI Small and Midcap Fund.

Peltzman effect at play – Time to be cautious and focus on risk

At this point, it seems pretty clear that the perception of equity risk is currently very low amongst investors and this has clearly manifested in higher risk taking behavior across Indian investors.

Everything at this juncture is about returns as risk has taken a backseat.

Hence we as investors must remain cognizant of the exuberant expectations being built into the current market. While earnings growth cycle is yet to begin, lofty valuations imply the possibility of sharp intermittent declines if in case something goes wrong. (and usually something always does go wrong in the interim)

So, at the current juncture the key is to focus on risk. Also

  1. Pare down return expectations
  2. Stay away from mid and small caps
  3. Stick to your asset allocation plan

If you don’t have an advisor to help you out with asset allocation, then dynamic equity allocation products can be a good option for incremental money allocation.

In a nutshell

  1. Peltzman effect – Introduction of safety belts in cars increased accidents as drivers compensated for the additional safety by reckless driving
  2.  Observed in several settings such as HIV prevention via condoms, Titanic, Olympic boxing etc
  3. Peltzman effect visible in current equity markets
  4. Deadly Trio: Indian Equity Volatility at all time lows + Great returns in equities + Alternative investments (Real Estate, Gold, FD) not doing well
  5. This lower perception of risk in equities leading to risky behavior in Indian investors
  6. Signs visible in 1) Unprecedented Equity MF inflows 2) Balanced Funds being sold as FD replacement 3) High Valuations 4) Small Cap funds restricting flows
  7. Time to be cautious and shift focus on risk (rather than returns)
  8. Things to do: Pare down return expectations, Avoid mid & small caps and stick to asset allocation

Happy investing 🙂

If you loved what you just read, share it with your friends and don’t forget to subscribe to the blog along with the 1800+ awesome people. Look out for some free super interesting investment insights delivered straight to your inbox. Cheers 🙂

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



This behavioral scientist has the surprising answer to our spending habits

10 minute read

The problem of sudden increase in spending..

Till a few years back, my idea of saving money was simple:
Spend all that you can and miraculously if there is some money still left at the end of the month – hurray I get to save”

“I would rather spend on things I love, today rather than save for an unknown future” went the voice in me.

My method worked perfectly for me and I did save up a reasonable amount as my spending was mostly less than my salary.

But somehow in recent times, I am finding it more and more difficult to save as my spending pattern has suddenly gone haywire.

Despite my salary going up, there is always a set of new expense cropping up each and everyday out of nowhere and eventually the entire salary is consumed.

My existing technique of saving money is up for a toss!

If you are nodding your head, then you have landed at the right place.

While obviously there is something definitely wrong with my spending habits, somehow most of my friends also seem to go through this problem in recent times.

Spending seems to have suddenly increased out of nowhere.

Is it just us or is there something else happening which is playing havoc with our spending habits? 

BJ Fogg has the answer..

To answer this question, let us catch hold of Mr BJ Fogg – a leading Stanford scientist who has done some super awesome research on how to change human habits.

At the end of the day, spending and saving are both habits. Understanding the science behind how habits are formed might give us a possible clue to what is happening.

Image result for bj fogg

According to him, for any behavior to happen, a person must have three things happening at the same instant

  1. Trigger – something that reminds him to do the specific task
  2. Motivationsome reward (either extrinsic or intrinsic) which motivates him to do the action
  3. Ability – Ability is all about whether the task at hand is easy to do

Now before you give me that “WTF” look, trust me it isn’t as complex as it looks.

In fact, who better than BJ Fogg himself to explain this in less than 3 minutes

 So the whole idea is that if the behavior to be done is pretty difficult (think exercising,  investing etc) then we need a high level of motivation and a reminder (trigger).

Vice versa, in cases where the motivation levels are too low, for the behavior to happen, the action needs to be extremely simple enough to do along with a reminder. (think brushing your teeth – no one woke up excited saying – I am going to brush my teeth – hurray!!)

This is also summarized via his model chart  below


For those who are interested in a detailed explanation – refer to this link here

Now you can apply this perspective to all your habits and behaviors and I am sure you will be surprised.

Try thinking about the trigger, motivation, ability combo in play when you do the following

  • Order food in Swiggy
  • Hail a cab via Uber
  • Order your jeans in Amazon
  • Scrolling through feeds in Facebook

Are you able to connect the dots?

Now let us see how the companies, end up either knowingly or unknowingly applying the framework to modify our behavior.

Historically, most of them would work on increasing our motivation like the one below

Related image Image result for india gym new year ad

But there is an issue with motivation – its transitional.

Remember all your new year resolutions of the past years and you know exactly what is the issue with motivation.

So we would do the behavior initially but with time as our motivation wave drops down, our behavior also stops especially if it is tough to do.

That is when these companies hit upon the holy grail of changing our behavior!

Make the behavior outrageously easy..

Instead of the difficult job of motivating the customers to do the behavior, they instead decided to make the desired behavior as easy as possible!

This meant you only needed to induce minimal amount of motivation to make the customer do the desired behavior.

So for the companies it all boiled down to:

How do we make the action outrageously simple to do?

To do this, Fogg suggested tinkering around with what he calls the “Six Elements of Simplicity” (or Ability):

Image result for simplicity + fogg model

  1. Time: You have more ability to perform a behavior that takes very little time versus one that takes a lot of time.
  2. Money: You have more ability to perform a behavior that costs very little money versus one that costs a lot of money.
  3. Physical Effort: You have more ability to perform a behavior that requires little physical effort and strain versus one that requires a lot of physical effort and strain.
  4. Mental Cycles: You have more ability to perform a behavior that is not mentally fatiguing or challenging versus one that is.
  5. Social Deviance: You have more ability to perform a behavior that is socially acceptable versus one that isn’t.
  6. Non-Routine: Your ability to perform a given behavior will change over time, and will have a greater ability to perform behaviors that are routine (versus behaviors that are non-routine).

So the task for the companies is simply to pick each and every item of the 6 simplicity factor and figure out how to simplify them with respect to the behavior that they want to induce.

End of the day, if they design – quick and physically/mentally easy behaviors that don’t cost a lot of money or violate any social norms – they have a winner at hand!

Amazon’s quest for “make it outrageously easy to buy and spend”

Let us take the example of Amazon and see how they went about simplifying their required user behavior – “to make them shop and spend on Amazon”:

1.One Click Patent

One of Amazon’s first patents was the “1 click patent”

Image result for amazon one click patent

The core of the proposition is that when you sign in on Amazon and you go to buy something, you can just press one button and presto – the thing is bought.

This means that there are fewer steps to ordering, which is less time-consuming and what is termed “friction-less”. Amazon patented that process back when it was just a little online bookseller in 1997.

Now for us in India – the 1 click equivalent is the COD – Cash on Delivery!

2.Shift to app version from desktop version

Gradually with higher discounts when you use the app version vs the desktop version, they slowly made us get comfortable with using the amazon app in the phone. This makes perfect sense as accessing amazon over the phone is extremely easy and solves the issue of time (can be accessed anytime) , physical effort (simple thumb action), mental effort (no thinking required), social deviance (desktop is not the in-thing), non routine (anyway all of us are staring at our mobile screens all day long)

3.Credit Cards solve the money issue

With our credit cards linked, the worry or thought of whether we have money in account balance has also been addressed.

4.One day delivery

The one day delivery for Prime members makes it even more simpler than actually going out to a physical store and buying (imagine the time & physical effort involved).


Add to this the constant triggers of

  • Notifications
  • New discount sales announced
  • Ads on other sites which remind us of the products that we are looking
  • Recommendations based on our viewing/buying history and similar people’s buying activities

6.The mind blowing future of convenience

If this was not enough, look at what the future holds

This is exactly what BJ Fogg calls simplifying Ability!

Conclusion: Ease of buying & spending will be taken to its extremes

All biggies have joined the party..

And this is just one company. Imagine what is going on in Apple, Google, Facebook, Uber, Netflix and millions of other companies etc

All companies have hit upon on this idea of making our making our buying and spending outrageously easy.

No wonder in recent times, our spending pattern has gone for a toss!

Do you think we seriously stand a chance in controlling our spending urges against an onslaught such as this.

And the corollary to this is that – Saving money is going to get more and more difficult as spending money gets more and more easy

In a nutshell

  • Spending pattern for most us has gone for a toss in recent times
  • BJ Fogg behavior model indicates that for any behavior to happen we must have 1)Motivation 2) Ability 3)Trigger occurring at the same instant
  • Companies have realized that trying to increase motivation to make us spend is a difficult ask
  • But there is a low hanging fruit – Ability; i.e to make the behavior as simple as possible and hence negate the requirement for a high level of motivation
  • Amazon has been doing it successfully over the years
  • With several companies (Apple, Google, Netflix, Uber, Flipkart, Ola, Swiggy etc) joining the bandwagon, our spending and buying pattern has gone for a toss – with several impulsive purchases
  • Going by the same trend, in future our ability to buy and spend is incrementally going to become more and more easier. This simply means more spending and less saving!

The million dollar question is – Can we really put up a fight and control our spending impulses against these giants who are after our wallets day in and day out?

Hang on till the next week for the answer..

Happy investing 🙂

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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

My What-if-things-go-wrong Investment Plan

In my earlier post here,  I had discussed on the need for us to have a backup plan just in case something goes wrong.

Don’t get me wrong.

I am not predicting a crash, but just in case something like that happens, I don’t want us to panic and want you and me to be better prepared.

It becomes extremely difficult to make sensible decisions in a falling equity market as the emotional stress that we undergo will be tremendous. Given our usual tendency to overestimate our ability to handle these situations, the key thing during these times is to protect ourselves from “ourselves”!

While obviously, all of us will have slightly different plans based on our individual risk appetite, investment time duration, savings pattern and magnitude of invested amount, I am sharing with you my simple plan to give you a rough idea of how you can go about with this.

What-If-Equity-Market-Tanks Plan

1.Emergency Fund:

Image result for emergency fund

I am gradually building up to 3 months spending requirements in a liquid fund (DSPBR Liquid Fund) via a monthly SIP.

As a back up, I also have credit card spending limits which can take care of my 3 month spending requirements.

Final resort – Mere Paas Maa Hai! (don’t intend to use this option)

This is to ensure that even if there is some unforeseen emergency I don’t need to dip into my equities.

2.Fund your short term requirements (next 5 years)

Related image

As of now, I don’t have any major expenses (anything more than 6 month salary I classify as major expense) which I can foresee for the next 5 years.

So I will keep reviewing this once every 3 months.

If in case some short term requirement crops up, then I will start saving for it via an SIP in either a short term debt mutual fund or arbitrage fund. The SIP monthly amount required can be calculated from any online SIP calculator (such as the one here)

In a bear market, the last thing I want to do is to be forced into selling equities to address an unexpected emergency or a short term requirement.

With the above two buckets in place, I have reasonably addressed this problem.

Now its all left to “my behavior” and the ultimate test of whether I can hang on.

Putting your current portfolio size in the right perspective

Image result for long term perspective

Barring the above two buckets, my entire portfolio is 100% equity consisting of stocks and mutual funds. My personal target for this portfolio is to achieve a portfolio size of 20 times my salary in the next 15 years which technically means I become financially free when I am  around 45 years old.

I personally think the markets are slightly expensive. So there is always an itch to play it “cute” – Should I take out some money and park it into safe assets such as debt funds and get back in post a correction.

This is a question that I keep grappling around as there is always an inherent urge to attempt to be the smart investor who buys low and sells high. Add to it the boasting rights that it will give me via the “I told you so” narrative. Its a heady combination indeed.

But instead of the elusive holy grail of market timing, I chanced upon a rather simple solution: Re-framing!

If I do a monthly investment of Rs 10,000 and assuming that I increase it by 5% in every year at 15% expected returns, I will end up with Rs 30 lakhs in the next 10 years and Rs 80 lakhs in the next 15 years. (Refer here for a detailed explanation on the calculations).

So based on my monthly savings that I currently do, I have a rough estimate of the amount I expect to achieve post 15 years.

The moment I put my current entire 100% equity portfolio as a % of the final value after 15 years it works out to be just around 6%.  With this sudden shift in frame, the answer to “Should I act cute and try asset allocation strategies with just 6% of my targeted corpus” becomes obviously simple.

Note to me:
So dear Arun, as of now, just focus on what is in your control;
Try to earn more and save more. Just continue your monthly investments.
You shall save your intelligence and asset allocation strategies for some other time 😦

I believe a lot of us end up doing this mistake of overthinking and trying to act extra cute during the initial years of wealth building where in reality, its predominantly our ability to save which really matters initially. (I am no exception)

But obviously as our portfolio grows in size, we reach a point in time, where the returns from our portfolio is much larger than the incremental savings. This is the point where an SIP or monthly investing does little to address overall portfolio volatility (as the 100% equity portfolio has significantly grown in size and a 50% temporary decline like that in 2008 can emotionally derail us from equities forever. You can read more about this here)

So I have a simple thumb rule – if my portfolio size crosses 5 times my yearly salary that is when I start attempting to be cute and will implement asset allocation strategies. At this size, protecting my existing portfolio becomes as important as making it grow!

At this juncture, I am still some time away from this 5 times annual income cut-off and hence I shall continue my 100% equity portfolio and focus my efforts on saving and investing more monthly.

The Odysseus Contract

So how given this background how does my pre-commitment plan look like (for readers wondering what a pre-commitment plan or who the heck Odysseus is, please refer my earlier post here)

Current Sensex level: 34,000

So this is my plan at various levels

  1. 10% correction i.e rounding off to ~30,500 levels: Continue with monthly investments (Notes to me: other than this monthly saving you won’t have additional money to deploy in equities as expected. Today, at this juncture, you have no clue on what will happen. So suddenly don’t act like you-always-had-it-figured-out and regret on not having sold out earlier)
  2. 20% correction i.e rounding off to ~27,000 levels: Continue with monthly investments
  3. 30% correction i.e rounding off to ~24,000 levels: Continue with monthly investments (painful – but what else can I do)
  4. 40% correction i.e rounding off to ~20,500 levels: Time to sell x amount of gold assets (hope my wife isn’t reading this) + Continue with monthly investments
  5. 50% correction i.e rounding off to ~17,000 levels: Time to sell 2x amount of gold assets (hope my mother-in-law isn’t reading this) + Continue with monthly investments

That’s how my plan looks like 🙂

Obviously there are no precise right or wrongs. Your plan most probably will be different from mine. The overall idea is to give you a sense of how I go about with this.

Do let me know on how it works and if in case you want to discuss your plan with me, do reach out to me at or comment in the below section.

As always happy investing and don’t forget to subscribe and share 🙂


“What-if-things-go-wrong” Plan

10 minute read

Nowadays, everyone is a long term equity investor..

Recently I had a conversation with one of my friend, who wanted my views on his equity mutual fund portfolio and the market.

“While I have no clue on what will happen to the markets going forward, expecting the last 3-5 year returns to repeat will definitely be a tall ask. The expectations need to be toned down and we need to brace ourselves for intermittent declines” went the conservative me.

“No worries. I can handle the falls, I am a long term investor and my horizon is 15 years!!”

Here is an additional data – He has started investing in equities only recently and is yet to experience any serious market decline.

Now honestly, it would be awesome if he really turns out to be a long term investor. But my worry is what if he is underestimating the actual emotional stress that he will have to undergo during a equity market correction.

My bigger worry is the fact that there are thousands of new investors entering the equity markets day by day, with heightened expectations and misplaced confidence on their ability to handle the market declines.

Am I being overly pessimistic here?

A honest confession…

Despite being a part of a large experienced firm with access to a support system in the form of brainy colleagues, market veterans, fund managers, name-it-and-I get-it data access and sophisticated software tools, we ourselves have our moments of panic, self doubt and fair share of mistakes. I know one thing for sure – handling a falling market is a lot tougher than we think. And even the best of investors have had their share of mistakes during a falling market.

Now why am I talking about a bear market now?

“The macro is improving, earnings are set to pick up, domestic flows are strong, interest rates are low, real estate and gold are not doing well, blah blah ..we are in the mother of all bull markets” goes the narrative.

I don’t have a view on the above but instead have a simple rule which I follow..

“When everyone is focused on the returns, focus on the risk and when everyone is focused on the risk, focus on returns”

So while, I profess no predicting capabilities or ability to time the market, inevitably good times in markets have always been followed by bad times.

Now that things are going great for the market, we are relaxed and have a clear mind, why don’t we spend some time thinking about a plan on how to handle things if at all something goes wrong.

And just in case something goes wrong, we have a plan and are slightly better prepared. Otherwise if the bull market continues, then it’s happy times as usual 🙂

Sounds fair?

So here we go..

Assuming things will go bad someday in the future, we need to answer two questions..

  1. Why is it so difficult to handle a bear market?
  2. How do we prepare ourselves for a bear market?

The heat of the moment effect


The popular behavioral scientist Dan Ariely and his colleague George Lowenstein in 2006 came up with a weird yet very interesting experiment. Let us listen to what they actually did.

This tendency for us to behave differently when in a calm state of mind (cold state) and differently when in the heat of the moment (hot state) is what behavioral scientists call as “empathy gap” or “heat of the moment” effect.

Now while most of wouldn’t have heard of this technical term “empathy gap”, but we can easily relate to the fact that when we’re emotionally upset, angry, happy or aroused, we don’t always make the best decisions.

The key takeaway for us is this:

When we are calm and comfortable, we turn out to be extremely bad in imagining how we will act during times of emotional strain (think fear, anger, hunger, exhaustion, thirst etc).

Such an under-appreciation of how we behave during times of emotional strain is where the trouble actually starts.

Now before we move ahead, spend some two minutes and answer this question

How do you think you will behave if the market cracks by 25%?

But remember, this is you in your “cool & calm” avatar!

Your “emotionally charged” avatar might have different plans.. and if you are like the rest of us it will panic and freeze!

Now that you are self aware, that is one step in the right direction.

But the problem of our “emotionally charged” avatar panicking and giving up on our equity investments still remains.

What do we do?

Odysseus to the rescue

In the legendary greek mythology, The Odyssey, the hero Odysseus takes on several challenges throughout his travels and at one point, he and his men are required to sail past an island that is inhabited by Sirens. The Sirens were beautiful but dangerous mermaids who lured sailors with their enchanting music and beauty. Under the spell of these Sirens, the men would hopelessly sail their ships towards the island of the Sirens, crash their boats on the shores and die.


Knowing this cruel fate of men who came before him, Odysseus though a man of great strength, not trusting his ability to resist temptation, decided to plan much ahead.

He instructed his men to plug their ears with wax so that they wouldn’t be able to hear the Siren’s song. He also asked his men to men to tie him to the mast of his ship so that he wouldn’t be lured to steer the ship towards the Sirens.

This method of previously committing towards an action while in a normal state is called pre-commitment.

The bear market is the Siren in our case. While we don’t know when, we must always be prepared for the Siren.

We have to protect ourselves from “ourselves” whenever the bear market arrives.

As Odysseus recognized that he would become a different person when subjected to temptation, we must recognize the same in ourselves when subject to a bear market.

All this points to a simple strategy –

We need to have a battle plan and pre-commit to it!

The Battle Plan

The last thing you want to do in a falling market is to be forced to sell equities to fund a near term requirement.

So let us solve this problem first

1.Emergency Fund

  • Build your 3-6 month spending needs in a liquid fund
  • With all talks about pay cuts, job losses etc during a bear market, this becomes a welcome relief

2.Fund your short term requirements (next 5 years)

  • Build using a short term debt mutual fund or arbitrage fund – you can invest the entire amount if you have or start an SIP

Now with near term money requirements out of our way, we are left with our long term investments and the most important thing from hereon will be our ability to remain calm and hang on.

3.Pre-commitment plan

Write down what would you do when the

  • Market falls 10%?
  • Market falls to 20%?
  • Market falls to 30%?
  • Market falls to 40%?
  • Market falls to 50%?

Take some time out and really think this through.

When the market goes down by 10%, what would you do?

Would you increase your equity allocation? Do you have cash which you can deploy? Should you wait for further correction? Have you identified where to invest? Should you sell some equity? If you sell, when will you get back? What are the parameters you plan to check? etc

Similarly start thinking about your decisions to be made at 20% fall, 30% fall, 40% fall and 50% fall.

The key thing to remember:

This plan is never going to be a one-size fits all plan. Each and everyone of us based on which stage of life we are, our overall portfolio size, understanding of equity markets and our ability to take risks will have a different plan.

So build a customized one for yourself.

Here is the most important part – put it in writing and whenever the situation arises and you have to make a decision, refer to this and get a sense of what your “cool & calm” avatar wanted you to do.

Also discuss with your better half and make sure both of you are convinced of the plan.

Hopefully, we should be able to steer clear of the lure of the siren!

4.Set the right frame

If you have just started saving, then approximate the expected 15 year value of your SIP. Then find the current % of your equity portfolio vis-a-vis your overall future portfolio. If it is a small proportion then don’t be too worried at this juncture. Even if there is a fall, the bulk of your portfolio is yet to be built, and what better period than a bear market to build your portfolio.

If the amount is large (say >5x your salary), then follow asset allocation, and decide on how you will increment equity allocation at various falls (the pre-commitment plan).

5.Stop listening to experts

  • Remember the “authority bias” – i.e in times of decision making during uncertainty we always turn towards the experts and they will have a substantial influence on our decisions
  • The truth will always be this – “No one really knows”
  • So stop listening to doomsday theories and continue with your pre-committed plan

6.Instruct your financial advisor (if you have one) to monitor you to act as per the committed plan

Most of us think a financial advisors job is to recommend investment products and ideas. But I believe, even a half decent investment website or a blog can help you out in that. The true value add of a good advisor however is actually on the behavioral front. During bad times there is nothing which can replace the support and comfort that a fellow human advisor can provide.

Anyway, in case you have a good advisor, work with him on the pre-commitment plan, take a printout with your sign on it and tell him it’s his responsibility to make sure you execute as per plan.

There you go..Your battle plan is ready 🙂

Parting thoughts..

But wait, hang on..

What if after all this we still panic and fail in executing our pre-committed plan.

Truth be told. That’s a pretty bad thing to do. But nevertheless, some of us may still succumb.

In that case, we need to go back to our battle plan sheet and update on what really happened vs what you had planned. This will serve as a mirror for our true risk profile rather than those theoretical questionnaires which are usually used to access our risk profile. This will also be our self introspection moment in understanding us as investors.

Based on this, in the future, we need to adjust ourselves to a much more realistic equity allocation going forward.

Remember, investing is a lifelong activity.

The idea is always to keep improving and becoming a much better investor version of ourself with the passage of time.

And yes, never let a crisis go waste.

So while we wait for the next one,  get your battle plan ready and as always happy investing 🙂

If you found what you just read useful, share it with your friends and do consider subscribing to the blog along with the 1600+ awesome people, so that you don’t miss out on next week’s post. Of course additionally you also get some interesting investment insights delivered straight to your inbox.

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

5 blind men and the equity markets

One of the best pieces of advice that I received from my boss goes like this –

“Arun, there are two periods which will define you and your career…

How you behave during times of success and

How you behave during times of failure.

The other things mostly will get taken care of..”

On similar lines, I believe being a good investor is all about two things –

How we behave during the best of times (bull markets) and the worst of times (bear markets) will eventually define us as investors

In other words, this means we need to be able to evaluate the degree of risk in equity markets at various points in time so that we can manage our behavior correspondingly.

Unfortunately, there are several moving parts in evaluating equity markets and for a large part of my investment career I have been guilty of taking only one perspective (based on whichever was the popular narrative at that point in time) and missing out on the bigger picture.

Image result for the blind man and the elephant

This was exactly how I was evaluating equity markets!

Anyway, better late than never..

While I proclaim no sudden  “enlightenment” on what drives the market, the attempt here is to share with you a slightly more holistic framework on evaluating equity markets.

I believe, there are 5 perspectives or vantage points, that we need to take while evaluating the equity markets.

are Organics

Since this is an evolving topic, I shall update corresponding articles underneath these topics as and when I write.


Focus will be on various valuation parameters to evaluate on how expensive or cheap the equity markets are..

What returns will I get from equities going forward?

What returns will I get from equities going forward? – Part 2

A layman’s guide to equity valuations

2.Earnings Growth

We will track the fundamental long term driver of equities i.e earnings growth in this section. We will also see various methods to evaluate earnings growth.

What returns will I get from equities going forward? – Part 3

Equities – dismantling the returns !!

Equity Investing – Just 2 things to remember

3.Demand and Supply

This vantage point is based on the The Law of Supply and Demand.

It simply states that when demand for a freely traded commodity exceeds the supply of that commodity, its price will rise and vice versa. And, since common stocks are a freely traded commodity, their price movements are dictated by the Law of Supply and Demand.

In this section, we will be analysing FII flows, DII Flows, MF Flows, IPO issuances, market breadth indicators, other asset class returns such as real estate, fixed deposits, gold etc

4.Interest rate

Interest rates act like gravity on asset values – The higher the rate, the greater the downward pull. That’s because the rates of return that investors need from any kind of investment are directly tied to the risk-free rate that they can earn from government securities. So if the government rate rises, the prices of all other investments must adjust downward, to a level that brings their expected rates of return into line.” – Warren Buffett

In this section we will evaluate our outlook on domestic interest rates..

5.Global Markets

To get an approximate sense of global markets via global market commentaries from popular investors, valuation parameters etc


Book mark this post, and hopefully a few years down the line as we put the pieces of this jigsaw puzzle together we should have a much better understanding of the equity markets.

As always let us keep learning and sharing.

Happy investing folks and don’t forget to subscribe to the blog:)

 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







Long term SIP is not risk free, yet you can workaround it

10 minute read

In recent times, there has been a significant interest in equity markets thanks to the strong returns of the last few years. The best thing to have happened is the new culture of SIP (systematic investment plan).


Source:AMFI, Link

A SIP is a simple investing process, where you invest a particular amount each and every month regularly. This is extremely convenient as the SIP amounts are automatically debited every month and also coincides with our cash flows (monthly salary). The SIP also supposedly solves the major issue of trying to time the equity markets as the investments are equally spread out and hence average out the ups and downs in the equity market.

Be present and mindful when purchasing new items. Ask yourself: do I need this? If I want this, do I have a place to store it? Do I own many of the same already?

All this is good.

But going by the numbers above it looks like a lot of us are entering the equity markets for the first time and SIPs seem to be the preferred route for many.

Given the great returns of recent times, there is a possibility of misplaced expectation if SIPs are not understood or sold properly.

Hence before you jump in, it is extremely important to understand some of the underlying nuances in the SIP concept (which are not generally talked about) so that you end up with a good experience and most importantly decent returns over the long run.

Expectation: I will continue my SIP for 10 years in a few equity funds. Life is taken care!

Here is an interesting article, which explores this question – Link

This is the long term 10Y SIP returns for Sensex over different periods as per the article.

Long term SIP does not remove risk and other important lessons from historical equity returns

And yes, here is the shocker –

There are periods when the Sensex 10Y SIP returns have been negative!

How is that possible?

  • Doesn’t an SIP stagger my investments thereby saving me from volatility?
  • Isn’t 10 years a reasonably long horizon for equities?

Now before you panic and redeem your SIPs, let us explore this further..

Never forget the underlying equity portfolio

Let us start with an hypothetical example. Assume I invest, Rs 10,000 every month for the next 10 years in a few equity funds and my returns are 15% annualized. This is how my portfolio would have grown.


I end up with around 27.5 lakhs at the end of 10 years.

But what is the blue and green component?

The good part of an SIP is that as we invest our money across several months, even as equity markets go up or down we end up averaging our buying price. And hence the notion that we don’t need to be worried about market ups and downs as the SIP will take care of it and in fact take advantage out of volatility.

A quick glance at the above chart and you know what we are missing.

The green bar represents 1.2 lakh invested via SIP (Rs 10,000*12 months) into our portfolio every year. The blue bar is our overall portfolio which grows in size.

Now the key is to realize that as time progresses, the incremental amount which gets invested via an SIP over a year becomes small compared to the overall portfolio (Sample this – In the above example, the incremental SIP component after the 6th year contributes less than 10% to the existing portfolio).

And hence, while the incremental amount is staggered across 12 months, the existing portfolio is completely exposed to equity markets. 

Thus the larger portion of the portfolio will be susceptible to equity market ups and downs in the later years and SIP will have little impact in reducing overall volatility.

Now armed with this simple insight, let us get back to solving the problem of 10Y SIP returns in equities sometimes being low.

Key Insight: The equity market returns in the last 3 years become very critical in a 10Y SIP calculation as almost 50% of the final portfolio value gets created in the last 3 years.


Going by this logic, the periods of low 10Y SIP returns should mostly be the ones where the last 3 year equity returns were dismal.

But nothing like concrete data. So let us check our thesis with actual evidence..

Given below are the SIP returns for different holding periods (7Y to 20Y) in Sensex across different starting dates starting from 1980 till date covering almost 28 years.

SIP Returns.png

The SIP returns below 10% has been shaded in red, 10% to 12% in yellow and above 12% in green.

Now if you are like the rest of us, you must have switched off seeing the complex table above. No worries, just relax, take a deep breath and focus only on the 10Y column. Take a note of all the periods where the returns were lower than 10Y (i.e the ones shaded in red)

You would have noticed that, 10Y SIP returns have been low for investors who started their SIP between mid of 1990 to 1994.  Going by our last 3 years being bad logic, most of the returns between 1997 to 2004 must have been really bad for Sensex.

Let us check..

CY Returns.png

As expected, the returns of Sensex has been poor between 1995 to 2002 – which has led to weak performance in the 10Y SIPs started between 1990 to 1994.

What does this mean for us?

For all those who have started or are planning to start their SIPs now – the Sensex returns of 2025-27 will be the critical determinant of overall returns (the previous 7 years of course do matter but of slightly lower significance).

So at this juncture, don’t break your head over near term concerns of whether the market is expensive or not today as your overall portfolio has not yet been built and your incremental money via an SIP will get averaged out over the ups and downs of equity market..

But what if we end up as the unlucky lot and the returns of 2025-27 goes for a toss?

Unfortunately, we have no way of predicting what will happen to the markets after 7 years.

But, all is not lost..there are a some investors who have actually experienced this situation earlier..Maybe we might find some clues there..

Let us go back and find out what happened to to the unlucky 1990-94 SIP investors.

Unlucky SIP Investors

Now with the benefit of hindsight, what would have been your advice to them?

Let me guess your magic words..

“Boss..Hang on for a few more years”

I know it sounds outrageously simple and dumb. But truth be told it is, perhaps emotionally the most difficult to pull off.

As seen above, the unlucky investors by simply extending their time frame to around 11-15 years, could have reversed their fortunes!

Takeaway: When doing a long term SIP in equities a time frame of 10-15 years is required for reasonable returns (and always be prepared to extend your time frame)

Even if you manage anything above 10% in Sensex, funds managed by good fund managers should be able to provide an outperformance of around 2-4% which implies a 12-14% return which is good enough.

Any other solution?

The other way especially for large portfolios, is to practice asset allocation (i.e allocate between equity, debt and gold and re-balance based on market conditions. This is easier said than done. But no worries I will address them someday in the future.)

Summing it up

  1. SIP will take advantage of equity market ups and downs only in the initial years, when the underlying equity portfolio is just about getting built
  2. As years progress, the underlying portfolio in most cases will grow and will be subject to equity market ups and downs
  3. Even 10Y SIPs can have lower returns as equity market returns in the last 3-4 years have a large bearing on overall returns
  4. Simple solution is to be prepared to extend your investment time horizon (to around 11-15 years)
  5. For large portfolios, asset allocation while behaviorally difficult to implement is a great solution (if you have a good advisor to help you out)



What returns will I get from equities going forward? – Part 3

In the first part of this series (Part 1) we had explored the impact of valuations and in the second part (Part 2) the impact of earnings growth on estimating future equity returns.

We still have some missing pieces and in today’s post let us take a deeper dive into valuations.

While doing my first post on valuations, I had accidentally chanced upon an interesting insight..

PE Ratio.png

Sensex valuations mean revert!

Grr..That’s too obvious right..

True, I was just kidding. Now look at this chart below

Sensex Min PE 2Y data.png

Take a few minutes to analyse this chart.

In this chart I have plotted the minimum PE valuations of the Sensex recorded in all possible 2 year periods in the last 17 years.

Now that I have given you the required data, its time for the detective in you to decipher the insight..

And just in case it helps, let us take the guidance of the great detective Mr Sherlock!


Are you able to OBSERVE…

Not got it, yet. Here is a clue

  1. The maximum of the minimum PE recorded in every possible 2 year period of the last 17 years is 17.4 times
  2. Current PE valuation is 23.5 times

There you go. Now you can connect the dots..

The insight is simple:

If you take any two year period in the last 17 years,
The Sensex valuation has always ended up falling to a PE valuation of at least 17.4 times during some point in the 2 year period.

For convenience and being a little conservative, let us round it off to 18 times.

So this means, if history repeats, in the next 2 years, Sensex valuation at some point during the next 2 years should at least fall to 18 times from the current 23.5 times.

This works out to a bare minimum valuation decline of 23% sometime during the next 2 years!

Wow! This is getting interesting.

This also means if you have a large sum of money today and want to invest in equity, we have some tough decisions to make.

This 23% valuation decline will have to be offset by earnings growth for us to make actual returns.

Let us take the best case where we assume this decline happens only at the end of 2 years, thereby giving earnings growth 2 years time to offset the decline.

Assuming if earnings growth clocks an above average 20% growth for the next two years, we end up with around 44% absolute earnings growth (if you are wondering why it is not 40%, remember the compounding effect).

Knocking off 23% decline from this, we end up with an absolute returns of around 11% for 2 years.

That translates to a compound annualised returns of around 5.3% !!

Oops. Isn’t this what we get from FD or debt fund returns.

Let us check the equity returns at various earnings growth expectations due to this valuation decline:

earnings growth vs returns

Even at 25% earnings growth, the equity returns over the next 2 years will just work out to be around 10%.

One thing is pretty clear, the earnings expectations being built in today’s valuations are pretty high (around 25-30% earnings growth).

So this means, given the requirement of a staggering earnings growth even historically it must have been extremely tough to notch up good returns if the starting valuations were this high.

As always, let us put our conclusion to test.

Any guesses what the future 2 year returns looked like historically, whenever the Sensex valuations traded above a valuation of 22 times ..

fwd 2Y Returns vs Starting PE

I have plotted the month end valuations (only for periods where PE>22) from 2000 till date and compared it with future 2 year returns.

Good. As expected, except for one occasion (Apr 06 to Apr 08 where it gave 20% CAGR) every other time the Sensex valuation has crossed 22 times the 2 year annualized forward returns has been less than 10%.

Even in the case of Apr-06, the starting valuation of 22.8 at the end of Apr-08 had declined to 18.4 – which implies an annualised valuation loss of 10%. However the earnings growth was extremely strong at around 34% annualised. So the overall returns adjusting for valuation loss still stood at 20%!

Thus our framework holds good and hence for the next two year returns even to be 10% and above we need earnings growth over & above 25%. That’s definitely a tough ask.

All this is fine boss. I have money now. How should I invest?

Now if you are someone who has just started investing in equities and is in the wealth building stage (i.e your total assets are still less than 5 times your salary), please ignore all the above ramblings. Simply continue with your SIP. In 10 years the outcome will be

Image result for all is well

For the others, whose overall equity investments are more than 5x your annual salary (this is just a random no to imply that the value is reasonably large for you), you need to seriously consider an asset allocation framework. (runs beyond the scope of this post)

How to invest currently into equities if you have a large one time amount to be deployed

As in life, there are millions of possible solutions. This is mine and you are free to improve upon it.

You want to invest a large amount in equities with a >7 year time frame

  • 25% of the money – Deploy Rs 25 in Equity Funds
    • Humble approach
    • “I don’t have a freaking clue where the markets are headed. And no one can predict or precisely time the market. So I will have a long time frame to mitigate the valuation risk. Time in the market is more important than timing the market”
    • Prefer value oriented fund managers like Sankaran Naren while selecting equity funds
  • 25% of money – Dynamic equity allocation funds
    • Funds which auto adjust equity allocation
    • I don’t trust myself. I might panic when market falls and fail to reallocate back to equities. So let me automate my asset allocation.
    • Eg: Motilal Oswal MOSt Focused Dynamic Equity Fund, ICICI Prudential Balanced Advantage Fund etc
  • 50% of money – Stay in liquid funds and deploy only when PE valuations come below 18 times over the next 2 years
    • Valuation based approach based on our findings above
    • I hope to start with a reasonable framework and keep evolving & improving it based on the feedback

The idea is to strike a balance between our insights (which can go wrong, thanks to the greatest humbler – the markets) and a “Time in the market is all that matters” approach.

Where can we go wrong?

While historically PE ratio has always gone below 18 times in a 2 year period, what if it doesn’t repeat.

What if it goes to 35 or say 50 times and stays there. Who decides where the PE value must be? Why should it mean revert?

Are we missing something..


This means we need to introduce a 3rd lens to evaluate future returns
(1st being valuations, 2nd being earnings growth).

And what would that be?

Hang on till the next post…

Till then happy Diwali and happy investing 🙂


And, just in case you found the contents useful, do consider sharing this article with your friends & family.

Also don’t forget to subscribe to the blog and join the 1600+ awesome people.

Let us all help each other in becoming a better investor version of ourselves.

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