7 Habits that can lead to Future Wealth

Unless you expect to win the lottery, or inherit the estate of a wealthy aunt, or write a killer app that Google or Amazon pays several million dollars to acquire - it is unlikely that you will get wealthy overnight.

Forget about the rags-to-riches stories. Most of them are really that - stories. People who are wealthy have put in a lot of time and effort to achieve their successful financial status.

If you wish to own a tree that will bear delicious fruits for many years, you won't be able to just buy it. You need to buy a sapling from a nursery, plant it, water it, fertilise it, protect it from the elements for several years before it can bear fruits.

To build wealth for the future, you need to make long-term plans and have a disciplined approach towards saving and investing. It is possible to do it on your own. But it is better if you seek advice from an experienced financial planner.

Sarah Chandler explains 7 habits that can lead to future wealth in an article in investopedia.com. Read it here.

Sunday musings: Lord Ganesha's lesson on preservation of wealth

There are several mythical tales about Lord Ganesha - most of them about how he got his elephant head, why one of his tusks is broken, why a serpent is wrapped around his waist.

The one that has relevance to modern life is how he taught Kubera a lesson. The story goes like this:

The god of wealth, Kubera, was extremely vain and proud about all the wealth he had accumulated in his fabulous city of Alakapuri. He wanted to show off to the gods by throwing a lavish party.

He personally invited all the gods to come to his city. But when he visited Mount Kailasha, Lord Shiva turned down his invitation. Seeing the look of disappointment on Kubera's face, Lord Shiva relented and said:

"Sorry I can't come, but you are most welcome to invite my young son, Ganesha. Just remember that Ganesha has an insatiable appetite."

Kubera immediately agreed to the proposal - thinking 'I have so much wealth, how much can young Ganesha eat?' 

The god of wealth took the young son of Lord Shiva to his grand city. Like the other guests, Ganesha underwent a ritualistic bath after which he was dressed in expensive clothing and jewellery provided by Kubera.

A serious problem arose when everyone sat down for the banquet. Whatever food was put in front of Ganesh was gulped down in the blink of an eye. Kuber's servants were running back and forth with plates of food to keep up with Ganesha's voracious appetite.

Within a short time, Ganesha finished all the food that had been prepared for the banquet. Still he wanted more. When no more food was made available, an omnivorous Ganesha started eating tableware, furniture, decorations, chandeliers and whatever else he could lay his hands on.

Kuber was horrified. He prostrated himself before young Ganesha and begged that his spectacular palace be spared from Ganesha's ravenous appetite.

Ganesha not only refused, but said that he was still hungry and if not provided with anything else to eat, he would devour Kubera himself. 

A frightened Kubera rushed off to Mount Kailasha and fell at the feet of Lord Shiva - asking for forgiveness and seeking a remedy to Ganesha's insatiable hunger.

With an indulgent smile, Lord Shiva gave a handful of roasted grains to Kubera and asked him to offer it to Ganesha with love and humility.

By the time Kubera returned to Alakapuri, Ganesha had devoured most of the city. Kubera humbly and respectfully offered the roasted grains to Ganesha. Ganesha's hunger was finally satiated and all was well.

There are different morals that can be drawn from this tale. At one level, it suggests that a simple meal, if offered with respect and consumed with love, can offer more nourishment than a sumptuous banquet.

At a metaphysical level, the roasted grains symbolise the 'burning' or extinguishing of our desires that can lead to progress along a less materialistic and a more spiritual path.

At a more mundane level of wealth creation from the stock market, there is a lesson to be learned about preservation of wealth. 

Showing off to your friends and neighbours by buying a curved-screen TV and an imported car can only give you temporary pleasure - till your friend buys a bigger TV and your neighbour buys a more expensive car.

Try to avoid the simultaneous switch

What is a simultaneous switch? It is when you sell a stock to immediately buy another. The simultaneous switch is quite a common practice amongst small investors - usually followed by the less experienced ones. But it is a mistake, and needs to be avoided if you want to succeed as an investor.

Why is an investment mistake to be avoided? Because you end up losing money. And avoiding losses is the only rule of investing. Remember that the stock market is not a zero-sum game.

Each buy order needs a sell order for the transaction to be completed. But if you buy 1000 shares, it doesn't mean a single seller sells the entire 1000. There could be several sellers of 100-200 shares each. If the stock shoots up after your purchase, you 'win' and 5 or 6 investors 'lose' (or, 'win' a much smaller amount).

A smaller percentage of investors make money. The majority lose. To make money from stocks, there has to be lots of losers. You don't want to be one of them!

Why is the simultaneous switch a mistake? It is a form of 'timing' the transaction which is fraught with risks. One is trying to make a sale and trying to make a buy at the same time. It is a rare occasion when a good time for selling one stock is also a good time for buying another.

The 'need' for a simultaneous switch occurs during bull markets. Small investors often enter late. In an effort not to miss the bus, they end up spending all their spare cash in buying some of the 'hot stocks' that have already run up a lot.

These 'hot stocks' may not provide great returns over the short-to-medium term. As sector rotation occurs and a different set of 'hot stocks' shoot up, investors get rid of a few of the non-performers (or the ones in which they have made small profits) and simultaneously re-deploy the money into another set of stocks.

This may provide a lot of excitement, but doesn't greatly enhance wealth building. When the next correction comes, there is hardly anything left in the kitty to pick up the bargains.

In a previous article, I had mentioned three reasons why one should sell a stock. Those reasons can not be reasons for buying. Learn the mental discipline of separating the reason for selling from the reason for buying, and avoid the temptation of the simultaneous switch.

(Note: If you are not sure how to time your selling, you need to learn about and implement an asset allocation plan. Read Chapter 12: How to Reallocate your Assets from my eBook. Haven't got your copy yet? Get your FREE eBook before it is too late.)

How to generate income and build wealth

It is important for all investors to clearly understand the difference between income generation and wealth building. Confusions arise since both income and wealth are classified in terms of money: Mukesh Ambani is a multi-billionaire; my nephew works for a multinational company where his CTC (cost to company) is Rs 15 lakhs per year.

Having a substantial income - whether from salary or business - doesn't necessarily make a person wealthy. Why? Because building wealth is a well thought out process that needs to be followed with intelligence and discipline.

Many young investors think that the stock market is a place where one can get rich (read: wealthy) quickly without spending too much effort. All you need is some luck and a few good tips. Every one has a cousin or a friend that has made a killing in the stock market.

Most older investors shy away from the stock markets. They look upon it almost as a vice den, where unscrupulous people take part in nefarious activities which are much worse than gambling in a casino. They all have a colleague or relative that has been reduced to penury by losing all his savings in the market.

Both views are extreme and do not help in building wealth. The younger group find their thrills in the stock market - where they lose as much as they gain, and look down upon bank fixed deposits and post office monthly income schemes as boring and old fashioned. The older group stick to risk-free fixed income streams that get eaten away by taxes and inflation. Neither end up being wealthy.

To build wealth over the long term, a system that combines these extreme views needs to be developed. The simplest and most effective way is to have an asset allocation plan. A certain portion has to be allocated to equity shares to hedge against inflation and taxes. One also needs to allocate a substantial portion to fixed income avenues, that can generate a regular stream of income to supplement the salary or business income.

Think of income as a cash inflow that is spent on bills, home and car monthly installments, eating out, watching movies, buying stuff at malls. If one manages to save something after all these 'important' expenditure, only that saving can contribute towards building wealth.

So one needs to have a plan that works backwards. First of all, have a goal about the amount of money you will require at different stages of your life. Your marriage, children's schooling, aged parents' medical expenditure, family holidays, your old age retirement requirements.

Then calculate how much you need to save every month to invest it as per your asset allocation plan to achieve your various financial goals. This amount - it need not be an exact figure as a rough estimate would suffice - should be taken out of your pay check or business income every month before you begin your monthly expenditures.

This may sound like an easy plan to implement, but believe me, it isn't. It would mean a lot of sacrifices - both small and large. A simple 'thali' dinner instead of one at a fancy restaurant; a DVD watched at home instead of a family outing at the multiplex; a holiday in Goa or Puri instead of at Malaysia or Mauritius; buying a 5 years old car instead of a spanking new one from the showroom.

At the end of the day, it is your mindset and prioritisation that will determine whether you have 'enough' money and can retire a wealthy person.

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