Category: Personal Finance

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Investing Life Design Personal Finance

Building a good relationship with money

I recommend reading the book Psychology of Money. It’s an easy, straightforward way to build a good relationship with money. I have many Kindle highlights from when I read the book recently; here are a couple.

What money does:

The highest form of wealth is the ability to wake up every morning and say, “I can do whatever I want today.” People want to become wealthier to make them happier. Happiness is a complicated subject because everyone’s different. But if there’s a common denominator in happiness—a universal fuel of joy—it’s that people want to control their lives. The ability to do what you want, when you want, with who you want, for as long as you want, is priceless. It is the highest dividend money pays.

Money’s greatest intrinsic value—and this can’t be overstated—is its ability to give you control over your time. To obtain, bit by bit, a level of independence and autonomy that comes from unspent assets that give you greater control over what you can do and when you can do it. A small amount of wealth means the ability to take a few days off work when you’re sick without breaking the bank. Gaining that ability is huge if you don’t have it. A bit more means waiting for a good job to come around after you get laid off, rather than having to take the first one you find. That can be life changing. Six months’ emergency expenses means not being terrified of your boss

What you should know about saving and using your money:

Manage your money in a way that helps you sleep at night. That’s different from saying you should aim to earn the highest returns or save a specific percentage of your income. Some people won’t sleep well unless they’re earning the highest returns; others will only get a good rest if they’re conservatively invested. To each their own.

There are basic principles that must be adhered to—this is true in finance and in medicine—but important financial decisions are not made in spreadsheets or in textbooks. They are made at the dinner table. They often aren’t made with the intention of maximizing returns, but minimizing the chance of disappointing a spouse or child.

Wealth is what you don’t see… Wealth is the nice cars not purchased. The diamonds not bought. The watches not worn, the clothes forgone and the first-class upgrade declined. Wealth is financial assets that haven’t yet been converted into the stuff you see.

Also on this subject: the excellently written Money is the Megaphone of Identity.

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Investing Personal Finance Real-World Crypto

How India could regulate crypto investments – Part 2

In Part 1, we discussed three ways in which the Indian government could apply existing regulation to cryptocurrencies instead of simply banning them outright:

One, cap the amount that people can invest in cryptocurrency. Two, set a high minimum to invest in cryptocurrency to place it out of reach of new, vulnerable investors. Three, limit access to only accredited investors who have a certain minimum income or net worth.

Each of these three are discriminatory in some way. One caps the amount of upside. The second and third limit investment and potential upside to those who already hold significant capital. Far from democratising access, each of them perpetuates the gap in investment opportunities.

I’d rather that investing in crypto, and alternative assets in general, require taking a test. After all, the question is whether or not the investor understands the investment and its risks well enough to make an investment decision.

This is not unlike a drivers’ license, which requires you to take a test to prove you can be responsible for not just your own safety (as is the case with investments) but that of others too.

Drivers’ license tests also show that India is capable of administering tests at scale, nationwide, throughout the year.

You don’t need to rely on the transport police infrastructure, though. The capital markets regulator’s National Institute of Securities Markets, or NISM, administers a range of tests for mutual fund distributors, PMS distributors, investment advisors, registrars, valuers, among others at centers nationwide in a number of languages. The government could require the capital markets regulator to expand this infrastructure to prospective investors too. The marginal costs are a lot lower than setting one up from scratch.

Education democratises access to opportunities. Capital requirements restrict it. To me it’s clear which path the government should take.

(ends)

(Featured Image Photo Credit: maxime niyomwungeri/Unsplash)

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Investing Personal Finance Real-World Crypto

How India could regulate crypto investments – Part 1

The government in India is expected to table a bill that, among other things, bans “private cryptocurrency”, making it “one of the world’s strictest policies against cryptocurrencies“.

One of the companies I advise, a tech-enabled wealth management service, has offered alternative assets for a few years now. Those include securitised debt, digital gold, P2P lending, settlement financing, portfolio management services, among others. I’ve gotten to see how they have been regulated – or not.

And I wonder if India’s government, central bank and capital markets regulator could apply some variation of these existing regulations to cryptocurrency, especially when held or traded as an asset.

The government could cap the amount of Indian rupees invested in cryptocurrency across all crypto exchanges. This is like P2P lending, which was initially capped at INR ten lakh, and expanded to INR fifty lakh subject to a few net worth criteria. The RBI controls the toll gates to crypto – the on ramps to transfer money from a bank account to a crypto exchange to buy crypto. That makes it possible to enforce these limits.

The government could set a minimum amount to hold in cryptocurrency. That puts it out of reach of the most vulnerable small investors who the government ostensibly wants to protect. This is like portfolio management services, whose investment minimum was recently doubled from INR 25 lakh to INR 50 lakh.

It could restrict investment in cryptocurrency to accredited investors, a qualification that’s well known in the USA but which the capital markets regulator has only just proposed. So instead of investment minimums or caps, the investor needs to have a certain minimum net worth or annual income. As of this writing, the qualifications are so strict, only a few tens of thousands or very low hundreds of thousands will quality.

(Part 2 – while each of these three are workable, I describe what I’d rather do)

(Featured Image Photo Credit: naraa .in.ub/Unsplash)

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Personal Finance Products and Design Real-World Crypto

The e-yuan cryptocurrency and privacy

China’s e-yuan – the Financial Times takes a look at how the Chinese Government is pushing adoption of the natively-digital currency, not just to advance payments and investments, but also to exert even greater control over its population: “Virtual control: the agenda behind China’s new digital currency”

(Article on Financial Times; may be paywalled; consider supporting good journalism)

China is intent on becoming the first large economy to introduce a digital currency, showcasing its position as the global leader in payments technology to the world at next year’s Winter Olympics.

Cryptocurrencies are often decentralised; they are not issued or backed by governments. The “e-yuan”, by contrast, is part of China’s top-down design… the digital currency project is tied up in the Communist party’s drive to maintain control over society and the economy. The technology is partly designed to reinforce its surveillance state.

Its digital format enables the central bank to track all transactions at the individual level in real time. “we will give those people who demand it [paper money and coins] anonymity in their transactions… but at the same time, we will keep the balance between the ‘controllable anonymity’ and anti-money laundering, CTF [counter-terrorist financing], and also tax issues, online gambling and any electronic criminal activities”

If current statements by the government are any measure, it’s a pretty big blow to privacy. The e-yuan is also seen

as a means to reassert state control over its fintech industry and a vast e-payments market that is dominated by two huge private companies, Ant Group and Tencent… the digital renminbi is distributed directly to the e-wallets of users by state-owned banks, thus setting up payments channels that circumvent Alipay and WeChat Pay.

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Data Custody Personal Finance Real-World Crypto

Nigeria and cryptocurrency

Earlier in February, the central bank of Nigeria banned its banks and financial institutions from servicing cryptocurrency exchanges. Nigerians now have little to no options to convert their local currency to bitcoin and cryptocurrency – which I suppose was the objective.

A few things in this context are notable:

~ This sounds identical to the 2018 ban by Reserve Bank of India.

~ Bitcoin is now trading at nearly a 50% premium in Nigeria: see http://www.bitcoinpricemap.com

~ Since there are no online exchanges, this is probably on local P2P markets like https://localbitcoins.com . This is as transparent a signal as you can get for how desirable cryptocurrency is there. Bitcoin in Malaysia, Indonesia, India, Turkey, and most South American countries is also trading at significant premiums – although Nigeria is off the charts.

~ Late last year, there was press coverage internationally on how anti-police-brutality protestors were using bitcoin (and potentially other tokens) to raise funds: “Nigerian Banks Shut Them Out, So These Activists Are Using Bitcoin to Battle Police Brutality“

~ Throughout 2019 and 2020, Nigeria topped Google trends for searches around bitcoin. One reason could be simply because Nigeria’s currency really hasn’t done well versus the dollar, or simply because Nigeria is a very young country and there’s curiosity about crypto: “Why Nigeria Tops Google Searches for Bitcoin“

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Data Custody Decentralisation and Neutrality Personal Finance Privacy and Anonymity Real-World Crypto The Dark Forest of the Internet

Dalio on Bitcoin – store of value and its threat to governments

Some extracts from the hedge fund manager Ray Dalio’s public note about Bitcoin.

I believe Bitcoin is one hell of an invention. To have invented a new type of money via a system that is programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment.

Because of what is going on in the world, besides there being a growing need for money or storehold of wealth assets that are limited in supply, there is also a growing need for assets that can be privately held. Because there aren’t many of these gold-like storehold of wealth assets that can be held in privacy and because the sizes of their markets are relatively small, there exists the possibility that Bitcoin and its competitors can fill that growing need.

He does make a counter-argument against supply: that while Bitcoin itself is limited, there is no limit to the number of cryptocurrencies that can be created in the same manner. As untamperable and un-shut-down-able as Bitcoin.

Speaking of untamperable, Dalio recognises that the biggest threat to Bitcoin is not an attack on the chain itself, but in governments restricting access to it in the first place.

I suspect that Bitcoin’s biggest risk is being successful, because if it’s successful, the government will try to kill it and they have a lot of power to succeed… for good logical reasons governments wanted control over money and they protected their abilities to have the only monies and credit within their borders. When I a) put myself in the shoes of government officials, b) see their actions, and c) hear what they say, it is hard for me to imagine that they would allow Bitcoin (or gold) to be an obviously better choice than the money and credit that they are producing.

This is potentially what could happen in India. While the government recognises – rightly – that cryptocurrency isn’t clearly either a currency or an asset and therefore doesn’t fit into existing regulatory frameworks, its approach to it seems to be one of antipathy. A bill that may be tabled and discussed in the coming weeks is described in the current parliamentary session agenda as one that intends to

… create a facilitative (sic) framework for creation of the official digital currency to be issued by the Reserve Bank of India. The Bill also seems to prohibit all private cryptocurrencies in India, however (sic) it allows for certain exceptions to promote the underlying technology of cryptocurrency and its uses.

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Life Design Personal Finance

Five steps to building a positive investing habit – the video

Back in August 2020 I described “five steps to building a positive investing habit” that described how to efficiently set up and automate monthly investments for yourself. Recently, in December 2020, I spoke about it in a thirty minute talk.

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Investing Personal Finance

What explains the gap between the roaring US stock market and its indifferent economy?

US financial markets had a remarkable year even as the economy struggled with business shutdowns, layoffs and unprecedented jobless claims in the wake of the pandemic.

This screenshot is from the 4 January issue of the excellent Morning Brew newsletter:

The New York Times tried to explain this disparity by looking at income and spending:

The millions of people no longer working because of the pandemic were disproportionately in lower-paying service jobs. Higher-paying professional jobs were more likely to be unaffected, and a handful of other sectors have been booming, such as warehousing and grocery stores, leading to higher incomes for those workers.

and

The obvious part was a decline in spending on services: All those restaurant reservations never made, flights not taken, sports and concert tickets not bought added up to serious money. Services spending fell by $575 billion, or nearly 8 percent.

– “Why Markets Boomed in a Year of Human Misery”

However, to me this isn’t the full picture. The article makes little attempt to show that the net savings were invested:

… for those a little more comfortable with risk, there was investing in stocks, which helps explain the 16 percent rise in the S&P 500 for the year. For those comfortable with a lot of risk — and with taking advantage of the market’s momentum — there was buying a market darling stock like Tesla or trading options.

In any case, retail investors – people like you and me – make up a small part of the markets, according to this Bloomberg TV video quoted by Business Insider:

Retail investors now account for roughly 20% of stock-market activity on average and nearly one-quarter of trades on peak days, Joe Mecane, the head of execution services at Citadel Securities, said… Individual investors made up just 10% of the market’s trades in 2019. That share then crept to 15% as popular brokerages including E-Trade, TDAmeritrade, and Charles Schwab erased their commission fees…

80% of the investment in the financial markets is institutional money. Those sort of people didn’t have their lifestyles affected in the same way as retail investors did. Institutional investors may have been spooked by the pandemic, withdrawing money in February and March, but they dove right back.

So what drove the markets’ performance this year?

Tech did.

See this chart of the performance of the S&P 500 index with and without FANG: Facebook, Amazon, Netflix and Google.

from Commonwealth Financial Network

This isn’t just a 2020 phenomenon. As the chart shows, a few tech stocks have both outperformed the rest of the market and have ballooned in market cap enough to have an outsize impact on the overall S&P 500 index performance.

This past decade is when tech giants overtook energy and manufacturing companies as the US’ largest corporations. A comparison of the world’s top ten largest companies by market cap in 2010 and 2020 makes this clear:

Of the 2010 top ten, five were in energy, two in finance, two in tech, and Nestle, the food/beverages multinational.

In 2020, nine out of ten were tech companies. One was the Berkshire Hathaway holding company. The only two tech companies in the 2010 list, Apple and Microsoft, are, in 2020, the world’s two largest companies.

The companies that have posted some of the highest gains in 2020 are all those tech companies that have directly or indirectly enabled our shelter-in-place pandemic-suffused lives – Zoom (up 425%), Peloton (439%), Shopify (166%), Spotify (111%), Twilio (220%), among others. And of course the FANG stocks above + Apple.

In 2021, as the US opens up after mass vaccinations, not everything will go back to how it was. There have been irrevocable lifestyle changes. There will be other, newer companies that capture the spends from these changes – Airbnb, perhaps, as the normalization of remote work means that people choose to work from, well, remote places a few weeks at a time. Potentially Zillow and Opendoor as property owners shift their holdings from large cities to smaller ones that are more likely to attract such short-term relocations.

End note: The stock market isn’t the economy and vice versa. Anyone who conflates them is uninformed at best and disingenuous at worst. However, it’s clearer than ever that the gap between the markets and the economy will likely remain: there are only a few companies that are likely to disproportionately shape our lives over the next few years. As these companies do well, their stock – having attracted ever more money – will do well too. And since these companies are also among the largest on the stock markets, the overall market will perform well too.

(I am not a registered investment advisor in the US. None of this constitutes investment advice. I own several of the stocks I’ve mentioned in this post.)

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Audience as Capital Discovery and Curation Personal Finance Products and Design Wellness when Always-On

Herd mentality

I read recently about the USA investing app Robinhood being charged with “gamifying” investing and not putting in place “proper controls to safeguard inexperienced investors.” I was curious about what gamification techniques the service actually uses. Here’s what I found:

“Robinhood’s Role in the ‘Gamification’ of Investing: QuickTake”, Bloomberg, Dec 2020

Investors are congratulated for their first trade with a confetti animation. They’re offered a (tiny) chance of snagging a share of a high-price glamour stock such as Apple Inc. if they get a friend to sign up. They can browse the 100 most-held stocks among fellow users for inspiration. An entertainment ecosystem has risen up alongside Robinhood; TikTok videos under #robinhoodstocks have millions of views.

“Robinhood’s Addictive App Made Trading a Pandemic Pastime”, Bloomberg, Oct 2020

Robinhood’s app emphasizes social interaction by using the possibility of getting a free share of stock in exchange for inviting friends to sign up. You have a tiny chance of snagging a high-price glamour stock such as Apple Inc., Robinhood says, if your friend signs up and links a bank account. If you find your well of investment ideas running dry—or perhaps don’t know where to start—you can browse the 100 most-held stocks among fellow Robinhood users for inspiration.]

Robinhood and the Gamification of the Stock Market, McGill Business Review, Jul 2020

Through a Candy Crush-esque UX design with additions like confetti showers to celebrate transactions, the app gamifies the stock market, sending millions of bored-in-the-house millennials into a trading frenzy through a seemingly playful environment with dangerously real consequences.

Robinhood Has Gamified Online Trading Into an Addiction, Scott Galloway, Jun 2020

Confetti falls to celebrate transactions.
Colorful Candy Crush interface.
Users can tap up to 1,000x per day to improve their position on the waitlist for Robinhood’s cash management feature (essentially a high-yield checking account on the app).

Designed to distract: Stock app Robinhood nudges users to take risks, NBC News, Sep 2019

When smartphone owners pull up Robinhood’s investment app, they’re greeted with a variety of dazzling touches: bursts of confetti to celebrate transactions, the price of bitcoin in neon pink and a list of popular stocks to trade.

A critique of Robinhood’s gamified interface, Georgetown Collegiate Investors, Aug 2020

For starters, the flashing green and red lights, as well as the confetti, often lead users to act on their emotions instead of keeping a calm and level head. The green lights and confetti serve as subtle but prevalent psychological rewards for users. Likewise, the red numbers on the screen invoke feelings of anxiety and fear that may drive users to make irrational choices.

It’s surprising how over the course of a whole year and more, all the articles criticising Robinhood about its gamified interface don’t go beyond the confetti and a detail-less reference to Candy Crush-like design.

Further, nearly every post I’ve read on this topic follows a familiar narrative: that Robinhood encourages poor investing decisions because it doesn’t charge commissions, that it turns investing into a game, that it is disingenuous about how it makes money (payment for order flow to high-speed trading firms), that a customer once took his life after misinterpreting a large negative balance, quotes from ‘industry experts’ about Robinhood being the vanguard of a disturbing trend towards casual DIY investing. It’s astonishing how similar these articles are.

Ironically, the only post with any more detail and actual screenshots is this one, which praises Robinhood interface:

Robinhood is gamified from the start. They reward users that have just signed up with one free share of a stock, chosen by chance. The app doesn’t simply present the free stock to the user from the beginning. The process is similar to something you’d see at a casino. Users are presented with three blank cards, and are prompted to choose one. When chosen, the card flips and the free stock is revealed, with confetti and all…
The black background and bright primary accent colors are reminiscent of a Pacman game. Red is used when a stock has moved down, and green when a stock is up, creating a sense that the user is winning or losing

Obviously, this isn’t about what I think of Robinhood the service. It’s that the onus of understanding an issue in depth seems to be on the reader. And it doesn’t seem to be practical – the only reason I read over a dozen articles on the specific topic of Robinhood’s gamification of stock investing was because that was what I was curious about. The average reader’s just going to read one of these and form an opinion, unaware that all the other coverage of this issue is identical and narrow.

Ultimately this means that we, as individuals, need to choose carefully what topics we are interested in, since, as we’ve seen, the quality of online coverage leaves the duty of diligence to us. And finally, curators will almost certainly become even more important, moving beyond their role as tastemakers and influencers to shapers of world-views.

[Addition 5 Jan 2021] The clearest description of Robinhood’s techniques to drive impulse-based purchases is from a Twitter thread. If you are at all curious about what Robinhood’s gamification means, read through this:

https://twitter.com/petershk/status/1344286419380916228?s=20

(Featured Image Photo Credit: Austin Distel/Unsplash)

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Decentralisation and Neutrality Personal Finance

Investing: tech sector breaks correlations

When I evaluate companies for my US portfolio – which consists only of tech companies that I think I understand – I am forced to think of how many companies I want in my portfolio. There are quite a few good bets. But adding too many of them dilutes individual holdings without adding much by way of diversification. As things stand now I’m pushing myself to think harder about my thesis – which we have written about before – so I can split it into two portfolios. Perhaps we will write about this as and when this pans out.

In this regard, at one point I was thinking about whether the portfolios would naturally align by size of company: one with older, more established companies like Apple or Microsoft. And the other with newer ones like Twilio and Square. Of course, this is lazy. In the economy at large age, size and stability are all mostly positively correlated, lending themselves to large-cap and small-cap fund strategies.

But they are anything but in tech. Network effects are much stronger and available to a lot more companies than in other sectors. Barriers to innovation by startups are much lower and switching costs for people are low, meaning disruption is vastly more common. Also, acquisitions of such companies by large companies for IP, talent and/or customers happen often, at very high valuations. And speaking of valuations, they can soar even for public companies, making them larger than much older competitors.

This may not always hold true in the future. Over time there are platforms emerging in many areas that are controlled by older, larger tech companies. Amazon’s AWS, Google’s Cloud Engine and Microsoft’s Azure for building internet applications are well known. Apple’s device-first strategy of building a platform around health and fitness (Fitness+) is less obvious. Platforms like these raise the barrier for newcomers. But we have also seen such platforms fail or die out – Facebook’s applications platform is one such. Its decline took along with it entire public companies like Zynga.

It’s exciting watching these platforms emerge and investing in companies that dominate them – for instance Cloudflare is building a new platform for the Internet that’s a lot more small-business-friendly and privacy-conscious. And Shopify is building a platform that gives merchants an independent presence online, unlike the Amazon model which subsumes their identity.