How does a millionaire manage his money?

In brief, tell us about your background.

I am an entrepreneur, angel investor, and engineer from IIT-Bombay. I co-founded CoCubes and was its CEO until last year. CoCubes is an online platform for assessments and hiring which was acquired by Aon's Assessment Solutions. Nowadays, I am thinking of what to do next and meeting (on zoom) entrepreneurs in the Internet/EdTech space. I just finished writing a book for first-time entrepreneurs called - Let’s build a company which will be published by Penguin India in October. 

Harpreet Singh Grover

What are some of your hard-earned investing lessons that you didn't find in books?

At first, I thought I could manage on my own by reading financial dailies or by asking around. Based on that process, I invested in some stocks and mutual funds but only ended up losing money.

For instance,  I met someone who said that he had made most of his money by investing in small cap mutual funds. So I went ahead and invested Rs. 50 lakhs in it. This was at the peak P/E ratio (a term I didn't really understand then). After 2.5 years, my investment of Rs. 50 Lakhs is Rs. 35 Lakhs.

Similarly, after reading suggestions on stock buys from a newspaper, I bought a few and also started tracking what happened. In most cases, the stock would go the other way around than what the newspaper suggested. At one point, I really contemplated getting a research analyst to analyze the recommendations to prove they always come out naught. 

I bought Spicejet stocks because I thought aviation will always grow. Besides, my fundamental belief was in a promoter running it. An entrepreneur will always generate more wealth over professional management, or so I thought. I did make some money but I realised aviation is just a bad sector to invest.

After that, I invested in bitcoin. Even today, I don't fully understand that asset class. Thankfully, I made money in it but that was mostly due to a stroke of luck rather than anything else.

What is your current asset allocation?

Property - 30%

Equity through PMS and Mutual Funds - 10% . Dabbled in quant funds but lost 10% there. 

Debt funds - 30% 

Risky investments - angel investments, venture capital - 20%

Safe in hand money - 10%

With Covid-19, how has your view about wealth and money changed?

Firstly, the pandemic has made me understand the security of having cash/liquidity in my investments. I have also understood it better through this old maxim -- there is no reward just for taking risk. 

The environment today is fraught with risk and it’s become all the more important to weigh risks against reward for every investment decision that I make.

What are some of the changes you have made in your investing style in the last couple of years? What are some of the fundamental truths you have learned?

First, I moved out of all stock investments that I had made on my own research, except one. I realized that I should either understand it or not do it at all.

Protect your principal: This seems quite obvious but I didn’t think of it this way for a long time. I believe managing money is best when it is boring. For example, when you can park your money and not look at it for a long time and stay at ease. If you are having fun managing money, there is a high chance you will lose it.

Risk comes from lack of knowledge. Don't invest in something you don't understand. 

 Angel investment is a risky proposition. But I could argue that given I have been an entrepreneur, I will be better at it than someone just doing it as his job. If I hadn't been an entrepreneur, I would not have done angel investing. 

Asset allocation is important. It is the first question to think about. Right asset allocation depends on your age, your future plans, income steadiness, parents’ health, age of children etc. For many of us, having 50-60% in equity will be a sensible choice.

What has been your biggest mistake in investing?

A big realization has been that if you don't want to manage money full time, get an advisor.

Some small realizations like that index funds in India still don't work. Maybe, it is because the definition of large cap has changed for mutual funds, or maybe it might start to make sense in the future.

If you had to choose one quote or statement on investing for a wall hanging, what would it be?

"To make what they didn't have and didn't need, they spent what they did have and did need."

What do you look for in a Wealth Manager?

The best advisor is not the one who can tell you which mutual funds to buy, but the one who can help you continue your SIPs when the world stops them and helps you sell when the world thinks there is more gain to be made.

Work with someone you can really trust. Don't work with the smartest salesperson. The person who knows how to manage money rarely looks or talks like a great sales guy. Use your network and get references. Don't commit directly. Ask questions, see what answers they give. Cross check them on the internet and other people who have invested money.

Follow-up question - What is the one question everyone should ask before working with an advisor?

The smart, sales guy might make you fall in love with him and charm you by promising you good returns. For example, one of my relatives invested in a timeshare company only because someone sold it to him.

Hence, choose someone who gives you a feeling of trust. You don’t need to give a lot of money to start a relationship. You will still need to do your research for all the advice you receive. 

For example, whenever time permits, I do my own research for all the suggestions or advice I get from Wealthy. By doing my own research, my confidence in Wealthy increases. Of course, there are times when I don’t act on my advisor’s suggestions and that is also okay. 

As always, don’t invest in a certain product just because your advisor is saying so. Instead, do your research, find out historical returns and invest with conviction.

What would you advise your 27-year-old self?

Firstly, I would advise myself or anyone to choose a comfortable debt-equity allocation and products one understands. For example, 40-60 might be a good allocation today.

Coming to my 27-year-old-self, let’s say that I have savings of Rs. 10 lakhs. I am planning to get married, start a family, and I also have some fear of losing my job. Hence, I would suggest that everyone should get health insurance for themselves and their family. Like I said earlier, everyone should have enough cash in hand and protect principal at all costs. 

Right now, contracting Covid-19 is a real risk. In my own firm, we are able to pay salaries only till 40% of fixed costs. So you should minimize your expenses and do everything to protect your savings of Rs. 10 lakhs.

If there was no pandemic, I would take a lot more risk and go for a 80-20 equity debt allocation.

Does money keep you at night?

If something were to happen tomorrow and I were to lose all my money, I think I would be okay. I would have to go and work again, but nothing more. That said, I have made poor choices with about 10-15% of my total wealth.

You said that angel investing is an expensive hobby? Why do it then?

As an entrepreneur, I saw myself in those people whose companies I was investing. As an entrepreneur who was also asking for money once upon a time, I could empathize with the person. I care about meeting determined founders who have enough conviction to leave a company and start a job. 

Although I want to believe that angel investing can give me good returns, I also know that it is an expensive hobby. My primary motivator is to identify a company in its early stages. The process of observing a great company from its early stages is very interesting. It is also interesting to watch companies grow and see the visions of their founders change.

I might be able to make 15% returns year-on-year, but that is not why I am doing it. That said, I would at least expect FD level returns from it. If that doesn’t happen, I would say that I didn’t make the right choice.

You’ve said you want better-than-FD returns on your investments. But will that change in the future?

Although my capital needs will only go up in future, the interest component will help me maintain my lifestyle. Since 30% of my investment is in risky areas or products -- which could return zero -- I won’t make any additional risky investment unless I am certain of outsized returns.

For example, I invested Rs. 50 lakhs in an offline business which has now been closed for the last 3 months. I have now gone from expecting Rs. 5 crore in 5 years to expecting just return of my capital. And if the pandemic continues for two more years, I may not get anything at all. Hence, principal protection is my main focus in investing today.

What would you say to those investing in FD today?

I would tell them that they are keeping money in FDs because they understand it and find it safe. One should get a Wealth advisor, but also do research on products. Once you understand a product and find it safe, you should go ahead with it. That said, there are instruments safer than FD out there.

Expanding the topic of investing, what are the one or two decisions that made you happy?

One would be what I didn’t do. For example, I took Wealthy’s advice and didn’t invest in Franklin Templeton debt funds. If at all someone wants to take risk, why not do it in equity? Why would anyone want to take risk in what is supposed to be a safe asset?

Second, even before COVID hit, I was underweight on equity. The equities had been expensive for a while, which I realised through my interactions with Wealthy, and ended up allocating very little to equity. Thus when COVID hit, I was protected from that fall and at the same time I had enough in debt to move to equity and take advantage of the correction.

You have invested in all asset classes, be it startups, real estate, and even quant investing. Among these, which one do you understand best and also aligns with your approach?

The closest to my approach would be Mutual Funds. Although there is some risk, there is also enough historical data. If you have a long-term horizon, you are almost certain to make more money than you would elsewhere.