What is this post about?

Retail investors invest in the stock market with money available with them. This investable money can come from various sources – salary, borrowed money, inherited money etc. Do you know that the source of the investable money plays a role in your investment approach? The source of your investable money influences your risk taking ability, motivation to spend time on company/industry research, and even impact your buy and sell decisions. In this post, I will explore the ‘Last Rupee Investment Mindset’, and how this mindset leads to wealth generation in the long term.

Easy Money vs Earned Money

Easy money is money that you get without working hard or long or smart. Some sources of easy money can be winning a lottery, inherited money, or borrowed money from friends/families.

Earned money is what you get by working hard, long, or smart. Typical sources of earned money can be salaries, self-made businesses etc.

To understand the difference between the characteristics of easy and earned money, let’s read through a short story.

Raj and Mohan are sons of two different farmers, who grow cotton. As Raj and Mohan come of age, their fathers help them learn the art of growing cotton. Raj’s father is well off, and gives his son 1 acre of fertile land, and 10,000 cotton seeds to begin his cotton farming journey. On the other hand, Mohan’s father is poor, and cannot afford to give his son large land or seeds. However, Mohan’s father tells him that if he is ready to eat one meal a day instead of two, he will save enough to buy Mohan 1,000 cotton seeds, and a small portion of their existing farmland to use for growing his own cotton. Mohan readily agrees, and starts eating one meal a day in order to save enough for 1,000 cotton seeds.

Raj spends the months before the sowing season enjoying his life, and vacationing in nearby hill stations. Raj is not worried as he has ample land and seeds to make a decent harvest. Mohan, on the other hand, is eating a meal a day. Mohan joins his father daily on the farm to learn about the right soil conditions, manure quantity, watering frequency etc. to grow cotton. Mohan knows what he is giving up (a meal a day), to get this opportunity. Mohan is fired up to make the most of this opportunity.

When sowing season comes, Raj sows 10,000 cotton seeds, over his 10 acres of fertile land. Raj waters the cotton plants, puts manure and pesticide as written in his father’s journal. Raj whiles away the remaining time with his friends. Mohan, on the other hand, sows the 1,000 seeds he bought by saving on his meals. He goes to the farm daily to inspect the cotton crops. Mohan adjusts the watering frequency, and manure quantity as he deems fit after daily crop inspection.

You might have guessed the outcome of the story by now. Raj ends up having a bad harvest, and his father refuses to give him land or more seeds. Raj’s father asks him to learn cotton farming for two more years before he is ready to farm again. Mohan, on the other hand, has a good harvest. He goes on to develop good relations with the distributor of cotton from his village. This leads to him signing up a long term annual contract with this distributor. Mohan is on his path to expanding his cotton produce, slowly and steadily.

Characteristics of Easy money in relation to the stock market are:

1. Taking Risky Bets: As the person is willing to lose all of the easy money, the person takes unnecessary risk in the stock market.
2. Emotional Buy and Sell Decisions: The person will allow his/her emotions to drive buy or sell decisions. He may sell a good stock when its price starts going down, and buy bad stock when its price starts going up.
3. Rely on Stock Tips: The person will spend less time on doing own research on stocks. Rather, the person will rely on stock tips he gets from SMS, calls, reading online articles, and watching YouTube videos.
4. Invest in many stocks: The person, with easy money, will invest in a large number of stocks as per the tips received. He will wait for some of the stock to do better, hoping these stocks will outperform the remaining stocks, and give him a large profit.
5. Unrealistic Expectations: Easy money leads to easy expectations. The person with easy money, will expect to double his money within months post investing. If this is not happening, the person will get bored. He may sell his existing stocks to invest in another potential multibagger stock.

Characteristics of a person who invests earned money in the stock market is the exact reverse of above. Person with hard-earned money to invest, will be careful in choosing stocks. The earned money has a history of sweat and blood behind it. The person will treat this earned money with gratitude, and will give high priority to capital preservation over rapid appreciation. He will avoid taking high risk bets in the stock market. He will validate any stock tips he gets by doing his own research. This person knows that money is earned the hard way over time. Hence this person will have realistic expectations of returns from the stock market. This person will not waiver over the ups and downs in the stock market. He knows that there are good days, and there are bad days. What matters is the historical consistency in the performance of a worker – or the stock in this case.

With the difference in easy money vs earned money clear, now lets move to understand the ‘Last Rupee Investment’ mindset.

The Last Rupee Investment Mindset

Assume you have only one rupee (INR or Indian Currency), with you. One rupee is all that you can invest in the stock market. How will you invest this last rupee? Well, you have to be careful, and invest in a good company. This company can give less returns, but will not go bust overnight. You will look for zero to low risk companies. Companies which will continue to grow into the future, thus increasing your invested money. Next, let’s jot down the characteristics of investing with the Last Rupee Investment mindset.

2.1 Well Run Company: You will want to invest in a well run company. Company’s management should be experienced. There should be no fraud investigations or news regarding the company or its promoters.

2.2 Moated Company: You want to invest in a well-moated company. You do not want to take a risk in a company which can be easily replaced by any other company. Moat can be in the form of a recognizable brand (think Maggi noodles), by licensees (think IRCTC/CDSL), or by long term contracts (think TCS/Infosys). Moats give you a comfort of future revenues of the company. The future revenues will increase your wealth in the form of dividends and stock price increase.

2.3 Future Growth Potential: You want a company which keeps on growing into the future. This is reflected by a company in a sunrise industry (think electric vehicles segment), a company which has announced capital expenditure (think of companies expanding by brownfield or greenfield capex), companies who are acquiring other companies to grow inorganically (think Reliance and Adani group companies) etc.

2.4 Attractive Valued Company: As your aim is to protect capital, and make gains over time, you want to avoid expensively valued companies. Companies with very high PE relative to their historically average PEs, or as compared with the industry average PE, can be considered expensive. Problem with expensive companies is that they can undergo PE re-rating in a downcycle. Or their price can remain the same over long periods of time even with earnings growth, thus allowing the high PE to normalize. Example: Tata Elxi, Neste which have high PE as on Jun’22. Rather, you would want to invest in fairly valued companies, whose current PE is comparable or lower than historically average PE.

2.5 Consistent Historical Performance: You want companies which have shown consistent performance historically. Companies whose Operating Margin, Return on Capital Employed, Revenue growth is stable over the past 5 or 10 years, indicate a consistently growing company with reliable performance. On the other hand, avoid companies whose revenue grew abruptly for a couple of years, and then flattened out. Avoid companies whose margins are contracting over the years.

2.6 No Red Flags: research the companies to avoid following common red flags: (a) > 50% promoter pledged shares. Pledging shares is a less preferred way for raising capital. (b) Decreasing Promoter Holdings: this shows that the promoters themselves have less confidence in the company. (c ) High Debt to Equity Ratio: A debt to equity ratio of > 1 means that the company has more debt than equity capital. This is not a good position to be in. (d) Insider trading/fraud news against company’s management/promoters: Promoters/management who work in only their own interest, cannot be trusted to work in favor of the investors. If any one or more of these red flags are found, avoid investing in such companies.

A good approach to select stocks using Last Rupee Investment mindset is to pick companies you know or use. Example: if you have a bank account with HDFC or ICICI bank, and are happy with their services, then pick their stock. If your home gas distribution is done by Adani Gas, pick Adani Gas stock. If you order dominos pizza regularly, and are happy with their service, pick Jubilant Foodworks stock. If you are a Starbucks fan, pick Tata Consumer Products. This way, you know the company as an end consumer. You have experienced growth in the company in terms of new digital banking options for ICICI bank, new store launches of Dominos Pizza or Starbucks etc. With these companies, you will be in a better position to know a growing company with focus on customer service, and visible growth over time. Which companies’ products or services you use which you are happy with, and feel ok to invest in these companies? Do mention in the comments below.

Downsides of Last Rupee Investment Mindset

The one and probably the only downside of the Last Rupee Investment mindset is that you are playing it safe. This means that you will avoid risky stock picks. You will avoid even well run companies who can give better returns in the future, as you do not want to take unnecessary risk. The reason is that with the last rupee available with you, you want to be sure of investing in a company which gives returns in the future, without eroding your capital.

However, this downside is not a limitation. As the investor makes more money in the future, he can take calculated risk in picking good stocks at attractive valuation with good future growth potential. The Last Rupee Investment mindset helps new retail investors to grow their wealth in a low risk, consistent manner.

Typically, the Last Rupee Investment approach will not invest in micro-cap stocks. This person will also avoid small cap stocks unless these stocks have a high moat. The person with Last Rupee investment approach will invest in large and mid-caps, which are leaders in their industry segment.

Why not invest in FDs or Bonds?

This is an interesting discussion topic. A person with low risk appetite can also consider investing in Fixed Deposits (FDs) or Bonds. These asset classes have low risk as compared to investing in equity markets.

However, with FD, capital gains taxes will eat away your gains. In FD, there is no long term capital gain tax savings, which is the case for bonds and equities. Hence, I would avoid FDs. Researching investment options in bonds is a little more complex. Hence people who have time can understand bonds and invest there. A better alternative is to invest in Bond Mutual funds, which give average 7-9% annual returns over 3-5 years horizon. Taxes on gains made on long term bond investments is very low (20%), and gives you indexation benefit as well (6-7% yearly inflation in India). Hence for >3 years investment in a bond mutual fund, you will end up paying negligible taxes on the gains made. With this mind, the second best investment option to equity investment is bonds or debt mutual funds.

My recommendation is still to go for equity investment, as they give higher returns over the long term.

Parting Thoughts

One Rupee will not help buy any stock on the stock market :-). You typically need at least INR 100/- or more to buy one stock. The Last Rupee Investment mindset is more of an investment approach. This investment approach is recommended for beginner retail investors, so that they can develop a self-research based investing habit. Over time, as they become more confident, they can start taking calculated risks in stock picking. Also, it is advisable to use your own money for investment. Avoid borrowing money from your parents or extended family in the beginning of your investment journey. Remember that the stock market will keep on teaching you new things every day. Do not assume that a price making strategy works every time in the stock market. By adopting the Last Rupee Investment mindset, you will be able to minimize your downside, and generate wealth over the long term (> 3 years).

What has been your experience of investing with your own money, vs borrowed or inherited money? Do mention in the comments below.