Nifty is down 15% from its high. Market analysts and economists are forecasting further pain in the short term. You are probably feeling anxious looking at your portfolio. Wondering if you should sell your holdings or continue to buy more. You are not sure if you are staring at an opportunity of a lifetime or a catastrophic mistake.

We have good news and bad news for you. The bad news is that we do not know where the market is headed. In fact, nobody does. And the good news is that with a proper strategy, there is a way to turn this short term volatility to our advantage. And we will see how.

A little background 📈

A year ago, we were discussing and speculating stocks and sectors that would return 20%, not in a year or a quarter but in one month. And now, we are worried if the stock markets will produce positive returns this year. How times change!

2021 was a great year, wasn’t it? Anything you bought went up 20% or 30% in a few weeks, and if a stock didn’t multiply by 2x or 3x in 6 months, it was a matter of shame. Several investors and stock traders took birth during this period. People in their 20s and 30s quitting their jobs to become full-time investors or traders.

It is easy to perform a postmortem of historical events and claim that the signs of a bubble were present all along. But it is difficult to spot a bubble when you are in one. Even Alan Greenspan, the former chairman of the Federal Reserve, agreed, “It is very difficult to definitively identify a bubble until after the fact—that is, when its bursting confirmed its existence.”

Risk & Investing 🎭

Risk is inevitable in anything we do. One way to think about investing is as negotiating risk in pursuit of profit.

The risk in investing doesn’t come primarily from the economy, businesses, or other geopolitical factors. It comes from the behaviour of the market participants. When investors are exuberant their overenthusiastic buying drives the prices to dangerous levels. When they’re depressed, the panic sale pushes prices down to irresistible levels.

This leads to volatility in the markets. Volatility is not necessarily bad for investors, especially when their investment horizon is long (5 yrs or more).

Becoming Antifragile 🌪

“Wind extinguishes a candle and energises fire. Likewise, with randomness, uncertainty, and chaos: you want to use them, not hide from them. You want to be the fire and wish for the wind.”

—Taleb

According to Taleb, all systems can be classified as either fragile, robust, or Antifragile.

Fragile: Breaks under stress.

Resilient: Resists shocks and stays the same.

Antifragile: grows stronger under stress (or shocks).

To understand this better, let us take the example of 2 brothers, Ram and Shyam. Ram is working at a large multinational corp in India, and he has a steady income of Rs. 50,000. On the other hand, Shyam runs a restaurant, and his income is highly variable. During good times he earns around Rs. 70,000 after paying the expenses, and Rs. 30,000 when the business is down. The average income for the year, however, is approximately the same for the brothers.

Their parents, and sometimes Shyam himself, wishes he had the job security and stability of his brother Ram. Although Shyam enjoys running his restaurant, the randomness of his income worries him.

Shyam is not alone here. There is this illusion among all of us that randomness is risky. And we should eliminate randomness from our lives and seek stability.

During the covid-19 pandemic, the firm Ram worked for had to cut down the staff to reduce expenses, and Ram found himself jobless in the middle of a recession.

Shyam quickly pivoted his restaurant to a cloud kitchen and offered home delivery. His income more than doubled during the lockdown.

The Illusion of Stability 💼

Employees have no volatility in their income, but they can be surprised to see their income go to zero with just a phone call.

Ram has one large employer; his risk is heavily concentrated. Shyam has many small customers, and through pricing, he can select the ones that fit him the best. Therefore, his risk is diversified.

Randomness is inevitable in life. Business earnings are not steady, and their profit margins are not steady. Man-made smoothing of randomness produces the equivalent of Ram’s income: smooth, steady, but fragile.

Shyam was able to survive the shock because his business, although volatile, was antifragile. By making small variations, he was able to adapt his business to a new environment.

“One career has the illusion of stability but is fragile; the other has the illusion of variability but is robust and even antifragile.”

Become an Antifragile Investor 🥷

You don’t have to surrender to stock market volatility and wait for things to get better. Building antifragile systems will help you take advantage of this current market drawdown and grow your investments. Here’s how you can do it:

Go aggressive on your SIPs:

Keep a long term view, and go aggressive on your SIPs. If you are new to investing, begin your journey with a low-cost index fund of Nifty 50 or Sensex and invest a fixed sum regularly. The markets will eventually rebound, so don’t miss out on the opportunity to grab the discount sale.

P/E or Price/Earnings ratio helps one determine if the underlying security is overvalued or undervalued. As you can see from the PE Ratio Heat Map above, Nifty 50 was overvalued at the beginning of 2021 and has begun cooling down since. Currently, the Nifty is trading at a PE of 20.5, making it attractive as an investment. Don’t get me wrong, there have been instances in the past when the Nifty has fallen below the 20 PE mark, and we may very well witness the same in the near future. Since we cannot time the market to catch the bottom, Sip is the most prudent approach.

Investing regularly and consistently is the best way to ride out volatility and grow your long-term investments.

Diversify your investments:

Build a diversified portfolio of index funds, gold, cash, fixed-income securities (bonds) and real estate. I am tempted to include cryptocurrencies in the list. But since most people have a low to medium risk profile, you are better off avoiding investments in cryptocurrency, at least until the regulations and tax rules are made clear in India.

The ratio in which you should diversify your investments depends on your risk profile, age and other factors. The ideal asset allocation

For someone in their 20s with a moderate risk profile: 60% equity, 15% bonds, 15% REITs and 10% Gold.

For people in their 50s with a low-risk profile: 30% equity, 40% bonds, 15% REITs and 15% Gold.

Likewise, the rules of diversification depend on your age, risk profile, country etc. If you want to simplify your diversification rules, here’s a rule of thumb you can follow:

Conclusion 🎬

Prepare an investment strategy and stick to it. While the future may seem gloomy, don’t forget that a recession is always followed by a recovery. 

Disclaimer: Please do your own research before investing. The purpose of this blog is for informational purposes only.

Ethereum Protocol is undergoing significant changes. Here is a simplified explanation of what’s going to come.

Blockchain technology may be the most important invention since the internet. Blockchain came to life with the launch of Bitcoin in 2009. Ethereum took things to the next level by building the world’s first programmable blockchain. Launched in 2015, Ethereum can run programs called smart contracts that allow developers to build their own applications. So far, we have seen applications like marketplaces, tokens, NFTs, DAOs, DeFi, etc.; but this is just the beginning.

Present Challenges:

While there is no arguing about the immense potential of the Ethereum blockchain, it has also received a lot of criticism for the amount of energy expended on proof-of-work mining. Mining is a process through which new coins enter circulation. It is also the way transactions are validated on the blockchain, and the network is secured. And “proof of work” is the underlying algorithm that sets the difficulty and rules for miners. To put things in perspective, a single Ethereum transaction burns energy equivalent to the power consumption of an average U.S. household over 8.85 days. Climate activists and policymakers around the world are concerned about this trend. Countries like China and Russia have banned cryptocurrency mining.

Apart from the environmental impact, the Ethereum Protocol has other unique challenges. To understand this, we need to understand the “blockchain trilemma.” Blockchain Trilemma is the widespread belief that blockchains must sacrifice either decentralisation, security, or scalability.

And at the time of creation, Ethereum chose to sacrifice scalability to achieve decentralisation and security, which Vitalik felt were more important. And a compromise on scalability means Ethereum can process only 15 transactions per second. In recent years, the rise of NFTs and DeFi applications increased the network demand on the Ethereum blockchain, driving up the gas fees to exorbitant levels.

Ethereum Protocol Upgrades:

The Ethereum Developer Community has been working on the upgrades since 2014 to solve the trilemma and achieve scalability, decentralisation, and security simultaneously. And the technology is finally ready to be deployed.

The Merge:

Through an event called “The Merge”, Ethereum plans to transition from a “proof of work mining” to a “proof of stake” (POS) consensus mechanism. In POS, the consensus is achieved by a vote among the holders of a cryptocurrency instead of a computational race among the miners. This upgrade is expected to make Ethereum more scalable and sustainable, as the network could potentially handle 100,000 transactions per second with 99% less energy consumption. Ethereum’s proof of stake is already being tested on the Beacon Chain since December 2020. The plan is to merge it with the main Ethereum chain in the next few months. That would make Ethereum the largest protocol ever to run on a POS mechanism.

Scaling solutions:

The scaling solutions of the Ethereum protocol can be classified as on-chain and off-chain scaling.

On-chain scaling requires changes to the Ethereum Protocol (Layer 1). Sharding is one of the most popular Layer 1 scaling solutions. After “The Merge”, the next upgrade will introduce sharding to the proof of stake network. Sharding will separate the main chain into many concurrent threads called shards. These shard chains simultaneously process the transactions, reducing network congestion and increasing the transaction throughput, allowing the network to scale and support more users.

Off-chain scaling solutions require no changes to the core Ethereum protocol, also called Layer 2 solutions. Layer 2 refers to a network or blockchain that operates on an underlying blockchain protocol. Layer 2 solutions derive their security directly from layer 1 Ethereum protocol, and they improve its scalability and efficiency. Optimistic rollups, Zero-knowledge rollups, side chains, plasma are some of the layer-2 solutions. We will have a closer look at each of them in our next article.

Conclusion:

These upgrades to the Ethereum protocol are expected to be released in various phases called The Merge, The Surge, The Verge, The Purge, and The Splurge. If the upgrades are successfully deployed, Ethereum 2.0 could be a game-changer in the blockchain industry. The “stakes” have never been higher.

Thank you for reading! 👋

Before I begin, this is what Nassim Taleb had to say on “money and happiness”:

“Money can’t buy happiness, but the absence of money can cause unhappiness. Money buys freedom: intellectual freedom, freedom to choose who you vote for, to choose what you want to do professionally. But having what I call “f*ck you” money requires a huge amount of discipline. The minute you go a penny over, then you lose your freedom again. If money is the cause of your worry, then you have to restructure your life.”

Wealth and Happiness 💫

The relationship between wealth and happiness is complicated. We think we would be crazily happy if we had tons and tons of money. But how far is our assumption true? What does science have to tell about the relationship between wealth and happiness?

Research in the West by Purdue University found that “once a certain income threshold was reached, further increase in income tended to be associated with reduced life satisfaction and a lower level of well-being.”

Let’s break that down. 

Most of us believe that the relationship between wealth and happiness is a linear function, and a massive increase in income will launch our happiness to the moon and back. In reality, the optimal wealth required to be happy is not infinite but a certain range to stay within. A little less or more, and you fall below the sweet spot. 

Additional wealth comes at the cost of freedom and time. You may work and grow to be richer, but you won’t be wealthy. 

You may ask, well, what’s the difference between the two.

Being rich simply means having a lot of money. Whereas being wealthy means having:

• Enough money to meet your needs

• Freedom not to work if you don’t want to

• Quality time with family and friends

Indian Scenario 🇮🇳

Many people in India live pay-check to pay-check. According to findings from a survey, 80% of Indian employees run out of salary before month-end. 60% of the respondents from the survey reported having a monthly income of 1 lakh or more. Which is three times the average income of Indians. Yet most of them could barely manage any savings. 

With meagre savings, many families in India are just one medical emergency away from financial ruin. Which is deeply concerning and calls for more financial awareness among the millennia. 

Rich vs. Wealthy ⚖️

On the other side of the wealth spectrum are the ultra-rich, whose net worth is insanely high. These are the Ambanis, Adanis, Warren Buffet, and Elon Musks of the world. 

Given an opportunity, you would instantly trade places with any of them, wouldn’t you?

Often, success in professional life means setbacks in personal life.

Elon Musk’s net worth at the moment is 232 Billion Dollars. Do you think he’s having a jolly time?

Read this excerpt from Elon’s interview with The New York Times:

In an hourlong interview with The New York Times, he choked up multiple times, noting that he nearly missed his brother’s wedding this summer and spent his birthday holed up in Tesla’s offices as the company raced to meet elusive production targets on a crucial new model.

Asked if the exhaustion was taking a toll on his physical health, Mr. Musk answered: “It’s not been great, actually. I’ve had friends come by who are really concerned.”

From the same article:

He said he had been working up to 120 hours a week recently — echoing the reason he cited in a recent public apology to an analyst whom he had berated. In the interview, Mr. Musk said he had not taken more than a week off since 2001, when he was bedridden with malaria.

“There were times when I didn’t leave the factory for three or four days — days when I didn’t go outside,” he said. “This has really come at the expense of seeing my kids. And seeing friends.”

Not just Elon, many ultra-rich individuals struggle to balance things in life. If you focus all your time on your career, your personal life will suffer. And with a lot of money and fame comes security risk, public scrutiny, and stifled freedom of speech.

Think again, do you really wanna trade places with Elon?

“Lack of money makes you a slave to your wages and job. Too much money makes you a slave to your net worth.”

Conclusion 🧩

So who is truly wealthy? Is it the billionaire hedge fund manager who is constantly worried because he has to outperform the market every year, or a common man with comfortable savings and a work-life balance? You decide. 

According to a study, to be in the top 10% of wealthy individuals in India, you need to be worth Rs.17.2 Lakhs, and to be in the top 5%, you need to be worth Rs.35.12 lakhs. 

Systematic financial planning and investments can take you there. 

And to answer the question: How much money do you need to be happy? Not a lot, as long as you enjoy your work, have enough savings to meet your needs and can afford to spend quality time with your family and friends. That is all that matters in the end, no?

Thank you for reading! ❤️😘

While there are reasons to believe a recession today won’t be as bad as the one in 2020 or 2008, a recession of any magnitude causes harm to society. People will lose their jobs or fail to find one. The stock markets will collapse, reducing peoples’ savings and upsetting their retirement plans. And if history is any guide, recessions tend to hurt low-income groups the most. 

However, most people go through a recession without any significant impact whatsoever. So there is no need to panic about the possibility of a recession. But it pays to be prepared. You can protect yourself and your loved ones by planning ahead of time.

Story Time ✍🏼

When I graduated in 2020, I walked right into a recession. Several students from my batch found their placement offers being revoked or deferred during the nationwide lockdown. Salary hikes, promotions, and bonuses were either canceled or indefinitely postponed. No one could have predicted the pandemic, let alone be prepared for it. But, in hindsight, if I had the knowledge of recession and economic cycles, I would have done things differently. The signs of an imminent recession were evident in 2019 when India experienced an abrupt economic slowdown. 

Now, with the threat of another global recession on the horizon, I want to share my learnings, so you are better equipped to fight any potential economic downturn. But before that, it’s time for..

A Crash Course on Economics 💸

GDP, or Gross Domestic Product, is a popular indicator of how well or badly an economy is doing. It measures the productivity of businesses, governments, and individuals. The GDP of an economy usually increases over time. However, the growth doesn’t occur in a linear fashion; it follows a cyclical pattern.

This cycle, called the economic or business cycle, constitutes phases of expansion and contraction. The expansion phase is associated with high household demand for goods and services, so businesses increase their spending and hire more workers to meet the rising demand. Salaries and employment-rate go up during this growth phase of the economy.

The peak of the expansion phase is when the economy reaches a saturation point, and maximum growth is attained. During this period, employment is at the maximum level, businesses are booming, and stock prices are at their peak.

As the wise rapper, Eminem once said in his popular hit, Lose Yourself, “Snap back to reality, ope there goes gravity”. What goes up must eventually come down.

In the downward or the contraction phase of the economic cycle, wages and employment rate begin to decline due to various reasons like drop in consumer spending due to high inflation, interest rate hikes, or external events like war, pandemic which forces the businesses to cut their expenses and lay off employees.

This period, characterised by a significant decline in economic activity and a high unemployment rate, is called Recession. Made popular in 1974 by economist Julius Shiskin, his rule of thumb to spot a recession is ‘two consecutive quarters of declining GDP’.

How to get recession-ready 👷🏽‍♂️?

1. Invest in yourself: The only investment that will always pay off regardless of the economic climate is an investment in yourself. Learn skills and technologies that are in demand in the job market. Become so good at a specific skill that people cannot ignore you.

2. Graduate into a job: Companies around the world are instituting a hiring freeze and laying off employees. Off-campus opportunities are getting scarce. So it is incredibly important that you graduate into a job. Else things are going to get really difficult in your professional career. 

   Try to graduate into a healthy economy. Unfortunately, that is not entirely within your control. But if you find yourself graduating into a recession without a job, consider going for an MBA or Master's or an online degree program. Use this time wisely to reevaluate what you really want to do with your life.

   Most recessions are brief. And in 2 years, when you complete your Master's, the economy will most likely be steaming ahead with a strong job market. 

3. Send that cold mail: You need to know at least five to ten people you could call right now to get a job. Use platforms like LinkedIn and Twitter to connect with people from your industry. Sending a connection request on LinkedIn is not enough. Build a relationship with them. Figure out how you can be helpful and offer to help even if you aren’t looking for a job. Share insightful content on LinkedIn so many people can discover you, which increases your chances of serendipity. 

   Attend networking events, find like-minded people and collaborate on side-projects. The true value of networking lies in helping others and doing so without expecting anything in return. And when you finally want something, all the universe (your network) will conspire to help you achieve it.

4. Have an emergency fund:  Most of you might have heard about emergency funds and the importance of having at least six months of income as an emergency fund. This should be your top priority now. Having cash reserves of 6 months gives you the cushion to tackle any unexpected events like a pay cut or lay-off. 

   Do not get tempted to put some of your emergency funds in the market. Your emergency fund must be in cash or ultra-liquid funds, which do not have any market risk attached to it. 

5. Work in a recession-proof industry:  Although no job is entirely safe from recession, few industries are more resistant to the recession than others. You don’t have to be an economist to identify recession-proof industries. Look around you. People will continue to pay for their basic needs like food and clothing even when the times are tough. As a rule of thumb, remember that need-based industries are recession-proof, and want-based industries are recession-prone.

   Some examples of recession-proof industries are Consumer Staples, Healthcare, Education, Law Enforcement, Cosmetics, Accounting, Media, Discount retailers etc., which perform well regardless of the economic cycle.

Conclusion 🏁

These are some of the strategies you can follow to prepare yourself. Become proactive in the face of a coming recession, rather than reacting to it. And hopefully, you will survive and thrive in the tough times that are about to come.

“Tough times don't last, tough people do.” -- Robert Schuller 

Thank you for reading! 😘