The best lessons we can learn is from the experience and lives of successful people. Words of wisdom from those who have achieved great heights of success, starting from nothing, must be heard with full reverence. In this article, we share the life lessons and advice from one of the most respected businessman from Asia – Hong Kong billionaire Li Ka-shing.

Sir Li Ka-shing is a Hong Kong investor, business magnate and philanthropist. Li, aged 91, though retired from active business, still features in the Forbes richest people in the world and was once the richest man in Asia. Li has an incredible rags-to-riches story. From being forced to drop out of school as a child to support his family, he has achieved what few have ever dreamed of. Today, we share his life's lessons and words of wisdom...

Li Ka-Shing money advice: The five sets of funds

Li was a strong believer in making the best use of the resources you have. He proposed the famous five-set of funds method to creating a successful and fuller life. Li suggested that we split your earnings into five sets of funds as given below. Please note that we do not expect everyone to follow the exact proportion for funds allocation in real life. It may change from person to person and situation to situation. What is more important though is that we follow the idea / spirit of the message in our lives...

1] 30% - Living expenses:

The most important things in life have to be entertained. However, what constitutes living expenses? Have we segregated 'needs' from 'wants'? Li suggests that we do a strict budgeting exercise living expenses to the minimum sustainable level. If your budget for living expenses exceeds 30%, you have a red flag. Try considering your expenses, be ruthless in removing unwanted things in life. Li shares that when he was poor, he used to have haircuts only once in three months. Hopefully, you don't have to go to that extreme but some strict action is surely required.

For those at the bottom of the pyramid, even this may seem to be difficult. Understand that if you are not even making such minimum income (matching 30% of living expenses) from the present job or business, it is a red flag in what you are doing. You need to work harder and smarter in life. If you have already spent good time, say at least couple of years, and you still aren't making more than this, then you need to reconsider what you are doing and have only yourself to blame. Li suggests that we move on and find more profitable avenues to put our time and mind. You may also look for other ways of earning income or having multiple streams of income.

2] 25% - Investing:

Li has been a strong advocate of continuous investing. He suggests that we invest in a diversified portfolio of assets. Investing has to be followed like a habit, a discipline. The more you cut on your unnecessary expenses, the more will you be able to save. 25% is the minimum savings required. The rest of the things can later follow. What is also important is that you know that is important in life and spend money on only those things, as we will talk later.

Buying too many clothes, eating our frequently, spending on luxury, etc must be avoided at all costs if you are serious about being wealthy one day. The amount of investments you have will ensure that you never run out of money and your quality of life never goes down drastically. Of course, it goes without saying that you have to spend less.

Li also suggests that we share our dreams and goals with the people around us. It is also okay to spend few times on those you love but it is also important to share to them why you are being thrifty and spending less money. Share with them what you plan to achieve doing so and what your dreams and goals are. One sure that people will then see you differently and appreciate what you trying to do, perhaps even support you.

3] 20% - Networking:

Jim Rohn once said that 'You are the average of the five people you spend the most time with.” The most successful, rich and powerful people are almost always those who are well-connected and have a very good network. Network yourself with the right people, those who have bigger dreams than you, who are more successful than you, are more ambitious than you and more richer than you or the people who have helped you in your career or from who you can learn a lot.

Networking is not cost-free. Even if you have to spend sometimes on such persons, it is all justified. You can spend by forwarding greetings, gifts or fitting the bill when dining out, etc. You may also spend money in joining clubs, associations, etc where such persons can be met and befriended. Spending money for networking is like investing in relationships, ones which teach you, help you, guide you or be of use when required. The valuable lessons and relationships that you earn are the returns which will be useful in life, making you a better person.

4] 15% - Learning:

Learning is a life long activity. Li suggests that you have to set aside some part of your funds to learn something. Use say 5% of your funds to buy books and learning resources. Spend about 10% of funds in attending seminars, conferences and training which will help you to develop and skill yourself and expand your knowledge and understanding. Apart from learning, meeting the right people at these forums is also a part of your investment.

GoodGood learning is that which is not easily forgotten. You have to learn with all seriousness and eternalise the lessons and strategies. You have to materialise your learnings into actions and share them with others. In short, learnings have to be put to action and used, else they will be soon forgotten.

5] 10% - Travelling:

This may be a bit of surprise for many. However, Li believed that one should travel and see the outside world. The big idea here is to rejuvenate yourself. During these 'off'' mode, you can take a break and relax. One cannot always keep performing at the highest levels at all the time. Use this time wisely to recharge yourself, build on your passion and more importantly also think. Travelling perhaps is the most rewarding and popular way to unwind and also offers other advantages. Meeting new people, exploring new worlds can also open up your imagination and can even open up new opportunities. A holiday at least once a year should charge you for the rest of the year to continue following your dreams with even more passion.

It is not mandatory that you travel or always travel far and wide. You may even choose to pursue any other passion or hobby that you may have. Travelling also need not be expensive. You can stay in budget hotels, plan your holidays much in advance, in off seasons or to places which are not hot on the tourist circuits.

Conclusion:

Continuous self-improvement is an important ingredient for one's success. You have to always seek ways to grow yourself. If you are stuck and not growing as a person, in Li's words, 'you should be ashamed of yourself'. In today's dramatically changing world, every job and every business is subject to disruption by technology. You have to invest in yourself if you wish to be successful. Once you are rich and successful, you have to stay at home more than yourself and keep a low profile i.e., don't show off and don't let other people make use of you. Just keep spending money on yourself as many others are doing just the opposite.

History has shown us that equities have been the most rewarding investment, asset class over long-term horizons. It has potentially generated tremendous wealth for investors. As more and more investors realise the potential and need for equities in their portfolio, they are faced with the choice of either investing directly into equities or investing through equity mutual funds. Which is better? What should I do? This article answers that question.

What do you need for direct stock investment?

1. Time to research stocks: Studying the share markets is a full-time activity and requires a lot of time and energy on part of the investor. You would also need to analyse economic numbers and macro-economic factors like government policy changes, global impact, currency, etc. You should probably leave your day time job /business to do that.
2. Market Expertise: One needs adequate skills and expertise in managing investments. Since too much information is readily available, true skill is to know what is important and to analyse the same and assess the impact on the stock prices. This is not which you can learn easily but comes only with experience, involvement and intelligence.
3. Research affordability: There are a cost and time factor involved in research and study. The time is something which carries huge costs but is unfortunately not often measures by small investors. Such costs are justified if your investment capital is small or if you are a small-time investor.
4. Unbiased and emotional control: It is a fact that a very large majority of equity investors haven't created much wealth from stock investing. Faulty investor behaviour is the culprit when it comes to less than optimum returns from markets even though the markets have performed very well in long-term. Can you claim to be unbiased to your stocks, remain unaffected from daily news and stock movement and not be carried away?

What you will not get with Mutual Funds investments?

1. Excitement and thrill (or worry) of stock movement: Let's admit it. Direct stock investment is exciting and thrilling. It is like T20 and if you wish to be always preoccupied with markets, like the excitement of uncertainty, direct stock investments may be your preference. Mutual fund investment would be like a test-match, it is boring and not exciting enough for you.
2. Full control over investments/stock selection: In mutual funds, there is someone else who is taking the stock investment decisions within the ambit of the scheme objective. You have no control if you want HDFC bank instead of a Yes Bank in your portfolio.
3. Ownership rights: With direct stock investing you become a part-owner of the company and get ownership rights. In a mutual fund, you do not get that sense of ownership since underlying stocks are 'indirectly' held by investors through the fund house.

But what you will get with mutual funds investments?

1. Professional management: In mutual funds, the investor leaves this task to the fund managers who are professionals in their field and manage the investment on behalf of the investors.
2. Portfolio diversification: With mutual funds, you have very good diversification. Even if a stock goes bust, you are not much affected. As opposed to this, if you had been invested in that stock directly, you would have likely suffered a huge loss.
3. Diversification at affordable cost: With just a few hundred rupees, one can invest in over 20-30 companies. This is because MF units have are priced at affordable NAVs derived from the entire portfolio. You may be owning highly priced stocks which may not be possible In direct equity investing, Also, such level diversification will not be easy to achieve in direct investments with low capital.
4. Economies of scale: Mutual funds enjoy great economies of scale for their entire research, fund management and administration costs. These are passed on the investors as the fund size or AUM grows in the form of lower expense ratios. Expense ratios are the only cost which the investors pay and it is clearly known in advance.
5. Investment management tools: Mutual funds offer many tools like SIP, growing SIP, STP, SWP, dividend payout, dividend reinvestments, insta cash, etc which can be smartly used by investors to manage their portfolio and cash-flows. Such multiple tools are not available at the disposal of direct stock investors.
6. Tax benefit: Of course, equity mutual funds enjoy similar tax treatment as direct stocks. However, equity-linked savings schemes or ELSS gets counted in your 80C investments. This benefit is not available in direct stocks.
7. Budget-friendly: For most of us, we are concerned with the investible surplus we have. With mutual funds, you can however relax and start saving with as little as Rs.500. There is no upper limit though.
8. Ready portfolios as per strategy: There is a huge choice of funds which follow different objectives and strategies in their preferred universe of stocks. There are ready portfolios like large-cap /mid-cap /blend /value /contra /sectoral or thematic fund, etc to suit one's risk appetite and strategy.
9. Choices for asset allocation: Moving beyond equity funds, there are funds offering every possible combination of equity and debt assets. Thus, even while you may be investing in a single fund, you may have a matching asset-allocation to your risk appetite. This is something you will have to manage separately in your portfolio.

To be fair, both mutual funds and direct equity have their pros and cons. What is more important is to know what you are looking for, what you are capable of and how much time and efforts you can put to it? Obviously, most of us are preoccupied in our lives, job, business, etc to devote quality time regularly only to investments, even assuming you have the necessary skills & knowledge. Investment in stocks is thus recommended only to those investors who not only are great researchers having expertise in markets but also willing to go put in the efforts. For the majority of us, mutual funds offer a much better trade-off where you can hire such proven experts in the industry for a small fee. When we look at the benefits offered, obviously we can safely say that equity mutual funds are the ideal vehicles for investing in stocks.

We as investors are mostly interested to know what returns I am going to get from my investments. It is seldom asked what is the real rate of return I am going to get.

It is very important to understand the real rate of return that is expected to come from one's investment rather than the absolute return which generally an investor ask for. To understand what you actually mean by the real rate of return and how it really helps in Wealth Creation you need to spare a few minutes to read through the article.

What is Real Rate of Return?

In simple terms, it is the return you earn above the inflation rate – which is the rate at which the prices, in general, are rising. To exemplify, if you invest in a fixed deposit which is today giving you a return of say 8% and the inflation is 6% then the real rate of return that you are generating would be 2%, ie., actual return (less) inflation for the period. The logic is simple – Rs.100 one or say 10 years ago does not carry the same value today because things have become costly due to inflation. Generally, consumer price Index growth (CPI) or wholesale price index growth (WPI) is taken as inflation indicators.

Having understood whats the real rate of return is, the question is how it is related to wealth creation. Let's understand what actually wealth creation means. Putting jargons aside wealth creation in simple terms is the increase in one's ability to purchase more things. If one feels his ability to purchase things have increased substantially over a period of time, one can simply say he has created wealth.

How can one increase its ability to purchase more through prudently investing?

That's a very right question to be answered. Let's go back to our example of one investing into fixed deposit with 8% absolute return and 2% real rate of Return. Say the investor had Rs 1,000 to invest in a fixed deposit. At 8% of interest rate, the value after one year of the amount invested would be Rs.1,080. Now assume that with Rs.1,000 he could have bought 50 packets of milk priced at Rs.20. Now with 6% inflation (assumed price increase of milk), the price of milk packet would be Rs 21.3 after one year.

At Rs 1080 available with the investor from his investment he now would be able to buy 51 packets of milk. The purchasing power of the investor has increased by one packet of milk thanks to the positive real rate of return. Had his return on investment been equal to the inflation he would still be able to buy only 50 packets of milk. And had his investment return lesser than the inflation, negative real rate, his capacity to buy milk packets would get reduced. That is the explanation why for creating wealth it is important to look at the real rate of returns and not the absolute returns on your investment.

Now interestingly let us look at the table below highlighting the approximate real rate of return across different asset class in India from 1981 – 2019. The question to ask is how it has increased the purchasing power similar to our example above over the period?

(Source: NJ Wealth – Internal. Assuming average inflation during period @ 6%.)

The results mesmerize us as to how the real rate of returns in equities over the period has increased the purchasing power and hence created wealth.

Never in the period considered had equities ever had a linear growth. There were many periods or phases when everyone considered to be the worst time for equity investors. For example, the equity markets in India post Harshad Mehta Scam (1994- 98) or post the Y2K technology bubble (1999-2001) or the after the Lehman brothers (2008-2012) and many such periods of dullness. But over the longer period, equities still delivered a real rate of return which increased the purchasing power the most as illustrated in the table.

Does the real rate of return increase the purchasing power over the shorter period say 5 Years?

The answer is NO. For a change in purchasing power, we require both time and returns.

What if we assume the same returns for the investor as return generated over 38 years to be generated in 5 years and measure the impact on the purchasing power?

There will be very marginal difference in the results and one cannot distinguish one from the other. Also, since equities are volatile in short-term, we cannot expect the same results of long term in the short term. That is not the nature of equities and something that everyone should understand.

Conclusion:

Equities change the purchasing power to a great extent and it been the biggest wealth creator across all asset class over a longer period, 10 years at least but longer the better, with the short term volatility. I would never understand why investor invests in equities and start seeing returns on a day to day basis and gets disturbed with short term negative returns. It is important to have a firm long term belief and give time to your equity investments for Real Wealth Creation through Real Rate of Returns from Equity Investments.