April 2021 - FinDIY

What is your Risk Appetite?

Many Financial advisors ask such questions to their clients. But what does it really mean? Risk appetite means how much loss of capital can you digest? And most people unless faced with the event probably have no idea but would just pick whatever they think you want to hear.

Understanding of risk appetite and managing the risk is one of the most important things to be taken care of in your savings and investment choices.

Rich and the Risk – Elon Musk Vs Bill Gates

Recently Bill Gates said Bitcoin may be a suitable investment for Elon Musk but not for him.

This comment was widely misreported as Bill Gates saying he is not as rich as Elon and so can’t afford Bitcoins. Of course Elon is significantly richer, atleast as on today. But is that really what Gates meant?

My interpretation of Bill Gates statement would be his understanding of risk appetites of these two business men.

Gates and Microsoft

Bill Gates and Microsoft have been a conservative business who chose to play their strengths and stick to what they know. They have preferred being late to a proven field rather than early in an unproven one. Some of Microsoft’s best products including MS DOS, MS Excel, MS PowerPoint were all early acquisitions from tech startups and not home grown innovations. Microsoft preferred to identify, invest and acquire products rather than build them from ground up and launch. This approach has worked very well for them

Despite being in easily scalable, cashflow rich business, Bill Gates once built cash reserves that would be able to pay salaries for employees for an entire year if we no new cash flows had come in. Bill Gates did not want to take chances and gamble away what they had built so far and ensure they survived by building a sufficient buffer even as they grew big.

Elon to the moon

As against this, Elon Musk has undertaken several risky ventures and had not hesitated to invest all his money into completely unproven ventures with the hope to make a breakthrough.

Elon Musk, who was working on two unproven concepts of Tesla and SpaceX at the same time and did not have enough money to pay salary to the engineers as the month was about to be over.

These are two extremely different approaches by two people with extremely different risk appetites. But they know where they stand.

And it is in cognizance of this fact that Bill Gates mentioned why Bitcoins were not a suitable investment for him.

What is in it for you ?

Are you conservative like Bill Gates who would like to preserve and maintain what has been built over the years or are you wild like Elon – willing to trade it all for the unknown?

Where do you stand?

On a scale of 1 – 10, 1 being Bill Gates and Elon Musk, where do you think you would place yourselves? This answer will play a key role in your asset allocation and choice of investments. Embrace who you are and build for yourself a portfolio that will suit you.

Padmanabhaswamy Temple and the Power of Compounding

How the power of compounding enabled one temple to accumulate trillion of dollars in its treasury and how you can use the same technique too.

A few years ago, some of the vaults of Padmanabha Swamy Temple in Thiruvandhapuram was opened as per the order of the Supreme court. The vaults had tons and tons of Gold Coins, Crowns embedded with precious stones, Gold Jewels with embedded diamonds, Statues of Gold , Diamonds and various other precious stones were found. There were many discussions on who should be allowed to manage the temple and its treasure.

But to me the important question was “how did this one temple amass such huge fortunes?”

I found my answer when I visited the temple and the museum in the Kudramalika Palace nearby. Travancore Kings considered their kingdom as God’s own country and themselves as only representatives appointed to administer the province. The Deeply religious kings visited the Padmanabhaswamy temple every year on his birthday and contributed to the temple treasury Gold equivalent to their weight.

This practice called Thulabaram is very popular all throughout Kerala even today. Although people give different things like coconuts pulses etc and not Gold unlike the Kings.

It is this practice that had been followed across generation of Travancore Royal Family that was one of the chief reasons of this huge treasure estimated to be a trillion dollars worth. This was also the reason probably supreme court has vested the rights of temple administration back to the unbroken dynasty of the Travancore Royal Family.

The compounding can work as well for you as it had worked for Lord Padmanabha. If you cannot contribute Gold equivalent to your weight every year, may be you can still start an SIP every month. May be you don’t have the few hundred years that Lord Padmanabha and the Travancore Raja Samsthanam had, but neither are you trying to build a vault with tons and tons of Gold. All that we hope to have is a peaceful retirement life without having to worry about keeping up with ever rising inflation and a few decades of your life should be sufficient to do the same.

So how are going to make time and money work for you?

The Games of Luck and Skill

Is Investment a game of luck or skill? How do we differentiate the two?

Luck, Skill and everything in between

My husband Hari and I were playing snakes and ladder with our baby niece and nephew of 4 and 6 yrs. They both were the first to win the board and get out the game. They were overjoyed to beat two adults in a real game. The 6 year old even tried to console us by saying “Don’t worry. We have been playing this game a long time, you will also get the hang of it soon.”

The next day, from my Nephew’s B’day gift we played a memory game. Now the difference between the adults and the children became obvious. We were trying to help them learn the game but were not planning to make deliberate mistakes to make them feel good. The kids were a good sport but were disappointed that they lost in all the games.

What really is the difference between the two games?

There is no world champion in the game of ‘Snakes and Ladders’ because it is a game of pure luck. But there is a champion of Memory, Spelling Bee, Tennis and even Poker. The luck and skill ratio in each of these games vary to a good extent from mostly skill to luck being a major contributor of results.

This is true of our investing journey too. Whether you invest a lumpsum or SIP, even the dates of your SIP may all be random and luck. But your asset allocation, review of portfolio performance, the discipline of consistently investing in alignment with your investing philosophy are all attributes of skill and discipline.

By mastering only what is in your control, you can significantly influence the results and the let the time play out the luck factor. So what do you think – Is Investing a game of luck or skill or both ?
#investing #luck