FinDIY

The Battle Against Misinformation from ‘Experts’

An Expert of a Different Kind

If your best friend is a competent gynacologist but you are a man with a prostate problem, would you consult your best friend or find a specialist in the area you require help? A specialist right, thats what I thought !!

But when it comes to finance, we still choose to go the gynaecologist.

An expert of all things Finance ?? !!

It is easy to give knowledge to an uninformed person, it is very hard to educate a misinformed person. I often hear things like,

-“My husband works in a Bank and he said Mutual Funds are risky.”
-“My cousin is a CA and he said not to go for this investment”
– “I follow a youtuber and based on that Video, I don’t need a term insurance.”
– My best friend work in Finance and he said Cryptos are the future

A banker is in charge of money deposited and lent by the bank. A CA checks compliance of accounts to the laws of the land. A youtuber shares some generic info on a topic.

What does a Personal Finance Advisor do?

A Personal Finance Adviser tries to understand you, your risk appetite, expectations, dependencies, your goals and timelines before giving you advice. They are not telling you the flavor of the month investments because it was on the news.

Any body who works in Finance Industry may not be equipped to provide you with investment advice despite their best intentions for you and your close relations with them.

Please work with an advisor. Your future will thank you for it.

Pant, Pujara and Investing Styles

How two Batsmen with completely different styles brought victory to the Indian team and what investing lessons can we learn from the two

India’s most followed religion – cricket has a lot Investing lessons for us. Let’s look at two successful Batsmen of recent times and see what they teach us about Investing.

Pant, the Aggressive Investor

Pant is a big hitter. He is most known for his fastest 50’s and 100’s. He has won some big matches for the country. The aggressive style of playing has at times cost the wicket too early in the match not giving a chance to make any impact in the score board.

An Aggressive Investor is someone who is betting on a few multi baggers to get good portfolio returns. They are not shy of the hero or zero trades, where they may lose in most trades, but a few good ones will likely compensate for the lost ones.

Pujara, the Conservative Investor

Chetaswar Pujara said this in a recent interview with ESPN.

“If I am successful with my method, I don’t need to take any risk. Even if you hit over the top, you just get four runs, and two extra if you clear the fence. So the question is whether it’s worth the risk.”

Here is a man who understand his style and understands risk. There is a great parallel to this in the investment.

Pujara is the kind of Investor who puts most of his money to government guaranteed schemes such as PPF, NSC, KVP etc. He is ok with returns on par or may be even below inflation as long as it consistent and has sovereign guarantee.

Are you Pant or Pujara ?

In Investment the most important question is to ‘Know thyself’. How much time are you willing to put to learn something, how much risk can you take which means how much money are you willing to lose, what is your investment tenure, How disciplined are you?

Playing in the net practice is not the same as playing in a real match ! A back tested strategy with high win % may not work for you as it does not suit your style.

Before you go looking for answers, look for the right questions to ask and know yourself.

How can you Buy Happiness with Money?

How to spend money to buy happiness?

“Money Can’t buy happiness”

is a lovely popular quote that is most certainly wrong says Dan Gilbert, Harvard Psychologist and author of ‘Stumbling on Happiness’.

Money provides an “opportunity for happiness,” the authors say, since moneyed people can live longer and healthier lives, enjoy financial security, have leisure time, and control what they do every day.

Dan Gilbert in the paper titled,

‘If money doesn’t make you happy then you probably aren’t spending it right.’ – talks about the right way to spend money to optimize happiness. So how do we do it?

(1) Buy Experiences instead of things

The best memories I have of my childhood were those I was on vacation with my family. The best memories of my adult life were also in obscure mountains and long road trips. However, I don’t think our trip around the could have been any better if we had travelled in a sedan over a hatchback. We like experiences more because we anticipate and remember them, the research says, and we appreciate them longer.

(2) Spend money to help others instead of yourself.

The money we willingly spend on others gives us a greater joy over those that we spend on ourselves. Look around you and see who you can help out. The pandemic has given us all a opportunity to do that to those unfortunate around us.

(3) Buy many small pleasures instead of few big ones.

Random gifting of a single rose and love notes multiple times during the year would bring net more happiness to your spouse than an elaborate exquisite dinner in Taj and a DeBeers Diamond Necklace during anniversary.

(4) Buy less insurance for “GOODS”

Extended warranties, replacement guarantee for the LED display, generous return policies may actually under mine happiness as we get used to good and bad things equally fast.

(5) Pay now, consume later

We are in the culture of use now, pay later, but it is the delayed gratification of desires that gives the most amount of happiness for most of the happiness is in the anticipation more than it is possession itself. Planning a vacation was fun, saving for it monthly gives you the anticipation that prolongs it, rather than putting it on your credit card and having to pay for it later.

(6) Think about what it’s really like to own the thing you want to buy

The cabin in the woods would have mosquitoes, your swimming pool will need to be cleaned, your beach house will be dirty with sand the furniture will get spoiled faster with salty air. Owning things in actuality are not as good as they show in ads. So give it a long hard thought !!

(7) Stop the comparison shopping

What is otherwise known as keeping up with the Jones. Too many people end up with bigger than necessary houses, Tv’s, Car’s because they are trying to impress somebody like parents, spouse, Ex’s, colleagues etc. If you let your buying decisions be determined by the matching or bettering what someone else has- that my friend is a bottom less pit.

(8) Ask your friends.

Your friends know you better than you know yourself. Your friends can tell with better accuracy who you should date, which of your relationship is likely to work out for you. You are too invested and bit to blind to see those things for yourself. So next time do ‘ask a friend’

It’s not the toys that makes the child happy but the play. It’s the same with you too. Rather than adding bigger, faster and fancier gadgets (toys), spend your money well and buy happiness.

Based on : “If money doesn’t make you happy then you probably aren’t spending it right.” by Dan Gilbert

“What is Risk?”

Do we really know what risk is ?

I did my MBA from a B’School that is routinely featured in the top 20 Business Schools in the world. One of the best things I liked about my MBA is how sound they made our foundations on the subjects.

We were then in second half of my MBA program and the class was ‘Risk Management’. My professor’s first question to the class was:

“What is Risk?”

Various answers turned up:

“Higher the Risk, Higher the reward”
“Variability”
“Variance.”
“Standard Deviation”
“Beta”

We came up with numerous answers but it was obvious even to ourselves that we were lost in jargon and never had given this simple question deep thought. Our professor also indulged us, until we had exhausted all possible answers and fell silent.

Finally my professor answered,

“It is the chance of losing your capital”

Suddenly, all the superfluousness of ‘high risk high reward’ / ‘risk hai to ishq hai’ all struck us really hard. And I realised,

The biggest risk is not knowing what one is doing.

Do you really understand the instruments that you have invested in?
What are the worst case scenarios?
How realistic are they?
Does your asset allocation permit the rare yet plausible worst case scenario?
What is guaranteed ? Guaranteed by whom?
What is secured? Secured by What?

Don’t get lost in jargons. Its ok to refuse to invest in an instrument you don’t understand. In fact it’s lot better to do nothing with your money than something you don’t understand at all. It’s ok to ask a stupid question. You don’t need to trust anyone with your money.

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